Before CLSA Ltd. was acquired in 2013, the Hong Kong brokerage’s research division issued a warning to investors in Chinese financial companies: beware of “high-frequency interference” from the Communist Party.
Nearly a decade on, there’s no better example of how Chinese government control can transform a financial firm than CLSA itself.
The latest case in point: CLSA executives have for the first time been ordered by their bosses at state-owned Citic Securities Ltd. to participate in China’s five-year planning process, a ritual that Communist Party leaders have used to guide the nation’s economy since the 1950s, people familiar with the matter said. Major state-owned enterprises are required to submit five-year plans to the government, and CLSA’s outlook will now feed into Citic’s report to Beijing, which is unveiling a new road map in October, one of the people said.
The diktat adds to a series of steps by Citic to overhaul CLSA, a Hong Kong icon that’s long been known for its independent-minded research and raucous investor conferences. Some observers have portrayed the moves as a financial-industry microcosm of the Chinese government’s broader clampdown on the former British colony.
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Citic’s leaders have argued that the changes at CLSA are needed to improve discipline and coordination on everything from hiring to deal making and risk management. Yet the upheaval has also contributed to a steady exodus of senior talent and made it more difficult for the firm to retain even recently hired investment bankers from international competitors.
After CLSA Chief Executive Officer Rick Gould left in August, just a handful of division heads who pre-date the Citic takeover remain, including Shaun Cochran, now head of research, and Edward Park, who runs institutional equities. Much of the original leadership team, including long-time CEO Jonathan Slone, departed in early 2019 after clashing with Citic Chairman Zhang Youjun.
“Converting a freewheeling investment banking business into an SOE structure amounts to real value destruction,” said Chen Zhiwu, director of the Asia Global Institute at the University of Hong Kong. “CLSA can’t compete internationally any more and will have to rely on what its parent company feeds to it.”
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A spokeswoman at CLSA declined to comment. Citic Securities didn’t immediately reply to an email seeking a comment.
The five-year plan ordered up from Beijing includes growth and hiring targets, an assessment of risks and opportunities in major markets and an analysis of the competitive landscape, the person familiar said, asking not to be identified discussing internal matters.
Chinese President Xi Jinping and other senior Communist Party leaders are expected to lay out their 2021-2025 strategy for the entire country in October.
CLSA’s planning directive follows other recent changes that include direct reporting lines from Hong Kong to Beijing and a more restrictive approval process for capital investments and hard underwriting decisions, the person said. Client non-disclosure agreements also need approval from a quality control team, whereas previously they only needed a sign off from a director or a licensed representative. To encourage collaboration between staffers in Hong Kong and Beijing, their bonus pools have been combined.
What the changes will mean for CLSA’s bottom line is hard to say, given that the unit doesn’t disclose detailed financial statements. One thing that seems clear, however, is that the firm is becoming increasingly China-centric.
While Zhang has pushed CLSA to build a stronger presence in India, Southeast Asia and Japan, his overseas ambitions aren’t as grand as those of his predecessor, Wang Dongming, who orchestrated the 2013 acquisition. The firm’s primary goal now is to serve Chinese clients and help foreign investors navigate China, the person familiar said.
That strategy still requires executives and deal makers with overseas experience, a cohort that CLSA has struggled to retain. Gould lasted just 16 months as CEO even though he was appointed by Zhang, who at the time deemed it important to have a non-Chinese CEO to maintain the firm’s international image. In April, Zhang installed former Vanguard executive Charles Lin, a Chinese native, as CLSA vice chairman. Lin, based in Hong Kong, has now assumed many of Gould’s responsibilities.
Andrew Hartley, who worked for almost 15 years at CLSA and most recently oversaw Singapore, left earlier this year. Richard Taylor, the former head of corporate finance and capital markets, quit around the same time.
The exodus bodes ill for CLSA’s ability to attract overseas clients and deals, according to Asia Global Institute’s Chen. “Investment banking is totally a people business,” he said. “Once the key people are gone, so is its main business.”