Finance

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

With all eyes on China's stock-market gyrations and Beijing's probes of securities violations at top brokerages, the nation's securities industry isn't developing a reputation for smart long-term thinking.

Yet in one area where much of the developed world is cutting back, the trading of bonds, currencies and commodities -- known as FICC -- China is building up, and it's looking astute. 

Shrinking Headcount
Wall Street's total employment in FICC, thousands
Source: Coalition
The Coalition Index tracks the performance of the 10 largest investment banks globally.

Last week, just as Bloomberg News reported that Morgan Stanley was cutting a quarter of its FICC staff worldwide, Citic Securities, the country's biggest brokerage, said it had launched  a trading desk in London. That operation, to be run by Citic's CLSA unit, initially will trade Asian credit and offshore yuan bonds for clients in Europe and the U.K. -- lucky timing as Beijing gets its coveted reserve-currency status for the yuan. Citic is looking overseas even as it's mired in investigations at home of brokerages' role in the midyear rout. Today, the company said it was unable to contact two investment-banking executives.

The expansion might seem illogical as FICC becomes a dirty word. Wall Street is reining in a capital-intensive business that once was the domain of the so-called masters of the universe, while Switzerland's UBS and Credit Suisse have veered toward private banking.

Not so in China, and Citic isn't alone. The firm's brokerage rivals may be less outward-looking after a spate of Hong Kong IPOs earlier this year, but Chinese banks are expanding. Their domestic clients, and foreign companies doing business in China, need a growing array of trading services. In February, ICBC, China's largest bank, bought the bulk of the markets --largely FICC -- business of its 20 percent-owned African lender, Standard Bank. Bank of China became in June the first Chinese bank to join the auction-setting process for London gold, giving it a hand in determining the price of one of the many commodities China dominates as a buyer.

That London is the base for the FICC push isn't surprising: the British capital is perhaps the world's top currency trading center and a beachhead outside Hong Kong for China's plans to get the yuan internationalized. For an overseas investor, or a Chinese company in London, what better place to clear yuan than via the mainland's largest brokers or banks.

The FICC offshore conduit goes beyond the C for currency. While  surprise devaluation in August caused some cooling of foreign investors' appetite for yuan bonds, the addition of the currency to the IMF's elite basket of reserve currencies should keep yuan assets a long-term buy. In fact, Chinese bond issuance so far this year is up more than 80% over levels in the whole of 2014:

Tapping Borrowers
Chinese bond issuance, in trillions of yuan

Commodities may be tanking, meanwhile, but even there a player from China, the world's biggest buyer of most metals, should have an advantage.

Citic describes its new London desk as a "prudent and carefully paced expansion,'' and little wonder: Chinese institutions lack the systems and technology of their peers in New York and London, and one reason FICC trading is flagging in Wall Street, apart from the regulatory overhang, is the increasing encroachment of tech-savvy hedge funds and electronic traders . Third-quarter fixed-income trading revenue across five banks -- Morgan Stanley, Bank of America, J.P. Morgan, Goldman Sachs and Citigroup -- fell an average 19% in the third quarter, according to a Barclays note in October.

As competition increases at home and trading margins erode, Chinese institutions will be looking to avoid the mistakes of the past, including Citic's previous attempt to enter the big league -- a narrow escape from owning Bear Stearns before the firm collapsed in the financial crisis. Slow and steady may yet win this race.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net