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Investment banking in Asia: How are China JVs faring?

China’s domestic market is not just a matter of potential. It has already arrived. Domestic corporate and government bonds combined have already become the second-biggest domestic debt capital market in the world after the US. The A-share market, too, though suffering a difficult year, is clearly a force.

For many years, foreign banks have sought to be part of this, which they can do by establishing joint ventures with local partners. Nine have been licensed so far.

To see how they’ve evolved, it is instructive to look at the first and the last. Putting aside the special cases of Morgan Stanley/CICC and CLSA’s venture with Fortune Securities, Goldman Sachs was the test case for China JVs. Its foundation in 2004 was structurally extremely complex, with two separate ventures, only one of which it legally has a stake in (it backed the other by funding a former employee to capitalize it and effectively hold it in trust on Goldman’s behalf); one holds underwriting businesses, the other research and broking.

Those close to the structure at its foundation recall meeting 40 government ministers in 10 ministries to get it approved; these days a 33.3% foreign ownership in a JV, with the majority held by the local partners and a split of board seats between them, is the norm. Today local partners must be successful local houses, unlike the early days when Goldman effectively started from scratch and UBS (which followed in 2006) created a new securities company out of a flagging local brokerage called Beijing Securities.

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