VZCZCXRO3847
RR RUEHCN RUEHVC
DE RUEHGH #0657/01 2820220
ZNR UUUUU ZZH
R 090220Z OCT 07
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 6341
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHNSC/WHITE HOUSE NATIONAL SECURITY COUNCIL WASH DC
RUEHGH/AMCONSUL SHANGHAI 6823

UNCLAS SECTION 01 OF 03 SHANGHAI 000657 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE PASS FEDERAL RESERVE BOARD FOR JOHNSON/SCHINDLER; SAN 
FRANCISCO FRB FOR CURRAN/LUNG; NEW YORK FRB FOR DAGES/CLARK 
STATE PASS CEA FOR BLOCK 
STATE PASS USTR FOR STRATFORD/WINTER/MCCARTIN/LOI/READE 
USDOC FOR 4420 
USDOC FOR ITA/MAC DAS KASOFF, MELCHER AND MCQUEEN 
TREASURY FOR EXEC - TSMITH, OASIA/ISA -DOHNER/BAKER/CUSHMAN 
TREASURY FOR WRIGHT AND AMB HOLMER 
TREASURY FOR SOBEL AND MOGHTADER 
NSC FOR MCCORMICK AND TONG 
 
E.O. 12958: N/A 
TAGS: EFIN EINV ELAB PGOV CH
SUBJECT: SHANGHAI FUND MANAGERS ON JV'S AND COMPETITION 
 
REF: SHANGHAI 654 
 
SHANGHAI 00000657  001.2 OF 003 
 
 
(U) This cable is sensitive but unclassified and for official 
use only.  Not for distribution outside of USG channels or via 
the internet. 
 
¶1. (SBU) Summary:  Joint venture securities firms in China only 
succeed when the foreign partner has explicit management control 
and can avoid cultural and managerial conflicts, according to 
managers at two such joint ventures.  Chinese security firms, 
fearing their inability to compete, have asked the China 
Securities Regulatory Commission (CSRC) to limit foreign 
securities firms in China.  The State Administration of Foreign 
Exchange has delayed an increase in QFII quotas to reduce 
foreign exchange inflows and will probably wait on increased 
QDII outflows to balance larger QFII quotas.  Recent gains in 
the equity markets have been fueled by savings 
disintermediation, but market fundamentals are sound and the 
bull market could last as much as five years.  The Ministry of 
Labor and Social Security welcomes foreign involvement in 
enterprise annuities, but poor tax incentives, strict controls 
on how the funds are invested and high fixed costs mean that 
these are unlikely to be profitable.  End summary. 
 
¶2. (SBU) Visiting Treasury DAS Mark Sobel and Embassy Finance 
Minister Counselor David Loevinger met with Fortis-Haitong 
Investment Management Company CEO and Board Director Tian Rencan 
on September 17 and Guotai Jun'an Securities Company Deputy 
General Manager Tuo Qibin on September 18 in Shanghai.  (Note: 
Reftel reports other meetings made by the delegation.  End 
note.) 
 
--------------------------------------------- --- 
JV's Fail When Partners Don't Focus on Strengths 
--------------------------------------------- --- 
 
¶3. (SBU) Fortis-Haitong's Tian attributed the success of his 
company to the hands-off approach taken by the Chinese partner 
in the day-to-day running of the fund.  In the formation of 
their joint venture (JV), Fortis made sure that it had the power 
to appoint the CEO, CMO and CIO.  Haitong has control over the 
appointment of the Chairman and the CFO.  Tian said this was 
intended to assure them that Fortis would not misappropriate 
funds.  This structure allows each JV partner to focus on its 
relative strengths, Fortis on asset management and Haitong on 
local marketing and distribution. 
 
¶4. (SBU) Tian contrasted Fortis-Haitong's "successful" approach 
with other, less successful, JV fund management companies.  He 
said that "most failures occur when the different management and 
investment styles and objectives of the Chinese 
partner-nominated Chairman conflict with those of the 
foreign-partner-nominated General Manager."  These conflicts 
stem from differing risk management strategies and business 
management techniques between the two sides.  Cultural 
differences also play a role in failed JVs, especially when the 
Chinese partners intervene in the decision-making process, said 
Tian. 
 
¶5. (SBU) In a separate meeting, Guotai Jun'an Securities Firm 
Deputy General Manager Tuo Qibin largely agreed with 
Fortis-Haitong's Tian.  Tuo admitted that the JV fund management 
company established by Allianz and Guotai Jun'an has been 
experiencing problems and that its performance is below the 
partners' expectation.  He blamed "Allianz's stubborn German 
working style," for the problems since they have not adapted to 
working "in the Chinese environment." 
 
