JP Morgan is discussing a potential stake sale to its China JV partner, according to an announcement on October 20.
It is uncertain whether the deal will close, according to a First Capital spokeswoman, who added that “even if the deal gets closed, we are not certain at this stage as to the proportion [of the stake that will be sold].”
JP Morgan owns 33.3% in the joint venture, the maximum limit allowed at the time of the launch of the JV in 2010.
There are market rumours that the bank was planning to quit its China venture in a move to seek a new partner or get stronger control in an onshore securities business, potentially a majority ownership. JP Morgan refused to confirm or deny this claim.
Foreign banks have struggled to build strong positions in the securities business in China, echoing the troubles some multinational corporations have had establishing a profitable presence in the country.
But some banks have stood out from the crowd. Goldman Sachs and UBS have both managed to have operational control of their respective JVs — Goldman Sachs Gaohua and UBS Securities — according to sources working at several joint ventures in the country.
These joint ventures offer tremendous opportunities. Leveraging a strong local partner’s network and familiarity with the market, a foreign bank can benefit from a bigger presence in China. But operational control can often be a trying issue, as foreign banks struggle with a local partner that will often have different aims for the business.
In JP Morgan’s case, its Chinese partner FCS has a decent presence in the local market, giving it a big say in the JV since the launch, according to a former employee at JP Morgan First Capital, who left the firm in 2015.
FCS’s business spans investment banking, securities brokerage, fixed income and asset management. After its IPO — which gave it more capital to put to work — the firm was in an even stronger position to expand business, the source said.
Staffing disagreements and changes, as well as divergent views on deals, are often cited as the main causes of tension between a foreign investment bank and its Chinese partner.
Strong start
Bei Duoguang, formerly with China International Capital Corp, was hired as chief exeutitve of the JP Morgan-FCS venture at the time of its creation. Liu Xuemin took the helm as chairman of the JV.
Ren Jing, formerly with Bank of China International, joined the JV in 2012 as deputy CEO and head of investment banking. In January, 2013, Ren replaced Bei to take the CEO role.
According to rankings by the Securities Association of China, most foreign JVs take a middle-range spot when firms are ranked by profits. They lack the “ground” for growing business in China and are not close to Chinese regulators compared to the local securities firms, said a Beijing-based local investment banker.
But JP Morgan denied that the deal represented a drawback from its investment banking business in the onshore market.
“JP Morgan will not exit securities business in China, that’s for sure,” said a JP Morgan’s spokesperson. “We take a very long-term view on what we do [in China]…and we continue to evaluate other viable options…and what the local market allows.”
JP Morgan confirmed the content of the announcement, but declined to comment on why the talks emerged. The JV also declined to comment on the matter, while its Chinese parent company – which became listed in May this year – said no deal had been made to date.
