VZCZCXRO1994
RR RUEHCN RUEHGH
DE RUEHGH #0333/01 1520237
ZNR UUUUU ZZH
R 010237Z JUN 07
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 5895
INFO RUEHBJ/AMEMBASSY BEIJING 1150
RUEHCN/AMCONSUL CHENGDU 0704
RUEHGZ/AMCONSUL GUANGZHOU 0684
RUEHHK/AMCONSUL HONG KONG 0812
RUEHSH/AMCONSUL SHENYANG 0706
RUEHIN/AIT TAIPEI 0576
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHNSC/WHITE HOUSE NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 6302

UNCLAS SECTION 01 OF 02 SHANGHAI 000333 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM AND EEB 
STATE PASS USTR FOR STRATFORD/WINTER/MCCARTIN/ALTBACH/READE 
STATE PASS FEDERAL RESERVE BOARD FOR JOHNSON/SCHINDLER; SAN 
FRANCISCO FRB FOR CURRAN/GLICK/LUNG; NEW YORK FRB FOR CLARK/CRYSTAL/MOSELEY 
STATE PASS CFTC FOR OIA/GORLICK 
CEA FOR BLOCK 
USDOC FOR ITA DAS KASOFF, MELCHER AND OCEA/MCQUEEN 
TREASURY FOR OASIA - DOHNER/CUSHMAN 
TREASURY FOR IMFP - SOBEL/MOGHTADER 
NSC FOR KURT TONG 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PREL CH
SUBJECT: GOLDMAN SACH'S GAOHUA SECURITIES: AN ONLY CHILD 
 
 
(U) This cable is sensitive but unclassified and for official 
use only.  Not for distribution outside of USG channels. 
 
¶1. (SBU) Summary: Goldman Sachs' venture in China, Gaohua 
Securities, has both benefited and suffered from being the only 
foreign-controlled, full service securities firm in China. 
Goldman's method of obtaining control of a Chinese licensed 
securities firm by giving unsecured loans to trusted Chinese 
business partners was, likely, "not a replicable model, said 
Gaohua Securities Company's Executive Director in a meeting with 
visiting Finatt on May 16.  In addition to explicit rules 
barring foreign from having majority ownership in Chinese 
securities firms, there are also more subtle barriers such as 
onerous licensing examinations for senior managers.  Goldman 
Sachs looked forward to the day when other foreign securities 
firms were doing business in China since securities market 
liberalization would not been viewed by the Chinese as having 
benefited a single firm.  End summary. 
 
¶2. (SBU) In a meeting on May 16, Gaohua Securities Company 
Executive Director Raymond Yin told visiting Embassy Finatt that 
the Goldman Sachs-Gaohua model for establishing a 
foreign-operated, but wholly Chinese-owned full service 
securities firm was most likely "not a replicable model." 
Goldman worked out a deal by which it provided two Chinese 
individuals with ties to the banking industry with unsecured 
loans to cover seventy-five percent of its start-up fees.  The 
venture capital subsidiary of the Lenovo computer company anteed 
up the remaining twenty-five percent to start the Gaohua 
Securities Company.  Goldman and Gaohua then set up the 
Gaohua-Goldman Sachs Banking joint venture in which Goldman has 
a 33 percent equity stake, but like other foreign owned joint 
ventures, is not allowed to trade A shares either for clients or 
on its own account.  Gaohua's application for a brokerage 
license then took two years to be approved; it was finally 
approved at the State Council level, said Yin.  Yin noted that 
details of how it structured the deal were still sensitive and 
not to be discussed with the press. 
 
¶3. (SBU) Further emphasizing Gaohua's uniqueness, Yin told the 
story of the China Securities Regulatory Commission Chairman 
Shang Fulin response to Merrill Lynch's request for similar 
treatment.  Shang apparently said, "You know how China has a one 
child policy?  Gaohua is an only child."  Goldman has 
successfully built its brand here so that, in Chinese, Gaohua 
means Goldman Sachs. 
 
