China's Investment Banking Culture: Does the Rainmaker still Exist?

Paul Calello, Asia-Pacific chairman at Credit Suisse First Boston (CSFB), knows exactly when he realized the concept of the Chinese banking rainmaker was an anachronism (see box below). “I was playing golf with the head of a major Chinese corporation and we were talking about an upcoming deal. He suddenly asked if I could bring in a well-known industry specialist from London to help on the deal. Chinese banking used to be about the one individual who could open doors in China; now more and more clients want to be covered by our industry experts.”

The view has permeated through to CSFB’s China investment banking operations. When the bank appointed mainland veteran Zhang Liping in September 2004, Calello says it made a conscious decision not to present the new hire as a star banker. “Credit Suisse knows as well as any firm the risk inherent in a superstar culture – we’ve had our share of them,” he says. “Liping consciously made the decision not to be a star. He said that if I wanted that, he would do it, but he did not think it was the right thing for the firm.”

The bank is not alone in its newfound determination to be seen first and foremost as an institution and a brand in China’s fast-maturing capital markets, rather than the financial extension of a single personality. And Chinese clients are looking for more than a chat over green tea and cigarettes. They now want an investment banker who actually knows something about investment banking.

One such bank that understood this before its competitors is Goldman Sachs. Hong Kong bankers express at the very least a grudging respect for the way Goldman has always promoted itself as an institution first in the mainland, gradually transferring its centre of gravity in greater China from Hong Kong to Beijing. “It shows how much confidence they have in their brand that they have promoted the institution over the individual from the very beginning, and stuck to that game plan,” says one Hong Kong based investment banker. “It’s not always been an easy thing to do, with the press and even investors wanting to see a rainmaker… someone who obviously epitomizes the bank’s image in a confusing market.”

Other investment banks are following this path. Jonathan Zhu, CEO of Morgan Stanley’s China businesses, is one of its two acknowledged star deal-makers, along with the less public character of C.G. Wu. “We do not promote the [star banker] system,” says Zhu. “Long term success in this market comes from a broader team approach where business is won off the back of your firm’s track record and expertise. It’s about developing a team of well-qualified bankers who work with, advise and add real value to local clients, and as needed bring the firm’s global resources to bear on specific situations. Relying solely on one or two individuals or relying on an individual’s guanxi [personal or family relationships] may be a short term fix, but it is usually unsustainable.” UBS has three chief mainland bankers – He Di, Zhang Wendong and David Li Yi – reporting to three divisional heads, and is also a strong believer in institutional branding.

When the Individual Ruled

The situation is a far cry from just three years ago, when a single banker could have an outsized influence over a corporation and a deal, given the right guanxi and a modicum of expertise. When Erh-fei Liu joined Merrill Lynch in 1999, for example, the US investment house did not have a US$1bn plus China equity offering to its name. The following year they were mandated to underwrite three initial public offerings that raised a total of US$11bn for China Telecom, China Mobile and oil major CNOOC. The deals, and that 12-month period, cemented Merrill’s reputation in the country. It was all thanks to the mainland-born Liu.

Three to five years ago he was the China rainmaker, playing a critical role in every Merrill Lynch mainland deal. Back in the late 1980s and early 1990s, when China’s capital markets were barely formed, Liu was pretty much the only game in town. “Everyone needed a guy with Chinese roots, who spoke Mandarin, had some connections and knew something about investment banking,” says the Merrill China and Asia Pacific investment-banking chairman. “I had my finger in each and every China mandate.” Liu spent most of that period being recruited, bouncing from Rothschild to Goldman Sachs (twice), Morgan Stanley, Smith Barney and Indosuez WI Carr before going to Merrill. But those days are over, he admits. “I still try to make the rain fall, but these days you can’t fly your own flag. China is a bigger business than a single rainmaker can handle.”

