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A farmer drives a tractor past a branch of Agricultural Bank of China in Xiangfan, Hubei province July 1, 2010. Agricultural Bank of China's Hong Kong share offering has been more than 10 times oversubscribed by institutional investors, signalling healthy interest in the dual listing that could end up being the world's largest ever. REUTERS/Stringer (CHINA - Tags: BUSINESS) CHINA OUT. NO COMMERCIAL OR EDITORIAL SALES IN CHINA

� Stringer Shanghai / Reuters/� Stringer Shanghai / Reuters/R

Morgan Stanley chief executive officer James Gorman wasn't going to miss his chance.

It didn't matter that he was on holiday. Mr. Gorman dropped everything and flew to Beijing last April. He wanted to show up in person to make sure his firm got a piece of what was shaping up to be the biggest initial public offering in history.

In Beijing, Mr. Gorman spent hours rehearsing with his team for a half-hour pitch to executives of Agricultural Bank of China, whose IPO would eventually raise $22-billion.

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"For a half-hour bake-off, he came all that way," Wei Christianson, Morgan Stanley's China CEO, said in an interview last month from her office near Financial Street in Beijing.

As he practiced, the Australian-born CEO debated with colleagues about whether the Chinese bankers would want to hear his stories about farming in the outback.

Mr. Gorman was not the only top Wall Street executive looking to get in on the AgBank deal. JPMorgan CEO Jamie Dimon and Deutschebank CEO Josef Ackermann also went to China to make their pitch, and in the end all three banks secured an underwriting assignment for the bank's Hong Kong offering.

For a while at least, with their eyes dead set on the AgBank pot of gold, global bankers could set aside concerns about the challenges they face in China, a market they are desperately trying to crack but where they are finding more setbacks than successes.

Why they want in is no mystery.

Economists at Goldman Sachs believe that mainland China's market capitalization will rise to $41-trillion by 2030 from $5-trillion now. That would make China's stock market the biggest in the world. U.S. market cap is expected to grow to $34-trillion from $14-trillion over that time.

But with China, American financial powerhouses may have met their match. Here, government connections and family ties can trump decades of banking experience and western swagger. So for all their efforts - and kowtowing - this is likely to remain one tough market Wall Street firms.

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GOLD RUSH

In Beijing, where the towering gray headquarters of the world's largest banks - Industrial and Commercial Bank of China, China Construction Bank and Bank of China - cast a long shadow, Wall Street banks are still on the outside looking in.

The towers in and around Financial Street wouldn't look out of place on Wall Street. But looks can be deceiving.

"You can't just come in here and act like this is New York and try to operate the same way you would in New York," said Philip Partnow, who heads China M&A for UBS.

Global banks trying to jump-start their China operations are tangled in a web of strict regulation, culture clashes and politics. They worry too that even the sweat equity they are putting into training their partners in the ways of western banking will be lost. Some wonder whether China's long-term plan includes their foreign guests from Wall Street.

"At some point, the Chinese want to get to the point where they don't need the foreign investment banks," said Michael Werner, a Hong Kong-based China banking analyst with Sanford C. Bernstein.

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China's domestic "A Share" IPO market is especially tightly controlled. Even though global banks are actively underwriting listings for Chinese firms on the Hong Kong exchange, they are being shut out of the mainland IPO market.

The China IPO market has reached $56-billion so far in 2010, more than five times what it was a decade ago. Despite such torrid growth, major U.S. banks have moved down the underwriting rankings, while domestic banks have solidified their spots at the top.

Global banking powers like Goldman Sachs , Morgan Stanley and JPMorgan have an investment banking presence in China, which connect Chinese companies, often state-owned entities, with foreign capital. The Chinese banks have not built up their international distribution networks yet, leaving the door open foreign banks to get a piece of the market.

But what happens when China's banks and its growing ranks of regional securities firms are able to shoulder the load?

Some foreign bankers fear they will be sidelined, with years of investment lost, and invaluable know-how left in the hands of their Chinese partners.

"Basically, it is a big technology transfer that is going on here - and then the Chinese shut the door," said Gordon Chang, author of the book 'The Coming Collapse of China'. "They've done this so many times."

BIG RETURNS

Look at Morgan Stanley's saga with China International Capital Corp (CICC), its investment banking joint venture.

On paper, Morgan Stanley is primed to make a handsome profit on its $34-million investment in CICC.

The bank is awaiting approval from Chinese regulators to sell it to private equity firms KKR and Texas Pacific Group for about $1-billion.

The firm made investment in the joint venture in 1995 after painstaking negotiations with its partner, China Construction Bank, giving it a roughly one-third stake in CICC.

The deal was the first of many securities joint ventures, with Goldman, UBS, Deutsche Bank and Credit Suisse later entering securities partnerships. JPMorgan Chase, Bank of America , Citigroup and Barclays are among the many banks that are trying to identify local partners and get the government's blessing.

The CICC deal gave Morgan Stanley an early entry into China and helped the firm play a significant role in building the country's capital markets, which surely bought it some goodwill with Chinese officials.

But while Morgan Stanley's investment returns are nothing to sniff at, many believe that the Wall Street firm got far less out of the joint venture than it put in.

CULTURE CLASH

One day a decade ago, during China's mid-autumn festival, CICC CEO Levin Zhu was the last one to leave the office. He was working late into the night in a smoke-filled room on the China Petroleum & Chemical Corp (Sinopec) IPO.

