Goldman lays groundwork for China future without ownership curbs

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People walk by the Goldman Sach’s New York headquarters on July 18, 2017 in New York City. -- AFP

AS CHINA gets ready to allow foreign banks to take majority stakes in local securities joint ventures, Goldman Sachs Group Inc. has been quietly laying the groundwork for an onshore business in which it will have equity control.

Goldman Sachs’s partner in China, Fang Fenglei, and his associates are open to selling a controlling stake in their local JV to the US firm and the parties are negotiating a structure, according to people with knowledge of the talks. A key hurdle to the plan was removed on Friday after China said it would lift a 49% ownership cap on such ventures.

Having a partner who’s a willing seller gives Goldman Sachs a clear path to equity control of its business in Asia’s largest economy — an outcome the company has lobbied heavily for. While Goldman Sachs already has an agreement with Fang that gives it sway over the JV’s management, greater equity ownership would provide the US bank an incentive to step up its expansion in China.

“We have long been strong advocates for full ownership of our joint venture, something which will lead to more investment in our China business,” said Goldman Sachs spokesman Edward Naylor, without commenting on details of the company’s plans. A representative for Fang declined to comment.

Negotiations are ongoing and the intended structure may change as details emerge on China’s plans to allow foreign control of securities JVs, according to the people, who asked not to be identified because the information is private. For instance, it isn’t yet clear how the parties will handle various business licenses, the people said.

China hasn’t said when the new rules, which initially increase the ownership limit to 51%, will take effect. The cap will be abolished three years after the rules are in place, according to Friday’s announcement. Some of Goldman Sachs’s competitors, including UBS Group AG, have also been working to boost their stakes in local JVs.

Goldman Sachs owns 33% of Beijing-based Goldman Sachs Gao Hua Securities Co., with the remainder controlled by Fang’s Gao Hua Securities Co. Under the main scenario discussed with Fang, a transaction where Goldman Sachs buys a majority stake would involve folding Gao Hua Securities into Goldman Sachs Gao Hua — establishing the foundation of an operation that would eventually be fully owned by Goldman Sachs, the people said.

Fang, who got approval for the Chinese venture with Goldman Sachs in 2004, believes global banks are better equipped to run institutional securities and investment banking businesses in China, according to a person familiar with his thinking. Fang stepped down from his day-to-day duties in 2007 while remaining chairman of Gao Hua Securities and Goldman Sachs Gao Hua.

Most licenses required to do business on the mainland, including securities trading and private wealth management, are currently held by Gao Hua Securities. Goldman Sachs Gao Hua only holds the investment banking license, which governs activities such as advising companies on stock and bond sales. Gao Hua Securities closed its asset management business in January.

If Fang sells his stake in the JV, he may focus on businesses that avoid direct competition with Goldman Sachs, such as retail brokerage and asset management, the people said. They added that Fang’s plans are early stage and may change.

Goldman Sachs’s former Asia-Pacific chairman, Mark Schwartz, left the company in late 2016 after years of unsuccessfully pushing for a more permanent solution for the China business.

After Schwartz’s departure, Goldman Sachs Co-President Harvey Schwartz assumed primary responsibility for discussions with China’s leadership, one of the people said. Goldman Sachs stepped up lobbying efforts this year, culminating in Chief Executive Officer Lloyd Blankfein’s meeting with senior Chinese officials on Thursday, according to the person. It’s unclear what role the firm’s lobbying played in China’s announcement on Friday.

Goldman Sachs plans to significantly increase both headcount and the amount of capital it deploys in China once it has equity control of its local operation, the person said, without giving details. Gao Hua Securities had 167 employees at the end of 2016, while Goldman Sachs Gao Hua had 100. Another 25 people worked at Gao Hua’s futures brokerage unit.

The US bank’s unique structure in China is a legacy of its 2004 agreement with Fang, which allowed the firm to wield control through a loan it extended to the Chinese banker. That loan, used to set up Gao Hua Securities, was repaid a decade later. Goldman Sachs doesn’t have any direct ownership in Gao Hua Securities.

UBS owns 25% of its local venture UBS Securities Co., which had 364 employees at the end of last year. The Zurich-based bank had been in talks to raise its stake to 49%, which would make it the biggest among five shareholders in the JV, people with knowledge of the matter said earlier.

UBS Securities posted a 95 million yuan ($14.3 million) profit last year, compared with a combined 79.5 million yuan for Gao Hua Securities and Goldman Sachs Gao Hua, according to company filings. — Bloomberg