Why the Next Goldman Sachs Will Be Made in China

Wang Dongming, chairman of Citic Securities
Nelson Ching | Bloomberg | Getty Images

Wang Dongming, chairman of China's biggest brokerage CITIC Securities, was so impressed by the Charles Ellis bestseller "The Making of Goldman Sachs" that he called for a Chinese translation and urged his employees to read it.

Wang is now busy remodeling his Beijing-based brokerage after Goldman Sachs by expanding into asset management, trading complex derivatives instruments and nurturing overseas businesses.

Hit by a languishing Chinese stock market and a freeze in initial public offerings since last year, mainland securities firms are diversifying away from their traditional businesses of stock broking and underwriting.

"For Chinese investment bankers, what Goldman has experienced in the past is very likely what we will go through in the future," Wang said in the foreword of the book's Chinese edition published by a CITIC affiliate, referring to Goldman's international expansion since the 1970s.

CITIC will beef up its asset management business in Hong Kong and venture into developed markets such as Singapore, Britain and Australia, sources with knowledge of the plan told Reuters.

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It will launch a host of alternative investment funds, a category that includes hedge funds, and increase market-making trades in fixed income and equity products, the sources said, declining to be identified because they are not allowed to speak to the media.

"These businesses are not new for Wall Street banks but have barely taken off in China," said one of the sources. "Expanding those businesses would improve CITIC's revenue structure and give the company an edge over domestic rivals once the mainland market is deregulated."

A spokeswoman at CITIC declined to comment.

In a sign of changing times, CITIC leapt to the No.1 spot as Asia's top mergers-and-acquisitions adviser in the first quarter from 18th a year earlier, data by Thomson Reuters shows, knocking Morgan Stanley from the top slot and ranking ahead of Goldman itself.

Chinese securities firms are also venturing into Western markets to compete with global names. But their lack of experience means any action, for now, will be limited to meeting the needs of Chinese companies operating in those countries.

So far, CITIC has been the most acquisitive of China's brokerages overseas.

The firm last year agreed to buy Credit Agricole's entire stake in Asia-focused brokerage CLSA for $1.3 billion. It also set up a brokerage unit in the United States.

(Read More: Goldman Hires Morgan Stanley's Asia Investment Banking Head)

Their global ambitions come at a time when even Wall Street giants such as JPMorgan Chase are struggling to navigate a post-crisis world where clients trade less and regulations and capital rules squeeze margins.

One of the challenges facing Chinese securities firms competing in overseas markets is their domestic corporate culture and lack of connections with prominent local business executives.

Unlike major Wall Street banks, most of the staff are Chinese nationals and many of their top brass have little or no experience working for global banks.

State-controlled investment banking venture China International Capital Corp ventured into the U.S. market in 2007, but has remained a niche player there.

CITIC has tried to overcome this problem by hiring a number of foreigners.

Its Georgetown-educated chairman hired Tatsuhito Tokuchi, a veteran banker at

Japan's Daiwa Securities Group, to head CITIC's investment banking.

That is the most senior role for a foreigner at any Chinese brokerage.

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CITIC, which has warned of a 66 percent slump in 2012 profit, will report its annual financial results on Wednesday.

Battle for Hong Kong

Brokerages are starting to expand their product offerings in anticipation of further loosening of market controls by Beijing, which plans to introduce derivatives such as bond futures and stock options as soon as this year.

As Chinese brokerages unclip their wings outside the mainland, Hong Kong has quickly become a major battleground for business.

Of the Asian equity commissions paid by institutions to brokers, more than 40 percent originated with trades of Hong Kong and Chinese stocksa study by Greenwich Associates shows.

Most of China's bigger brokerages, including Haitong Securities and Everbright Securities, have already set up operations in the former British colony.

CITIC recently launched its prime brokerage business in Hong Kong serving global hedge funds, locking horns with banks such as UBS and Citigroup.

CITIC also plans to ramp up its derivative products business in Hong Kong, an area currently dominated by Western banks such as BNP Paribas and Goldman, which alone earned more than China's 114 brokerages combined last year.

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While CITIC still faces a long road ahead before it can compete with global rivals, its moves into new businesses such as derivatives will give it a key advantage in its home market when Beijing further loosens its grasp on capital markets.

"CITIC won't be able to challenge the dominance of Western banks in this area, but such a move would enable the company to accumulate experience," said Lian Ruiqing, analyst at Xiangcai Securities Co. "That would give CITIC a first-mover advantage when the derivative market at home is further deregulated."

Chinese regulators have recently allowed brokerages to expand their margin trading and short selling businesses, and will soon let them market mutual funds and act as market makers in the fledging over-the-counter equity market.