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| Mainland PRC, where even the mighty barely roam. |
It's 2015. Do you know how well international banks' joint ventures in China have done? The perhaps surprising answer is:
not well at all. These banks have had to take joint ventures since wholly-owned foreign subsidiaries remain disallowed. With the notion that one cannot be left behind by not having a China presence, most Western majors have piled in at one point or another. Now, HSBC is taking another stab at it, with the advantage of potentially being allowed a majority stake for the first time as a Hong Kong-based entity. That said, the
history of these JVs isn't all that promising:
So far, two decades of joint ventures in various forms have produced very limited tangible benefits for the overseas banks involved. Not only have they been limited to minority ownership, but the joint ventures enjoy only so-so profitability and their rankings in banking league tables are unimpressive for top-flight global institutions.
The most damning evidence of international banks' futility in China is that, despite recent rule changes allowing them to up their stakes in their PRC operations from 33 to 49%, no one has taken up the option. Actually, observers believe that most are instead interested in finding an opportunity to exit their mainland JV operations
altogether:
Firms set up variously by Credit Suisse, Royal Bank of Scotland, Deutsche Bank, Citigroup, JPMorgan Chase and Morgan Stanley (again, after it sold its CICC stake) have been allowed to underwrite primary equity and debt issuance but so far have been excluded from the far more lucrative secondary trading markets. All claim publicly to work well but rumours swirl constantly that one or other bank is looking for an exit. Gossip aside, it is worth noting that none of the western banks has as yet taken up the opportunity, since a rule change in 2012, to raise its stake from 33 per cent to 49 per cent.
In all fairness, the Communist Party restricts the profitability of these Western JVs. By limiting their activities to underwriting debt and equity issues--an already-crowded area for financial services instead of the more lucrative secondary market--money-making prospects are hurt:
To be fair, judging success is not straightforward. JVs that are restricted to primary markets are competitive in the equity and debt issuance league tables but far down the rankings by profit. Most mainland securities houses make their money in trading, not underwriting, where intense competition has squashed fees to levels unimaginable on Wall Street. Many of the ventures have faced culture clashes that have made it hard to implement international practices, according to bankers involved. Some of the overseas banks also privately admit they picked partners who turned out to be weaker than they realised.
The logic of "having to be in China" despite limitations to what you can do has long since lost its luster. HSBC aims to buck the trend, though, and you wish them well even if things haven't gone swimmingly for its peers in the past.
