WRITES LILLIAN LIU

Why China's housing market hasn't collapsed yet

NEWLYWEDS WITH ACCESS TO FAMILY MONEY, COUPLED WITH CONTINUED MIGRATION TO

CITIES AND THE GOVERNMENT'S DESIRE TO STOKE GROWTH, WILL CONTINUE TO FUEL THE
STEAMING HOT PROPERTY MARKET,
1,305 words
15 March 2011
Finance Asia
MEDFIN
English
Copyright 2011. Haymarket Media Limited. All rights reserved.

CHINA PROPERTY

It is a truth universally acknowledged in China that a single man in want of a wife has to be in
possession of property. It's also genuinely agreed that as the number of boys increasingly outnumber
girls, the inevitable bride shortage is going to spur eligible bachelors to up their odds of wooing women
by making sure they own property.

"Owning more properties improves personal attractiveness to girls," said Wang Xiang, a marketing
manager in Guangzhou. The 36-year-old, who is single, already has a 110sqm flat in the southern city,
yet he is looking to buy another one to help boost his prospects of finding a bride.

"Family life is not complete unless the flat in which we live in belongs to us. That brings a sense of
security," he said. His view is shared by many of his compatriots nationwide.

"No way my wife would marry me if I didn't buy a flat before I proposed to her," said Li Yan, who works
for a bank in Jiangxi. "But that's understandable. In the future, I definitely will not allow my daughter to
marry a guy if he can't even afford his own flat," he added.

"A flat is not just a place that provides us shelter, it's the benchmark of personal achievement and an
icon of social status," he explained, underlining the importance of home ownership.

Although China's home prices are growing increasingly beyond the common household's affordability,
demand for houses remains strong. To understand this phenomenon you must understand the mentality
behind the desire for home-ownership.

In a country that lacks an established social-safety net, where stock markets can appear like casinos
and food is often contaminated (the latest case is rice - the nation's most consumed staple), everyone
wants to feel more secure by holding onto something solid. Furthermore, there seems to be a race to
display icons of success to be taken seriously, and property symbolises personal achievement and
social status. The fear of heavy mortgages is overcome by the fear of lagging behind.

To Chinese people, owning a home brings much needed security, whereas renting signifies a miserable
drifting life. Ever-increasing prices don't seem to be putting people off. "China's property prices haven't
really crashed during the past 10 or 20 years, which makes people believe the prices will continue to
rise," said Pang Shiyi, chairman of Soho China, a Beijing-based developer.

Demand for housing is especially inelastic in the wedding market as the nation's wedding culture
changes. It's almost shameful if brides and bridegrooms-to-be don't have a nicely decorated flat and a
car to boast about. If they don't, their wedding could be labelled a "naked wedding", or luo hun in
Chinese. Whoever has a naked wedding in China, as this reporter did, is sometimes considered to have
dishonoured the family.

There are no statistics showing how many properties in China are starter homes for young families, but
property agents use the number of university graduates each year as an indicator to predict the property
market demand of first-time buyers in following years.

Most students leave university at around the age of 22 and most Chinese who were originally from rural
areas get married in their mid-20s, while urban Chinese typically marry in their late 20s. Each year there
are more than 6 million university graduates. The number is growing and is forecast to reach 6.9 million
by 2015. Although still a relatively small percentage of the overall population, this group of people is
pushing up property prices for all first-time buyers.

Page 1 of 16 2011 Factiva, Inc. All rights reserved.

Although the majority of 20-something Chinese don't have the financial capability to afford the down
payment or cover the cost of a grandiose wedding, their parents (in part thanks to the one-child policy)
can help; and of course mum and dad (and grandma and grandpa) expect to be taken care of as they
age, so it is a quid-pro-quo agreement.

On top of that, around 10 million rural people migrate to the cities every year, seeking to boost their
status and to have the same kind of life as their urban compatriots. That trend will likely continue for the
next decade or two.

Supported by such demand, property sales in urban areas by the leading property players soared
despite what developers called "the most stringent year" with a series of government measures to cool
the sector in 2010. Home sales by China Vanke and Poly Real Estate, the country's two largest
developers, jumped more than 70% and 50% year-on-year respectively, according to company
statements to the Shanghai Stock Exchange. Vanke's January sales rose 221% to a record Rmb20.1
billion ($3 billion) as a result of selling 1.65 million square metres of properties during the month.

"The housing market has been and will continue to be supported by strong and persistent demand
driven by both self-use needs and investment needs," said Yifan Hu, an economist at Citic Securities.

GO-GO governing

For the supply side, the growth-addicted local governments are more than happy to sell their land, which
is the major source of revenue for their coffers. Many can get away with charging cash-rich developers a
premium price. As a result, in 2010 land sales by local governments reached Rmb2.7 trillion nationwide,
a record high and an increase of 70% year-on-year, according to the Ministry of Land and Resources.

Despite publicly expressing concerns about sky-rocketing asset prices, Beijing's intention to cool down
the market remains questionable. In discussing the economic and policy outlook for 2011 in late
February, the Political Bureau called for the macroeconomic policy to feature "continuity, stability,
pertinence, flexibility, and effectiveness", according to an official press release.

However, in all similar discussions of previous high-level policy meetings since October 2010, the words
"continuity" and "stability" were conspicuously absent. That is "a subtle yet meaningful change in policy
wording that suggests the authorities' pro-growth bias," said Qing Wang, an economist at Morgan
Stanley, adding that Beijing still gives more weight to maintaining reasonably strong growth rather than
controlling inflation.

