Morgan Stanley, Goldman Sachs Group Inc. and Citigroup Inc. are finding patience pays off in China. The trio now have an advantage over some of their largest Wall Street rivals after officials in charge of the world’s No. 2 economy promised to let foreigners take majority stakes in securities firms there — raising limits that had long frustrated US and European bankers. JPMorgan Chase & Co. pulled out of a joint venture in China in 2016, and Bank of America Corp. also doesn’t have one.
In contrast, Morgan Stanley increased its stake in a partnership with Huaxin Securities to 49 percent earlier this year — the limit at that time — from about 33 percent, according to a person with knowledge of the deal. Goldman Sachs and Citigroup also have stuck by their ventures, in which they each hold 33 percent. And behind the scenes in recent months, Goldman has pushed for the ability to take control, a person with familiar with those talks said.
Big Wall Street firms have long hoped to expand in China’s relatively young but burgeoning securities industry, only to find their ambitions thwarted by an inability to run operations as they saw fit. While numerous local brokerages now compete in China, few have found ways to differentiate themselves, leaving an opening for strong foreigners to win clients, according to analysts including Felix Luo at Guangfa Securities Co. in Hong Kong.
Giving global firms more access would benefit the local market, said Jordi Visser, chief investment officer at Weiss Multi-Strategy Advisers, a hedge fund in New York. “There is still a need for expertise and product development within the financial sector,” he said. “This decision will help accelerate that.”
European firms also have ventures in China, and aspirations for expanding them. UBS Group AG, Switzerland’s largest bank, said that the Chinese government’s decision “represents an important step in further opening up China’s financial sector.” It plans to work on increasing its stake in UBS Securities Co.
China had raised the cap on foreign ownership of joint ventures before, increasing it in 2012 to 49 percent from 33 percent — still just shy of a majority. Regulators said they now plan to set the limit at 51 percent and will scrap that altogether three years after it takes effect.
The government said it’s also removing limits on foreign ownership in banks. Many Western lenders already have reduced or sold off those minority investments, which suggests they’re unlikely to take advantage soon of the threshold’s removal. Deutsche Bank AG, for example, sold a 20 percent stake in Huaxia Bank Co. last year to shore up capital.
HSBC Holdings Plc is the only international bank with a major holding — a 19 percent stake in Bank of Communications Co. The London-based lender has been building its business on the mainland as part of a “pivot to Asia” under outgoing Chief Executive Officer Stuart Gulliver.
JPMorgan spent six years as a minority partner in an investment-banking joint venture before pulling out last year. Chief Executive Officer Jamie Dimon has said the bank wants to find a new way into that market, but with full control. “My longer-term dream is that we have, we own, 100 percent of something,” he said in a June interview. The firm has yet to announce a strategy for returning.
To be sure, most foreign-backed securities joint ventures are minnows in China. JPMorgan First Capital ranked 120th out of China’s 125 brokerages by net income in 2015, according to the Securities Association of China. UBS Securities Co., whose 296 million yuan profit was the biggest among foreign-backed joint ventures, ranked 95th.
“At the end of the day, China favors Chinese entities,” Steve Rattner, chairman at Willett Advisors, said in an interview with Bloomberg TV. “So yes, you can own 51 percent of a bank now, but how much business are you going to do, who are you going to do it with?”
US firms may move slowly, he said. Meanwhile, Morgan Stanley acknowledged it has ambitions for the venture it kept. “Morgan Stanley is committed to growing our businesses in China,” it said. “We see this
policy change as an import-
ant step in the further development and opening-up of China’s capital markets.”