American investment banks have finally got what they wanted. After tortuous journeys, Goldman Sachs and Morgan Stanley join JPMorgan with approvals to take majority control of Chinese ventures. It’s an incremental concession at a precarious time, and local rivals have gotten stronger. It’s good news nevertheless.
China verbally committed to letting foreign banks control of their partnerships years ago, but progress was glacial. Beijing foot-dragged in part because it saw market access as a barter item, and so it became a perennial item in trade negotiations. Unfortunately, by the time officials got around to delivering the liberalisation, a great deal of foreign enthusiasm had evaporated.
People’s Republic has successfully incubated domestic giants like $7 billion China International Capital Corp (CICC) and state-owned CITIC, routinely found at the top of home league tables. Foreign commercial banks’ share of the domestic market remains stuck in single digits, and stubborn capital controls have made it hard for overseas institutions to leverage their international expertise to win clients away from local brokerages and wealth managers. One theory is that China wants competition from Wall Street to keep its local institutions nimble, plus channel offshore funds into domestic assets, but will never let foreigners — especially Americans — achieve significant market share.
But Goldman and Morgan Stanley, which have been in China since 1994, are different. They have already done quite well helping Chinese corporations tap overseas stock and bond markets, and have facilitated big offshore mergers and acquisitions. Eikon league tables show the two were in lower rungs of the top ten M&A advisors in China in the last full year, and were ranked three and four for equity offerings, just behind CITIC and CICC. And while the concession is incremental, it does free up the two to push through internal improvements. Goldman, for example, can rationalise its unusual structure, migrating wealth management and brokerage operations, currently parked in another company, into the joint venture where it already boasted management control.
It also frees the banks to compete harder for new lines of business in securities trading and wealth management, instead of treading water. Local institutions may be big and well-connected at home, but many are also clumsy and parochial, as CITIC’s disastrous acquisition of CLSA has shown. Foreign money could play an important role in reviving China’s battered economy, which plays to Goldman and Morgan Stanley’s strengths. Patience could pay off yet.