Bear in mind that Chinese policymakers won't allow anything to go amiss this year. After all, 2011 is the
first year of the nation's 12th five-year plan, and more significantly, the 90th anniversary of the
establishment of the Chinese Communist Party.

But while the government tries to play down the drama of the socio-economic pressures of home-
ownership, popular culture reflects it. Snail House, the most popular soap opera in China in recent
years, featured one character becoming a government official's mistress to keep up with mortgage
payments. The programme, which seemingly upset the image of the harmonious society that China's
government would prefer to portray, was taken off air.

The government can control scripted television, but it cannot change reality. A live match-making
programme recently featured a girl claiming: "I'd rather be miserable sitting in a BMW than happy on a
bicycle."

Even if we can't see an imminent collapse in the property market, a morality crisis could be on the way,
and the Chinese government can't fix that by central regulation.

For more related stories on FinanceAsia.com:

Wharf seeks $1.29 billion to invest in China properties

China hikes rates for the third time in three months

China to become biggest luxury consumer market

Document MEDFIN0020110323e73f0000o

Page 2 of 16 2011 Factiva, Inc. All rights reserved.

SME BANKING
Asia-Pacific banks playing the SME tune

Jonathan Barlow.
1,107 words
15 March 2011
Finance Asia
MEDFIN
English
Copyright 2011. Haymarket Media Limited. All rights reserved.

Banks are offering more sophisticated cash management services to cater to their increasingly savvy
SME clients,

Overlooked and underserved. This is a common refrain heard from many small and medium-sized
enterprises (SME) in Asia. But, as all eyes turn to the region in the aftermath of the financial crisis, local,
regional and a handful of international banks with SME businesses are responding with ever more
sophisticated services as they compete for business.

The SME sector is a broad church, though the precise definition varies from bank to bank. For a bank
such as OCBC starts off with companies that have a turnover of about $8 million, rising to a top end with
Citi handling clients who boast a turnover of $500 million. Though these businesses are small for banks
used to large multinational companies (MNCs), SME bankers do not underestimate the effect these
relationships can have on the bank's bottom line. In Indonesia, for example, government figures show
there were about 52 million SMEs at the end of 2010, with 60% located in Java. That's a large pool of
potential clients.

These statistics are by no means unusual. Precise numbers are hard to gauge, but the consensus is
that SMEs in Asia-Pacific account for about 50% of formal employment and between 30% and 60% of
GDP.

Catering for the sector, however, is not straightforward. Only around 10% of Singapore's 200,000 or so
SMEs have turnovers of more than $8 million - a far cry from banking multi-billion dollar listed MNCs.
"On a portfolio basis, serving this segment is extremely complicated because of the wide range of
service requirements, ambiguity around financials and non-standard operating procedures. On an
individual basis, while you seldom see a structure that is more complicated than a global MNC, the basic
principles of working capital management do apply to companies of all sizes," said Tom McCabe, DBS
managing director and head, global transaction services (GTS), whose bank generates about 60% of its
cash and trade revenue from SMEs.

Banks that lack local roots or a continuous presence in the region, however, need not apply. SMEs
typically place a great deal of value on continuity and relationships. And vice versa. "This entire
spectrum of SMEs - including the emerging businesses [SMEs with turnover of less than about $8
million] - is one of the most important customer segments to OCBC," said Raymond Chee, head of cash
management, group transaction banking at OCBC. SMEs account for more than half of the bank's
current account balances and cash management fee income.

Margins from SME business may also be higher than for large corporations, as SME cash management
requirements still generally need less customisation, while their growth rates can exceed those of larger
MNCs by many times, albeit from a lower base. OCBC reported that growth of its SME current account
balance year-on-year is at least 2% higher than growth of the non-SME portfolio. Its SME fee income is
also 14% higher than the non-SME portfolio. Across the water, Bank Negara Indonesia's (BNI) SME
lending portfolio (excluding commercial lending) reached about $3.4 billion at the end of 2010,
accounting for 21% of its total lending portfolio. "We managed to grow at 20% annual growth [in 2010],
and expect to grow at the same percentage for 2011," said Iwan Kamaruddin, general manager
transactional banking services at BNI.

BNI reports that fashion, handicraft, furniture and tourism-related SMEs are driving cash management
requirements, principally because they are so exposed to the forces of globalisation. "They have
expanded from local to global buyers, which has also forced them to globalise their banking services.
We have also observed that more and more of our clients require internet banking services to support
their businesses," said BNI's Kamaruddin.

Simplicity, convenience... and recognition

Strategies to woo these clients vary but getting in early helps, as today's SME may be tomorrow's
corporate champion. Feedback to an OCBC survey emphasised that SMEs want simplicity, convenience
and, crucially, recognition as business leaders in their own right, said OCBC's Chee. The bank's new
Page 3 of 16 2011 Factiva, Inc. All rights reserved.
business card appeals to just such a sentiment.

Bankers also uniformly report that their SME clients are becoming increasingly savvy. "Liquidity
management solutions, such as sweeping and concentration, used to be the sole preserve of large
corporations, but now our SME customers are also looking to these sophisticated solutions to optimise
the use of their funds and to increase their yields from such balances," said DBS's Lum Yin Fong,
managing director of GTS.

