As banks cut staff around the world, they are fighting in China over a rare commodity: a banker licensed by the government to do stock and bond deals.
Chinese securities rules require that every underwriter on a domestic initial public offering of shares or a bond sale have two qualified "sponsors" among the bankers working on the deal. The pair nursemaid the IPO from beginning to end and ultimately take responsibility for signing off on the company's books and business plan.
The pressure on sponsors, already great, is increasing as the country's regulator steps up its efforts to root out accounting fraud by listed companies and cracks down on underwriters.
Only about 2,000 sponsors are active in China, home to many of the world's biggest IPOs. Based on last year's deal flow, they are fully employed. China limits each to working on no more than two deals at a time, and deals can take a year or more to complete. Salaries, already high by local standards, are rising rapidly as firms compete for the relatively small number of people.
To earn the title, bankers must show proficiency in accounting, law and finance through a written exam in Chinese that takes place once a year. Only about 10% pass, according to a banker who did pass as well as several senior bankers; the China Securities Regulatory Commission wouldn't disclose the rate. Bankers say all who pass are Chinese nationals, and most have studied abroad.
"Ultimately this is a very coveted position, given there are a limited amount of sponsors and the exam is not easy," said Jonathan Penkin, co-head of equity capital markets for Asia, excluding Japan, at Goldman Sachs Group Inc. The 14 sponsors at Goldman's China joint venture Goldman Sachs Gao Hua Securities Co. report to him.
China's government tightly restricts the ability of foreign firms to operate in its capital markets and requires them to do business through licensed joint ventures, in which they can hold a maximum stake of 33%.
To keep their securities licenses, banks need to employ at least four sponsors. But for a firm to do a reasonable number of deals, it needs many more. That has led to a scramble as more Western banks set up securities joint ventures. J.P. Morgan Chase & Co., Morgan Stanley, Citigroup Inc. and Royal Bank of Scotland Group PLC have set up such ventures this year and are adding employees. Bankers complain the scarcity of sponsors is creating a bottleneck for deal making in China and driving up banks' costs.
"There is a huge fight for [sponsors]," said one banker in China who works for a Wall Street firm.
In one example, Morgan Stanley is in the process of hiring a team of roughly 20 bankers, about half of whom are qualified sponsors, from J.P. Morgan Chase's joint venture, according to people familiar with the matter. The switch may accelerate the plans of Morgan Stanley's Shanghai-based joint venture, Morgan Stanley Huaxin Securities, to add offices in Shenzhen and Beijing, one of the people added.
A sponsor typically earns around 2 million yuan (US$300,000) a year, including bonuses, which is high for locally hired bankers, and rising due to strong demand. Chinese banks sometimes outbid Western banks because they often offer commission-based pay allowing a sponsor to double his base salary in a good year, the bankers said.
"Once you have this license you are all set for life, even if you don't do deals," said the head of a Wall Street firm in China.
Still, the life of a sponsor isn't easy. One 30-year-old sponsor said he lives in a state of constant anxiety. Getting detailed answers from massive, complicated state-owned Chinese companies to meet the regulators' deadlines is difficult, he said. In some fast-growing companies, records are incomplete and ownership opaque.
Penalties for a sponsor who is found to have been negligent range from a warning to losing the license, fines and criminal prosecution, according to the securities regulator's website.
Bankers complain that the system puts too much responsibility in the hands of young, book-smart but unseasoned bankers who may miss instances of fraud. Some even claim the regulator is deliberately restricting the number of sponsors so it can more easily control the flow of IPOs. The regulator, the China Securities Regulatory Commission, declined to comment.
Now China's new top securities regulator is stepping up scrutiny of the industry. Local media have reported that Guo Shuqing, former chairman of China Construction Bank Corp., who was appointed to the job in October, has opened a record number of securities investigations. On its website, the CSRC says it has investigated 82 securities-market cases this year, of which half relate to insider trading. The regulator this year has disciplined 35 firms, including brokerage firms and handed out fines to some.
The CSRC, which created the sponsor system in late 2003, has argued that holding specific people responsible can prevent fraud as well as accounting scandals. In the U.S., the norm is that the investment bank, not the individual, is held culpable for errors unless fraud is involved.
While Chinese companies have been accused by short sellers of accounting fraud, most of the cases occurred in companies that used so-called reverse mergers to list in the U.S., a process that doesn't require a qualified sponsor.
In November, the regulator stripped the licenses of two sponsors who worked for Chinese firm Ping An Securities, saying their due diligence on the IPO of Chinese rice-wine maker Shengjing Shanhe Bio-Technology Co. had been sloppy. The IPO was canceled earlier this year by the regulator because it said the company didn't disclose important information for investors.
"The objective is to remind people they cannot hide behind the name of an institution if they make major mistakes in the listing process," said Heiner Braun, managing partner of law firm Freshfields' Shanghai office.
This story originally appeared on WSJ.com.
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