¶4. (SBU) Yin said that while the loans to the two Chinese 
individuals were unsecured, they were treated as Goldman 
partners and received remuneration in the form of Goldman stock. 
 This had the effect of tying them closely to Goldman's 
financial performance and provided a quasi-guarantee for the 
loan. 
 
--------------------------------------------- -- 
Subtle Barriers to Securities Business in China 
--------------------------------------------- -- 
 
¶5. (SBU) Yin said that in addition to explict barriers to FDI in 
financial services in China, there were also many "subtle 
barriers" for foreign companies.  To be certified as a "senior 
manager" in a securities business, one needed to take the 
"Senior Manager Exam."  This exam was only offered in Mandarin 
Chinese.  Yin said that to pass this exam one needed to have 
been educated in Chinese as it was highly technical.  Yan, an 
American citizen and 14-year Goldman partner, admitted that 
although he had been born in China and was a native Chinese 
speaker, he had to take the exam twice.  Once the examination 
was passed, the senior manager then needed to have all original 
diplomas certified by a special office in Beijing.  Finally, the 
applicant for a senior manager position must then provide the 
passport numbers and names of all of his extended family members 
 
SHANGHAI 00000333  002 OF 002 
 
 
-- including uncles, aunts, and cousins.  This final measure was 
to allow the Chinese government to stop these people from 
fleeing China in case of fraud investigations.  Yin said, 
however, it made him feel like he was already being treated like 
a criminal.  Because his diplomas had yet to be certified, Yin 
had to use the title "Executive Director" rather than "General 
Manager." 
 
¶6. (SBU) In addition to the senior management test, 75 percent 
of all personnel at a securities firm must be citizens of the 
People's Republic of China.  This combined with the Chinese 
language requirements for senior managers created a difficult 
but not insurmountable challenge for overseas firms, said Yin. 
 
¶7. (SBU) Another barrier, said Yin, was the licensing 
requirement to become an "innovative broker."  This license 
allowed securities firms to create financial products.  To 
qualify, a brokerage submitted an application to an industry 
panel, "made up of your competitors," said Yin.  This panel was 
then, "invited into a firm's back room, to view all of its 
internal processes, and kick the tires," he added. 
 
--------------------------------------------- -- 
Gaohua: A Chinese Firm with Foreign Limitations 
--------------------------------------------- -- 
 
¶8. (SBU) While Gaohua had been granted a full brokerage license, 
and was technically a wholly-owned Chinese securities company, 
it continued to face extra scrutiny and controls from the CSRC, 
said Yin.  He noted that Gaohua's underwriting of the Ping An 
Insurance's initial public offering (IPO) had received a great 
deal of media attention.  When Gaohua subsequently sought 
approval to underwrite another, Yin said, the CSRC indicated 
that Gaohua had had "too much publicity" and then refused 
permission to underwrite the next IPO. 
 
¶9. (SBU) Yin speculated that foreign fund management firms and 
had been more welcomed in China than foreign securities firms 
since the former was a relatively new industry in China and 
foreign firms offered technology and know-how that China lacked. 
 Securities firms, on the other hand, had been established 
longer in China and due to financial weakness more reluctant to 
face foreign competition.  Yin said that Chinese authorities did 
not appear interested in following the "London Model" of opening 
up their securities industry which had lead to a vibrant 
financial center at the expense of domestically owned firms, but 
would pursue a more gradual and restrictive approach that would 
leave a larger role for domestic securities companies. 
 
----------------- 
Safety in Numbers 
----------------- 
 
¶10. (SBU) Yin was clearly pleased with the leadership position 
that Goldman Sachs had taken in China.  However, he also 
admitted that being the only "foreign" securities firm in China 
also had its downsides.  He said that currently Goldman was "the 
only voice" and that it was forced to break all new ground on 
its own.  When more foreign securities firms were allowed to do 
business in China, Goldman would be able to benefit from having 
"a collective voice" to share its concerns.  For the meantime, 
Yin said, Goldman was attempting to set a good example of the 
benefits that foreign firms could bring to China and act as a 
good corporate citizen.  It had spent a great deal of effort and 
time training and advising the CSRC.  "We treat them like a 
client," he said. 
JARRETT