This view is echoed by Som Subroto, global head of SME banking at Standard Chartered, who notes a
growing trend for a combination of cash management and working capital solutions, instead of stand-
alone cash management solutions. "Furthermore, the continuing global trade liberalisation has resulted
in more sophisticated cash management solutions (such as cross-border financing against domestic
cash deposits under the China cross-border trade settlement policy), and it is a trend that is likely to
continue in 2011 and beyond," he said.

Overseas expansion and an end to paper and fax-based systems requires banks to invest in technology
and a global footprint.

"It is a natural progression for SMEs that as they grow bigger, their requirements grow more complex. A
lot of the local banks have very strong capabilities in their own markets, but it is a little more complex for
them to address the needs of clients across multiple markets with the same consistency. That is our
bread and butter," said Sridhar Kanthadai, managing director and head, Asia Pacific and Japan,
treasury and trade solutions at Citi.

Even so, a regional footprint can be just as important. According to a UPS Asia Business Monitor report
published last September, mainland Chinese SMEs now conduct most of their business in Asia Pacific.
The annual survey, which covered 1,350 SMEs in 13 markets across the region, showed that 78% of
mainland SMEs do business in Asia Pacific, compared to just 10% of them doing business in Europe
and just 6% in the US. In addition, more than 70% listed Asia Pacific as having the best prospects for
trade growth and business expansion during the next three years, according to the survey.

SMEs are fast emerging from the shadow of their larger corporate brethren, and banks are responding
in kind.

For more on cash management for SMEs, read these stories on FinanceAsia.com:

l?BNI spies growing e-banking needs among Indonesian SMEs

l?Chinese banks target SMEs with new treasury offerings

Document MEDFIN0020110323e73f0000l

Page 4 of 16 2011 Factiva, Inc. All rights reserved.

SPONSORED PROFILE
Breaking new ground

1,229 words
15 March 2011
Finance Asia
MEDFIN
English
Copyright 2011. Haymarket Media Limited. All rights reserved.

DBS is establishing a new kind of Asian-based banking model

Asia is no stranger to banks claiming to be regional specialists, but DBS is the first and only Asian-
based regional bank. "Nobody has taken the space as a focused Asian-based banking franchise
before," said Tom McCabe, DBS' managing director and head of global transaction services (GTS).

"You do have large Chinese, Indian

and Korean banks, and of course the large multinational banks, but nobody has taken the space in
between."

This space is where McCabe and his team are positioning Singapore-headquartered DBS, and much
progress has already been made. The bank expects to double its annual transaction banking revenue of
S$700 million

($551 million) in three years and has also made investments of approximately

$27 million in technology and new product capabilities, including in smartphone applications. In addition,
McCabe has also made several high profile hires from banks such as JP Morgan, Citi, StanChart and
ABN/Amro to expand and strengthen his team.

These initiatives are in line with the strategic plan laid out by CEO Piyush Gupta early last year. The
plan, which consists of nine key priorities, includes the mandate to diversify DBS' earnings beyond its
core markets of Singapore and Hong Kong which currently constitute about 80% of the bank's revenues.
"A lot of progress is already being made," said McCabe. "If you look at our global liabilities from
customer deposits, for instance, they grew 23% in 2010 but their rate of growth was over 40% outside
Singapore and Hong Kong."

DBS' strategic priorities have a heavy focus on growing its trade and cash business. The plan calls for
building out the bank's transaction banking and treasury cross-sell business. It also aims to build a
leading small and medium-sized enterprise (SME) business (companies with up to $120 million in
annual turnover) across Asia - a strategy where trade finance will play a large role.

McCabe also wants to reinforce the bank's reputation as the pan-Asian bank of choice, and the
distinction is not one of semantics. DBS banks the full range of clients, from small and medium-sized
enterprises (SMEs) to large firms, MNCs and global financial institutions. It is also the only regional bank
with a presence throughout Greater China. "We have much wider Asian network than any other regional
bank and deeper penetration into the key markets than most of the global banks. Our balance sheet is
also one of the strongest in the world: DBS has been named the 'Safest Bank in Asia' for two years in a
row."

"We have an extremely strong

SME business which is acquiring new customers at an incredibly rapid pace. The dominant need of
these fast-growing businesses are cash management, payments and trade services - all marquee
product lines

at DBS," said McCabe.

DBS' new team of GTS veterans

Under McCabe's leadership, DBS has instilled more focused and coordinated client targeting, based in
large part on his own experience with Proctor & Gamble (P&G). This means allocating the sales
organisation's resources with the same prudence with which banks allocate capital. The new operating
model for GTS sales has delivered an immediate increase in calling capacity and revenue per sales call,
and has helped to accelerate the growth of
Page 5 of 16 2011 Factiva, Inc. All rights reserved.
GTS revenues by 20%.

DBS has also made record investments on transaction banking personnel in 2010, reinforcing its
burgeoning local market presence across Asia. The appointment of industry veteran Ken Stratton from
JP Morgan to the newly-created position of global head of sales for GTS, heralds a different approach to
the way the bank targets clients. Stratton is one of many top bankers that DBS is attracting across all its
business lines.

Lum Yin Fong, global head of product management at GTS, has also added new talent to the product
team. This has enabled DBS to roll out new products across the trade and cash management product
set quickly, in response to market demands. DBS' innovation and agility in providing RMB solutions -
the bank now has around 20% share in the offshore RMB interbank market - is evidence of the bank's
ability to anticipate and provide relevant solutions to its clients expediently.

