Considering that a long list of blue-chip Western investment banks is scrambling to access ChinaÆs booming securities industry, and that the market has been exceptionally buoyant over the past year, the timing of the deal raises many questions.
Indeed, the Chinese domestic stockmarket is far more lucrative than it was in 2003, the year in which the JV was founded.
For example, IPOs were resumed last year, after being suspended for several years to avoid dampening prices through excess supply. In addition, trading volumes have recently reached record heights.
Some analysts point out that the very structure of JVs can be so unfavourable to the foreign partner so as to overwhelm the advantages of even the most buoyant market.
ôJoint ventures are often prone to terrible power squabbles. The foreign partner pulls one way and the other partner pulls the other way," says Zuo Xiaolei, a leading securities expert in Beijing.
Zuo cites risk-tolerance levels, internal regulations, profit sharing and strategy as common areas where local players and foreign players clash. Foreign players are, in any case, handicapped by the fact that they may only own up to 33% of the joint venture.
A mainland banker stationed in Hong Kong estimates that æsomething badÆ must have happened to dissolve the æmarriageÆ - as such ventures are often known in China û possibly massive losses at the JV or the parent level, or even malpractice.
Six months ago, CLSAÆs JV, China Euro Securities, with Xiangcai Securities saw a transfer of the Chinese partnerÆs stake to a third party, also operated by the Hunan government. That was reportedly due to losses made by Xiangcai Securities, which it could not pay back apart from with an asset transfer.
Apart from the ownership ceiling, other rules conspire to keep foreign partners on the sideline.
Securities industries JVs only give the foreign partner access to the underwriting market, for example.
ôThe really lucrative part of the business is the brokering, especially given the massive rise in the A-share index in the past year,ö says Zuo.
A key change from 2003 is that after the improvement in the market, Chinese securities firms have become a lot more confident about their ability to face the future.
ôThe Chinese securities houses now reckon they donÆt need foreign support. Changjiang may feel it has learnt enough in the past four years of dealing with BNP Paribas to go it alone,ö estimates one observer.
The fate of BNP Paribas continues a trend of problematic JVs in the securities industry.
The granddaddy of JVs is China International Capital Corporation, between Morgan Stanley and China Construction Bank. Observers report that Morgan has long given up any attempt at active control, although it still gets a pro rata share of the profits.
As for the situation at China Euro, ôthe stake transfer (of its parent) caused many disruptions to the business and it could happen again,ö says one observer,
The JV is reportedly profitable and kept itself afloat during the IPO embargo through bond underwriting.
Goldman Sachs may have broken the mould in its China venture, since industry sources estimate that the Wall Street bank effectively controls both sides of the venture.
Wise to the perils of JVs, UBS is in negotiations for a direct stake in Beijing Securities but no deal has yet been announced.
Insiders at Xiangcai and Changjiang say that part of the problem is that smaller banks like CLSA and BNP Paribas are not able to attract the best local partners or decent staff û and their negotiating clout is simply too small to permit the rule bending that the bulge bracket firms can enjoy.
Observers are split about the reaction of the securities regulator, the China Securities Regulatory Commission, to the news.
ôIt doesnÆt reflect well on the CSRC that this JV has failed,ö estimates Fraser Howie, author of ôPrivatizing Chinaö, a pioneering book on the Chinese stock market.
The CSRC is supposedly wedded to the concept of improving the Chinese securities industry by throwing it open to foreign competition.
However, many suspect that the CSRC is susceptible to industry lobby groups.
Thus, the CSRC recently put a veto on any further China-foreign alliances, capping foreign participation at its present levels.
Howie believes that BNP Paribas may have done the smart thing.
ôIf they are not making money, why not exit? It makes business sense. Especially as BNPP has been doing good business in trading Hong Kong-listed China shares,ö he says.
No details are available about the consideration, if any, BNP Paribas received for transferring the shares to the parent.
The æend of the affairÆ does not terminate BNP ParibasÆ presence in China. The French bank still has a 19.2% stake in Nanjing City Commercial Bank and a 33% stake in an asset management JV with top Chinese Securities house Shenyin Wanguo.
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