Oxstones Investment Club™by Peter Stein, WSJ,
Wall Street has managed to firm up its foothold in the burgeoning Chinese securities industry. But its best chance to negotiate major access into China’s capital markets may have passed it by a decade ago.
On Friday, Chinese regulators confirmed that J.P. Morgan Chase & Co. (NYSE: JPM – News) and Morgan Stanley (NYSE: MS – News) have both been given the green light to set up shop in China’s domestic securities market.
Like other investment banks looking to enter the China market, neither can look forward to an awful lot for now. They’re both restricted to 33% ownership of a joint venture with a local partner. They can underwrite stocks and bonds, but they won’t have the licenses to trade those securities in the secondary market. Even UBS AG (NYSE: UBS – News), whose UBS Securities is the most active foreign underwriter in China, made a net profit in 2009 of only around 109.2 million yuan ($16.5 million), according to publicly available data.
Foreign banks in general have struggled to build meaningful businesses in China. But the rules that hold back investment banks from doing more China business are unusually strict. Commercial lenders, by contrast, can set up banks in China that they own entirely, avoiding the perennial risk that their relationship with a joint-venture partner sours. In the asset-management industry, foreign investors can own 49% of a joint venture, giving them a bigger slice of the profits. The Street may have only itself to blame.
Foreign investment banks just weren’t that into China, or at least its domestic stock market, back when China was negotiating admission to the World Trade Organization in the years before a deal was reached in 2001, says Zili Shao, chairman and chief executive of China for J.P. Morgan. As a lawyer, Mr. Shao worked on setting up China ventures for Goldman Sachs Group Inc. (NYSE: GS – News), UBS and CLSA Asia-Pacific Markets, a unit of the French bank Crédit Agricole SA (PARIS: ACA.PA – News).
At the time, China’s financial sector was a mess, and its stock market was a far cry from the major force that it is today. With plenty of market opportunities elsewhere, the need to press for access to China might not have ranked as a top priority at the banks. “That was a major underestimation,” says Mr. Shao.
David Strongin, managing director of the Securities Industry and Financial Markets Association, says, “We vigorously and aggressively pursued opening China’s market.” But rules on foreign participation in China’s securities industry were among the last unresolved issues blocking China’s entry into the WTO, he adds, “so all leverage to negotiate was gone.” He describes the current restrictions as “a huge impediment to competing in China.”
Not that China was particularly warm to the industry. Charlene Barshefsky, the former top U.S. trade negotiator and now a partner with Washington law firm WilmerHale, notes that “various forms of financial instruments were looked upon with suspicion, including the securities industry in general, where regulatory expertise was quite thin.”
In the wake of the global financial crisis, of course, China has had every right to congratulate itself for sticking with a go-slow approach to financial deregulation.
Today, says Mr. Shao, there’s no discussion taking place about changing the status quo. In Washington, he says, the goal of boosting U.S. access to China’s markets has taken a back seat to political pressure for China to revalue its currency. “There is a lot of debate about the currency,” he says, “but no one is arguing for greater market access.”
Write to Peter Stein at peter.stein@wsj.com
Tags: Asia, Banks, big picture, China, financial sector, food for thought, JVs, WTO