As explained by Lum, "Our business model in Singapore has been highly successful - DBS has been
recognised as the dominant cash management and trade finance bank in Singapore for many years. My
immediate priority now is to take our industry leading products and replicate them across Asia. Our two
year, S$20 million ($15.7 million) investment to create the next generation corporate internet banking
platform DBS IDEAL(tm) is targeted to be launched later in the year, and it will bring to market the most
innovative and efficient platform in the industry."

The bank has, however, been careful to balance its recruitment, said McCabe. "Building businesses is
fun, but I still have to manage my P&L to deliver a high ROE to our shareholders and that means being
smart about keeping expense growth under control. Building sustainable business models and
infrastructure are not projects that can be completed over a year. It will take a balanced investment plan
over a three to five year cycle," he said. "In addition, we already have in place an experienced and
competent team of professionals who have built this franchise over the past years. I don't want to over
recruit and lose the distinctive culture that exists in DBS."

"One of our strengths is that we have a business model that extends across SMEs, large companies
and financial institutions (FIs); we have the technology platform to back this up, and now we are putting
the infrastructure and regional products in place to better service our clients," said Stratton. "There is no
doubt that with our huge corporate client base across Asia, there is plenty of transaction banking
business that is ours to win."

In Greater China, a key growth market for DBS, the bank has 53 branches in Hong Kong, 40 branches
in Taiwan and 17 branches and sub-branches in China (which it intends to increase to 50 within the next
three years). DBS is also looking to double the number of its 1,000 China-based staff. The bank has
been at the forefront of launching renminbi-denominated products and services and has acquired over
1,900 renminbi corporate accounts last year.

"DBS' technology platform, geographical footprint and licences are ideally set to complement each other.
Our goal now is to provide the best services, to stand by our customers through thick and thin and to
unlock value from our huge client base for our shareholders and customers alike."

"Personally I am very excited about what the future holds. Our franchise is well-positioned in terms of
people, network, products and balance sheet to capitalise upon the fast-growing

$91 billion revenue pool in Asia's transaction banking business. Our entire organisation has an
incredibly positive buzz about what we are building and the vision we have for the DBS franchise across
Asia," said McCabe.

CONTACT

Global Transaction Services

Lum Yin Fong

Global Head of Product Management

yinfong@dbs.com

Ken Stratton

Global Head of Sales

kenstratton@dbs.com

DBS Group

Page 6 of 16 2011 Factiva, Inc. All rights reserved.

6 Shenton Way

#40-00 Tower 1

Singapore 068809

www.dbs.com

Document MEDFIN0020110323e73f0000k

Page 7 of 16 2011 Factiva, Inc. All rights reserved.

By Anette Jönsson
China Petroleum and Chemical Corp (Sinopec)

Goldman Sachs Gaohua, China International Capital Corp, Citic Securities, Credit Suisse Founder
Securities, Guotai Junan, UBS
1,030 words
15 March 2011
Finance Asia
MEDFIN
English
Copyright 2011. Haymarket Media Limited. All rights reserved.

Rmb23 billion convertible bond

Deal of the month

Company background

Sinopec, which is listed in Hong Kong and Shanghai, is an integrated oil company with businesses
ranging from exploration and production to oil refining and petrochemicals. It is the largest refining
company in China. The money raised from this CB will be used primarily for capital expenditures,
including the upgrade of two oil-and-gas pipelines and an oil refinery, as well as the construction of a
new ethylene plant.

Chinese regulators have been pushing issuers to sell CBs instead of bonds with warrants, which were
previously quite popular. The latter instruments are similar to CBs in that they give holders the option of
buying equity at a pre-agreed price in the future. However, the bonds and warrants can be traded
separately, and typically end up with different investors. As share prices have tumbled in recent years,
investors left holding the warrants - often retail investors - have ended up losing a lot of money as they
have lacked downside protection, which is part of the bond portion and thus held by different investors.
As a result, regulators prefer the use of CBs as they are safer for investors.

At Rmb23 billion ($3.5 billion), this is the largest domestic CB issued in China after Bank of China's
record-breaking $5.9 billion deal in June last year and Industrial and Commercial Bank of China's $3.7
billion offering a couple of months later. It is also the largest equity or equity-linked transaction in Asia
year-to-date.

Timing The deal was announced on February 17 and the bookbuilding took place on February 23.

Structure The CB is denominated in renminbi and convertible into domestic A-shares only. It has a six-
year maturity and came with fixed terms, including an annual coupon that starts out at 0.5%, but will
step up on each anniversary, to 0.7%, 1%, 1.3%, 1.8% and 2%. The redemption price of 107% (which
includes the final 2% coupon payment) will result in a yield of 2%. However, given that the bonds are
expected to convert well before that, not many investors look at the yield.

Initially, 60% of the CB was offered to existing shareholders. Just under half of that was taken up, which
left 73% of the total deal to be sold through the subsequent bookbuilding exercise.

