minority report

Wall Street's Chinese Chimera

Morgan Stanley and UBS want to raise their minority stakes in  ventures that remain also-rans.

Wall Street is split on the value of having a Chinese joint venture.

Morgan Stanley and UBS Group AG are planning to raise their stakes in their securities operations in the country to the maximum 49 percent allowed, just weeks after JP Morgan Chase & Co. severed ties with its local partner amid frustration over a lack of control.

China increased the cap on foreign holdings from 33 percent in 2012, still below the coveted threshold of 50 percent above which majority control would be possible. Morgan Stanley, with 33.3 percent of its venture, and UBS, with 24.99 percent, clearly have decided the market potential merits the extra investment.

Whether that confidence is justified is an open question. The fact is that China just doesn't make much money for foreign investment banks. 

UBS topped foreign securities firms in the country with net income of 296 million yuan ($44 million) in 2015. That's barely enough to pay JPMorgan CEO Jamie Dimon's salary ($30.4 million). Morgan Stanley's venture with Huaxin Securities made even less -- 30 million yuan in 2015, though that represented a turnaround after years of losses. 

Swiss Finish

In 2015, UBS had the biggest investment banking joint venture by net income

Source: Securities Association of China

Note: Zhong De is the Chinese joint venture of Deutsche Bank, while Hua Ying is that of RBS.

Overseas banks remain minnows beside the dominant Chinese firms. UBS ranked 95th among  brokerages in China in 2015, overshadowed by rivals such as Citic Securities Co. in stock trading and lenders like Industrial & Commercial Bank of China Ltd. in onshore bond underwriting.

Debt sales are a lucrative business and remain a lock for Chinese banks: arranging yuan-denominated issues accounted for 75 percent of the Asia-Pacific's total bond underwriting fees for most of last year, according to data from Freeman & Co.

Hey, Big Lender

China's top onshore corporate bond underwriters last year were mostly the country's biggest banks

Source: Bloomberg

For UBS at least, there's an added draw in China: Unlike Morgan Stanley, the Swiss bank has management control over its venture (Goldman Sachs Group Inc. is another overseas firm with that privilege). UBS's venture also has a license to trade domestic shares. Like Goldman, UBS has more than a decade of history with its venture, which has helped cover the costs of building out operations.

Morgan Stanley was the first overseas bank allowed to enter the market when it helped establish China International Capital Corp. in 1995. But the New York-based bank sold its stake -- again after being stymied by a lack of control -- and set up with Huaxin Securities in 2011.

More than two decades since that groundbreaking investment, U.S. and European investment banks are still waiting for their big payday. If nothing else, they can't be faulted for patience. UBS wants "to build a long-run, steady presence in China," Chairman Axel Weber told Bloomberg Television from Shanghai on Monday.

China's Ministry of Finance has said the 49 percent ownership limit will be raised gradually. No date has been given. HSBC Holdings Plc said in November 2015 it was seeking majority ownership for a securities venture in China. It's still waiting. Meanwhile, local investment banks have grown ever stronger as the size of China's financial markets has ballooned.

Without control, on paper or otherwise, a Chinese investment banking venture is just a placeholder for a promise that may never deliver.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

    To contact the editor responsible for this story:
    Matthew Brooker at mbrooker1@bloomberg.net

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