Zurich-based UBS is poised to swallow up―then manage―a long-standing Chinese securities company, making it the first foreign investment firm to do this.
　　On September 1, Beijing Securities applied to the China Securities Regulatory Commission (CSRC), the industry’s supervisory body, to close its 27 operating branches and one service center. That indicated UBS is near completing its year-long campaign to take control of Beijing Securities.
　　The plan for restructuring Beijing Securities into the new company, UBS Securities Co. Ltd., hasn’t changed much since September last year, when the framework was proposed. UBS expects to invest up to 1.7 billion yuan, for about 20 percent of the venture. The Beijing State-Owned Assets Supervision and Administration Commission (the Beijing SASAC), meanwhile, will hold a 33-percent share in the restructured venture. The International Finance Corp. will hold no more than 5 percent. The other 42 percent will be held by a consortium of Chinese strategic investors approved by Beijing Securities and UBS.
　　After the restructuring, despite its 20 percent minority share, UBS will have the right to manage the new company, which makes it not only the first foreign investment firm to run a Chinese securities company, but also the first foreign business with a license to trade shares and manage assets and wealth on China’s mainland.
　　Total assets of UBS Securities are expected to reach 3 billion yuan, far exceeding those of the old Beijing Securities. Inflows from the Jianyin Investment Co. and Beijing SASAC will amount to 998 million yuan and 492 million yuan respectively.
　　
　　The shell game
　　
　　Beijing Securities, founded in 1997 with 21 shareholders, registered total assets of 1.515 billion yuan in 2000. According to the company’s annual report in 2004, however, its total net assets dropped drastically to 477 million yuan that year, while incurring a heavy loss of 160 million yuan. Industry insiders revealed that taking into account the amount of money put into entrusted managment and the embezzled clients’ cash deposits, the company’s actual loss was even greater.
　　To some extent, Beijing Securities’ losses were unavoidable as the entire industry was running afoul of prosperity.
　　Then in September 2005, UBS purchased a 20-percent stake in Beijing Securities, restructuring the latter into UBS Securities. Up to now, Merchants Securities has taken over 21 branches of Beijing Securities, as well as its brokerage business.
　　Li Kai, a staff member of the former Beijing Securities Chegongzhuang Branch, now a branch of Merchants Securities, told Beijing Review that UBS only kept six of the Beijing Securities’ 27 operating branches―two each in Beijing, Shanghai and Shenzhen.
　　As for these branches, UBS took a rare approach, persuading their clients to turn to the 21 branches sold to Merchants Securities, as it has transferred all the Beijing Securities’ brokerage business to the latter. 　　“At first, we couldn’t understand why UBS wanted to turn the clients away,” explained Li Kai. “Those are good quality clients who can bring a good return. Later we realized that those operating branches would serve as a ‘shell’ for UBS―a platform to develop high-end customers.”
　　Indeed, UBS doesn’t necessarily need many outlets to target high-end clientele, said Rory Tapner, CEO of UBS Asia-Pacific. He told the press that remaining outlets would focus on wealth management.
　　Tapner explained that wealth management is more like a professional financing operation. In developed markets in North America and Europe, a family that possesses huge amounts of wealth accumulated for generations will need a professional financing institution to manage it.
　　Li noted that UBS only kept all the staff in the investment banking section in his branch.
　　“We lack professionals in this field. Those with government backgrounds will have the privilege in our future recruitment process,” said Li.
　　Huw Jenkins, CEO of UBS Investment Bank, stated that UBS Securities will make proper arrangements for the former Beijing Securities employees. In the first three months, he said, UBS Securities will provide training for other employees on professional skills, foreign languages and management systems. All the trainees will have to take exams after the training, and only those qualified can stay. UBS will still keep employment ties with those who fail the exam and provide them with opportunities to study. According to the restructuring agreement, UBS will not lay off the former Beijing Securities employees for one year.
　　“This arrangement is in line with UBS’ plan at a primary stage,” said Wang Jing, a researcher with Orient Securities. “UBS won’t pursue a profit at this stage. Instead, it will focus on the most valuable asset of a securities company―human resources―so as to lay a solid foundation for the new company. UBS’ plan is practical as the wealth management upon which UBS prides itself cannot be brought into full use immediately.”
　　Jenkins explained that UBS was pursuing a long-term goal with regard to investing in Beijing Securities. He said that it may take five to 20 years to build up this opportunity, and that UBS was intent on being patient.
　　
　　History in the merging
　　
　　If patience with China’s securities market is a virtue, private capital is finally reaping its reward for the wait.
　　After a government notice encouraging securities companies to attract stocks and capital was issued in November 2001, private capital began surging into the securities companies from various channels.
　　But following four years of stagnant stock market performance, many securities companies were on the verge of bankruptcy. Statistics from the Securities Association of China show that in 2004, the 114 domestic securities companies logged a net loss of 14.993 billion yuan.
　　To save the Chinese securities companies, China Central Huijin Investment Co. Ltd. and Jianyin Investment Co., both affiliated with the central bank, took on the project of restructuring those companies and turned to foreign help.
　　Thus enter UBS Securities and a few other joint ventures, namely China Euro Securities, Changjiang BNP Paribas Peregrine Securities, Daiwa SMBC-SSC Securities, and Goldman Sachs Gao Hua Securities.
　　But unlike the other joint venture foreign partners, UBS, enjoying the holding right, has the right to manage Beijing Securities.
　　Other foreign firms are following suit. The French Credit Lyonnais Securities and Dutch ABN AMRO Bank are in negotiations to restructure Xiangcai Securities, which again would include management control.
　　“UBS’ deal with Beijing Securities sent a clear signal that foreign capital can take control of joint-stock securities companies and enter into the fields of comprehensive operational services,” said Zuo Xiaolei, chief economist with Yinhe Securities.

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