JP Morgan agrees to form securities JV in China

J.P. Morgan has signed an agreement to set up a securities joint venture with Chinese financial services firm First Capital Securities that will give it access to China's primary equity and bond markets. The joint venture is subject to regulatory approvals and will then also have to apply for an operating licence before it can start to do any actual business -- a process that can take up to a year.

If cleared by the regulators, the joint venture will make J.P. Morgan the sixth international bank to gain direct access to China's domestic markets, including the coveted business of underwriting A-share issues, after CLSA, Goldman Sachs, UBS, Credit Suisse and Deutsche Bank. Morgan Stanley still has a joint venture with China International Capital Corp, but has given up all the operational influence and is in the process of trying to sell its stake so that it can set up a new venture with more direct access to the China market.

As per current regulations, J.P. Morgan will own 33% of the JV, while First Capital will hold the remaining 67%. Further details, such as who will run the JV and how much operational influence J.P. Morgan will have, have not yet been worked out.

However, the structure will be similar to the JVs of Credit Suisse and Deutsche Bank, which have been set up under the same regulatory principles. In other words, it will be a greenfield operation with each firm contributing according to their proportional holdings. First Capital will transfer its entire primary equity and bond business to the JV as there cannot be any conflict of interest between the two entities. In the future, the Chinese firm will focus on its other businesses, which include fixed-income, M&A advisory, securities brokerage and asset management.

Zili Shao, the chairman and CEO for J.P. Morgan's China business, told FinanceAsia that the joint venture and the access it provides to China's domestic markets is "very important" for the firm.

"This is a gap in our franchise and we need to bridge this before we can be a player in the domestic capital markets," he said. While Hong Kong is expected to continue to benefit from dual listings in both Hong Kong and Shanghai, there is no doubt China's domestic A-share market will continue to grow, Shao added.

Shao joined J.P. Morgan from Linklaters in November last year, right around the time the bank started the discussions with First Capital about a joint business. The two firms signed a memorandum of understanding in March this year.

Assuming it gets across the regulatory hurdles, and as alluded to by Shao, the JV will complement J.P. Morgan's existing franchise in China, which includes a futures brokerage business that focuses on commodity and financial futures, and a 49% stake in a fund management joint venture -- China International Fund Management Company --  together with Shanghai International Group.

The bank started operations in China in 1921 and currently has five branches in Beijing, Shanghai, Tianjin, Guangzhou and Chengdu, which provide financial services to local and foreign companies, as well as government entities. It became the first locally-incorporated foreign bank in Beijing in 2007, under the name of JPMorgan Chase Bank (China).