Switzerland's largest bank, UBS, is close to completing a deal that would make it the first foreign financial institution to take a slice of a Chinese investment company.
UBS will pay SFr270 million ($220 million) for a 20 per cent stake of brokerage firm Beijing Securities if its proposal is accepted.
When the deal gets rubber stamped, as expected, the brokerage will be renamed UBS Securities, UBS said on Wednesday. The Swiss bank would be the first foreign company to be allowed to apply for licenses to trade in financial products on the Chinese market.
UBS prepared the groundwork for the deal last September, when it spent SFr645 million to buy a 1.6 per cent stake in the Bank of China, which has been subsequently listed on the Chinese stock market.
Rory Tapner, chairman and chief executive of the Swiss bank's Asia Pacific division, said UBS has agreed to act as a guinea pig for the Chinese authorities, who will be keen to monitor the progress of the first foreign-led firm in the country's capital markets.
"It was our top priority to get our infrastructure right in China," Tapner told swissinfo.
"We did not want to be treated as a foreign firm that can only underwrite securities, we wanted to be treated as a domestic firm that can actually trade in securities."
The International Finance Corporation (IFC), the private sector arm of the World Bank, has bid for a five per cent stake in Beijing Securities and plans to work with UBS to restructure the company.
If the deal goes ahead Tapner will sit on the board of UBS Securities to help appoint a management structure that "enables us to direct activities".
"In China you have to show that you are trying to contribute and that you are keen to work alongside the regulators," he said. "Control is a very sensitive word in the context of China, but there is nobody else who has any idea of how to run a securities company."
He pointed out that of the 130 or so securities firms in China, some 120 are bankrupt or near to collapsing.
Tapner acknowledged that there are risks as well as potential rewards associated with the deal. With this in mind, the bank has separated its activities in China to avoid the risk of "contagion" if one sector's reputation takes a battering.
"If we screw up the execution in a major way then we are dead and we will not be forgiven," he told swissinfo.
"China will continue to be a difficult market for foreign companies. The IPO market [Initial Public Offering, or listing on the stock market] has only existed in China for the past three years because the authorities said no to IPOs before."
Tapner added it was unlikely that any other bank would be granted the same type of deal at least for 18 months, giving UBS an advantage over its competitors.
swissinfo, Matthew Allen in Zurich
UBS's financial figures for 2005
Net profit: SFr9.844 billion (+28%)
Total attributable profit: SFr14.029 billion (+75%)
Total net new money: SFr148 billion (+80%)
Staff at the end of 2005: 69,569 (26,028 in Switzerland)
UBS is making rapid inroads into China after group chief executive Peter Wuffli announced last year that a key strategy area was to increase the bank's footprint in the Asia-Pacific region.
The entry of UBS is seen as a central plank in China's desire to reform its financial market.
The City of Beijing will take a 33% stake in the restructured company, controlled by Mayor Wang Qishan (described by some as the "godfather" of China's capital markets). A Chinese domestic consortium will share the remaining 42% of the company.
UBS rival Credit Suisse reportedly failed in an attempt to buy into China Construction Bank in September last year.