Salomon, Goldman Sachs...Bank Of China?

BOC's trading arm aims for the investment-banking big league

Thirty years ago, during the Cultural Revolution, Bank of China's squat, granite building in Hong Kong was a pulpit for Maoist propaganda. Bank employees with megaphones stood on a balcony exhorting passersby to join the glorious cause of communism. Now, the building houses Bank of China Group Securities (BOCGS), a 12-year-old brokerage whose agenda couldn't be more different: to make millions doing investment deals.

The biggest of China's Big Four state-owned banks, with $159 billion in assets, Bank of China (BOC) already has a formidable presence in Hong Kong. It is the territory's second-largest financial institution--BOC in Hong Kong has assets of $90 billion and controls 25% of the island's loans and deposits. It also boasts political connections on the mainland, a long list of Chinese corporate customers, and an AA- credit rating from the Japan Bond Research Institute. Now, BOC wants to propel its securities arm into the big leagues in Hong Kong investment banking. Instead of sticking to trading, as it has in the past, it will vie for a piece of the region's rich privatization and merger business.

That's an ambitious goal. Hong Kong is among the world's most competitive environments for investment banking. Huge blue-chip firms are poaching one another's star employees and investing immense sums to boost their market share. Elbowing into this crowd may take more strategic savvy--and cash--than mainland parent BOC has on hand.

"NATURAL NICHE." Yet upstarts have succeeded before. Peter Fu, managing director of Peregrine Securities, notes that his own firm came out of nowhere in the late 1980s to become one of Hong Kong's hottest finance players. Fu gives BOCGS his vote of confidence. "They do have a natural niche," he says. Indeed, if Beijing continues to buy stakes in key Hong Kong companies, as it did with Cathay Pacific Airways Ltd., BOCGS would be a logical dealmaker.

The new plan is for the brokerage, which has $13 million in capital, to target BOC's Hong Kong and Chinese corporate customers, participating in small underwritings on the Hong Kong Exchange. Next, the firm hopes for listings in Shanghai and Shenzhen and perhaps listings of larger Chinese corporate issues in Hong Kong. Eventually, it wants to underwrite issues that trade globally. "We want to be co-lead or eventually lead underwriters," says BOCGS Managing Director Fung Chi Kin.

But BOCGS's ties to Bank of China are a double-edged sword. As a government entity, BOC is subject to directives from Beijing. Just as China can order its domestic banks to lend to money-losing state-owned enterprises, it could pressure the new investment bank to secure listings for state companies, most of which are starved for capital. Says the China team head at a major U.S. investment bank in Hong Kong: "Their hardest job will be establishing the ability to say no to China deals." Fung insists he will have the autonomy he needs to operate profitably.

LOFTY DREAMS. The BOC connection could also be a liability when it comes to staffing. Bank of China's salaries are notoriously low--because of socialist tradition, not lack of resources. A senior research director in Hong Kong makes around $450,000. BOCGS pays about a third of that.

To be sure, BOCGS has made its presence felt. Originally set up as a joint venture between Bank of China and a Hong Kong firm that sold out in 1988, it today has 10 seats on the Hong Kong stock exchange. Bank of China is awaiting approval from the Bank of England to establish a merchant-banking operation in London. Ultimately, the merchant bank would be folded into BOCGS, creating a genuinely international presence.

Yet such lofty dreams are still far from coming true. BOCGS will need to build a network of offices overseas before it can drum up underwriting business from non-Asian companies, let alone place the issues. The parent company's aspirations are symbolized right in the Hong Kong skyline. Down the street from its venerable old home is the new Bank of China building, a dramatic I.M. Pei skyscraper. The question is whether the securities group can outgrow its ties to its Maoist past.

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