They're on the home stretch, and the price beckons.

Barclays Bank Plc is in the final stages of establishing a branch in Shanghai. Risk and fund management specialists Barclays Capital will handle its China business.

The Shanghai branch plans to offer interest rate related derivatives products in the world' s seven major currencies to help clients hedge currency risks, says Robert Diamond, president of Barclays Plc.

Barclays is now the third largest bank in Britain, with total assets of 560 billion pounds (US$966 billion), trailing only HSBC and Royal Bank of Scotland Group Plc.

Diamond says that Barclays will apply to the China Banking Regulatory Commission (CBRC), the industry watchdog, for approval to trade derivatives products in those seven currencies by the first quarter of 2006. He says that the London-based bank also expects to offer yuan denominated derivatives products within the next two years.

The company is expecting 15 to 20 per cent annual growth in China, Diamond adds. The opening of the Shanghai branch will help it prepare for new opportunities in China after the scheduled opening of the domestic financial market in 2006.

The world's fastest growing economy will open its banking industry to foreign competition in 2006, under its commitments to the World Trade Organization (WTO). Foreign players are understandably eager to access a financial market underscored by US$1.69 trillion in household savings.

Eighteen foreign institutions have already invested US$13 billion in 16 Chinese banks. HSBC, the largest bank in Europe by market value, now holds a 19.9 per cent stake in Bank of Communications, China's fifth largest lender. Joint-stock lenders, including Bank of Communications and Shanghai Pudong Development Bank, attracted US$2.6 billion in overseas investment.

Currently, the Chinese Government limits combined foreign investment in a single Chinese bank at 25 per cent. The maximum stake owned by a single investor is as much as 20 per cent. Investment banks such as Goldman Sachs and Morgan Stanley are actively striving for the businesses from Chinese companies seeking overseas listing.

There is obviously big money to be made in the initial public offerings. For example, when China Construction Bank launched its US$8 billion IPO in Hong Kong this October, the world's biggest one in four years, Morgan Stanley and Credit Suisse First Boston were said to have earned a combined US$100 million in sponsorship and advisory fees.

Barclays Capital, the new kid on the block, is taking a rather different, and perhaps more narrowly focused path. Risk management and financing services are considered the company's forte. These are the two areas in which it has proved its strength and will also provide good growth prospects in the China market, says Diamond.

This strategy is in line with Barclays Capital's focus in other markets as well. The company has consistently ranked among the top three debt capital markets in Europe.

Diamond began his career in academia as a lecturer at the School of Business, University of Connecticut. He made the move to investment banking in 1979 and has since worked in various times at Morgan Stanley and Credit Suisse First Boston before joining Barclays Capital as its chief executive officer in 1996. He was appointed chairman of Barclays Global Investors in 2002.

In the January 2004 issue of the Banker, Diamond was quoted as saying that Barclays Capital's business had benefited from the development of several financial trends in Europe. These included a shift away from bank lending to capital markets funding and the need to boost Europe's pension assets.

Similar trends are being encouraged in China. The central government has been known to favour the expansion of the pension fund pool to help establish a social safety net that can better cope with the changes brought about by a rapidly-developing economy.

The People's Bank of China, the central bank, has expressed the need to attract more institutional investments in China's long-term capital market, including pension funds, by encouraging more qualified enterprises to issue debt instruments.

It is believed that a significant shift by large enterprises to direct financing will make it easier for small- and medium-sized enterprises to secure bank lending to help finance their growth.

Barclays Capital is looking to play a bigger role in China's fast expanding fund management market, especially the nation's pension funds, according to Diamond.

The World Bank has projected that China's pension fund market could grow to as much as 1,500 billion yuan (US$184.9billion) by 2030, and industry professionals predict that managed corporate pension funds could reach that level much earlier.

China has given the nod to 29 local firms to manage corporate pensions this August. Foreign investors, such as Deutsche Bank, Fortis, Morgan Stanley and Bank of Montreal were thus able to enter the pension market of the world's most populous country through their joint ventures with local partners.

Barclays Capital was granted a qualified foreign institutional investor license last September, which allowed it to invest US$75 million in yuan-denominated bonds and shares listed on domestic exchanges. It has applied to China's foreign-exchange regulator to raise the limit for investment in yuan-denominated shares and bonds this year. However, analysts say it will still take some time before Barclays can tap into China's pension market.

Under current regulations, foreign companies can only participate in China's asset management industry through a joint venture with a local partner, with foreigners eligible to take a maximum 49 per cent equity stake.

Barclays Capital is expected to concentrate on servicing Chinese enterprises that are expanding overseas aggressively for future growth.

Overseas expansion has become the corporate catchword among some of the largest Chinese enterprises. Quite a few have actually made the move. For example, Lenovo Group Ltd bought International Business Machines Corp's personal computer unit for US$1.25 billion this year. The company is aiming to become the leading PC-maker within the next five years.

"We don't do proprietary trading," says Diamond. He explains that this would be more beneficial to its fund management clients.

(China Daily 11/28/2005 page4)