When it Rains, it Pours

Many believe China has never had a true rainmaker akin to Citigroup’s own Hong Kong investment banker Francis Leung, who in the mid-1990s moved from HSBC’s investment banking arm Wardley to help set up defunct Asia-focused broker Peregrine, taking with him major clients such as Cheung Kong, Hutchison Whampoa and Hopewell Holdings. Certainly none can claim to have made the skies open up like Joseph Perella or Bruce Wasserstein did on Wall Street in the 1980s.

The closest China has come, in the view of virtually every investment banker or industry specialist interviewed for this story, is Merrill’s Liu, Deutsche Bank’s Lee Zhang, or Margaret Ren, once of Bear Stearns and Citigroup. Of the three, Ren was the most compelling character, until being fired from Citigroup for alleged involvement in falsifying documents. “Margaret Ren took Citigroup from nowhere to the very top – she is probably the single most effective rainmaker that China has ever had,” says one Hong Kong-based banker. “She got Bear Stearns into the China Telecom IPO, perhaps the ultimate act of rainmaking China has ever seen, [then she] left, went to Citi[group], and then got them into the China Telecom IPO too. I don’t think anyone else could have done that.” Ren also got Citigroup mandates to underwrite several jumbo mainland IPOs including China Life Insurance and China Construction Bank (CCB) – two deals that should have put it into the fast lane in China once and for all.

After the Floods, the Drought

Ren’s outsized impact on Citigroup had huge implications on several financial institutions. Her eventual replacement at Citigroup, Wei Christianson, was lured away from CSFB with the promise of an annual US$6m salary, guaranteed over three years. Recruitment specialists say Ren was guaranteed up to US$8.5m a year. The only investment banker in China paid more than Christianson is her Citigroup colleague, Francis Leung, who was guaranteed a huge US$25m over three years. Insiders say Leung has just signed on at Citigroup at the same rate for the next three years.

Christianson’s arrival could hardly have come at a worse time. Her tenure as Citigroup’s chief China investment banker has been more damp squib than rainmaker, with occasional deals penetrating the gloom – most notably advising state oil giant CNPC on its takeover of PetroKazakhstan. Its summer 2005 decision to backtrack on a promise to buy a strategic stake in CCB prior to the mainland lender’s IPO denied it a lucrative underwriting mandate and undermined mainland trust in the US investment house. It’s redolent of Salomon Smith Barney’s disastrous cancellation of CNOOC’s IPO in 1999, a decision that set Citigroup back years in China. “She’s got a tough job there,” says one mainland-born investment banker. “Citi screwed up on [CCB] and now everyone is saying Citi has no China strategy. So Wei came in at the worst possible time. She is very capable and will bring in the deals, but she’s been there for over a year now and she hasn’t got a lot to show for it. She’s clearly under pressure to pull a few rabbits out of hats.”

Christianson defends Citi’s recent record, and is also hesitant at using the word rainmaker to describe her role there – although she is clearly the leader of the China team and does not report directly to her theoretical senior Francis Leung. Christianson says the last year for her has been about “building a team and building a business. The days when a rainmaker could make a difference, or make business by themselves, are changing. I wouldn’t say they are over, but the clients are getting more sophisticated”.

Where Credit’s Due

Christianson’s arrival at Citigroup, and the appointment of veteran Zhang Liping to the China hot seat at CSFB after an extended absence from the banking scene, prompted her previous employers to rethink the role of the star banker. CSFB’s culture was very different when Christianson was in charge of the China team. Back then everyone on the street knew one name. Today it is widely viewed as having a stronger group of bankers working with a wider skill set.

Calello nonetheless acknowledges the desire, subconscious or not, on behalf of banks to be represented in a vibrant, growing market by a human face. “Everyone wants a hero, and to point to the person they think is the rainmaker,” he says. “Everyone loves these Horatio Alger stories (the US author who embodied the American Dream), but Liping didn’t want to be a part of that.” Christianson’s tenure at CSFB also coincided with a raft of departures, including the highly respected Janice Hu, granddaughter of the late chairman of the Communist Party of China. Hu has returned to CSFB since Zhang’s appointment, and the two are credited with landing one of the China deals of the year – the lucrative third underwriting mandate in CCB’s mammoth US$9bn October Hong Kong stock sale – a deal, sources close to the bank say, that Zhang desperately needed. The former Merrill and Dresdner Kleinwort Benson banker, considered something of a rainmaker himself in the 1990s, had struggled to drag in major deals since his return to the banking fold, until the CCB deal.

