J.P. Morgan and First Capital Securities have received the final business permit that will allow them to start operations at their securities joint venture in China. This comes a month after Morgan Stanley got the go-ahead for its JV with Huaxin Securities and will make J.P. Morgan the eighth international bank able to underwrite and sponsor primary equity and corporate bond issues in China’s domestic market.
Echoing his comments from early January when the two firms received regulatory approval to set up the joint venture, J.P. Morgan’s chairman and CEO for Asia-Pacific, Gaby Abdelnour, referred to the establishment of the JV as an important milestone in the bank’s 90-year history in China. The JV, he said, “is of strategic importance to both partners and central to our shared desire to expand and enhance the range of services we are able to offer our respective client bases in China”.
With more and more international banks gaining direct access to China’s capital markets, firms without the ability to offer underwriting of domestic A-shares in particular run the risk of becoming less competitive in the fight for Chinese mandates. As Nick Ferguson noted in his cover story in the March issue of FinanceAsia magazine, it is still difficult for overseas banks to make money from their securities JVs in China, but a key benefit right now is that the JVs allow the firms to put more investment bankers on the ground, which makes it easier to get in front of clients in China.
“Most people do not measure [the benefits] purely by standalone profit,” Zili Shao, chairman and CEO of J.P. Morgan’s China business said in that story. “The JVs enhance your ability to serve your clients, which means that through the JV you might generate more work offshore.”
And there is no denying that China is important when it comes to capital market issuance. In the first half of this year, equity issuance involving Chinese companies amounted to $52.6 billion and accounted for 42.4% of total Asia-Pacific ECM volumes, preliminary Dealogic data show. This is up three percentage points from the same period last year and the highest year-to-date percentage ever. China also accounted for almost 30% of global IPO volumes.
Meanwhile, debt capital markets volume generated by Chinese companies is up 36% year-on-year to $111.3 billion and stands at the highest year-to-date level on record. Agricultural Bank of China’s $7.7 billion domestic bond was the largest corporate bond in the world in the first six months.
The Dealogic data do not provide a breakdown between domestic and international issuance, but it is quite telling that the five international banks that make the top-10 in the China league table for the first six months this year — Goldman Sachs, UBS, Morgan Stanley, Credit Suisse and Deutsche Bank — all have securities JVs in China (or, in the case of UBS, a direct investment in a domestic securities firm).
The DCM table is even more differentiated, since the volume of domestic bond issuance swamps international issuance. Only UBS and Deutsche Bank are in the top 10, in places nine and 10 respectively, while the rankings from one to eight are all occupied by domestic firms.
As per current regulations, J.P. Morgan will own 33.3% of the JV, which is headquartered in Beijing and will operate under the name of J.P. Morgan First Capital Securities. Its Chinese partner will own 66.7%.
As reported earlier, Bei Duoguang, formerly with China International and Capital Corp (CICC), has been hired as CEO of the JV, while First Capital’s chairman, Liu Xuemin will take the helm as chairman of J.P. Morgan First Capital Securities as well.
In a release issued yesterday, J.P. Morgan referred to Bei as one of China’s most seasoned investment bankers with more than 20 years of experience in the securities and finance industry, both as a banker and as a regulator. “He has a deep understanding of China’s capital market and regulatory environment, built on 12 highly successful years at CICC. He will play a pivotal role in the development and future success of this joint venture,” said J.P. Morgan’s Shao.
According to a source, J.P. Morgan has also been instrumental in filling some other senior posts, which should give it “significant management influence” of the JV.
First Capital is headquartered in Shenzhen and has branches in 21 cities in China. It provides corporate finance, fixed-income, M&A, brokerage and asset management services to its clients and, according to the release yesterday, it has a strong reputation among governments, corporations, institutions and individual investors.
The JV will add to J.P. Morgan’s existing franchise in China, which includes a futures brokerage business that focuses on commodity and financial futures, and a 49% stake in a fund management joint venture — China International Fund Management Company — that it operates together with Shanghai International Group. The bank started operations in China in 1921 and currently has five branches in Beijing, Shanghai, Tianjin, Guangzhou and Chengdu, which provide financial services to local and foreign companies, as well as government entities. It became the first locally incorporated foreign bank in Beijing in 2007, under the name of J.P. Morgan Chase Bank (China).
Aside from the banks already mentioned, CLSA has a JV with Hunan-based Fortune Securities under the name of Fortune CLSA Securities, which is primarily focused on brokerage. And earlier this month, Citic Securities agreed to buy a 19.9% stake in CLSA in a move that, according to CLSA chairman and CEO Jonathan Slone, will provide the Hong Kong-based brokerage and investment group with “a partner in China with direct access to China IPOs”. His comment suggests that the firm is keen to develop the underwriting side of the business as well. Citic Securities is China’s largest stockbroker and a leading investment bank in the domestic market.
Meanwhile, Royal Bank of Scotland became the first British bank to be able to underwrite stocks and bonds in China when it received the operational go ahead for its JV with Guolian Securities in late May. The new entity, which is named Huaying Securities, plans to target China’s growing entrepreneurial sector: small and medium-size private businesses that are looking to raise money in the equity capital markets for the first time.
Also waiting in the wings is Citi, which in early June signed an agreement to set up a securities JV with Orient Securities. The JV still needs regulatory approval, which it hopes to secure by the first quarter next year, as well as a business licence to operate that could take another five to six months. This suggests that Citi will have to wait another 12 months or so before it can actually start to do business in the domestic capital markets.