China OKs JPMorgan, Morgan Stanley joint ventures

HONG KONG (Reuters) - Chinese securities regulators on Friday approved the joint ventures of J.P. Morgan Chase & Co JPM.N and Morgan Stanley MS.N, bringing the banks a step closer toward operating securities businesses in China that they, and other banks, have long sought.

A trader works in the J.P. Morgan stall on floor of the New York Stock Exchange, September 14, 2009. REUTERS/Brendan McDermid

The widely-expected decision will enable the two Wall Street banks to underwrite stocks and bonds in one of the fastest growing securities markets in the world.

But the two banks will have to wait another five years before their joint ventures are able to start the more lucrative broking operations.

While foreign banks are attracted to China’s rapidly growing economy and capital markets, finding the right partner for a joint venture and regulatory restrictions have delayed and sometimes derailed their attempts to enter Chinese markets.

“This was a gap we had in our franchise which we have filled now,” said Zili Shao, chairman and CEO of J.P. Morgan’s China’s operations. “But we have a lot of work to do to make best use of this platform.” he added.

The long awaited approvals come just ahead of Chinese President Hu Jintao’s visit to the United States from January 18.

Sun Zhe, a professor at Tsinghua University in Beijing who studies China-U.S. relations, said that China has been making concessions in a show of goodwill before Hu’s visit.

The approval allows J.P. Morgan to make its maiden entry into the Chinese securities market, while Morgan Stanley will make a come back after exiting a joint venture with China International Capital Corp (CICC) last year.

J.P. Morgan will link up with First Capital Securities Co, a Shenzhen-based brokerage, and hold 33 percent of the venture.

Morgan Stanley meanwhile, is able to move ahead with its new Chinese partner, Huaxin Securities Co Ltd, also known as China Fortune Securities Co Ltd.

Morgan Stanley was an early entrant into China when it formed a JV with CICC in 1995, but recently sold its stake to a group of investors including KKR, TPG and Singapore’s GIC.


Morgan Stanley will hold a one-third stake in the new joint venture, which will be called Morgan Stanley Huaxin Securities Co Ltd and registered and principally located in Shanghai.

Chinese IPO markets have taken off in the past two years, with total proceeds from last year’s offering rising to $69.5 billion, compared with just $9.5 billion in 2008, according to Thomson Reuters data.

China has dominated global IPOs, accounting for about 27 percent of global volumes last year. Similarly, the bond market in China has more than doubled since 2008 to $172 billion in 2010.

The lack of management control is one issue faced by Western banks.

“We will have significant influence over the management. We will be making decisions together. Even if you have the contractual contract for control, it does not means anything if the relationship fails,” J.P. Morgan’s Zili Shao said.


The China Securities Regulatory Commission approval comes as more and more foreign banks enter into joint venture partnerships in China, which are subject to a mandatory ownership cap of 33 percent.

“It is extremely difficult to get approval for these ventures, J.P. Morgan has been trying for many years,” said Stuart Valentine, a partner at law firm Mallesons Stephen Jaques.

“The big thing these ventures all try to get, but only some of them manage, is the ability to broker A-shares.”

Credit Suisse Group AG CSGN.VX, Deutsche Bank AG DBKGn.DE, Goldman Sachs GS.N, and UBS AG UBSN.VX have similar ventures in China.

Other global investment banking banks, including Bank of Merrill Lynch BAC.N, Barclays BARC.L an Citigroup C.N are on the lookout of joint ventures partners.

(Additional reporting by Chris Buckley in Beijing and Rachel Armstrong in Singapore)

Editing by Chris Lewis and Dhara Ranasinghe