People walk near the New York Stock Exchange on Wall Street. (Photo : Getty Images)
China may consider the possibility of allowing Wall Street investment firms, including banks, to run their businesses in the mainland, as part of a new trade and investment framework currently being worked out between China and the U.S.
The Wall Street Journal reported that the proposed framework would enable firms such as Goldman Sachs Group Inc. and J.P. Morgan Chase & Co. to independently manage their investment-banking business in China, unlike in the present setup where foreign financial and investment firms must partner with Chinese brokerages in joint ventures to operate in the country.
The report however, said that the negotiations are not yet final and details of the framework have to be threshed out with Chinese regulators first before the U.S. Senate could ratify any agreement.
China's Ministry of Finance, Ministry of Commerce and the China Securities Regulatory Commission and the Office of the U.S. Trade Representative did not give information about the framework yet.
If the plan succeeds, it would be considered a breakthrough for Wall Street firms' goal to break into the Chinese market and get access into the $7.48 trillion stock markets of Shanghai and Shenzhen as well the country's domestic bond market, which have been restricted to global banks.
But changes could take some time as the balance sheets of Chinese banks are often large, not to mention the competition from rivals. In addition, it may also take time for corporate clients of Chinese banks to familiarize themselves with Western firms.
The report cited data from Dealogic which showed that the investment -banking revenue of Chinese banks in Asia, excluding Japan and Australia, increased to 61 percent this from a 10 percent share in the last ten years, as Chinese companies started doing business with firms in the mainland.
The data also showed that U.S. banks' share in the region declined from 43 percent in year 2000 to 14 percent this year, despite investing heavily to enhance their operations in the region.
McKinsey & Co., a consulting firm, estimated that foreign investment banks take less than 5 percent of the share in investment banking, trading and other securities businesses in the Chinese market.
Sources said that if China finally decides to open access to domestic investment banking, it would likely cover all foreign banks, not only U.S. firms.
For more than two decades, Wall Street banks have been trying to penetrate the country's investment-banking market. In 1995, Morgan Stanley and a state lender formed the China International Capital Corp, as the first effort but Morgan Stanley eventually gave up its shares after a row with the management and sought a new partner.
Most Western banks doing business in China cannot cope up with problems such as the rising competition from Chinese firms and the changing policies such as bans on IPOs.
These problems also make it difficult for them to expand, some bankers said. Global banks are allowed no more than one-third share in joint ventures, which was raised to 49 percent in 2012, but it had very little effect on their businesses.
According to some officials of foreign banks, the joint venture structure also affected the bank's operations and management such as in moving money and setting priorities. Banks also sometimes clash with local partners regarding employees count and compensation, sources said.
Joint ventures have no licenses to trade securities, which local brokers have taken advantage of, allowing them to build retail-sales networks that allowed them to win bonds and IPO deals in mainland China.
But joint ventures also helped some global bankers to solicit business offshore. Citi Orient Securities Co., a joint venture by Citibank, partnered with Lufax, a Chinese online lender, to obtain an IPO in mainland China.
Though some bankers consider profits in joint ventures to be small, in terms of global operations, the revenue in joint ventures are also huge as eight foreign investment-banking joint ventures collected profits of about $116 million in 2015 and $38 million in 2014, on revenue of $664 million and $493 million, respectively, according to the Securities Association of China.
Last year, Goldman Sachs however reported a global pre-tax profit of about $8.78 billion on $33.82 billion in revenue. This made some Western investment banks to rethink about their partnerships with Chinese mainland firms. J.P. Morgan is reportedly planning to sell its stakes to its partner while Credit Suisse Group AG is choosing options between increasing its shares or find a new partner.
"Can the globals make enough of an inroad to make it interesting against the very strong mainlanders? That's the crux of the issue," Ken Koo, deputy general manager of Citi Orient Securities, said. "The country is a bit of a longer game, but this is not going away in terms of the opportunity," he added.
