Published On: Sat, Dec 10th, 2011

Foreign JVs in China Eye Slice of Pie

Brokerages with experience in cross-border deals will gain from new Shanghai international board

Although China has been a member of the World Trade Organization (WTO) for 10 years, the expansion of foreign investment banks in the country remains slow and joint-venture securities firms are still struggling to gain clients and a larger share of the underwriting business in the Chinese market.

As of October, 58 securities firms in China had underwritten a total of 226 initial public offering (IPO) deals and gained underwriting fees of 10.5 billion yuan ($1.67 billion) this year, according to data provided by Wind Info, a Shanghai-based integrated service provider of financial data, information and software. But only five IPO deals were underwritten by joint-venture securities firms, just 4.23 percent in terms of the total underwriting fees in the A-share market.

While foreign investment banks such as Morgan Stanley and Goldman Sachs Group Inc have long taken part in facilitating Chinese companies selling shares in Hong Kong or foreign markets, their business in the domestic A-share market has not seen any significant breakthrough.

Last year, 106 brokerages in China earned a total profit of 80.9 billion yuan while joint-venture securities firms made only 1.9 billion yuan, accounting for 2.4 percent of the total profits in the market, according to Wind Info.

Analysts said that joint-venture securities firms are unlikely to challenge the dominance of their domestic counterparts in the domestic underwriting business in the near future.

“In the short term, foreign investment banks are unlikely to challenge the dominant position of domestic ones in the market as they don’t have the network advantage,” said Zhang Qi, an analyst at Haitong Securities. “They also face the hurdle of local restrictions on operating in the Chinese market.”

In 2002, Changjiang Securities signed an agreement with French bank BNP Paribas to set up a joint-venture securities company, which was the first joint-venture brokerage established after China entered the WTO. But three years later, the brokerage dissolved because of disagreements over strategy.

The China Securities Regulatory Commission (CSRC) introduced rules in June 2002, which set the maximum foreign stake in a Chinese brokerage at 33 percent.

In the following years, UBS, Goldman Sachs, Credit Suisse and Deutsche Bank each formed a Chinese joint venture with a local securities firm by holding a minority stake.

Despite the local market restrictions, foreign investment banks are eager to expand in China, the world’s second-largest economy with a capital market that raised about $72 billion in IPO deals in 2010, which was more than the Hong Kong and New York stock exchanges for the first time.

However, the Chinese securities regulator has been cautious about foreign investment banks setting up joint venture firms in China.

“Foreign securities firms have to show their genuine interest in the Chinese financial industry when they seek cooperation with their Chinese counterparts,” said Shang Fulin, former chairman of the CSRC earlier this year at a conference in Beijing.

“We will not allow any kind of stake holding by foreign investment banks of unlisted Chinese brokerages purely for the purpose of financial investment.” he said.

However, despite the huge hurdles they face, foreign banks have not given up on the lucrative Chinese market, and the launch of the international board in Shanghai will help provide more business opportunities for joint-venture securities firms in Chinese A-share market, according to analysts.

The international board will allow foreign companies to float shares on the Chinese stock markets and the so-called red-chip companies that are listed overseas are also eyeing a return home.

“It definitely means more underwriting business for the brokerages, especially the joint-venture ones who have more experience in cross-border deals,” said Zhang.

In 2011, JP Morgan Chase & Co and Morgan Stanley formed joint-venture firms in China and their senior executives have expressed optimistic views about the outlook of China.

“This is a platform,” Zili Shao, chairman and chief executive of JP Morgan China, was quoted by the New York Times as saying. “We must have this capacity or else our franchise will have a gap in the firm’s global offerings.”

JP Morgan’s securities joint venture with Shenzhen-based First Capital Securities Co has got off to a good start, Zhao said in October. The joint venture, which began operations in June, allowed JP Morgan to enter the Chinese securities market. It already has some equity and debt underwriting deals in the pipeline, he said.

To illustrate how lucrative the Chinese market can be, CITIC Securities Co Ltd, the country’s largest brokerage by market value, earned 10.9 billion yuan in net profit in 2010, even though the country’s stock market was among the worst performing that year.

The 106 securities brokerages together earned about 108.5 billion yuan in net income from the underwriting business in 2010, according to the China Securities Association.

Analysts said that domestic firms should be well prepared for the competition from foreign financial institutions that are looking to expand their presence in the Chinese market.

“If they are not well prepared for the inflow of foreign investment in the domestic securities industry, they will gradually lose their market share,” Fang Xinghai, director of the Shanghai Financial Services Office, was quoted by Chinese media as saying.

“Therefore, China should accelerate the reform of the financial industry and actively open its market,” Fang said.

“Domestic financial institutions should grow along the trend of Chinese companies going abroad.”

Source: China Daily

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