Wall Street, listen up.
Frustrated with its Chinese partner, JP Morgan is in talks to sell its stake in their investment banking venture, just days after it emerged that Goldman Sachs's Beijing-based Asia Pacific chairman, Mark Schwartz, is retiring from the firm.
A Chinese investment banking presence, once highly coveted, has lost its appeal for foreign institutions. Ventures have failed to deliver on the growth promised by an increase in companies raising capital in the nation's bond and stock markets, which now rank among the world's three biggest.
JPMorgan's decision to sell is a sign the bank is rethinking its China strategy amid dissatisfaction over this lack of progress. It's a lead that other Western banks would do well to follow.
Overseas institutions have made little headway since China opened the market more than two decades ago, with local brokerages continuing to dominate. UBS, last year's top earner among Western banks, ranked No. 95 last year, earning a paltry net income of 296 million yuan ($44 million). That's 2 percent of the profit of Citic Securities, China's largest brokerage, based on figures from the Securities Association of China.
Even among foreign entrants, JPMorgan's performance has been underwhelming. Its six-year-old venture, JPMorgan First Capital Securities, generated 156 million yuan of revenue in the first half of this year, less than a third of what Citigroup’s Citi Orient Securities pulled in.
JPMorgan is in talks to sell its one-third stake to local partner First Capital Securities and aims to set up a new venture where it can exercise more control. While China restricts foreign banks to minority stakes, UBS and Goldman have secured management control over their ventures and also gained licenses to trade stocks and bonds, where the real money is made in China's brokerage industry. HSBC is also seeking regulatory approval for majority control of a venture established in the free-trade zone of Qianhai, close to Hong Kong, this year.
That doesn't mean it will be easy. JPMorgan is following a path already trodden by Morgan Stanley, the first Wall Street bank to establish a Chinese venture. In the mid-1990s, Morgan Stanley helped set up China International Capital Corp. It exited CICC in 2010 after being refused permission to take a controlling stake. Morgan Stanley Huaxin, set up the following year, had net income of 30 million yuan in 2015.
Far from achieving dominance in China's capital markets, foreign investment banks are starting to feel the pressure from Chinese rivals moving offshore. Mainland securities firms are increasingly encroaching across the border into Hong Kong, where many of the biggest Chinese companies choose to go public.
Meanwhile, overseas brokerages have made even less of an impact in bond sales in mainland China.
It's telling that Goldman Sachs was the only Western investment bank to base its regional chief in Beijing apart from Morgan Stanley, whose Wei Christianson is co-CEO for Asia Pacific. Schwartz's replacement is unlikely to be stationed in the Chinese capital.
Hong Kong is the favored regional base for investment bank heads in Asia. As the mainland market continues to disappoint, the semi-autonomous Chinese city looks set to retain that status. It remains an important source of Asian investment banking revenues, even if Chinese underwriters are grabbing a bigger slice of the business. Another important service, helping Chinese firms buy overseas assets, can also be easily performed from Hong Kong.
China's investment banking market has been running largely on promise for more than two decades. It's about time for Western banks to rethink their strategies. Without the ability to take full control of a Sino-foreign venture, it may make more sense to exit. JPMorgan gives other banks plenty to ponder.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
China limits foreign ownership of mainland securities firms to 49 percent, though HSBC may be able to skirt this regulation by virtue of its Hong Kong-incorporated unit. That avenue is closed to U.S. and European banks.
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Nisha Gopalan in Hong Kong at firstname.lastname@example.org
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Matthew Brooker at email@example.com