Goldman maneuvers to clinch venture in China

Shortly after a SARS crisis scared many people off the streets of this city, Henry Paulson, the chief executive of Goldman Sachs, flew here for a quiet dinner on June 4, 2003, with two of China's most influential power brokers.

They worked out a remarkable deal, approved last year by Chinese President Hu Jintao (胡錦濤), that marks a triumph for Goldman -- the creation of a joint venture that gives the firm greater access than any other foreign investment bank to China's increasingly lucrative financial services market.

But to gain that access, Goldman engaged in an unusual horse trade. In exchange for making a US$67 million "donation" to cover investor losses at a failed Chinese brokerage firm, Goldman won government approval to set up its own joint-venture investment bank in Beijing.

And to jump-start the venture, Goldman also agreed to lend US$100 million to one of the men Paulson met that evening at the marble-columned Noble Court restaurant in the Grand Hyatt: a 52-year-old Chinese banker named Fang Feng Lei (方風雷).

The Goldman deal, which the company hopes will mean millions of dollars in profits in the coming years, offers a rare glimpse into the maneuvers that many foreign companies undertake to get a leg up in the rough-and-tumble race to establish business in China. And like others before it, the joint venture was years in the making, involving frequent huddles with high Communist Party officials.

What was so unusual about the Goldman deal is that a blueblood US firm was willing to pay US$67 million to help the government dissolve an entirely unrelated state-owned enterprise, Hainan Securities (海南證券), whose officials have been accused in lawsuits of embezzling millions of dollars from investor accounts.

Why the Chinese government chose Hainan Securities remains unclear. But Fang and another power broker at the dinner table that evening, Wang Qishan (王岐山), the mayor of Beijing, had ties in Hainan Province -- Wang had been Hainan's party secretary from 2002 to 2003. And Fang had overseen a real estate investment with Hainan Securities in the mid-'90s.

Goldman officials declined to comment on any aspect of the Hainan Securities bailout or the joint-venture loan, including what kind of collateral Fang pledged to back the loan.

But there is no evidence that Fang or Wang was involved in fraud at Hainan Securities, or that Goldman's donation money will benefit them in any way.

Analysts say major investment banks like Goldman are expecting a growing number of Chinese companies to tap the capital markets and they expect increasingly wealthy Chinese to start investing.

"There's a lot of talk now about a dysfunctional stock market," said Li Jin, an assistant professor at Harvard Business School, "but in the future China's capital markets will be huge."

Carson Wen, a Hong Kong securities lawyer, added: "Everyone wants to be in China because it's a market that holds a lot of potential for the long term. And Goldman wants to be one of the first with control over their own venture."

Until now, most foreign investment banks have largely taken Chinese companies public in Hong Kong or New York, or married Chinese companies with Western counterparts. Goldman will have greater control over a venture that will be able to take companies public in China and sell shares directly to Chinese investors -- a level of control that neither its rival Morgan Stanley nor any other foreign investment bank can yet claim.

Goldman is paying an additional US$30 million for its one-third stake in the joint venture, to be called Goldman Sachs Gaohua Securities, bringing the cost of its ticket to China to nearly US$200 million. And that just gets Goldman a foot in the door; it does not cover the cost of buying equipment, renting office space or hiring staff members.

According to former bankers, an important player in pushing the deals to Goldman was CICC's deputy chief executive, Fang, who had sparred with Morgan executives over how to operate in China.

For his role in the China Mobile offering, Fang earned a reputation as a visionary who knew how to move deals through the Chinese bureaucracy.

"He's a big deal maker," said Cao Yuanzheng (曹遠征), chief economist at Bank of China International and a former colleague of Fang.

"This isn't like the US. Here in China, you have to know about reforms and state-owned companies. You need a special guy and that's him," Cao said.