Domestic Chinese CBs are different from other Asian CBs in the sense that they are much more equity-
like, in other words they are issued and bought on the premise that they will be converted into equity
well before maturity. To fit that purpose, they have very low conversion premiums as well as early calls,
and tend to come with step-up coupons (the issuer is happy to offer higher coupons towards the end of
the life of the bond - as it isn't expected to survive that long - in exchange for low coupons initially). The
reason issuers don't sell equity straight away has to do with price restrictions, which dictate that a share
placement cannot be priced below the latest close or the 20-day volume-weighted average price,
whichever is higher. This means companies cannot offer new shares at a discount to the market price,
which makes it a difficult sell. CBs are subject to the same rules, but because the bonds will be
converted in the future, investors will typically be able to buy the shares at a discount to the market price
at the time.

Pricing The bonds can be converted into shares at Rmb9.73 apiece, which equalled a 5% premium to
the close of Rmb9.27 on February 17 (the day the deal was first announced). However, Sinopec's A-
share price fell 7.6% in the four days up to the bookbuilding, which led the premium to widen to 13.5%.
The issuer can call the bonds after the first six months, subject to a 130% hurdle.

While the premium is very low compared with most Asian CBs, it is consistent with other domestic
Chinese converts - or even a bit higher. ICBC priced its CB at a 2.9% premium, while BOC offered a
Page 8 of 16 2011 Factiva, Inc. All rights reserved.
premium of just 0.2%.

Who bought it? The deal was 123-times subscribed following the bookbuilding, with orders from more
than 2,000 investors. The level of interest was so large, in fact, that it prompted a rush for financing in
the interbank market, which pushed up the overnight repo rate some 300 basis points between the
announcement and the bookbuilding.

Interestingly, investors seemed completely undeterred by the fact that Sinopec's share price took a hit in
the days leading up to the deal as the unrest in Libya sent oil prices to more than $100 a barrel. With
most of its businesses in downstream refining, rising oil prices is generally negative for Sinopec.
However, the scarcity of liquid CBs in China clearly overshadowed any such concerns. Aside from the
huge deals from BOC and ICBC last year, most other China CBs are no more than $200 million to $300
million in size. This scarcity tends to result in significant gains on the first day of trading as investors try
to add to their allocations.

Aside from domestic institutions there was also interest from international hedge funds, which started
approaching the bookrunners shortly after the initial announcement to see whether they could offer any
buying opportunities via existing qualified foreign institutional investor (QFII) quotas. In the end only two
or three QFIIs participated, according to a source.

Aside from the 27% that went to existing A-share holders, 19% of the deal was allocated to insurance
companies, 18% to mutual funds, 15% to securities firms, 7% to corporations, 6% to trusts and 8% to
others, including QFIIs.

Secondary market trading The share price continued to edge slightly lower after the transaction and on
February 28 closed at Rmb8.53. The CB was expected to start trading in the second week of March.

Document MEDFIN0020110323e73f0000f

Page 9 of 16 2011 Factiva, Inc. All rights reserved.

COVER STORY
The future is China

By Nick Ferguson
2,803 words
15 March 2011
Finance Asia
MEDFIN
English
Copyright 2011. Haymarket Media Limited. All rights reserved.

But so far the gold-rush into China's domestic IPO business has generated more excitement than profits
.

Investment banks from all over the world are queuing up to enter China these days, but the much-
coveted licences hardly confer the right to print money. Indeed, the joint ventures that mainland
authorities force foreign banks to enter offer so little upside that many of them exist only on business
cards and at the bottom of league tables.

Even so, the roll call of firms waiting to tie up continues to grow longer as banks cross their fingers and
hope to strike it lucky with their newfound partners. On New Year's Eve last year, J.P. Morgan and
Morgan Stanley both won new licences to set up securities joint ventures that they hope will give them
access to the huge potential of China's domestic securities market - even though few of their rivals have
yet managed to do so.

For Morgan Stanley, it is a case of second time lucky. Its first marriage, with CICC, was the original
China joint venture, consummated back in 1995. That first deal was way ahead of the game, though little
has changed to make today's joint ventures any more attractive than that first deal.

Still today, to conduct securities business on the mainland, foreign banks must tie up with a local
securities house and accept a junior role in a joint venture. The strict ownership rules limit foreign
partners to a one-third share in the joint business. That is a legacy of China's accession to the WTO in
2001, when negotiators focused more on direct investments rather than securities.

At the time, few people expected China's capital markets to develop so quickly. "I was involved in the
first B-share issue in 1990 and the first H-share in 1992," said Liping Zhang, Credit Suisse's China CEO
and vice-chairman of the bank's global investment banking business. "But even I did not anticipate that
issuance would grow so quickly. The fee volumes at that time were very small and I could not imagine
that the fee pool would increase so dramatically."

Indeed, the fees that Chinese clients pay help explain a lot of the attraction for foreign investment banks.
"Look at Thailand, Taiwan, Indonesia; these clients are paying 1% or 1.5%," said Zhang. "Chinese
clients are paying 7% for US offerings and 3.5% for Hong Kong offerings."

That, multiplied by the size of China's market, is putting the rest of the region in the shade. Not only do
the Chinese pay real fees, they are also raising more equity capital than anyone else.

But nobody foresaw that even 10 years ago and, as a result, foreign investment bankers have to share
their technology and their knowhow, plus two-thirds of any profits they make. It is a one-sided
relationship that has caused strains in most of the joint ventures.

The rules haven't changed much, but the landscape has. The state still accounts for most of China's
economic activity, but during the past five or six years the partial sale of state-owned assets and the rise
of Chinese entrepreneurship have rapidly created a private sector that needs private sources of funding.
At the same time, post-WTO liberalisations have made it easier for mainland businesses to raise capital
from foreigners.

