While Wall Street banks are trying to wrest control of their struggling China ventures and hoping to go it alone, the investment firm once known as the country's own Goldman Sachs has found itself a partner it could probably do without.
China International Capital Corp., in a bid to reduce its overdependence on dealmaking, is forking out $2.5 billion in shares for a largely bricks-and-mortar brokerage.
With 192 branches, China Investment Securities Co. definitely has more heft in the brokerage business than CICC and its 20-outlet operation. The problem is that China Investment Securities just doesn't have the digital franchise that matters as investors increasingly migrate to their cell phones.
How important that digital presence is can be found in the client numbers of a much bigger rival, Huatai Securities Co., one of the country's top brokers. It said during first-half results that more than 90 percent of new business came from its mobile app.
Shenzhen-based China Investment Securities also isn't very big, ranking 17th in revenue terms. That's not much of a lead over CICC, at 23. Breaking the stranglehold of China's biggest brokerages won't be easy without a good strategy that goes beyond branch acquisition and some tinkering with training and technology upgrades, as CICC has outlined.
To top it off, consolidation in China is never an easy business, and China Investment Securities, which sprang from the ashes of China Southern Securities Co. after it went bankrupt in the mid-2000s, has deep roots.
There's no doubt CICC should bulk up in brokerage, a key route to the hearts of China's growing ranks of investors in wealth-management products. About 24 percent of its revenue comes from investment banking, versus 30 percent from trading. By contrast, industry behemoth Citic Securities Co. makes more than 60 percent from its brokerage operations.
Buying China Investment Securities has not only landed CICC with a brokerage minnow, but also with the government as a large shareholder. Once the stock swap is complete, Beijing will double its stake to almost 60 percent, diluting interests held by well-connected foreign shareholders.
As the investment bank set up by former Premier Zhu Rongji to list Chinese state firms in Hong Kong, CICC was never fully independent. But it was always known for carving its own path. That's going to be more difficult now.
Securing a partner with brokerage heft will go some way toward helping CICC achieve its ambitions of cracking China's wealth-management market. It's just a shame it found a spouse that isn't quite sophisticated enough, and got an overbearing father-in-law in the process.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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