When Citic Securities was created in 1995, its eventual chairman Wang Dongming told visitors to his Beijing office that he wished to make the Chinese brokerage an international player on a par with the most powerful Wall Street groups.
The state-owned company has since become the largest brokerage on the Chinese mainland and in 2013 it underlined its global ambitions with the $1.25bn acquisition of its scrappy Hong Kong-based rival CLSA.
However, since then there have been signs of a growing clash of cultures between a western style investment banking ethos and the conservative values of a state-owned financial conglomerate that considers many Wall Street practices anathema.
This clash has been highlighted by the serial resignations of the top three executives at CLSA. But more than that, the friction between the two sides symbolises the way China has put the internationalisation of its financial system on hold.
The departure of the trio — Tang Zhenyi, a former finance ministry bureaucrat who was chairman of CLSA; Jonathan Slone, its longstanding chief executive; and Nigel Beattie, chief operating officer — underscores the Chinese parent’s efforts to rein in its Hong Kong based unit.
It also highlights the effort by Beijing to tighten its control of state-owned enterprises generally — even the most influential and powerful ones such as the Citic Group.
“Today in China, it is two steps forward and eight steps back,” says a senior CLSA executive. “There is a total inability to make decisions, and to sign off on basic stuff. Everyone thinks that President Xi believes without more control the future is fraught.”
Mr Tang is currently the object of an internal audit by the authorities in Beijing and cannot leave the country until that process — which is expected to be completed by the end of the month — is over, according to several sources with direct knowledge of the process.
While there is no suspicion of wrongdoing, and the restrictions on Mr Tang’s movements are standard operating procedure, they still symbolise to many former executives of state-owned entities just how tight the grip of the Party has become.
Mr Tang’s departure comes as more and more executives are leaving Citic and other central-government controlled entities, balking at similar restrictions, such as those on their personal movements. While Mr Slone is also senior enough to undergo similar scrutiny, he will be allowed to remain in Hong Kong.
It was not supposed to be like that when Citic was born almost 25 years ago.
After the group was established over 23 years ago, Mr Wang studied Nomura Securities intensively, noting that while the Japanese brokerage had one of the largest market capitalisations in Tokyo during the bubble years, it failed to make the leap from being a dominant domestic force to being a global actor with a global culture. “I want to avoid becoming the Nomura of China,” he would say.
The 2013 deal to buy control of CLSA from France’s Crédit Agricole in a deal hammered out between Mr Wang and Mr Slone was designed to avoid Nomura’s fate and help Citic move towards the chairman’s vision of becoming the “Chinese Goldman Sachs”.
Mr Wang, however, was forced to step down in November 2015 in the aftermath of the meltdown in the Shanghai Stock Exchange amid allegations of insider trading by several other Citic executives. He was not charged with any wrongdoing.
When Zhang Youjun, then head of the board’s office, succeeded Mr Wang that same year, the tensions between the bankers of CLSA and their Beijing parent began to build almost immediately. Even the size of the Citic logo versus that of CLSA became a source of dispute.
Personal factors as well as institutional issues were also at play, as a powerful but poorly paid group of executives — many of them former bureaucrats — at a Chinese parent dealt with the far more highly paid staff of their Hong Kong-based stepchild.
Mr Zhang reached out to the heads of other groups in the Citic empire almost immediately to try to serve as mediators in the disputes. At one point, the parent discussed selling the unruly unit. As the bitterness deepened on both sides, Chang Zhenming, head of Citic Group itself was brought into the matter, these people add.
“There was always a question about whether they could be the Goldman Sachs of Asia without being strong in the US — and that seemed to set the stage for tension between CLSA and Citic,” says one person familiar with CLSA.
The catalyst for the latest bout of friction was over bonuses. CLSA staffers say their return on equity was higher than that of their parent. Yet senior executives who sat on the CLSA executive committee were paid nothing in 2018 and very little the previous year. But to Mr Zhang, the business model of the Hong Kong offshoot had become uneconomic.
“They relied on their investment banking business, but it wasn’t very profitable,” says one person close to Mr Zhang. “And in many cases, the business they did have had come from their parent’s referrals. Brokerage commissions had come way down. Mr Zhang wanted to see the firm become more profitable while the bankers wanted to be paid millions.”
CLSA has struggled to transform its regional brokerage business into the international investment banking arm that Citic believed it was buying, said Fraser Howie, a former managing director at CLSA and a former employee at CICC, the Chinese investment bank.
Citic, on the other hand, has not had the global expertise to assist CLSA with threats to its business model.
Over the past three years, CLSA has attempted to build out its IPO underwriting and M&A advisory with limited results. The company has also sought to open its own prime brokerage serving hedge fund clients under the direction of leaders in Beijing, although those plans have also faltered.
At the same time, CLSA’s research sales model has been under attack from global regulation — notably Europe’s Mifid II investor protection rules — a development to which its Chinese owner has been oblivious.
“There were a lot of great stories and great parties at CLSA but in the end Citic has struggled to figure out how to make it profitable,” Mr Howie said. “The patience has run out. I don’t think that either side appreciated what they were getting themselves into.”
Meanwhile Mr Zhang has been calling round other Citic group executives for advice on whom to recruit to replace Mr Slone. He has told them that he thinks Mr Slone’s successor should also be a westerner.
Additional reporting by Robert Armstrong in New York