--------------------------------------------- ------ 
Local Opposition to Opening the Securities Industry 
--------------------------------------------- ------ 
 
¶6. (SBU) Guotai Jun'an's Tuo said that Chinese securities firms' 
opposition to foreign investment in the securities sector stems 
from the belief that local securities companies have no 
comparative advantage that would allow them to compete.  Should 
they be allowed to operate, foreign firms would quickly hire the 
limited supply of qualified staff.  This would be a significant 
problem since the local securities firms' compensation packages, 
 
SHANGHAI 00000657  002.2 OF 003 
 
 
and thus their ability to retain staff, are constrained by the 
fact that they are state-owned enterprises, he said.  Tuo said 
this view was made clear to the China Securities Regulation 
Committee (CSRC) at a meeting held in the second half of 2006. 
At this meeting, local securities companies expressed their 
concerns about the threats that foreign firms represented and 
asked the CSRC for protection. 
 
¶7. (SBU) Fortis-Haitong's Tian separately expressed his 
agreement that the major obstacle to increased foreign 
investment in China's securities industry comes from the local 
securities industry.  Only after local companies become 
stronger, better managed and more competitive with foreign 
companies would the regulators fully open China's securities 
market to foreign investments. 
 
--------------------------------- 
Enterprise Annuities Developments 
--------------------------------- 
 
¶8. (SBU) According to Fortis-Haitong's Tian, the Ministry of 
Labor and Social Security (MOLSS) is open to foreign involvement 
in enterprise annuities.  However, both a lack of tax incentives 
and the 25 percent ceiling on equity allocations make the 
products unattractive to both businesses and employees.  As a 
result, of the nine companies with enterprise annuities 
licenses, half have no business.  While Fortis-Haitong has 
signed deals with 25 companies, totaling over RMB 1 billion (USD 
133 million) in assets under management, high fixed costs mean 
that it has yet to be profitable.  Concerns about insufficient 
profitability among existing licensees has made MOLSS reluctant 
to issue new licenses and has threatened to de-license firms 
that are not using licenses they have been issued. 
 
¶9. (SBU) Nevertheless, the Chinese Government is pushing the 
expansion of enterprise annuities and Tian expects significant 
growth in this area of the market.  According to Tian, the 
State-Owned Assets Supervision and Administration Commission 
(SASAC) has issued a circular to large SOEs requiring them to 
submit draft annuities schemes by June 2008.  CSRC has also 
created a list of companies approved to manage assets. 
 
--------------------------------------------- ------ 
QFII Quota Increase Delayed -- Huge Demand for QDII 
--------------------------------------------- ------ 
 
¶10. (SBU) Fortis-Haitong's Tian said that the CSRC had been 
ready to increase the Qualified Foreign Institutional Investor 
(QFII) quota from USD 10 billion to USD 30 billion.  However, 
over-liquidity in the capital markets led the regulators, 
especially the State Administration of Foreign Exchange (SAFE), 
to delay this increase until there were more capital outflows 
through the Qualified Domestic Institutional Investor (QDII) 
programs to set off the capital inflows from increasing the QFII 
quotas.  Tian also noted that due to volatility in the equity 
market, several QFIIs had sold off part of their holdings in an 
attempt to short the market.  Additionally, the CSRC cited this 
as a justification for delaying the QFII quota increase by 
saying that there was no need to increase the QFII quota until 
the original quota has been fully utilized. 
 
¶11. (SBU) Tian said that the QFII requirement that investments 
be held for minimum periods make them difficult to use in some 
markets, such as Japan, which requires mutual funds to be 
redeemable daily.  Moreover, given SAFE's desire to promote 
capital outflows, Tian saw little justification in requiring 
QFIIs to hold their investments for minimum periods.  Still, 
Fortis-Haitong is interested in expanding the QFII program to 
include alternative investment such as private equity. 
 
¶12. (SBU) Tian said that there is a huge demand by Chinese 
investors for QDII products.  While investors had been focused 
on the huge gains in China's equity markets, they were beginning 
to seek ways to diversify their portfolios.  Fortis-Haitong is 
in the process of designing a QDII product that included Chinese 
companies listed overseas.  Tian attributed the success and 
massive oversubscription of Southern Fund Management Company's 
QDII product, issued in September, to the fact that there had 
 
SHANGHAI 00000657  003.2 OF 003 
 
 
been a dearth of new mutual funds issuances. 
 
¶13. (U) Embassy Finatt has cleared on this cable. 
JARRETT