Western investment banks are central to enabling this business, thanks to their ability to corral those
pools of foreign capital and channel them into China (or Hong Kong, at least). The reverse is now also
true. As Chinese businesses mature, they are naturally looking overseas for opportunities to spend the
huge amounts of foreign capital they have amassed.

Why bother?

That's all well and good, but banks don't need a joint venture to do any of that work. Equity capital
markets teams can sit in Hong Kong and help Chinese companies raise foreign capital in the
international debt or equity markets, while M&A bankers generally go wherever they want anyway.
Page 10 of 16 2011 Factiva, Inc. All rights reserved.
Moreover, the banks earn 100% of the profit from doing that work in Hong Kong, while they have to give
up two-thirds for any work they do onshore through their mainland joint venture.

This creates an obvious conflict of interest that dooms most joint ventures before they even start. If a
Chinese client asks a banker based in Hong Kong for advice about where to raise capital, the reply is
hardly likely to be unbiased. Even if he has an onshore licence, the Hong Kong banker earns much
more money from offshore fund-raising, whereas his mainland joint venture partner has exactly the
opposite incentive.

"I don't believe that the business model of the joint ventures can succeed," said one Chinese banker.
"It's just not possible. The onshore/offshore business model puts the two partners in competition with
each other. That's exactly what you saw with Morgan Stanley and CICC 15 years ago and it's still the
case today."

Banks roll out each new joint venture with a certain amount of fanfare and bullish commentary about the
potential size of China's onshore securities business. But figures from 2010, a record year for Chinese A-
share issuance, tell a different story.

According to Dealogic's league tables, only UBS features in the top 10 of advisers by deal value.
Significantly, UBS has a unique arrangement. In 2005 it paid $200 million to buy 20% of a struggling
Chinese broker, Beijing Securities, and re-launched the business in 2007 as UBS Securities, with a
crucial difference to the other joint ventures: it had management control plus licences that allow it to not
only handle primary securities issuance in China, in both debt and equity, but also the ability to trade in
the secondary markets, which no other foreign firm can do.

"We were very fortunate at the time UBS Securities was established because we were granted the
necessary licences and our management control of the entity was approved," said Matt Hanning, co-
head of China investment banking at UBS. The Swiss bank also has asset management and a private
wealth business onshore in China, making it the most full-service international bank operating on the
mainland.

Chinese regulators suspended issuing licences after theUBS deal and, in effect, closed the door on
other banks hoping to replicate the structure. At that point, only Morgan Stanley, Goldman and CLSA
had set up joint ventures, leaving all the later arrivals to make do with the now-standard arrangement of
a 33% minority interest.

These types of joint ventures pit foreign and domestic partners against each other in a way that can
quickly lead to a loss of control for the minority foreign partners. In the event of a disagreement, it is not
hard to see which of the two partners prevails, given that one owns twice as much of the business as
the other, as Morgan Stanley soon discovered after its early deal with CICC. "We don't have those
issues in our business," said Hanning. "But there would appear to be no guarantees that other JVs won't
head for that kind of outcome."

At Goldman, the answer to that is typically enigmatic. "Statutorily we're a joint venture, but in essence
we run the whole business as a Goldman Sachs platform," Jin-Yong Cai told FinanceAsia during
breakfast at the Shangri-La hotel in Hong Kong. "And it's not just that we run it that way; it's also that
everyone in the firm believes they are part of Goldman."

Cai is a Goldman partner and, as well as heading the joint venture, Goldman Sachs Gaohua, he also
heads Goldman's China investment banking business, which puts him in charge of both onshore and
offshore bankers, all of whom feed from the same trough, so to speak.

Even UBS does not operate in this way, despite its management control. The Swiss bank is set up with
two distinct teams, as mandated by the China's regulations, with a separate offshore team in Hong Kong
and one onshore in China.

But Goldman says that all its bankers, whether onshore or off, are in effect part of the same team.
"There's never a thought that if I take this client to Hong Kong I'm going to lose revenue," said Cai.
"That's the biggest difference. We compensate the same, we are in the same revenue system and
everyone is a part of Goldman Sachs. We act, we think, we do everything as a team. That's not true for
any of the other joint ventures."

That very well might be the case, though it's difficult to understand - and Goldman accepts that it's
difficult to explain - how a business can operate simply on the belief that it is a single entity.

Regardless, Hanning at UBS simply points to the league table. "There are challenges in addressing the
joint venture structure and those challenges are non-trivial," he said. "While we are not the only
international bank with a licence in China, we are the only international bank in the top-10 for
underwriting A-shares and corporate bonds. Why is that?"

That debate could rage for pages and pages. But what both Goldman and UBS agree on is that the
structure international banks are forced to operate under in China is far from ideal. The licences that
Page 11 of 16 2011 Factiva, Inc. All rights reserved.
Goldman and UBS won in 2004 and 2005 are not on the table today. (Goldman teamed with Chinese
investment banker Fang Fenglei to bail out Hainan Securities and, together, created Goldman Sachs
Gaohua.)

As it stands, the regulations serve to protect Chinese securities houses from rapacious foreign
competition, rather than ensuring the most efficient fund-raising for Chinese companies. In this respect,
the regulations have been a success - China's securities houses remain the dominant players in the
domestic securities business.