By that time, Morgan Stanley's influence on CICC had shrunk in part because Mr. Zhu had wrested control of the bank from the Wall Street firm, reducing it to a passive investor. It was a far cry from the more engaged role that Morgan Stanley had envisioned when helped to launch the joint venture.

When Morgan Stanley began the JV, its majority partner, China Construction Bank, was purely a commercial bank and had virtually no investment banking experience. That's what Morgan Stanley brought to the table.

Morgan Stanley brought seasoned bankers, its brand, and an invaluable amount of know-how to the joint venture. The information would be critical to CICC getting off the ground.

With CICC, Morgan Stanley found itself on the inside of a successful investment bank, but one that was fraught with culture clashes and internal warring between western bankers and their Chinese counterparts, according to people who worked in the joint venture.

THE RIDDLE

Mr. Zhu, who was a riddle to some of his Morgan Stanley counterparts, personified the cultural differences that make or break joint ventures.

Mr. Zhu is what is known in China as a "princeling," the offspring of a powerful politician. The son of former Chinese premier Zhu Rongji, he studied meteorology before going into finance and eventually landing atop CICC.

Some former Morgan Stanley executives remain perplexed by Mr. Zhu, who they say understood finance and investment banking, but worked odd late hours and appeared to rely too much on his father's political ties.

Mr. Zhu, with his political clout, succeeded in reducing Morgan Stanley to a passive investor for much of the past decade, removing the Wall Street bank from management decisions and giving complete control of the operation to the Chinese.

Morgan Stanley's interest in exiting CICC came to light as early as 2007, but the bank is still waiting for approval from regulators to sell its stake. Media reports have indicated that approval could come soon.

The slow-moving process has delayed Morgan Stanley's plans to apply for a license with a new partner because rules forbid the banks from having two joint ventures simultaneously.

And China does not seem to be in a hurry to create another competitor.

Despite the history, Morgan Stanley refuses to speak ill of its CICC endeavour.

MANY RISKS

In September, Reuters met with a number of executives and investment bankers from global banks, all of which are jockeying for position in the Chinese market.

The executives offered a positive outlook for China and spoke with hope and ambition about building operations there.

With China expected to emerge as the largest market in the world - it's economy is growing more than 10 per cent annually - bankers are careful not to say anything that could catch the attention of regulators and potentially hurt their access.

"A lot of what these people say publicly, that China is going to be great, just cannot be true; there are too many risks," said Victor Shih, who teaches political science at Northwestern University. Foreign banks are under pressure to appear bullish China because they are trying to sell Chinese investments to clients, he adds.

But if China's growth goes as expected, there is no doubt it will be a boon to financial intermediaries who stand to see billions of dollars in yearly revenues over the next two decades - making it all the more critical for Wall Street banks to become true players in the market.

LONG-TERM PROSPECTS

Executives from Goldman and UBS, two banks that are among the best-positioned in China, were upbeat about the long-term prospects.

"I think people thoroughly understand that long-term is long-term," said Mark Machin, co-head of Asia investment banking for Goldman Sachs, who has been in Asia for 16 years.

"These businesses and relationships don't come in a month or week, they take years. We are building for a very long time. Everybody understands that," he said.

UBS talks about how it has found success "swimming with the current" in China.

"What are the government's priorities in China and how can I align my activities with their goals?" UBS's Mr. Partnow said, explaining how his firm has found success in moving with regulators.

Even though some bankers privately share frustrations about the strict hand of Chinese regulators and the pace at which they move, publicly the executives measure their words when talking about the government.

Robert Morrice, Barclays' Asia-Pacific CEO, says he understands where the Chinese regulators are coming from.

"I try to put myself in their position," he said. "If I were them I would want to control international entrance to my marketplace because you have to have the right participants."

THE DANCE

As banks salivate over the possibilities, there are some doubters, however.

One of them is James Chanos, the hedge fund manager known for correctly predicting the demise of Enron. Since the start of 2010 he has been making the case that China is built on a real estate bubble that is likely to burst.

"I don't see this ending well," Mr. Chanos said from his New York office. "The bulls think the Chinese authorities will slowly let air out of the bubble. History is not on their side."

The slowdown might be starting already. Property investment is set to grow 26.8 per cent for all of 2010, slowing from a rise of 37.2 per cent in the first seven months of the year, according to a report from a top China economic planner.

Mr. Chanos does not speak Mandarin and he has never been to Beijing. But he knows numbers, and his predictions do not look good for Wall Street banks hoping to find gold in China over the long term. "China is not going to be a driver of their profitability," he said.

When Gordon Chang, the author, considers how banks are tripping over one another to get an edge in China, it conjures up memories of former Citigroup CEO Charles Prince's infamous comment before the U.S. housing crisis: "As long as the music is playing, you've got to get up and dance."

"When your competitors do something, you've got to do it as well," said Mr. Chang. "But I think they're all missing something."

Mr. Chang, a lawyer who worked in China and Hong Kong for two decades, also points to the overheated real estate market.

He said he believes that foreign banks are already getting hints that China could be on a course for trouble.

Goldman recently pared its stake in the Industrial and Commercial Bank of China by $2.3-billion.

Earlier, Bank of America pared down its interest in the China Construction Bank to raise $7.3-billion.

"That's not what you would do if you were truly bullish about it," Mr. Chang said.

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