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Capital markets: How to enter China

By Rebecca Feng

Foreign banks are rightly excited about their chances of getting unfettered access to China’s capital markets. 

They can already own 51% of onshore securities joint ventures – the China Securities Regulatory Commission (CSRC), headed by Yi Huiman, who took over the securities regulator in January 2019 and was determined to open up the domestic market even further, said in October that it would scrap that limit on December 1, 2020.

Yi Huiman,

That offers opportunities for those firms already operating in the market. HSBC and UBS gained majority control of their JVs in August 2017 and December 2018 respectively. 

Other JVs are still burdened by a majority partner but are finding a way out. In early November, Goldman Sachs and Morgan Stanley got the nod to lift their holdings in Goldman Sachs Gaohua Securities and Morgan Stanley Huaxin Securities to 51%. 

Others plan to expand in China even if they do not yet have JVs onshore or have not had one for years. Societe Generale is setting up a wholly owned securities firm and Nomura’s majority-owned JV has already received a securities business licence, despite not having been through a phase of collaborating with Chinese partners. 

Daiwa Securities and JPMorgan are coming back to set up new JVs after pulling out of their previous ventures in 2014 and 2016 respectively. JPMorgan already got permission in March to do so and Daiwa Securities filed an application with the regulator in September.


But foreign bankers have revealed their fears about how much – or, indeed, how little – impact China’s open invitation could have on their businesses. 

Any bank chief executive with any global ambition will talk at length about the need to expand in China, but few are sure how to do it.

A big problem is the competition foreign banks face in the domestic primary bond markets. Local rivals will swallow small fees and use buckets of their own capital to underwrite deals. Many of them are not only willing to hold bonds on their own balance sheets, but eager. 

Primary business is a more obvious step for global investment banks, but it also presents problems. Is it worthwhile? 

Debt capital markets, for these firms, is a way of sourcing investment opportunities.

Few foreign banks will play this game. Most are unwilling to dramatically adapt their underwriting standards to add ‘Chinese characteristics’. 

Too many foreign banks may be pinning their hopes on a naïve belief that ‘global standards’ will sway clients who want to prove they can play in the international marketplace. But when much of the competition will come from other global banks, ‘global standards’ won’t be enough on its own.

A few banks will make it work, most likely those whose relationships in the onshore market will simply echo those they have already built offshore. The favourites should certainly be those who have already set up JVs in the country, although separating their relationships from local partners or rivals may prove difficult.


The best solution seems to approach the market with humble ambitions. One China head at a global firm says he plans to concentrate his near-term efforts on the country’s secondary markets. Broking may not be a glamorous business, but it does present an obvious step for foreign bankers hoping to bring their offshore clients into the market.

Primary business is a more obvious step for global investment banks, but it also presents problems. Is it worthwhile? A head of DCM at an onshore securities house says that 10 years ago, the firm could earn as much as Rmb100 million ($14 million) in fees underwriting three large corporate bonds. Now that number has gone down to just a few million.

Consider another set of numbers: Citic Securities, Haitong Securities and Guotai Junan Securities had Rmb232 billion, Rmb166.4 billion and Rmb174.1 billion in financial assets on their balance sheets at the end of September. 

UBS Securities, HSBC Qianhai Securities and Goldman Sachs Gaohua Securities, three of the biggest foreign JVs in terms of total assets, held just Rmb4.10 billion, Rmb1.69 billion and Rmb1.68 billion at the end of 2018, respectively.

These firms are all likely to increase their local asset base in the coming years, but their growth will be careful and almost certainly slower than some of their hyper-aggressive local rivals.

Cue a wall of new entrants trying to position themselves as the broker of choice for foreign investors entering China. This will be neither sexy nor as lucrative as many banks would like, but it is still a sensible step in a country that offers almost as many hurdles as it does opportunities.

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