2011年1月8日 星期六

Two Banks Gain Access Within China

JANUARY 5, 2011   WALL STREET JOURNAL



By ALISON TUDOR And PETER STEIN

HONG KONG—J.P. Morgan Chase & Co. and Morgan Stanley have both won approval for securities joint ventures in mainland China, the first U.S. firms to gain such access in six years.
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Reuters
Employees walk past the company logo at the JPMorgan Beijing office in Beijing December 13, 2010.
The new ventures will allow the two Wall Street banks to underwrite stocks and bonds in mainland China. Like other international investment banks, both firms can already underwrite deals for Chinese companies in Hong Kong, New York and other markets.
The approvals, announced by China's securities regulator, are the first for any U.S. banks in China since Goldman Sachs GroupInc. got the go-ahead to set up a China venture in late 2004. Since then, several European banks have established partnerships, including UBS AG, Deutsche Bank AG and Credit Suisse Group.
The announcements also provide a buzz of positive news on U.S.-China business relations ahead of a trip by Chinese President Hu Jintao to Washington later this month. Such high-level political summits often coincide with favorable bilateral trade deals.
Wall Street banks have been lobbying hard to do deals in the world's fastest-growing major economy as more companies go public and China's capital markets expand.
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"China has the world's second-biggest stock market, where every investment bank has to find its niche," said Zili Shao, chairman and chief executive of China for J.P. Morgan.
IPO volume on mainland China's exchanges in Shanghai and Shenzhen together hit $72.1 billion in 2010, topping the volume of new listings in Hong Kong and in the U.S. for the first time on record, according to data provider Dealogic. Combined, the two mainland exchanges have a market capitalization of $3.572 trillion, second only in size to the New York Stock Exchange.
So far though, China's domestic markets have been a source more of promise than profit for foreign investment banks. Chinese state-owned securities firms dominate the market for so-called A shares bought and sold in mainland China.

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Market leader Citic Securities Co., for instance, earned 6.19 billion yuan, or $935.3 million, in net profit in 2009, according to data published by the Securities Association of China. By contrast, Goldman Sachs's joint venture made a net profit of 44.9 million yuan, or $6.8 million.
China's government tightly restricts the ability of foreign firms to operate in its capital markets. Current rules only allow them to do business through joint ventures in which they can hold a maximum stake of 33%. Despite gaining the ability to underwrite securities, J.P. Morgan and Morgan Stanley won't be able to conduct sales and trading on the mainland.
But nor can banks ignore the China market's growth trajectory. Goldman economists estimate that, by 2030, China's combined equity markets, including Hong Kong, will become the largest in the world, overshadowing those in the U.S.
Bankers say having a presence in China is important for other reasons, too. For one, competitive pressure means banks need the ability to help a Chinese company go public either in mainland China or Hong Kong. And a China venture gives J.P. Morgan and Morgan Stanley a way to win new clients for other services such as advisory work on overseas mergers and acquisitions.
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"The joint venture is one critical piece of a larger equation for us in China," said Gaby Abdelnour, chairman and chief executive of J.P. Morgan's Asia Pacific operations.
In particular, the new ventures could help Wall Street fend off competition from Chinese banks that are using their lock on domestic markets to grab more business outside their home base, particularly in Hong Kong, and from European banks such as UBS, which already has a full license to both orchestrate deals and trade securities in China.
J.P. Morgan's joint-venture partner, Shenzhen-based First Capital Securities Co., was ranked 22nd in the equity-underwriting league tables in China last year, according to Dealogic. "Our objective is to become one of the top players over the next few years," said Mr. Abdelnour.
First Capital has historically been most active in the middle market.
"China middle-market IPOs have generated more fees than have large-cap IPOs," said Todd Marin, head of investment banking for J.P. Morgan in Asia Pacific. He estimated fees for middle-market transactions can run 5% or more, whereas fees for large-cap IPOs tend to be in the neighborhood of 2%.
For Morgan Stanley, its venture with Huaxin Securities Co., also known as China Fortune Securities Co. is a chance to start anew the process of building a presence in China after a failed partnership with China International Capital Corp.
"Developing our domestic market capabilities in China has been and continues to be a priority for the firm," said James Gorman, Morgan Stanley's president and chief executive, in a statement.
Morgan Stanley helped found CICC, one of China's biggest investment banks, in 1995. But disputes with the venture's management over personnel, corporate culture and CICC's dealings with other foreign banks meant Morgan Stanley over time became a passive investor.
J.P. Morgan has come under criticism for taking longer than peers such as Morgan Stanley and Goldman Sachs to build a China presence, but the bank's executives say finding the right partner was more important than getting into the market early.
"Any mistake you make in China could take as long as a decade to fix," said J.P. Morgan's Mr. Shao.
Write to Alison Tudor at alison.tudor@wsj.com and Peter Stein at peter.stein@wsj.com
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