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Strategic Insights

Sino-Foreign Securities Joint Ventures

This report looks at the evolution of the Chinese securities landscape and the opportunities that recent financial liberalisation measures are presenting to established, newly-formed and aspirant Sino-foreign securities joint ventures.
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Executive Summary

From the early 2000s, what was seen as the unstoppable rise of the Chinese economy and stock markets meant that any international brokerage firm or bank with global aspirations saw a need to be on the mainland. Coupled with China’s commitment to financial market liberalisation as part of its accession to the World Trade Organization in 2001, this paved the way for foreign investment banks to partner with domestic players in the Chinese securities market through Sino-foreign securities joint ventures (JVs). Despite a recent slowdown in the country’s economic growth, China has established itself as a global economic powerhouse, boasting the second largest economy and stock market in the world, as well as the largest capital market fee pool in Asia Pacific. In 2015 alone, China’s core investment banking fee pool was larger than the next five Asia Pacific countries combined. However, for the JVs that set up in the past decade, the growth story has been much less compelling. Leading domestic firms continue to dominate the market, whilst cost structures are dragging on JV profitability. Licence restrictions, a lack of management control, and major cultural differences between both foreign and domestic partners have resulted in many JVs being significantly under-leveraged. The JV landscape saw very little change from 2012 until the end of 2015: apart from a handful of exits by smaller foreign players due to international strategy changes, all tier-1 global banks left their onshore operations unchanged. However, in late 2015, Credit Suisse became the first foreign JV partner since UBS and Goldman Sachs to secure access to an A-share brokerage licence. Since then, up to eight Hong Kong or Macau- headquartered and funded financial institutions – including Hongkong Shanghai Banking Corporation (HSBC) and Bank of East Asia (BEA) – have also applied under the Closer Economic Partnership Agreement (CEPA) Supplement X to set up securities JVs in various free trade zones (FTZs). Unlike the first wave of JVs that were set up in the mid-to-late 2000s, those established under CEPA Supplement X are fully-licensed and can be up to 51% non-PRC-owned. With the competitive landscape rapidly evolving and regulatory liberalisation measures in full swing, we believe now is the time for foreign banks to revisit their onshore JV strategy. We see considerable room for existing JVs to both grow and further optimise their platforms, particularly with respect to better leveraging the powerful onshore-offshore footprint of their foreign partners. We also believe that despite limits to management control, there is scope to exert greater management influence. For the new FTZ entrants, much can be learnt from the first wave of foreign players to enter the market, and we feel the new regulations will provide them with a competitive edge. For aspirant JVs, the market remains ripe for the picking, particularly where competitive niches can be found. With China’s core investment banking fee pool alone expected to exceed USD 7 billion in 2016, a mere 1% market share gain translates to USD 70 million in annual revenue. This is an opportunity simply too large to ignore. It’s time to get ready for Round 2.
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