China will limit JV control through new rules, Global banks fear

Western banks are seeking clarification from China’s securities watchdog on proposals to allow them to take over their onshore securities ventures, among concerns about high asset value requirements and limits to ownership by non-financial investors.

Giving foreign financial firms a controlling stake in their China securities joint ventures is a key part of China’s pledge to ease foreign ownership curbs, especially in the country’s trillion-dollar financial sector.

But last month draft rules released for consultation by the China Securities Regulatory Commission (CSRC) could have the opposite effect and warp broadening participation, people with knowledge of the matter warned.

Under the proposed rules, controlling shareholders must have a net asset value (NAV) of at least 100 billion yuan ($16 billion), and non-financial Chinese investors would be limited to a one-third shareholding.

As opposed to the global entity, most international banks would be ruled out, if the NAV rule applied to the Western banks’ local units. Bankers are rushing to submit requests for clarification of the rules by Sunday, when the consultation period closes.

Lyndon Chao, head of equities at Financial Markets Association (ASIFMA) and the Asia Securities Industry, which represents global banks in Asia, said that while China had opened the door to foreign capital it appeared to be reluctant to welcome overseas securities firms.

He said that welcoming foreign securities firms to enter China onshore on a level playing field appears less open than what we had originally thought, based on the second consultation and the net asset value requirement for firms seeking majority ownership.

Bankers are unhappy too with the one-third limit on non-financial Chinese investors, which means that if a Western bank linked up with such an investor, it would still need to find another partner for the remaining 16 percent.

One person with knowledge of the proposed rule changes said that doesn’t fly with the spirit of what was intended based on the comments from different Chinese regulators. Three may be a crowd.

Due to sensitivity of the issue, the people who spoke to Reuters declined to be named. They said the final rules, expected to be announced by end June, could change to reflect their concerns. CSRC did not immediately respond to a Reuters request for comment.

China lobbyists and surprised bankers in November when it said foreign investment banks could raise stakes to 51 percent in their securities joint ventures, which offer underwriting and trading services, from a 49 percent cap.

Banks including Morgan Stanley (N:MS), Goldman Sachs (N:GS), and UBS (S:UBSG) run joint ventures with varying degrees of operational control but all have pushed for majority ownership. In 2016, a lack of control was a factor in JPMorgan’s (N:JPM) decision to sell out of its joint venture. /

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