Of all the opaque and tangled elements of Chinese banking, few are harder to decipher than Sino-foreign securities joint ventures.
These things have always stood out for being cumbersome and odd. Since foreign banks are not allowed to own their own domestic investment banking operations on the mainland, they have been obliged to enter into joint ventures with local partners and to cede majority ownership to them. But even that simple statement is rich with caveats: UBS and Goldman Sachs, the first two in, received wider suites of licences and more preferential operational conditions – in Goldman’s case at the cost of splitting the venture into two separate businesses.
All this clunky inconvenience was supposed to change with the announcement – more than a year ago now – of a venture between HSBC and Shenzhen Qianhai Financial Holdings to launch a JV in Shenzhen within which HSBC would have majority control. This was a landmark: the difference between the 49% ownership cap on other ventures and the 51% mooted in the HSBC deal is, of course, management control and an ability to dictate direction.
But where is it? Approval has been expected imminently for at least the last six months and rumours are growing that China may be re-evaluating. The state has already signalled changes of direction on outbound M&A, dual-branded credit cards and capital outflows; it would be no surprise if a new joint venture structure was under renewed scrutiny too.
Cautious excitement
Similarly, there was cautious excitement when securities JVs found their way on to broader trade negotiations between China and the US. It was said that, at long last, full foreign ownership of investment banking businesses in China was on the table. But the Trump administration has already thrown US-China relations into a new and uncertain light.
So while HSBC has waited for its moment to go in, others are reaching different conclusions. In October came news that JPMorgan planned to end its own securities joint venture with First Capital Securities. Deutsche’s venture with Zhong De Securities has survived the bank’s exit from its stake in Huaxia Bank, but has other issues, including legal ones, to deal with.
Even if foreigners ever get full control, they are hopelessly late to the party, as none of the JVs can truly be said to have thrived in their own right. In 2015, the highest-ranked venture in net profits was UBS, according to the Securities Association of China – it ranked 95th with only 1/50th of the net profit of the leader, Citic Securities.
First half 2016 numbers showed the highest net profit from a JV was Citi Orient Securities, at Rmb186.3 million ($27 million). If that sounds weak, consider that Goldman Sachs Goahua logged Rmb4.6 million and Credit Suisse Founder a Rmb35.7 million loss.
So far, few of these ventures can be said to have been worth the effort.