Beijing may allow Wall Street firms to run their own investment-banking businesses on the mainland, according to people briefed on the discussions, a significant step that would give them more access to China’s hard-to-crack domestic markets.
The long-awaited move, which is being discussed as part of a new U.S.-China trade and investment framework, would mean companies like Goldman Sachs Group Inc. and J.P. Morgan Chase & Co. could conduct investment-banking business in China on their own, such as underwriting initial public offerings on domestic exchanges. Currently, foreign financial firms operating on the mainland must pair up with domestic brokerages in joint ventures in which they hold minority stakes, split profits and have a limited scope of business.
The people briefed on the discussions caution negotiations are still going on. Details need to be hashed out with Chinese regulators, while an agreement would need to be ratified by the U.S. Senate.
That wholly owned foreign banking units are on the table at all is a breakthrough for Wall Street firms. Global banks have limited access to the $7.48 trillion stock markets of Shanghai and Shenzhen and China’s onshore bond market, compared with the ease with which they can operate in global markets like London and Tokyo.
Yet any change may come too late to do the Western firms too much good. China’s banks have large balance sheets and have grown into more formidable rivals. The firms also have long relationships with corporate Chinese clients, some of whom may not recognize Western brand names, one banker said.
Chinese banks had just a 10% share of investment-banking revenue in Asia excluding Japan and Australia a decade ago, according to data provider Dealogic. This year, that share has increased to 61%, boosted by Chinese companies that prefer to do business with domestic firms.
Although U.S. banks have spent heavily to bulk up operations in the region, their share has declined since 2000, from 43% to just 14% so far this year, according to Dealogic.
In China, foreign investment banks have less than a 5% market share in investment banking, trading and other securities businesses, according to consulting firm McKinsey & Co. estimates.
Any deal on opening access to domestic investment banking in China is likely to extend to all foreign banks, not just U.S. firms, the people familiar with the mater said.
China’s Ministry of Finance, Ministry of Commerce and the China Securities Regulatory Commission didn’t return requests for comment. A spokeswoman for the Office of the U.S. Trade Representative declined to comment.
Wall Street banks have been trying to get into China’s domestic investment-banking market for more than two decades. The first such effort, China International Capital Corp., was launched by Morgan Stanley and a Chinese state lender in 1995, but Morgan Stanley eventually sold its stake after clashes and found a new partner.
Part of the problem has been the rise of Chinese rivals. Changing regulations, such as periodic bans on IPOs in the country, also make it difficult for foreigners to keep up.
But bankers said not being able to own their businesses outright has also frustrated efforts to expand in China. Global banks were initially allowed to own no more than one-third of joint ventures. That threshold was raised to 49% in 2012, but many bankers said the difference is minimal.
The joint-venture structure hampered banks’ ability to control operations, move money in and out of the venture, and set strategic priorities, foreign banks said. As well, the banks have tussled with local partners over head count and compensation, people familiar with the ventures said.
Most of the joint ventures don’t have licenses to trade domestic securities. This is a lucrative business for local Chinese brokers, and one that has given them big retail-sales networks that have helped them win bond and IPO deals on the mainland.
Some global bankers said the joint ventures have helped drum up business offshore. Citi Orient Securities Co., Citigroup Inc.’s joint venture, this year worked with Chinese online lender Lufax on an IPO in mainland China. When Lufax decided it would list in Hong Kong instead, Citi Orient referred the company to Citi’s Hong Kong team, said people familiar with the matter. A spokeswoman for Lufax declined to comment.
Still, joint-venture profits have been thin. Although some revenue from the joint ventures may be counted in global operations instead, eight foreign investment-banking joint ventures collectively eked out profits of just $116 million in 2015 and $38 million in 2014, on revenue of $664 million and $493 million, respectively, according to the Securities Association of China. By contrast, Goldman Sachs alone last year reported world-wide pretax profit of $8.78 billion on $33.82 billion in revenue.
Banks have still made money separately on deals in China and from investing in and later selling stakes in domestic Chinese banks. And Western bankers say they have the advantage of large international investor bases that they can draw on for deals.
Executives at many Western investment banks privately said they are rethinking partnerships on the mainland. J.P. Morgan is discussing selling its stake in the joint venture to its partner, while Credit Suisse Group AG is considering increasing its stake or finding a new partner, among other options, people familiar with the matter said.
“Can the globals make enough of an inroad to make it interesting against the very strong mainlanders? That’s the crux of the issue,” said Ken Koo, deputy general manager of Citi Orient Securities. China is “a bit of a longer game, but this is not going away in terms of the opportunity.”