China's Opening to Wall Street Comes With Caveats: QuickTake

Written by
Cathy Chan
Written by

Cathy Chan

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(Bloomberg) -- After years of prodding, China is finally getting ready to allow global investment banks like Goldman Sachs Group Inc. and Morgan Stanley to take majority stakes in local securities joint ventures. The opportunity to push into China's vast securities market is huge -- but so, it appears, are the hurdles. As a June 30 deadline for implementing the changes approaches, here are some thorny questions bankers are grappling with, based on two consultation papers issued by the securities regulator. Final rules could differ from those proposed in the consultations.

A 100 billion yuan net asset value requirement

This $15.9 billion requirement applies to any majority shareholder and could be potentially troublesome for U.S. banks like Goldman Sachs and Morgan Stanley. That's because they hold stakes in Chinese joint ventures, or JVs, through entities incorporated in Asia, not the global company. Those entities typically don't meet the NAV threshold, according to people with knowledge of the matter. European firms like UBS Group AG, Credit Suisse Group AG and Deutsche Bank AG own their JV stakes at the global level and so likely wouldn't be threatened. The rule also requires a majority shareholder to have three-year cumulative revenue of at least 100 billion yuan. The consultation paper doesn't make explicitly clear whether the NAV and revenue requirement applies to the legal entity that holds the stake or to the parent company, so there could be some wiggle room.

Limiting single non-financial shareholders' ownership

Non-financial companies can only hold up to 33 percent of a JV. This means investment banks that want to team up with a non-financial player to avoid potential conflicts of interest would have to split the JV with at least two other shareholders. Some securities JVs have at times been hamstrung by tension between the foreign investment bank and its local partner, in part because of differences regarding strategy. To some banks, limiting a non-financial owner to a 33 percent stake would make it more inconvenient to set up a JV as more partners would be involved.

China's version of a ‘fit and proper' requirement

The consultation states that foreign shareholders in a securities JV must not have been subjected to any major punishment by regulators or legal authorities in their home country in the past three years. They also cannot be under current investigation over any major violations of rules or laws. It isn't clear whether, say, a regional or global entity would have to meet this requirement for every single market that entity operates in. With large banks having received billions of dollars in fines around the world in recent years, the concern is few firms would pass this hurdle if applied stringently.

Rules on granting licenses for new JVs

This proposed rule would allow newly established JVs to apply for four different licenses once they're set up and another two permits a year later. While this would allow new players to narrow the gap with JVs that have been up and running for years, established ventures might object that it's unfair that their new competitors can get licenses at a faster pace.