By Alec Macfarlane
HONG KONG (Reuters Breakingviews) - Western investment banks will have to pick their fights in China. In April, Beijing lifted the cap on foreign ownership of securities joint ventures from 49 to 51 percent, and said this would be raised to 100 percent in three years. But it is hardly worth battling local brokers in underwriting new issues or share dealing.
The move is a big improvement for foreign institutions, which have mostly been restricted to minority stakes in JVs, though some enjoy management control. Conflicts are common. For example, convincing state-backed partners to pay dealmakers top dollar is tough, as is asking them not to favour public-sector clients.
The six existing JVs, which are linked to Citi, Deutsche Bank, Goldman Sachs, Credit Suisse, UBS and Morgan Stanley, are small fry. They shared a measly 0.3 percent of the industry’s 113 billion yuan ($17.6 billion) net profit pool last year, Securities Association of China records show. The JVs can also apply for licences to conduct business that some could not do before, notably for broking Chinese shares and managing assets.
Fierce competition to underwrite share issues means fees are low and it will be hard to make headway against established local outfits. That makes bulking up equity capital markets teams brave. The same goes for trading stocks: this is dominated by retail investors, who flock to the branches of Chinese brokers such as China Galaxy Securities and Guotai Junan Securities.
China’s giant bond market is more promising, with a largely institutional customer base that is familiar territory for Western banks. There is nothing stopping firms from doing overseas mergers and acquisitions for Chinese clients now, but this could also generate more work. Firms could syndicate equity and debt to finance cross-border takeovers by Chinese customers. They could also do local deals as loss-leaders to win bigger M&A mandates abroad – not easy in the current setup.
Stocks are not a totally lost cause. Credit Suisse, Morgan Stanley and UBS, for example, could help private-banking clients buy and sell securities, and solicit new business through their brokerages. On balance, foreign banks could find that paying up for control is a worthwhile trade.
Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.
Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.