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How CLSA Had the Life Squeezed Out of It

Nisha Gopalan

(Bloomberg Opinion) -- CLSA Ltd. is losing its identity. That’s bad news for its parent’s ambitions to build a globally competitive Chinese investment bank in the mold of Goldman Sachs Group Inc.  

Citic Securities Co. is tightening control over CLSA following an exodus of employees and top executives from the Hong Kong-based brokerage last year, Cathy Chan of Bloomberg News reported Wednesday, citing people familiar with the changes. China’s biggest broker is creating a “coordination committee” at CLSA that will include Citic Securities’ president and chairman, an interim step toward reordering a decision-making structure that’s seen as too independent, they said.

Once dubbed the “insane asylum” by former Chief Executive Officer Jonathan Slone for its nonconformist ideas, CLSA has lost a lot of its luster since the 2013 takeover as the brokerage’s independent-minded research, which included opinions critical of China’s Communist Party and led to a culture clash with its parent, a unit of state-owned Citic Group.

CLSA, with 21 locations across the world, hasn’t brought the benefits of an international network that Citic might have hoped for. Revenue from Citic Securities’ international operations declined 3% annually between 2014 and 2018, according to Bloomberg Intelligence analyst Sharnie Wong. By contrast, smaller Chinese rival Haitong Securities Co. has recorded average growth of 21% at its international unit. Under pressure to cut costs, Citic shuttered CLSA’s American equities business in 2017.

While that was an understandable move, the squeeze has dented morale at CLSA and damaged its standing with international clients — the very people who were meant to vault Citic into the top tier of Wall Street heavyweights. CLSA has also been hurt by the implementation of the European MiFID II regulations that forced fund managers to pay for research. Many ditched smaller-scale firms such as CLSA, which fell to eighth in the rankings for Asian equity research market share last year, having once been in the top three, according to data from Greenwich Associates.

There is some logic to Citic’s tightened grip. CLSA needs to boost its exposure to mainland China, a growth area for brokerage research as the inclusion of domestic shares and bonds in the MSCI and Bloomberg Barclays indexes drives billions of dollars of foreign money into its markets. International investors are ever more interested in the A shares Citic Securities covers, as opposed to the Hong Kong-traded shares in which CLSA has long specialized.

The Chinese brokerage needs to buffer itself against stiffer competition on its own turf. China is opening up its $45 trillion financial industry, allowing foreign firms like Goldman Sachs and UBS Group AG to fully control their domestic investment operations. As foreign fund managers such as Blackrock Inc. boost their presence in the country and seek out more familiar advisers, that could threaten Citic’s reign as China’s top brokerage.

Here’s where integrating CLSA into the mothership could prove self-defeating for China’s ambitions of creating an “aircraft-carrier sized” investment bank that can compete globally. The value of an investment bank’s brand lies in its people and their connections, and few global names have been run successfully from Beijing. In subsuming CLSA within the state-owned company structure and stamping out its idiosyncratic ways, Citic risks being left with little more than a nameplate and the fading memory of a once-formidable global reputation.

 

To contact the author of this story: Nisha Gopalan at ngopalan3@bloomberg.net

To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Nisha Gopalan is a Bloomberg Opinion columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

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