Wall Street's Quest for China Supremacy Takes a Political Turn

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(Bloomberg) -- International politics are looming large over the race among global investment banks to secure coveted permits for taking majority stakes in Chinese securities joint ventures.

Switzerland’s UBS Group AG and Nomura Holdings Inc. of Japan in the past week became the first to apply for permission to buy 51 percent stakes in local securities JVs. Both banks acted after China’s securities regulator encouraged them to quickly submit applications, people with knowledge of the matter said.

It wasn’t a coincidence that U.S. banks such as Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley weren’t likewise asked to seek approval, three of the people said. Amid escalating tensions with President Donald Trump’s administration over trade and investments, Beijing wanted to signal that getting majority control over local JVs -- something Wall Street has desired for years -- could take longer for U.S. firms, according to these people.

The securities regulator’s stance illustrates how U.S. companies could be left at a disadvantage, at least in the short term, as President Xi Jinping opens big parts of China’s $12.7 trillion economy further to foreign firms. China has warned in negotiations with Trump’s team that its opening measures won’t be applicable to American investors if the U.S. doesn’t meet Beijing’s request for equal treatment of Chinese investment.

Dimon’s Hopes

UBS has been a minority owner in its JV for more than a decade; Nomura, which announced its application on Tuesday, doesn’t have a local partner. Representatives for the two banks declined to comment, while the China Securities Regulatory Commission didn’t immediately respond to a fax seeking comment.

At least one top Wall Street leader has recently expressed hope that his China plans won’t fall victim to trade friction. JPMorgan Chief Executive Officer Jamie Dimon on Tuesday said in an interview he hopes there won’t be a trade war and -- if there is one -- “hopefully it doesn’t affect JPMorgan.”

Dimon reiterated that JPMorgan, which more than a year ago sold its minority stake in a local JV, one day wants a wholly-owned onshore securities business. Morgan Stanley and Goldman Sachs are also pursuing majority control of their China JVs.

Read more on Dimon’s long-term plan for China

Wall Street Frustrated

Rules that limited foreign players to being minority owners have long frustrated global investment banks because they prevented them from running the business unfettered by local partners who may have differing objectives. But just as China began laying the groundwork for easing restrictions, the Trump administration started cracking down on Chinese imports as well as technology investments by Chinese companies.

Despite the short-term turbulence, U.S. firms aren’t likely to face a significant disadvantage in gaining access to China’s securities markets, according to Hubert Tse, a Shanghai-based partner at Chinese law firm Boss & Young, which has been advising foreign companies on their local joint ventures since 2005.

“The opening will be applied to all qualified foreign players in the long term and this direction won’t change,” Tse said. “But in the short term, various factors may come into play, including political ones.”

Nomura’s Plans

China’s government in late April issued new rules that eased ownership restrictions in local JVs for foreign firms. Starting in 2021, they will be allowed to take full ownership -- finally putting them on equal footing with local giants like Citic Securities Co.

Nomura had been preparing since November to seek permission for a majority-owned China venture and was planning to file by June, a person with knowledge of the matter said. But the investment bank accelerated those plans after hearing from the securities regulator, putting in a brief submission on Tuesday that it plans to augment with further documentation later, according to the person.

The CSRC announced on Tuesday evening that Nomura had filed its application, prompting the firm to issue a two-sentence confirmation shortly after. In Nomura’s case, the regulator also wanted the news to coincide with with Japanese Prime Minister Shinzo Abe’s meetings on Wednesday with top leaders from China and South Korea, the people familiar with its thinking said.

Read more on Abe’s trilateral summit in Tokyo

©2018 Bloomberg L.P.

With assistance from Takahiko Hyuga, Steven Yang, Keith Zhai

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