Morgan Stanley and Huaxin start operations at China JV

Morgan Stanley and Huaxin Securities announced on Friday that they have started operations of their securities joint venture in China after receiving a business licence on May 30. The Shanghai-based JV will allow Morgan Stanley to underwrite and sponsor primary equity and bond issues in China’s domestic market and also to conduct proprietary trading of corporate and government bonds.

The launch comes five months after the two firms received regulatory approval to set up the joint venture, which will operate under the name of Morgan Stanley Huaxin Securities. As per Chinese regulations, Morgan Stanley owns one-third of the JV, while its Chinese partner, which is also known as China Fortune Securities, owns the rest.

Morgan Stanley is the seventh international firm to gain direct access to China’s capital markets after Goldman Sachs, UBS, Credit Suisse, Deutsche Bank, CLSA and Royal Bank of Scotland. RBS became the first UK-based bank with an onshore underwriting licence when it kicked off its JV operations with Guolian Securities at the end of May. Meanwhile, Citi announced at the beginning of June that it has agreed to set up a JV with Orient Securities and is now awaiting regulatory approval, which typically takes about six months.

Also, J.P. Morgan is believed to be close to getting a business licence for its JV with First Capital Securities, which received approval from the China Regulatory Securities Commission (CSRC) at the same time as Morgan Stanley Huaxin Securities (December 31, 2010). A spokesperson for J.P. Morgan in Hong Kong said on Friday that the bank was still waiting for the go head, but noted that the operational licence is usually a formality. It is the CSRC approval to establish the JV that is the critical step.

Morgan Stanley is by no means a newcomer to China’s domestic market, having set up China International Capital Corp (CICC) as a joint venture with China Construction Bank as early as 1995 to help lay the ground for the opening of China’s capital markets to foreign players. The US bank was closely involved with CICC’s rise to a full-fledged international-style investment bank and initially provided a lot of talent to the JV, but in 2000 it gave up management control and after that had no real influence of the business. It continued to collect revenues in proportion to its 34.3% stake, however.

In December last year it sold the CICC stake to pave the way for the JV with Huaxin, pocketing a pre-tax gain of about $700 million. The sale was viewed to be long overdue and a much desired development since it will enable Morgan Stanley to compete with key rivals Goldman Sachs and UBS on more equal terms in China.

“Today’s launch is an important milestone that allows us to bring to China and to domestic clients many of Morgan Stanley’s core capital market skills and competences,” Morgan Stanley’s president and CEO, James Gorman said in written comment.

At a press conference in Shanghai on Friday, Morgan Stanley Chairman John Mack said that that contrary to CICC, which is primarily focused on state-owned enterprises, the new JV will focus on helping small and mid-sized enterprises access the domestic capital markets.

“Both Huaxin and Morgan Stanley believe that the A-Share market is going to grow and going to need financing,” he was quoted as saying by Dow Jones Newswires.

The A-share markets in Shanghai and Shenzhen have grown rapidly in the past five years already with total issuance volumes increasing to $104.8 billion last year from $20.9 billion in 2006, according to Dealogic data. Meanwhile, IPO volumes reached $71.6 billion last year, making China the biggest IPO market in the world for the first time, ahead of Hong Kong and the US.

Year-to-date, Chinese companies have raised a combined $31.3 billion from the A-share market, of which $22.6 billion have come from IPOs.

The JV will have nine board members. Wang Wenxue, who is chairman of Huaxin Securities, has been appointed chairman of Morgan Stanley Huaxin as well, while Yang Kai, who was most recently CEO of Hangzhou Industrial and Commercial Trust, will take on the day-to-day running of the business as CEO. Hangzhou Industrial and Commercial Trust is 19.9%-owned by Morgan Stanley and Yang Kai was a senior China-based banker with the US bank before he transferred to that firm.

Huaxin was established in Shenzhen in 2001 and now has 21 branches in Beijing, Shanghai, Xi’an, Shenzhen and Changzhou. It has had a partnership with Morgan Stanley since 2008 when they jointly invested in a fund management company under the name of Morgan Stanley Huaxin Fund Management Company.

Morgan Stanley’s other businesses in China include M&A advisory, fixed-income and merchant banking. In 2006 it became the first foreign bank to gain a wholly-owned commercial banking licence in China and operates a banking entity under the name of Morgan Stanley Bank International (China). Last month it also set up a renminbi private equity investment management firm in Hangzhou.