April 29, 2018 is an important day in the history of Chinese capital markets. Following the publication of new rules, foreign institutions can now take up controlling stakes in Chinese securities firms and in asset management and wealth management businesses too.
In response, some international players are already out of the blocks.
Three have announced their intention to set up majority-owned security joint ventures (JV) in mainland China, while one, UBS, said on May 3 that it wants to increase the near-25% share it already holds in its existing mainland JV to the maximum 51% at the earliest opportunity.
JP Morgan and Nomura lodged applications with the China Securities Regulatory Commission in early May, while Societe Generale said on May 15 it “plans to set up its securities business in China via a local JV”.
Strategy for the new entities will be pivotal in the coming years, as the competition will be tough. Some, such as Nomura, see building out their existing high net worth individual business as key to bringing them on further down the line as investment banking clients.
Others, most notably JP Morgan, are looking to establish new securities companies from the outset to compliment their existing asset and wealth management business, providing a range of products catered to both existing and new clients.
The early movers will be moving in on HSBC who have management control of their JV through the special dispensation Hong Kong and Macau funded firms are afforded by the CSRC.
Others are waiting in the wings: Morgan Stanley’s chief executive James Gorman said in November that the firm would wish to raise its stake to 51% as soon as possible.
The lure for foreign institutions is obvious, according to Daniel Pinto, co-president and chief operating officer of Wall Street heavyweight JP Morgan Chase.
“China represents one of the largest opportunities in the world for many of our clients and for JP Morgan Chase” he said in a May 14 statement.
And that opportunity is what makes this rule change a potential “genuine game-changer”, believes Benjamin Quinlan, managing partner of Quinlan & Associates, an independent strategy consulting firm specialising in the financial services industry.
"Why would a firm spend time, energy and capital in China when the returns have been so slim?" Quinlan asked, in conversation with FinanceAsia. "Now with full control, the playing field is more level."
Foreign partnerships in the financial services sector in China have had a chequered history, partly due to policy differences at board level. This is evidenced by their 3.9% share of the onshore securities market last year, according to a recent report from Natixis.
So being able to take control of both a securities business and an asset and wealth management business gets over some of the stumbling blocks and opens up new opportunities for international players.
MARKET ENTRANTS
Like all new market entrants, the strategies employed from the outset may well determine their relative success.
Nomura is focusing first on its wealth management business, catering initially to mass affluent individuals in China, according to a May 10 press release. From there they are looking to expand into a fully fledged brokerage, it said.
A source from the firm said the sharp increase in wealth in the new economy offers a new client base of people needing solutions to help their businesses grow and manage their personal wealth.
JP Morgan, meanwhile, has said it plans to increase its current JV stake in China International Fund Management Co Ltd and to establish a new securities company JV.
“Our investment in China is a commitment to bring the full force of JP Morgan Chase and our resources to the country” Jamie Dimon, the US bank's chairman and chief executive officer, said.
JP Morgan pulled out of a previous securities JV with Shenzen-based First Capital in 2016.
To be sure, these international giants bring a wealth of knowledge, expertise and global reach with them to the table. But the big local players have had fifteen years to hone their own skill sets and products.
Going head-to-head with the long-established local rivals may prove more difficult today than it would have 10 years ago.
“The big local financial institutions and banks currently have a stranglehold on relationships on the ground, and this will make it hard for international banks to capture market share,” Quinlan said.
That perhaps explains why JP Morgan has quickly appointed Mark Leung, a 21-year JP Morgan veteran, to be the new chief executive officer for China. Most recently Leung was co-head of global equities & prime services, overseeing a $7 billion to $8 billion global equity markets portfolio.
Having a proven dealmaker with experience across the financial centres of Asia may prove critical in establishing a beachhead in such a critical market.
And if China continues in the next decade to liberalise its financial markets, as expected, being an established player with a proven track record could now prove more of an advantage.
As two banking sources who declined to be named put it to FinanceAsia, it now makes more sense to bulk up in China and bolster relationships and forge new ones as quickly as possible; with management control foreign firms have a fairer chance of gaining market share.
