JPMorgan Dropping China Venture as Dimon Seeks More Control

  • U.S. bank in talks to sell minority stake in joint venture
  • Foreign firms have long struggled to challenge local players

After six years as a minority partner in a Chinese investment-banking joint venture, JPMorgan Chase & Co. has had enough of playing second fiddle.

The U.S. bank is in talks to sell its stake in JPMorgan First Capital Securities as it seeks to free itself up to get more control in a potential new venture, according to a statement on Thursday and people familiar with the matter.

Since UBS Group AG and Goldman Sachs Group Inc. established Chinese joint ventures more than a decade ago, foreign banks have struggled to challenge local players. One competitive disadvantage is that Chinese rules limit them to minority stakes, reducing their sway over key decisions.

JPMorgan Chief Executive Officer Jamie Dimon’s decision signals that some banks are growing frustrated with the hurdles in China. Mark Schwartz, the Goldman Sachs veteran who oversaw efforts to secure full control of the firm’s local investment-banking venture, is stepping down as Asia-Pacific chairman, according to a memo this week.

“Having a minority stake in a China joint venture is no longer attractive because their role is rather passive and they only have limited participation,” Wong Chi Man, a Hong Kong-based analyst at China Galaxy Securities Co., said by phone. “I wouldn’t be surprised if other foreign firms follow suit.”

‘Fully Committed’

JPMorgan’s local partner, First Capital Securities Co., said it was in talks to buy the U.S. firm’s stake. In a separate release, JPMorgan said that it “remains fully committed to our China franchise.”

JPMorgan First Capital Securities generated 156 million yuan ($23 million) of revenue in the first half, less than a third of what Citigroup Inc.’s joint venture pulled in, according to reports from their Chinese partners. Globally, JPMorgan had almost $25 billion of revenue in the most recent quarter, Bloomberg-compiled data show.

One option JPMorgan is weighing is forming a new joint venture under a framework established in the Shanghai Free Trade Zone, the people said. That framework opens the door for overseas banks to achieve greater control of local ventures and pick partners that aren’t in the securities business, they said. Even so, the rules have yet to be finalized, according to the people.

HSBC Holdings Plc, which stayed on the sidelines for years as other banks set up minority-owned JVs, is attempting a setup with control. It plans a majority-owned venture in the free-trade zone of Qianhai and is in the process of seeking approval from China’s securities regulator, in what CEO Stuart Gulliver says would be a first for a foreign bank.

HSBC’s Asian banking unit is incorporated in Hong Kong, allowing the company to apply for such a venture under the city’s Closer Economic Partnership Agreement with China. Its partner is state-owned Shenzhen Qianhai Financial Holdings Co.

Patchy History

JPMorgan’s businesses in China include corporate banking and stakes in a fund manager and in a commodities futures joint venture, according to the bank’s China website. It holds a one-third stake in the Beijing-based investment banking joint venture, whose business includes equity and debt underwriting and mergers advisory.

While tying up with a local firm is a prerequisite for investment banking in China, collaborations haven’t always worked out.

BNP Paribas SA pulled out of a venture with Changjiang Securities Co. in 2007 after disagreeing on strategy, while Morgan Stanley exited from China International Capital Corp. -- the first Sino-foreign brokerage venture -- in 2010. Morgan Stanley opted instead to form a partnership with a Shenzhen-based company.

Most foreign-backed joint ventures are minnows in China. JPMorgan First Capital ranked 120th out of China’s 125 securities firms by net income in 2015, according to the Securities Association of China. UBS Securities Co. whose 296 million yuan profit was the biggest among foreign-backed joint ventures, came in at 95th place.

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