Wednesday , March 20 2019

Global banks rush into a Chinese black box

Global banks are rushing to plant their flags in China. That doesn’t guarantee they’ll be winners.
Last week, JPMorgan Chase & Co. lodged an application to take a majority stake in a securities company, having exited a venture where it was a junior partner. The Wall Street firm follows UBS Group AG and Nomura Holdings Inc., which were the first to seek permission to take 51 percent stakes in local ventures under loosened rules announced last month. Both acted after China’s securities regulator encouraged them to apply quickly, Bloomberg News reported. Mizuho Financial Group Inc. is also considering direct investment in a Chinese brokerage, according to the Nikkei.
At first blush, the initial batch has much to do with politics and optics. JPMorgan CEO Jamie Dimon was in Beijing last week so the bank’s announcement was opportune, and accompanied by much fanfare. The prospect of worsening US-China trade tensions may have encouraged the New York-based firm to move swiftly. While Goldman Sachs Group Inc. and Morgan Stanley have been more circumspect, they can be expected to apply soon. Meanwhile, improving ties between China and Japan mean Nomura’s approval looks guaranteed.
To assume this will be one big bang for all would be naive, though. Each institution has a different starting point, so the playing field is uneven. That means the incumbents are likely to remain on top.
Nomura would become the first Japanese brokerage to hold a majority stake in a Chinese venture. Ask any Japanese banker and they’ll say that even seven decades after World War II, getting business in China remains tough. Meanwhile, other firms such as London-based HSBC Holdings Plc have already been allowed to operate majority-owned ventures or are being tapped to put in applications.
JPMorgan said it plans to increase its presence in China, including doubling research coverage of mainland-listed companies. Its application may have got the jump on Wall Street competitors, but any first-mover advantage will count for little. The bank’s securities venture will be starting from scratch, whereas the likes of UBS and Goldman have spent years building up their China operations.
Getting partners to agree to a junior role also won’t be easy for foreign banks. JPMorgan obviously felt it was easier to exit in 2016 than try to wrest control. Assuming a partner does agree, who knows how long approval will take? If there’s one thing foreign players agree on it’s this: The timing and process of winning approval is a black box. Meanwhile, a looming merger of China’s financial regulators adds to the pressure to apply quickly.
Multiple hurdles to success remain once the door is open. China lacks the deep and liquid markets that are required for global banks to put their financial savviness to work and fully harness any opportunity.
In any case, the chance to strike big looks restricted. Just look at how China’s dominant local brokerages have performed this year: net profit was down 8 percent in the first quarter from a year earlier, gains from proprietary trading dropped 10 percent and investment banking income fell 24 percent, according to Goldman Sachs.
Overseas brokerages are already on the back foot, as we’ve noted before, with domestic rivals such as Citic Securities Co. almost impossible to topple.
The experience of South Korea and Japan offers a lesson. Global brokerages that ventured into those markets were able to capture only 2 percent to 8 percent of industry revenue, stymied by a combination of hard and soft barriers. It took decades for brokers such as Morgan Stanley and Goldman Sachs to reach the top tier in Japan. China may be no different.

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