Goldman Sachs unveils big plans for China

China is the world’s most populous nation and one of its biggest capital markets, and foreign investment banks are eager to grab a slice of the action. Goldman Sachs Group Inc. is right at the head of the pack.

In October, it became the second foreign investment bank to get the go-ahead to take 100% ownership of its Chinese securities joint venture, Goldman Sachs Gao Hua Securities Co. Ltd., ending a 17-year partnership with veteran financier Fang Fenglei. That followed approval in May to set up a majority-owned wealth management venture with Industrial & Commercial Bank of China Ltd. (ICBC), the world’s largest commercial lender by assets.

The Wall Street giant has big plans for China and is already ahead of its target to double its onshore workforce to 600, one of the goals laid out in a five-year growth strategy in 2019. The bank is looking to grow all of its four global business lines — investment banking, global markets, asset management, and consumer and wealth management.

“The short-term focus on our China business will still be to provide Chinese clients with investment banking and investing services,” Todd Leland, co-president of Goldman Sachs for Asia Pacific excluding Japan and head of the region’s investment banking division, told Caixin in an exclusive interview.

“At the same time, our investment in wealth management and asset management will increase. Although the base is not large, the growth rate will be very fast,” he said.

Sean Fan, chairman of the securities venture and co-head of investment banking in China, pointed to longer-term plans. “We hope to bring in all of Goldman Sachs’s global businesses into China when the opportunity arises,” Fan told Caixin. “Many of the businesses will need more than past experience. We will invest into IT platforms, AI technology and people to be consistent with the company’s global standards.”

Restrictions on foreign shareholdings and business licenses, and putting the right localization strategies in place have been the main challenges for foreign institutions looking to expand in China since the country started opening its financial sector more than two decades ago.

In China, securities companies are typically involved in investment banking, research, equities and fixed income. Having 100% ownership of the operation rather than 30% or 70% “means a stronger commitment to investing in licenses, capital and people,” Leland said.

“It’s similar to being a school athlete,” Fan added. “If you can’t represent the school 100%, the school may not give you enough support. You’d also probably feel less motivated. That’s different now.” Fan, 46, will continue to lead Goldman Sachs’ onshore operations. The securities venture will be renamed Goldman Sachs (China) Securities Co. Ltd.

The official blessing will give the bank more freedom to grow its business in China at a time when the government is accelerating the opening-up of the country’s financial markets.

Goldman Sachs’ capabilities across markets mean it can work with clients in evaluating U.S., Hong Kong and A-share markets for their funding needs, Leland said.

Although the New York-based bank is going it alone in securities, in wealth management it’s teamed up with ICBC and has taken a 51% stake in the venture. According to its 2020 annual report, the Beijing-based state-owned lender had more than 16,100 domestic outlets and 680 million personal banking clients, and its wholly owned wealth management unit had more than 25 million customers. The tie-up is expected to give Goldman Sachs a vast distribution network and access to millions of wealthy customers.

Alternative assets

A notice on the website of the State Administration for Market Supervision in December shows that the venture will focus on developing products in three main areas: quantitative and active equity strategies, cross-border investment and innovative alternative investment. These are not typical retail investor products.

Traditionally, among the major banks in the U.S. and Europe, direct investment is one of Goldman Sachs’ strong suits. The company currently manages about $416 billion in alternative assets globally, surpassing Carlyle Group Inc. and just behind Blackstone Inc. and KKR & Co. Inc., according to the company. In China, Goldman Sachs has cumulatively invested about $10 billion in alternative assets.

Globally, the company has already pulled in more than half of the $150 billion target for its alternatives business, with a considerable portion of the funds raised for its first global growth fund earmarked for China. In Asia, Goldman Sachs plans to double the size of alternative investments from $30 billion to $60 billion over five years.

According to Leland, Goldman Sachs’ alternative asset management business doesn’t touch on all industries or stages of investment. For example, the company doesn’t participate in more-volatile venture capital rounds of financing, but rather focuses on late-stage industry-leading companies.

“In terms of sectors, our private investment strategy is currently focused on health care, consumer and services, corporate services including software and software as a service, as well as ESG (environmental, social, and governance),” he said. “Beyond equities, investments are made in assets such as data centers and life science industrial parks.”

Size isn’t everything

Despite Goldman Sachs’ global reputation and size, its securities operation has a tiny market share in China and, like other foreign banks looking to expand in the country, will face tough competition from the domestic heavyweights that dominate the market.

From 2018 to 2020, Goldman Sachs Gao Hua Securities generated a total profit of about 200 million yuan ($31.4 million), far less than that of China’s largest securities companies. By comparison, Citic Securities Co. Ltd., the country’s biggest brokerage, reported net profit of 14.9 billion yuan in 2020.

But size isn’t the only thing that matters. The superior operating capabilities of foreign investment banks, along with their deeper and broader expertise in capital markets and risk management, have fueled concerns that the opening-up of the Chinese mainland’s capital markets will hurt domestic brokerages and their long-term competitiveness. They are seen as being in a weaker position to take on their foreign rivals, and this concern is believed to have spurred regulators into considering scrapping rules that prevent banks from entering the sector. This would allow the development of “flagship” securities companies that could compete more effectively in the domestic market.

Nevertheless, Leland is confident that Goldman Sachs will find its niche in the mainland market.

“In China,” he said, “we are not going to become bigger than Chinese institutions. We need to play a different role.”

Author: WANG LIWEI, NIKKEI Asia