Bankers have been waiting for this for so long many of them had pretty much given up.
Ever since Morgan Stanley bought in to the launch of CICC in 1995, and certainly since Goldman Sachs gained approval for its pioneering Goldman Sachs Gao Hua joint venture (JV) structure in 2004, western banks have waited and hoped for a pathway to control of their domestic securities operations.
The ceiling lifted from 33% to 49% in 2012, but that made little difference: banks want control of their ventures and, without it, have been dwarfed in domestic securities business by local houses.
But now, progress.
On Friday, vice finance minister Zhu Guangyao said at a Beijing briefing that foreign firms will be allowed to own up to 51% in securities ventures and life insurance companies, and that those caps will be steadily removed in future.
He also said that foreign ownership limits on domestic banks and asset management companies would be removed.
He added that details were being drafted by regulators and would be released soon.
One would assume that foreign banks will take up this opportunity, but not necessarily by upping their stake in an existing venture, for two reasons. One, the foreign partner might not want to do that; two, foreign banks might decide it is better to set up something new.
The HSBC experience
It might be illuminating to look at the recent experience of HSBC, which became the first foreign bank to get approval for majority ownership of a securities JV this year and is in the process of launching HSBC Qianhai Securities Limited.
HSBC was, until now, in a different situation to most other international banks, because it is covered under the CEPA (Mainland and Hong Kong Closer Economic Partnership) agreement, and in particular by a clause introduced in 2013 allowing Hong Kong-funded foreign-invested securities companies to set up a majority-owned securities JV provided that the venture is in Shanghai, Shenzhen or Guangdong.
Given that freedom, HSBC opted not for an established player in domestic underwriting but for a less well-known partner that was happy to be second fiddle in the venture to a multinational.
When HSBC and Qianhai started talking, the Shenzhen company was only just feeling its way in financial services. It has a contribution to make beyond its location, for sure, but it is clear the JV will be very much HSBC’s show.
Indeed, one has to wonder what HSBC makes of this news. It appeared to have stolen a notable march on its rivals with its majority controlled-venture, and it was not unreasonable for it to assume it would have that accolade to itself for some years.
There was a school of thought that it was being seen as a test case, and that an opening of the market for US and European banks might depend on how well the HSBC venture fared. In the end, it appears its head-start will just be however long it takes the others to get their stakes listed or new organizations approved.
Moreover, they might not be subject to the restriction HSBC faced around location – others might be able to gain majority control of a venture based in Beijing.
It has happened under US president Donald Trump, a man who just 18 months ago said 'we can’t continue to allow China to rape our country'
Still, for everyone else, the HSBC approach has been interesting to watch. JPMorgan, for one, will probably be looking to do something similar – and has to, because it sold out of its own JV, with First Capital Securities, in 2016 after six years of treading water.
CEO Jamie Dimon has since said that the long-term ambition is to own 100% of such a venture, and would only consider re-entering if a venture gave the US bank management control.
Selling out of the venture didn’t appear to harm the bank; it gained a licence to underwrite corporate bond sales in China’s interbank market just a couple of months after doing so.
The others will have a decision to make. Goldman’s structure was ground-breaking in its time and allowed the bank greater sway in decisions than its stake would ordinarily demand, but is structurally clunky.
One could say the same for UBS Securities, the other JV pioneer, where the Swiss bank has always had greater operational control than it has had a stake in the economics.
Citi’s venture with Orient Securities has been among the better ones, but the bank would surely hope to do better with control of its domestic investment banking vehicle.
Credit Suisse Founder, Morgan Stanley Huaxin, Deutsche Bank’s Zhong De: each must decide whether it is better to try to gain control of what they’ve got or find a wiling new partner to start afresh with – one who will provide the pathway to get the right licences and perhaps bring some local connection but otherwise allow the foreign bank to set strategy.
The ideal local partner is probably one that sees itself as an investor as much as a driver of business.
They will also want to take into account just how long it takes to get anything new licensed in China. Just ask HSBC: it announced its JV in November 2015, and then spent the better part of two years waiting for approval from the China Securities Regulatory Commission.
It is interesting that the announcement came just a day after confirmation that Goldman Sachs will form a $5 billion fund with sovereign wealth fund the China Investment Corporation. The China-US Industrial Cooperation Partnership will invest in US companies in manufacturing, industry, consumer and healthcare with a link – or the potential of a link – to China.
This is a different beast – it will be Goldman’s merchant banking division involved, acting as sponsor and investment manager, rather than any of the China investment banking teams – but it adds to the sense of real progress being made between the US and China around access to mainland business and markets.
And it has happened under US president Donald Trump, a man who just 18 months ago said “we can’t continue to allow China to rape our country”, calling its trade practices “the greatest theft in the history of the world”. Who’d have thought it?