Team Over Individual

While long-standing relationships in China will still sometimes trump a bank’s image, a select few investment houses do work hard to promote brand over individual. “Within five years, China will have the second- or third-largest capital markets in the world, and you’ll begin to see a structure similar to what you see in Europe or the US – more segmentation into industry groups,” says Calello. He adds that strong generalist bankers will remain essential to relationship-conscious China, just as they are in any other developed market – but the institutional brand should, by then, be bigger than any one person.

Goldman Sachs is the pinnacle of this phenomenon. The institution itself spearheads deals, backed by a clutch of well-connected professionals. It has an impressive line-up among its 40-strong mainland investment banking workforce but works furiously to keep its brand in focus without quashing its bankers’ business instincts. At many other banks, individuals such as economist Fred Hu from Goldman Sachs, Gao Hua head Fang Fenglei, or newly appointed Shanghai managing director Wei Zhu, formerly of consultancy AT Kearney, would be automatically considered rainmakers, or at least stars in the making.

Deeper, Broader, Better

The strength of the brand winning out over the individual is in large part due to China’s burgeoning capital markets and to the wealth of new products banks can offer mainland-based or mainland-focused clients. CSFB’s Zhang was instrumental in setting up the bank’s Shanghai office, obtaining a derivatives licence, cutting deals to buy up non-performing loans and setting up the asset-management JV with mainland lender Industrial and Commercial Bank of China.

It may sound less thrusting than landing a multi-billion dollar state privatization, but it cuts the mustard with New York executives keen for their China franchises to show long-term growth potential, rather than relying on revenues from one or two large state-driven deals. “It’s not about single deals any more, so much as a multitude of varying deals that include derivatives, private equity, M&A and joint ventures,” says Merrill’s Liu. “The institutions have changed as well. Now it’s all about building a franchise that is profitable long-term.”

The Declining Power of One

Even those banks perceived to be run by star dealmakers in China are changing their ways. Citigroup’s future strategy is unclear, as is JPMorgan’s, but Merrill Lynch is recruiting hard – and is developing a core of effective, professional investment bankers under Liu. Deutsche Bank, too, is adding to its roster and taking some of the strain off the broad shoulders of Lee Zhang, the bank’s co-head of global banking for Asia ex-Japan. Zhang, who joined Deutsche in March 2001 after falling out with Goldman Sachs’ then-China head, Xu Ziwang, often surprises rivals by shoehorning Deutsche into deals it has no apparent right to win. “Deutsche Bank is not a strong brand in China, but Lee Zhang somehow seems to make them seem stronger than they are,” says one mainland peer. “Sometimes we go into pitches and we’re surprised to be competing with [Deutsche] and that is entirely due to him.” That’s changing, however, and Deutsche, belatedly aware that it needs to build an institutional image in China, is aggressively looking to recruit local bankers.

Show me the Money

Ultimately, promoting collective identity would not be a valid long-term strategy unless it made financial sense. Good bankers don’t come cheap, particularly in China’s talent-poor market which, many say, will suffer from a paucity of able investment bankers over the coming years as demand outstrips supply. One Hong Kong-based recruitment specialist says a China head of investment banking can expect between US$3m and US$5m a year guaranteed. Merrill’s Liu, who takes home a guaranteed US$4m a year, according to head-hunters, points out that the last thing investment banks really need if they are to build long-term, profitable franchises, is ego-driven rainmaker-style bankers who can leverage their star status to demand higher salaries – and threaten to quit if their expectations aren’t met.

“As a manager I hate the star banker thing,” Liu says. “We need good bankers but we don’t want them to have too much of an ego. Individuals are important, they have relationships, and we need them to make rain in their own way, but an individual cannot make rain now the way they once could. These days it takes the individual, the team and, most importantly, the institution to be able to do that.”