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Morgan Stanley, UBS Plan to Boost China Ventures Stakes: Sources

  • Banks plan to boost holdings to regulatory threshold of 49%
  • UBS in talks with shareholders about exercising call options

Morgan Stanley and UBS Group AG are in talks with local partners to boost holdings in their China securities businesses, a sign of growing confidence in those operations, according to people familiar with the matter.

The banks are engaged in separate discussions on raising their stakes to 49 percent, the maximum allowed under current regulations, the people said, asking not to be identified because the negotiations are confidential. UBS currently owns about 25 percent of its China securities firm, which has a license to trade domestic shares. Morgan Stanley holds 33 percent of its venture, which mostly provides investment-banking services and research.

For UBS, “talks are still underway, we can’t tell you much more than that,” Chairman Axel Weber said in a Bloomberg Television interview on Monday from Shanghai. “We have a strong interest in increasing our footprint and our presence in China. We want to build a long-run, steady presence in China.”

Foreign firms have been allowed to own up to 49 percent of the joint ventures since 2012, when China raised the cap from 33 percent, and an increase in profits generated in China in recent years encouraged both companies to move forward with their plans, the people said. Not all overseas banks have taken that opportunity, deterred by losses or a desire for more control.

JPMorgan Chase & Co., for example, decided to withdraw from its joint venture by selling a 33 percent stake to partner China First Capital Securities Co. for 307 million yuan ($44 million). The New York-based firm hopes to find a new partner for a venture in which it can wield greater control, people familiar with the matter said in October.

The Wall Street Journal reported on UBS and Morgan Stanley’s plans on Sunday. Spokesmen for both banks declined to comment.

Call Options

UBS has been in talks with multiple shareholders since last year about buying their stakes through the exercise of call options held by the Zurich-based bank, one person said. While the firm has informed China’s securities regulator of its intention to boost its holding to as much as 49 percent, an application won’t be submitted until a new shareholder agreement is signed, the person said.

Net profit at UBS Securities Co., the local joint venture, more than doubled to 296 million yuan in 2015, according to the latest public data available from Securities Association of China. In the same year, Morgan Stanley reversed years of losses at Morgan Stanley Huaxin Securities Co., turning a profit of 30 million yuan. Since UBS and Goldman Sachs Group Inc. established Chinese joint ventures more than a decade ago, they’ve struggled to take business from the dominant local players.

China stepped up opening its capital markets after it was admitted to the World Trade Organization in December 2001. The government also encouraged local brokerages to find overseas partners to help strengthen an industry riddled with corruption scandals, mismanagement and losses.

The nation’s Ministry of Finance reiterated in November it’s committed to letting overseas banks own bigger stakes in securities and fund-management joint ventures, and the 49 percent ownership limit will gradually be raised, it said, without specifying when or by how much. Foreign investors’ participation can boost the industry’s competitiveness and global influence, the ministry said.

— With assistance by Hugh Son, and Tom Mackenzie

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