When asked about their priorities, regional managers at global investment banks operating in Asia have over the past few years often told Euromoney that getting approval to launch a joint venture with a Chinese securities firm was high on the list. They have seen winning these licences as crucial to their chances of earning a steady stream of fees in China as its companies issue ever increasing amounts of equities and bonds in the domestic markets. Without such partnerships, foreign banks are restricted to the offshore market of Hong Kong, being unable to underwrite and sell shares and bonds in the onshore markets of Shanghai and Shenzhen. Goldman Sachs and UBS are special cases, having secured special deals for themselves in the first round of agreements before the rules were formalized; Morgan Stanley is concluding a divorce from its original partner CICC but was also originally one of this chosen few. Next, in December 2008 and April 2009, came Credit Suisse and Deutsche Bank respectively, the first of a new wave of firms that must follow strict new rules limiting the foreign partner’s stake in the joint venture to 33.3%. Since then RBS and JPMorgan have been among the foreign banks to announce that they too are forming joint ventures with Chinese securities firms, aiming to follow their rivals towards success in the region’s most exciting onshore capital markets.
Some well-placed sources in the industry, however, are increasingly questioning the value of these joint ventures. When these enterprises launch both sides speak of the mutual knowledge transfer that will occur. In practice, Chinese walls required by the regulators too often keep technology locked with the foreign bank’s separate China entity, leaving their legally distinct securities joint ventures high and dry. A glance at the league tables confirms the suspicion that the banks able to operate their China securities operations as extensions of their global brands – UBS, in the form of UBS Securities, and Goldman Sachs, via Goldman Sachs Gao Hua – do the best job of penetrating the local markets. UBS is the only foreign firm to crack the top 10 for A-share issuance this year, sitting in ninth with a 3.9% market share, while local firms CICC and Citic Securities sit predictably in first and second, with 10.6% and 8.6% shares respectively. Credit Suisse and Deutsche Bank’s joint ventures have secured them 3.3% and 1% shares respectively, suggesting that the Swiss bank has made much more progress.
In the debt markets the progress of the joint ventures launched under the new regulations (from Credit Suisse onwards) is even more miserable. Dealogic’s league table for China local-currency DCM in 2010 to date shows Deutsche Bank in 26th place and Credit Suisse in 38th, with market shares of 0.9% and 0.3% respectively. The latter’s market share has actually declined year on year, from 1.2% in 2009.
Credit Suisse and Deutsche Bank did well to secure their licences with local firms, and neither is in China for the short haul – indeed both might convincingly argue that their progress in a difficult market for Sino-foreign endeavours is reasonably promising. Certainly they have made more inroads than such rivals as JPMorgan, Bank of America Merrill Lynch and Citi, which have all failed to make an impact in China onshore primary capital markets.
Yet the truth is that for now China’s onshore investment banking market is very much a game run by the local securities houses. The history of investment banking is not littered with successful stories of joint ventures, and the circumstances under which global banks have been allowed to set up such enterprises in China do not bode well for their success. If local firms are not receiving the full benefit of their global partners’ technological experience, and the foreign banks have little control over their local partners and are not winning much business, neither side is profiting a great deal by Sino-foreign securities joint ventures that are promising much more than they have delivered.
