Overseas Institutions Seek To Seek Sole Proprietorship Dealers In China: Joint Ventures Are Hard To Get Rid Of, But Domestic Challenges Remain.

Brewing wholly owned securities licences is becoming the demand of some foreign institutions.

In October 15th, market sources pointed out that Citigroup would set up a wholly owned securities subsidiary in China to conduct brokers and futures trading. On the previous day, the head of the global market of France's third largest bank, faxing bank, said at a financial forum that it had abandoned the plan to set up a joint venture broker in China and turned into a wholly owned subsidiary.

In fact, Citigroup and faxing's "stir up the wind" is a reflection of the CSRC's release of the foreign stock holding ratio restriction signal. Recently, the securities and Futures Commission has made it clear that in 2020, the upper limit of foreign shareholding ratio of the three categories of securities, funds and futures should be abolished.

In the view of the industry, since the performance of joint venture brokerages in the market is generally not ideal, and there are cultural conflicts in joint venture brokers, it is not ruled out that more foreign institutions are more interested in setting up wholly owned securities brokers in China.

Citi and faxing "Mo Quan"

In the morning of October 15th, Citigroup's intention to set up a wholly owned securities subsidiary in China was fermented in the market. Citigroup responded in an e-mail statement that it will continue to focus on and evaluate new business opportunities to better serve the financial needs of customers, but details of the plans for the establishment of wholly owned securities companies are not disclosed.

Citigroup is not the only foreign institution that is expected to set up a wholly owned securities company in China recently. Earlier, the head of China's global market in faxing bank said publicly that it had abandoned the plan to set up a joint venture broker in China and set up a wholly owned subsidiary. "With the further opening of the Chinese market, we will invest more in China."

Prior to that, the main path for foreign institutions to enter the securities business in China was mainly joint venture brokerages or joint venture holding brokerages. This time, Citigroup, France and Xing and other institutions opposed the idea of applying for wholly-owned institutions, mainly related to the quietly loosening of regulatory policies.

In October 11, 2019, the securities and Futures Commission said that it had abolished the restrictions on foreign capital shares of fund management companies since April 1, 2020. Since December 1, 2020, the securities and Futures Commission has abolished the restrictions on foreign capital shares of securities companies, and has lifted the restrictions on foreign capital shares of Futures Company since January 1, 2020.

The open statement of FA Xing bank also confirms this logic. "At this stage, we are studying the conditions for setting up securities companies in China, mainly because of the latest announcement of foreign investment in China, which can be wholly held by securities companies in China after December 2020."

"If we can achieve wholly-owned holding, more foreign investment institutions may choose this way." A non banking financial analyst at a brokerage firm in Beijing said.

Localization challenges remain

Last year, after the release of foreign securities holding domestic brokerages at the policy level of the SFC last year, many foreign institutions have continued to exert force on the issue of holding joint venture brokers.

At present, UBS Securities, J.P. Morgan securities and Nomura Securities three foreign controlled securities firms have been approved. In addition, according to the SFC website, DBS securities, Morgan Stanley Huaxin securities, Dahe securities, Strait securities and other foreign institutions related to the establishment or control of securities companies to change the examination and approval matters are in the queue process.

In the industry view, seeking wholly owned securities companies may still be the choice of many foreign institutions.

"Achieving a holding ratio is still a relatively compromise and compromise plan. Many foreign institutions may eventually increase their shareholdings to a wholly owned level." Aforementioned non bank analysts said, "this is mainly related to potential conflicts between Chinese and foreign shareholders in terms of culture, values and business philosophy."

In fact, there were few good joint venture brokers in the industry. In the first half of 2019, according to the 131 commercial performance rankings announced by the China Securities Regulatory Commission, Morgan Stanley Huaxin, Credit Suisse founder, East Asia Qianhai, HSBC Qianhai, Sino German securities and many other joint venture brokers were outside 100.

On the one hand, most of the joint venture brokerages are sponsored by some brokerages, such as Morgan Stanley Huaxin securities, Sino German securities, Oriental Citigroup, Goldman Sachs Gao Hua, Credit Suisse Founder Securities and so on.

"The difficulty in running the shareholders in culture will affect the efficiency of the joint venture. Many things can be done by Chinese shareholders, but the foreign shareholders will have some concerns." A mother bond merchant who joined the establishment of a brokerage firm with foreign investment agencies is frankly speaking.

In addition, if some foreign institutions try to start a "joint venture broker", some of them may also face new resistance in the future when they attempt to hold a wholly owned stake.

"For foreign capital, once a joint venture broker is established, if it is not well done, it will be relatively easy. If the joint venture broker does well, the cost, cost and procedures for the return of the remaining shares will be higher in the future. In this time, there will be no more foreign institutions going to wait for the implementation of the policy to declare the establishment of a wholly-owned institution." The analysts said.

But at the same time, foreign institutions, even if they have wholly owned securities subsidiaries in China, may face a lot of localization tests.

"Foreign institutions need to have a better understanding of the domestic capital market and deal with domestic customers, investors and regulatory authorities. If they are in joint venture brokers, they can try to be localized through the resource endowments of the Chinese shareholders, but if the sole proprietorship is to set up subsidiaries, all these need to be independently faced by foreign investment institutions." The analysts said.

"For example, in the process of routine institutional supervision, regulatory authorities may have specific window guidance for different businesses, which is rare in mature market countries, and foreign institutions have lost joint protection barriers. There is also some uncertainty about whether they can adapt to this regulatory culture." A broker dealer in Shanghai pointed out.