Identifier
Created
Classification
Origin
07SHANGHAI334
2007-06-01 02:37:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Consulate Shanghai
Cable title:  

HAITONG SECURITIES ON CHINA'S STOCK MARKET

Tags:  EFIN ECON PREL CH 
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VZCZCXRO1996
RR RUEHCN RUEHGH
DE RUEHGH #0334/01 1520237
ZNR UUUUU ZZH
R 010237Z JUN 07
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 5897
INFO RUEHBJ/AMEMBASSY BEIJING 1152
RUEHCN/AMCONSUL CHENGDU 0706
RUEHGZ/AMCONSUL GUANGZHOU 0686
RUEHHK/AMCONSUL HONG KONG 0814
RUEHSH/AMCONSUL SHENYANG 0708
RUEHIN/AIT TAIPEI 0578
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHNSC/WHITE HOUSE NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 6304
UNCLAS SECTION 01 OF 02 SHANGHAI 000334 

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: HAITONG SECURITIES ON CHINA'S STOCK MARKET

REF: A. SHANGHAI 251


B. SHANGHAI 325

(U) This cable is sensitive but unclassified and for official
use only. Not for distribution outside of USG channels.

UNCLAS SECTION 01 OF 02 SHANGHAI 000334

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: HAITONG SECURITIES ON CHINA'S STOCK MARKET

REF: A. SHANGHAI 251


B. SHANGHAI 325

(U) This cable is sensitive but unclassified and for official
use only. Not for distribution outside of USG channels.


1. (SBU) Summary: Representatives from Haitong Securities
Company told visiting Embassy Financial Attache (Finatt) on May
16 that competition from foreign companies would ultimately
strengthen China's securities industry. Haitong has struggled
to accurately value China's listed companies and manage risk in
the face of insufficient information and an overheated stock
market. Haitong's joint venture relationships with two foreign
banks in the fund management business had increased its risk
control and management abilities although there had been some
conflicts caused by cultural differences. End summary.


2. (SBU) Visiting Embassy Finatt met with Haitong Securities
Company Internatonal Business Department General Manager Liao
Rongyao and Haitong Securities Research Institution Deputy
Director Zheng Zu on May 16. Haitong Securities was a
full-service brokerage that conducted initial public offering
(IPO) underwriting, institutional investing and proprietary
investing. Haitong also had two joint venture (JV) mutual fund
management companies and was considering opening a venture
capital company, according to Liao.

--------------
Companies Only Grow Strong With Competition
--------------


3. (SBU) Liao said that its JV fund management companies, one
with Bank of Montreal and the other with Fortis Bank and other
domestic investors, had been very successful. She noted that in
its four years of cooperation with the foreign companies,
Haitong had "learned a lot" about risk control, investment
processes, and technical and managerial skills. Nevertheless,
there had been "conflicts in working styles." Liao said that

according to regulations, a securities fund was allowed to be a
part of only two fund management companies. Liao also noted
that Haitong had plans in place with unnamed foreign companies,
to form JV securities brokerages should regulations allow JV
investment in underwriting, asset management and financial
consulting. Haitong also was also in discussions with foreign
firms to create partnerships that would give it access to
foreign know-how in the financial derivatives business (Ref A).


4. (SBU) While discussing the possibility of foreign securities
companies being permitted to open in China, Zheng acknowledged
that competition brought "both good things and bad things."
Zheng said that China's brokerages would benefit from
competition in terms of an increased service level to clients
and improved risk management abilities. The downside of
competition was, of course, "competition" he said. "Companies
only grow strong when there is competition; they do not grow
under protectionism," he added.

-------------- --------------
Interest Rate Hikes Aimed at Economy, Not Markets
-------------- --------------


6. (SBU) Zheng said despite the recent increases in value of
China's equities market, it still only represented a very small
portion of China's overall economy and thus any macroeconomic
impact of a downturn in the market would be limited. He
believed that interest rate hikes were aimed at cooling the
whole economy, not just aimed at an over-heated stock market.
In general, interest rate hikes did have an effectively negative
impact on the market, although the recent hikes had not affected
the market. Zheng said that the most effective way to cool the
market was to increase the number of good quality IPOs. By
increasing the supply of stocks, prices would stabilize.


SHANGHAI 00000334 002 OF 002



7. (SBU) Haitong's Liao agreed that overheated equity market was
due to being lack of investment channels for Chinese investors.
Increasing market supply was the only way to cool the markets
down. One way to increase the supply of listed stocks, Liao
said, was to allow foreign companies to list in the Chinese
equity market. She had heard that HSBC might list on Shanghai
Stock Exchange.

--------------
Managing Risk in a Hot Market
--------------


8. (SBU) Haitong's Zheng told Finatt that it was especially
difficult to manage risk in such a volatile market (Ref B).
Haitong's Research Department's investment philosophy was to
look at the value of the company. A year ago, he said, it had
been "easy" to recommend stocks based on the company's intrinsic
value. Now, however, given the massive market gains and high
price/earnings ratio, "this year was very hard." Zheng said at
times he "felt very embarrassed" with customers when trying to
explain why a stock Haitong "had valued at RMB 20 had gone up to
RMB 30." Outlining the risks, he said, "In this market, it was
very difficult to keep a clear mind and not follow the sentiment
of the market."


9. (SBU) Despite the current bull market mood amongst investors,
Zheng said that eventually the market would go down. Haitong
was not concerned that it would be liable for customer losses,
however, and Zheng asserted that Chinese investors were not
blind to the dangers inherent in a market. "Customers had four
years of a bear market; they know the risks of the market and
understand that no one will compensate them," he said.


10. (SBU) Liao said that when Haitong customers opened new
trading accounts, they signed risk disclosure statements. "But
we do not know if they can afford that risk. That is another
issue," she said. Applicants for new accounts were required to
show their government-issued identification card. Liao
acknowledged the difficulty that most of Haitong's customers
would have accessing or understanding research reports.

--------------
The Mechanics of Haitong's Risk Assessment
--------------


11. (SBU) Zheng said that his department tried very hard to get
an accurate picture of the companies that it was researching.
Nevertheless, he acknowledged that the information Haitong's
analysts received was "less than 100 percent." Haitong had 120
branches throughout China, and he relied on staff at the local
branches to "have good relations and contacts with listed
companies" in their area. This local knowledge allowed his
researchers to know "who was upstream and who was downstream."
In the face of incomplete information, Haitong's researchers
would "evaluate what we do not know so as to control risks."
(Comment: Should foreign securities firms be permitted to
operate in China, it would be unlikely that they would have a
similar network of branch offices from the start. End comment.)


12. (U) Embassy Finatt cleared on this cable.
JARRETT