China's factories are the world's workshop, churning out Nikes and Barbies, umbrellas and underwear. But its financial system is broken, steering capital to money-losing companies rather than healthy ones. Half its bank loans are duds, and its investment banks feed a rumor-driven market.
Li Shan figures that it's about time China's financial system caught up with its manufacturing prowess. For years, the 38-year-old Li has told anyone who would listen that he wants to build China's first internationally competitive investment bank. Now, the well-connected Sichuan native with a PhD in economics from Massachusetts Institute of Technology has his chance. In November, he was named chief executive of BOC International Holdings, the Hong Kong-based investment-banking arm of the Bank of China. That same month, BOCI won permission from China's Cabinet, the State Council, to engage in a full range of investment-banking activities both inside and outside China. That makes it one of just two institutions granted such a coveted license, along with China International Capital Corp., or CICC, in which Morgan Stanley Dean Witter & Co. holds a 34.3% stake.
The two firms have the inside track in getting business from Chinese companies seeking to tap international capital markets through bond sales and share issues. Indeed, one of BOCI's next deals will be a landmark initial public offering, in New York and Hong Kong, of the Hong Kong and Macau operations of the Bank of China; the deal, planned for this year, is expected to raise $2 billion to $5 billion. Goldman, Sachs & Co., UBS Warburg, and BOCI itself are the lead managers. But the clock is ticking. As part of the price of World Trade Organization entry, foreign firms will be allowed to operate on their own in China in five years.
So Li is moving aggressively to restructure BOCI to make it competitive with its Western counterparts. In mid-March he sacked a quarter of the staff, about 100 people. He also has upended traditional pay practices. He slashed the salaries of top managers by an average of 35%, but he increased the amount they could make in bonuses. Salary and bonuses for top performers can now reach $500,000 a year, an unheard-of amount for a state-owned Chinese operation. "He inherited a deeply flawed system," says Fred Hu, a BOCI board member and a managing director at Goldman Sachs. "Some of his plans are directly at odds with traditional state-owned enterprise culture."
With other banks cutting staff, Li has been able to pick up experienced talent from the likes of Goldman, HSBC Securities, and Deutsche Bank. Nonetheless, BOCI's compensation doesn't match the packages at top-line investment banks, so filling his ranks with rainmakers will remain a struggle.
As for himself, the youthful Li freely acknowledges that his own expertise is broad but not deep, although he has spent almost a decade in investment banking, at Goldman, Lehman Brothers, and Credit Suisse First Boston. "All of the people I've hired are better than me," he says.
But whether Li succeeds or fails clearly depends on him. The Bank of China has granted him an extraordinary degree of autonomy, and the bank's reformist chairman, Liu Mingkang, has plans to devolve more power to BOCI's 12-member board. And in another departure for China, the board includes two outsiders, Hu and Stanford University professor Lawrence J. Lau. Two former Goldman partners are senior advisers and attend board meetings.
The decision to let BOCI operate as if it were a private bank was so unusual that final approval came from Premier Zhu Rongji and the State Council. Given the serious recent financial scandals at the Bank of China, it was a gutsy call. "This is an enormous political risk that Liu Mingkang is taking by supporting such a bold experiment," marvels Hu.
Li's personal connection to Zhu has certainly boosted his campaign to establish a Wall Street-style investment bank in China. Raised in Sichuan's remote Weiyuan County, Li was the first person from the area to attend Beijing's elite Qinghua University. "He's the pride of the county," says Gan Huaxun, chief director at the Weiyuan Education Bureau. "He was Zhu Rongji's student!" Zhu was a dean at Qinghua for many years, and it was there that Li met him.
At BOCI, Li is taking over a firm with something of a checkered history: He's the fourth CEO in the four years since it was founded. Until now, it was run as a typical Chinese state-owned enterprise--meaning that it was heavy on political intrigue and short on business savvy. Although the bank has a substantial $450 million capital base, its return on equity is less than 10%, well below firms such as Goldman and Morgan Stanley. "We have to prove that professional managers can do a better job," vows Li.
Li is building his investment bank from a position of strength. BOCI or CICC have managed to muscle into every major overseas listing of a Chinese company. That helped BOCI become the third-largest IPO banker in non-Japan Asia last year, with deals worth $421 million, trailing only Merrill Lynch and CSFB, according to Thomson Financial. CICC dropped from first to eighth place. BOCI is already the largest retail stock broker in Hong Kong, thanks to the Bank of China's extensive branch network there. It also has a joint-venture asset-management company with Britain's Prudential Corp. that is well positioned in Hong Kong. BOCI doesn't release detailed financial figures, but a summary financial sheet provided to BusinessWeek puts net profit in 2001 at more than $45 million.
It's a long way from the rice fields of Sichuan to Li's perch in Hong Kong's stunning Bank of China tower. Smarts, drive, and guanxi have carried Li a long way. Given the window that the WTO agreement opens for them, Li and his team have got a shot at building BOCI into an Asian powerhouse.
By Mark L. Clifford in Hong Kong