Goldman Sachs Set For China Joint Venture Investment
Bank
Goldman Sachs is set to get approval for a joint venture
investment bank in China. The new entity, which would
be controlled by its parent, Goldman Sachs, would have
power to arrange equity and bond deals in Chinese markets.
The junior partners in the deal would be Fang Fenglei,
a leading Chinese financial entrpereneur and Lenovo, formerly
Legend Computers. Lenovo has recently been taking a beating
in the PC market, largely at the hands of Dell.
It appears that the deal has been approved by senior
political authorities in China. The deal still needs to
be finalized by the China Securities Regulatory Commission,
the leading government watchdog.
If the deal goes through, it would give Goldman a leg-up
in the Chinese capital markets, which some have predicted
will quickly grow to the third largest in the world by
2010. All US investment banks are waiting for China's
reforms of the financial sector. In their present form,
China's state-owned banks are incapable of serving China's
capital needs.
As China's economy develops, more growth is coming from
China's consumers and the private sector. The state-owned
banks are used to serving other state-owned enterprises
in a top-down policy fashion without the normal lending
review requirements required by private banks.
Reform has currently been held up by the Chinese government's
inability to reform the Chinese financial sector. Premier
Wen Jiabao had earlier tried to dilute the banks' bad
loan portfolio by injecting cash to dress up the four
leading banks for overseas IPOs in Hong Kong and the US,
but this effort failed when questions about Chinese corporate
governance in the US were raised, pushing share prices
down. At the same time, Wen was unable to change management
in the banks. The end result was that Wen's policy was
strongly criticized in China's domestic press.
China's equity markets have also performed miserably
largely because the share prices of the listed companies
are over-priced, bearing no relation to reality.Most listed
companies are state-owned, with large share holdings still
held by the government. For years, the Chinese have discussed
how to unload these shares, known in Chinese as guangu,
without disrupting the market, but have not come out with
a policy or solution.
If the Goldman JV deal is approved, this means that the
Chinese government, at its highest levels, has given up
on finding a policy to reforming China's capital markets.
Instead, it will outsource the solution to private companies
which can solve the problem at a profit, and create wholly
new Chinese capital markets which are not tied down by
legacy structural problems.
Since US Wall Street investment banks are the most daring,
imaginative and resourceful in this area, the advantage
will go to them, and their new China joint ventures.
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