Even so, there is no shortage of foreign banks who want in. "That's the future," said Rodney Tsang, co-
head of China global banking at Citi, which is yet to win a securities licence despite its eagerness to join
the fray. "Today, the rules are very strict, particularly with regards to cross-selling between the onshore
and offshore teams, so the synergies are a lot harder to realise, but over time it will make more sense."

There are other reasons, too, why it makes sense for banks to enter such apparently restrictive joint
venture arrangements: even if they are somewhat constrained in how much cross-selling they can do,
the securities licence is still the easiest way for them to get in front of clients in China.

"Without this JV a foreign investment bank cannot legitimately put people on the ground in China; we
can only put a few people in a rep office but with a JV you can have 100 or 200 people on the ground,"
said Zili Shao, chairman and chief executive of J.P. Morgan's China business. "That enhances your
ability to serve your clients, which means that through the JV you might generate more work offshore.
That is an important aspect."

Playing by the rules

It is easy to blame wonky regulations for foreign banks' problems in China, but rules alone are not worth
much. On paper, markets such as Hong Kong and Japan, for example, are similarly open to foreign
banks, but they are very different in practice.

In Hong Kong the local names have all but disappeared, replaced by international financial services
conglomerates. But in Tokyo, one banker at Morgan Stanley readily admitted that in 40 years of trying it
had failed to break the domestic stranglehold of the big Japanese securities houses, and Nomura in
particular. That's easy for him to say today. Morgan Stanley is now 21% owned by Japan's Mitsubishi
UFJ, which gives it access to the sprawling Mitsubishi family and a complex web of relationships dating
back to the start of Japan's postwar economic miracle.

Even so, bankers at Nomura are not too worried. Their advantage in Japan does not arise from
megabank relationships or restrictive rules, but a cult-like belief in the bank's ability to marshal retail
investors. As a result, Nomura has a role on a remarkable 70% of Japanese equity offers - a truly
remarkable franchise, and not in a good way.

But Japan is probably a unique market. As one foreign banker in Tokyo told us: "Japanese banks have
turned the manufacturing industry's famous concept of kaizen [continuous improvement] completely on
its head. I call it mukaizen [no improvement]. They don't want change. It's bizarre; we can't even
compete on price in Japan. Clients don't like it if you underbid and you'll lose business if you do. That's
not the case in China, or indeed anywhere else in the world."

Put simply, China is too competitive to become Japan. Today's licences might make it difficult for foreign
banks to compete with Ping An or Citic, but the truth is that it doesn't cost much and the real reward is
being able to put people on the ground in China, develop relationships and, as an add-on, have the
opportunity to offer clients A-share capability as well.

Zhang at Credit Suisse agrees that the securities licence is about more than just building a domestic
securities business. "The JV gives us a wider and deeper platform for our offshore coverage team," he
said. "As part of our overall franchise development, this JV is only one of Credit Suisse's investments in
China."

Credit Suisse, like many other banks, also has a commercial bank licence and an onshore asset
management tie-up, (with ICBC) and is keen to take its private banking business onshore. Although
these units are all regulated separately and there are strict divisions in place, most banks' China
strategy is focused on their overall China platform, rather than the marginal return from each individual
element.

Indeed, discussions about whether any of the securities joint ventures are making money are somewhat
besides the point. "Most people do not measure purely by standalone profit," said Shao at J.P. Morgan.
"The JVs enhance your ability to serve your clients, which means that through the JV you might
generate more work offshore."

That argument makes a lot of sense, particularly when you consider the CSRC's closure of the A-share
market during the crisis - this is a business that can be completely shut down on the whim of a
committee. If banks were just there for the A-shares, it would be a risky venture.
Page 12 of 16 2011 Factiva, Inc. All rights reserved.
In this light, UBS's success in the domestic securities business is a nice fillip and a good piece of
marketing, but it does not automatically translate into more lucrative offshore investment banking
business.

According to Dealogic figures, Morgan Stanley was the only foreign bank to crack the top five for overall
investment banking revenues from China in 2010 - a year in which it had, in effect, no onshore securities
business at all.

The lack of a securities licence is certainly not an impediment to making money from China, or at least
not yet. Take Macquarie, for example, which is reportedly planning a securities joint venture with
Hengtai Securities but has not yet secured its licence. Even so, China is already a huge part of its
business.

"In the year to March 2011, China investment banking revenues will represent just over 50% of our total
Asian business, which is a significant increase over the previous year," said Kalpana Desai, who heads
Asia investment banking. "China is clearly our single largest market now, by some measure, and that
growth will continue."

That revenue is coming through a variety of channels, including principal investments and the group's
fund management joint venture with China Everbright.

In time, the onshore securities business will certainly become more important and the balance of
issuance will inevitably shift from equities to debt, but the market is not there yet. For this reason, banks
that do not yet have licences are behind the curve but not out of the game.

"Having that securities licence will probably not be a material P&L event for any bulge bracket
investment bank in the next year or two," said Tsang. "But in four or five years, with the right people, that
will change. And, in 10 years time, the head of China global banking for Citi will not be the guy sitting at
my desk. It will be the guy running the domestic business onshore, because he will be out-hitting me
considerably."

