Breakingviews: Goldman still on wrong side of China's great wall

Tue Aug 21, 2012 5:55am EDT

Traders work in the Goldman Sachs stall on the floor of the New York Stock Exchange July 16, 2010. REUTERS/Brendan McDermid

Traders work in the Goldman Sachs stall on the floor of the New York Stock Exchange July 16, 2010.

Credit: Reuters/Brendan McDermid

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

By John Foley

(Reuters Breakingviews) - Goldman Sachs is trying a new approach to going local in China: bring in foreign bosses. After country head Cai Jinyong quit last week, leadership will be centered on two newly arrived Goldman veterans. For the domestic business, probably the most valuable thing they can bring is patience.

The old approach started eight years ago, when Goldman hit on a clever workaround to tap China's restricted equities market. It funded the launch of a local brokerage, Gaohua, and created a joint venture with it to underwrite share issues in the mainland market. Goldman got contractual control of Gaohua, and an economic interest, without owning a single share. Approval went as high as China's State Council.

It hasn't been a great success. While Goldman's China franchise has thrived, the equities business has produced just three mainland initial public offerings. Goldman's $100 million of equity-related business in China's share markets in the first half of 2012, according to Thomson Reuters data, trailed UBS, JPMorgan and Deutsche Bank. And despite employing around 300 people in China, including 100 investment bankers, Goldman hasn't found a successor to Cai as the venture's regulatory point person.

The new arrivals, Asia investment banking co-head Matthew Westerman and returning vice-chairman Mark Schwartz, will help Goldman do more of what it's already good at, such as offshore listings and cross-border mergers. Of its $60 billion of China-related deals done since 2010 according to Reuters data, around half saw the firm on the non-Chinese side. Canada's Nexen, which Goldman is advising in a potential $15 billion takeover by Chinese oil major CNOOC, gives an example.

In equities, even a whizz like Westerman, who formerly ran global equity capital markets, may struggle to liven things up. The flow of IPOs in China is tightly managed by the securities regulator, and Goldman is unlikely to compromise its global reputation by taking on doubtful clients. Goldman's strategy of giving local equity houses a run for their money may work eventually. For now the firm is in the same boat as its rivals: the slow one.

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