U.S. banks get one foot in the door in China
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
HONG KONG — Days before President Hu Jintao’s U.S. visit, Beijing has given Washington a present. Morgan Stanley and JPMorgan have been given the go-ahead to form local joint ventures, giving them access to China’s $100 billion a year securities underwriting market. But the approvals come at a time when foreign JVs are losing out to local players. Meanwhile, more lucrative broking services are still off limits.
Morgan Stanley is starting again in China after selling its stake in China International Capital Corp. in December. JPMorgan, meanwhile, will be able to build an onshore operation for the first time, following similar ventures involving Credit Suisse and Deutsche Bank.
The licenses help both inside and outside China. The country accounted for 27 percent of the global initial public offerings by volume in 2010, and its bond market has doubled in size since 2008. Banks with Chinese JVs can also put more bankers on the ground, improving their chances of getting involved in outbound deals, such as foreign acquisitions and overseas IPOs.
However, foreign JVs are collecting a smaller slice of China’s growing pie. The top 20 underwriters of IPOs in China last year were all domestic players. And although JVs were more active with big companies — like arranging rights offerings for Chinese banks — their share of total domestic securities underwriting still slipped. UBS, for example, dropped to seventh in 2010 from third in the previous year.
Moreover, the newcomers won’t have as much influence as longer-established players. Though all Western banks are limited to minority stakes, Goldman Sachs and UBS have joined forces with passive investors. Morgan Stanley and JPMorgan, meanwhile, are forming partnerships with established Chinese securities firms. New arrivals will also suffer from not being able to offer broking services for five years. China’s two exchanges rank third and fourth in the world by trading volume, just behind the NYSE and Nasdaq. Without brokerage licenses, foreign banks won’t be able to offer research on China-listed companies.
For JPMorgan and Morgan Stanley, winning a high-profile securities license fills an important gap. But when it comes to establishing themselves in China, they still only have one foot in the door.