`A Wild West' In The East

It's becoming almost a common sight in Beijing. Led by a police car with lights flashing, a motorcade of Mercedes-Benzes pulls up to the entrance of a government ministry and out pile teams of crisply dressed Wall Street executives. In the past year alone, the chief executives of Merrill Lynch, Salomon Brothers, Oppenheimer, and Bear Stearns, among others, have traveled to meet the likes of Premier Li Peng and economic czar Zhu Rongji.

The financiers hope to grab some territory in what could be investment banking's greatest frontier. Recognizing that equity stakes can generate triple-digit returns, U.S. firms are lining up to make direct equity investments in Chinese businesses. Says Bear, Stearns & Co. CEO James Cayne: "China is the most exciting thing I've ever seen."

Exciting, but risky. The flow of deals is dominated by overseas Chinese tycoons with huge property and infrastructure projects in China and close ties to top officials. And disclosure is limited. Still, the potential gains make bankers' mouths water, because China's need for direct investment is staggering.

Morgan Stanley & Co. and Goldman, Sachs & Co. have been the most adventurous U.S. firms so far. Morgan, which has moved its Asian headquarters from Tokyo to Hong Kong to capitalize on China, last year decided to "really turn on the heat," says Asia Managing Director John S. Wadsworth. He, along with President John Mack, just returned from Beijing. Morgan has taken stakes in two investment funds, is negotiating to invest in several large mainland real estate projects, and is looking at a wide range of industrial projects.

Blackstone Capital Partners is also getting its feet wet, planning to invest $250 million in Asia over the next five years, most of that in China. Oppenheimer & Co. has put together a group to identify up to $100 million in investments in consumer-products companies. But it has yet to put together a deal. "It's a Wild West environment," says CEO Stephen Robert. "The risk is great, and the upside is great."

Others don't see any need to plunge in at all. Lehman Brothers Inc. floated China's first "dragon bond," placing $300 million in notes with Asian investors, yet it has no plans to invest. Merrill Lynch & Co., Bear Stearns, and CS First Boston are also avoiding direct investments.

U.S. financial firms could play a big role in the development of the Chinese financial markets, though. Americans could advise the Chinese government on how to set up a bond market or a commercial paper market. "Given the sophistication of senior officials, they'll want to make sure the new structures are state-of-the-art," says John Lipsky, chief economist at Salomon Brothers, who just got back from China.

Before long, the parade of Mercedes carrying Wall Street financiers is likely to cause first-class gridlock.