Document MEDFIN0020110323e73f00009

Page 13 of 16 2011 Factiva, Inc. All rights reserved.

editor's letter
Betting on China

Lara Wozniak, Editor

247 words
15 March 2011
Finance Asia
MEDFIN
English
Copyright 2011. Haymarket Media Limited. All rights reserved.

In our cover story, we look at how investment banks all over the world are queuing up to form securities
joint ventures in China - and we question their worthiness. The consensus seems to be that even if in
the short-run you see no real benefit on the league tables, it's worth it in the long haul. Unlike Japan,
where the investment banking industry remains sewn up by the domestic players, China will look for the
best service, at the best price, which might give foreign players a fighting chance.

Elsewhere in the magazine we update readers on banking regulatory reform in India, which is needed to
democratise and widen the base of its economy. Over in Korea we write about how the Financial
Services Commission has suspended the activities of 11 mutual savings banks, promising cash to shore
up weak balance sheets and prodding mainstream financial firms to provide rescue restructuring. And in
Vietnam, we speculate that the central government probably has enough FX reserves, but still needs to
do a better job attracting investments.

We also have included a country report on Brunei, focusing on its efforts to wean itself from its oil
dependency; plus we have a report from the recent global competitiveness forum in Saudi Arabia, a
nation that is also working on diversifying its economy.

Finally, for a lighter touch, see our photos from our Awards for Achievement dinner held in February.

Document MEDFIN0020110323e73f00001

Page 14 of 16 2011 Factiva, Inc. All rights reserved.

Hutchison Whampoa will spin off its port assets in Hong Kong, Macau and China’s southern Guangdong
province for a separate listing in Singapore.
Hutchison to float ports business in Singapore

Equities
717 words
15 February 2011
Finance Asia
MEDFIN
English
Copyright 2011. Haymarket Media Limited. All rights reserved.

Hong Kong conglomerate Hutchison Whampoa is planning to list its Chinese container-port assets in
Singapore, in a deal that could raise up to $7 billion. By Anette Jönsson

The choice of Singapore over Hong Kong is reportedly motivated by the possibility to list the assets as a
business trust there, while Hong Kong doesn’t have the regulations in place for such vehicles. A
business trust will allow the company to distribute essentially all of its free cash flow as dividends, giving
unit holders direct access to the stable revenues generated by this business.

Hutchison Whampoa, which is controlled by Hong Kong’s richest tycoon Li Ka-shing, intends to continue
to own around 25% of the business trust after listing, meaning it will continue to benefit from its growth
and development. It will also retain control of the day-to-day operations as the trust will be managed by
a subsidiary wholly-owned by Hutchison, which is itself listed in Hong Kong. The company didn’t
comment on how much it will raise from the listing, but noted that the assets intended to be included in
the initial portfolio were valued at about $5.5 billion at the end of 2009. However, it seems unlikely that
Hutchison would conduct this listing exercise if it didn’t believe it would help realise hidden value, which
suggests the eventual valuation will be higher.

Or, as Moody’s senior credit officer Elizabeth Allen put it: “The financial impact of this proposed
transaction is uncertain at this point. However, Hutchison Whampoa has a history of monetising its
assets at strong valuations.”

Aside from ports, Hutchison’s businesses also include property and hotel development, retail, energy,
infrastructure, telecommunications and financial investments.

Market sources said the deal size is likely to be at least $5 billion and could be as big as $7 billion. The
final size will depend on the amount of debt included in the business, market conditions at the time of
the deal and, of course, how much of the trust Hutchison does decide to sell. In addition to a global
offering, the company also plans to offer units in the new trust to its existing shareholders, on a
preferential basis.

DBS, Deutsche Bank and Goldman Sachs will be joint bookrunners for the proposed offering, but
marketing to investors will not start until after Hutchison receives approval from the Singapore Exchange
for the listing — a process that normally takes four to six weeks.

The listing vehicle will be named Hutchison Port Holdings Trust (HPH Trust) and will comprise the deep-
water container terminals at Hong Kong’s Kwai Tsing port and at the Yantian container terminals in
Shenzhen that are currently part of Hutchison Port Holdings (HPH). It will also include Hutchison’s entire
port ancillary interests in the same regional area, including trucking, feedering, freight-forwarding and
other logistics services, as well as its economic interests in certain river ports that serve mainly as
feeder ports to the two deep-water terminals.

HPH is an 80% subsidiary of Hutchison Whampoa. The remaining 20% is owned by Singapore port
operator PSA International, which is controlled by Temasek Holdings.

At the rumoured size, HPH Trust will be by far the largest IPO in Singapore, ahead of Global Logistic
Property’s $3 billion listing last year. Together with the indication that the trust will have a free-float of as
much as 75%, this suggests that HPH Trust should be fairly liquid — an important issue since inferior
liquidity is often seen as one of the drawbacks of a listing in Singapore compared to Hong Kong.

HPH Trust is likely to be marketed on a total return basis, taking into account the annual dividend yield
as well as the growth prospects. In that respect, the comparables will not only be other container ports
businesses such as China Merchants (Holdings) International and Cosco Pacific, which are both listed
in Hong Kong, but Singapore-listed real estate investment trusts as well.

The prospective returns are also likely to be evaluated in the context of the Singapore government risk-
Page 15 of 16 2011 Factiva, Inc. All rights reserved.
free rate. n

Document MEDFIN0020110215e72f00005

Page 16 of 16 2011 Factiva, Inc. All rights reserved.