How to read the latest loosening of the rules on Sino-foreign joint ventures? Last week the China Securities Regulatory Commission (CSRC) spelled out a timetable for lifting foreign shareholder caps on securities companies, among other things, stating that from December 1 next year, foreigners will be able to take full ownership of their JVs.
Subject to approval, of course, which is a whole other thing.
If you haven’t read much about this apparent landmark, it’s because it simply gives an implementing timetable to something already agreed.
The bigger deal was when the CSRC allowed foreigners to move to 51% majority stakes for the first time, announced in November 2017 with greater detail following in April 2018. UBS was the first to gain approval in December 2018. At the time of that first announcement, it was said that full ownership should be permitted by 2021.
Yet there’s a slight sense of surprise that China has honoured that original timetable. Much has changed in the meantime: the trade war with the US has worsened, both in quantum and rhetoric, and many of the JVs in question – including those for JPMorgan, Citi, Morgan Stanley and Goldman Sachs – are US-backed.
It is tempting to bracket the announcement with the resumption of US-China trade talks, a show of good faith in order to bring about a broader agreement.
But perhaps it’s just pragmatism. Through various means, China has sought greater participation of foreign capital in its markets, through measures such as the Stock Connect and Bond Connect channels and liberalization of the Qualified Foreign Institutional Investor regime (without fully opening it up to an onslaught that China cannot control).
It has pushed for greater representation of its domestic markets within international benchmarks such as the MSCI Emerging Markets index.
In this environment, it would naturally be helpful to have foreign securities houses represented without being impeded as they have been throughout this century with limitations on equity ownership. Foreigners will bring foreign capital with them, as well as some welcome robust market practices, which aren’t always a given on the mainland.
The same announcement also gave a date for the removal of caps on futures companies (January 1, 2020) and public securities investment fund management companies (April 1, 2020). There is a concerted industry-wide plan under way, under Yi Huiman, who became chairman of CSRC in January.
Bankers had been counting on this for some time, though most have been sufficiently bruised by past experience to avoid making any assumptions on timing.
Most of the JVs – particularly the new ones, from JPMorgan and Nomura, as well as Citi’s once its replacement for Citi Orient is set up – have been geared towards seeking 100% ownership when available, as have the two set up by HSBC and Bank of East Asia in Qianhai under the Mainland and Hong Kong Closer Economic Partnership Agreement (CEPA).
That said, there is arguably some merit in keeping a local partner engaged to some degree, as UBS has said it will do.
Majority ownership is important but there isn’t always a compelling reason to squeeze out a local partner completely. They know what they are doing and have connections.
Perhaps the bank that gains the most is Goldman, whose structure – a function of being, along with UBS, the first to create a test case JV when China began to open its securities market – is so complex it really wasn’t worth the effort of going to 51%, but instead to wait for a path to full ownership.
In any event, the date is only really a starting point. Approval is a whole other can of worms.
Credit Suisse and Morgan Stanley have been waiting for the best part of a year for the green light to move to 51%, a process one would expect to be fairly rudimentary. Credit Suisse, for example, announced back in April that it had reached an agreement with its JV partner, Founder Securities, to move from 33.3% to 51% of the venture through a capital injection. HSBC Qianhai took 20 months to get to approval in June 2017.
Still, it is finally possible to foresee a future where foreign banks totally own their securities operation on the mainland.
That means they will put more resources into them, make more returns from them, and can more precisely gear them towards the markets and transactions they want to chase.
They will be able to integrate them into global operations more clearly and combine onshore and offshore capabilities more seamlessly. That is a welcome development.