Morgan Stanley and J.P. Morgan have both received regulatory approval to set up securities joint ventures in China. The two JVs will be able to underwrite domestic equity and bond issues and will give the two US firms the same access to the Chinese market as Goldman Sachs, UBS, Credit Suisse and Deutsche Bank.
Before they can start operations, the new JVs to be set up by Morgan Stanley and J.P. Morgan together with their respective partners will also need a business licence – a process that can take another three to six months. Typically that licence is viewed as a procedural issue, however. It is the approval to establish the JVs that is the critical step.
The China Regulatory Securities Commission (CRSC) gave the approvals on December 31, but the news was announced by the US banks on Friday.
As reported earlier, Morgan Stanley will be setting up a JV with Huaxin Securities (also known as China Fortune Securities), while J.P. Morgan will set up a JV with First Capital Securities. As per current regulations, the US firms will own 33% of their respective JVs while their Chinese partners will own the remaining 67%.
For Morgan Stanley, Friday’s news comes less than a month after it announced on December 8 that it had received all the necessary approvals from the Chinese regulators to sell its 34.3% stake in China International Capital Corp (CICC) to TPG Capital, Kohlberg Kravis & Roberts (KKR), The Great Eastern Life Assurance Company and the Government of Singapore Investment Corp (GIC). At the same time, it said that the CSRC accepted its application to set up a JV with Huaxin at the end of November.
Morgan Stanley had tried to sell the stake in CICC for several years as the understanding was that Beijing wouldn’t allow it to invest in a second Chinese securities firm or JV as long as it still held a stake in CICC – something which it has been keen to do in order to get more direct access to China’s domestic markets, equities in particular, and not slip behind key competitors like Goldman Sachs and UBS.
Morgan Stanley set up CICC as a joint venture with China Construction Bank in 1995 and was closely involved with its rise to a full-fledged investment bank with operations similar to those of an international firm. Being the first Sino-foreign securities JV in China, their cooperation helped lay the ground for the opening of China’s capital markets to foreign players. In the early days, Morgan Stanley provided a lot of talent to the JV, but in 2000 it gave up management control and since then has had no real influence on the business, although it has been collecting revenues in proportion to its 34.3% stake. The CICC sale closed before the end of December. Morgan Stanley is believed to have received about $1 billion for its stake and has earlier announced that it made a pre-tax gain of about $700 million.
“Developing our domestic market capabilities in China has been and continues to be a priority for the firm,” Morgan Stanley’s president and CEO, James Gorman, said in a written comment. “Our securities joint venture with Huaxin Securities builds on Morgan Stanley’s consistent track record of success in China and allows us to offer a broader spectrum of financial services to local and international clients.”
Huaxin is a securities firm initially established in Shenzhen that now has 21 branches in Beijing, Shanghai, Xi’an, Shenzhen and Changzhou. Morgan Stanley and Huaxin have had a partnership since 2008 when they jointly invested in a fund management company under the name of Morgan Stanley Huaxin Fund Management Company. The new JV will be named Morgan Stanley Huaxin Securities and will be registered and based in Shanghai.
Morgan Stanley’s other businesses in China include M&A advisory, fixed-income and merchant banking. It also has a trust joint venture called Hangzhou Industrial and Commercial Trust and in 2006, it became the first foreign bank to gain a wholly owned commercial banking licence in China. That entity now operates under the name of Morgan Stanley Bank International (China).
J.P. Morgan had to wait a bit longer for its approval, having signed a preliminary agreement and submitted an application in early June. According to a source, J.P. Morgan has hired a senior CICC banker, Bei Guo Guang, to become CEO of the JV, and expects it to be up and running in the second quarter of this year. The US bank has also been instrumental in filling some other senior posts, which should give it “significant management influence” of the JV, the source said. The JV will be based in Beijing and will operate under the name of J.P. Morgan First Capital Securities.
Gaby Abdelnour, chairman and CEO of J.P. Morgan Asia-Pacific, referred to the JV as an important milestone in the firm’s China expansion strategy and its 90-year history in the country. “Through this joint venture J.P. Morgan has dramatically expanded its access and growth potential in the world’s fastest growing capital markets, as part of its long-term development strategy in China. We share First Capital Securities’ enthusiasm and confidence in the outlook of our partnership,” he said in a written comment.
“Our cooperation with J.P. Morgan will boost the growth of both our companies in China and will add value to our brands,” added Liu Xuemin, the chairman of First Capital.
First Capital is headquartered in Shenzhen and has branches in 12 cities in China. It provides corporate finance, fixed-income, M&A, brokerage and asset management services to its clients and according to the joint release issued Friday, it has a strong reputation among governments, corporations, institutions and individual investors.
J.P. Morgan’s existing franchise in China 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 JPMorgan Chase Bank (China).
Aside from Goldman Sachs, UBS, Credit Suisse and Deutsche Bank that are able to underwrite domestic bonds and equity issues either through a JV, or in the case of UBS through its direct investment in Beijing Securities, CLSA also has a JV with Hunan-based Fortune Securities under the name of China Euro Securities (CESL). This was set up in 2003 under regulations that were introduced as a result of China’s entry into the World Trade Organisation. However, after being granted a brokerage licence for the Yangtze River Delta area in 2008 the firm has been focusing on brokerage rather than on the primary equity and debt issues.
In November this year, Royal Bank of Scotland also secured CSRC approval to establish a securities JV with Guolian Securities, which mean it looks set to become the first UK bank to be able to underwrite domestic equity and bond offerings in China. It too is expecting to receive a final business licence sometime in the second quarter.