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Development Paths of Overseas Investment Banks as Inspirations for China

In their development process, Chinese investment banks share more characteristics with their U.S. counterparts. Therefore, the model and development path of U.S. investment banks should serve as the main reference point. However, beneficial practices of investment banks in other countries should also be considered. This approach is of great significance to the development of the Chinese investment banking industry.

Investment banks are the product of a mature and developed market economy, exemplifying economic innovation. As the epitome of financial innovation, investment banks have accentuated the knowledge economy and information economy elements of the market economy. Investment banks in economically developed countries have the following major characteristics:

- A high level of industrial concentration and signs of monopolistic competition.

- Implementation of a global operation strategy.

- Trends toward diversification and specialization in business:

Specifically, the business of investment banks has expanded from traditional underwriting and brokerage to such fields as M&A of enterprises, asset management, risk investment, risk avoidance, and investment counseling.

- Mixed operation adopted by most investment banks.

Complex and diversified competition: This includes domestic and international competition between the investment banks of various countries and the constant selection of the fittest by the market as a result. It also includes the challenge to investment banks from modern "universal banks" in various countries.

- Great importance attached to the cultivation of professional talents.

Amidst the trend of transition from separated operation to mixed operation, Chinese investment banks should take full advantage of the development patterns and experience of overseas investment bank business models in the following ways:

- Great efforts should be made to expand the financing channels for investment banks. One of the reasons that Chinese investment banks have been suffering from weak capital strength and a small asset scale is that the financing channels for Chinese investment banks, securities companies in particular, are somewhat obstructed. The shortage of funds has greatly constrained the development of securities companies. A series of policies and regulations introduced in China in recent years have improved the financial situations of securities companies to some extent. For example, securities companies are now allowed to raise their capital scale through share expansion and public offering. In addition, 72 Chinese securities companies have gained permission to enter the interbank borrowing market for fund position adjustment, which relieved the capital pressure on securities companies. Securities companies are also allowed to mortgage their proprietary shares and investment funding bonds for loans from commercial banks or other financial institutions, which helps them get flexible term funds and optimize their asset structure.

- They should attach great importance to financial innovation, expand their business scope and realize diversification. Unlike overseas investment banks with excessive innovation and well-developed derivative products, Chinese investment banks are apparently lacking in innovation. For that reason, domestic investment banks should strengthen the development of new products, break through the bottleneck of traditional services, and promote a transition of their main business from traditional types (securities underwriting and brokerage and proprietary business) to innovative types (strategic services such as M&As and restructuring of enterprise) and derivative types (asset management and financial derivative instrument trades). By doing that, investment banks can diversify and stabilize their income and improve their resistance to risks.

- The capital scale of Chinese investment banks should be raised through M&As and asset restructuring. The overall industrial concentration of Chinese investment banks should be raised. Specialized and professional services should also be offered, based on the conditions of the Chinese capital market.

- Internationalization strategies should be implemented at the right time. Chinese investment banks mostly focus on the domestic market. This is mainly because Chinese investment banks are still not strong enough. Domestic investment banks should run their investment banking business from a global perspective like domestic commercial banks do. They can first improve their expertise through cooperation with international investment banks and then get into the overseas market and take part in international competition at the right time. In this respect, the success of China International Capital Corporation and BOC International have already set good examples for domestic investment banks.

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