Morgan Stanley will seize chance to control China business after 'surprise' foreign ownership U-turn, says CEO James Gorman

James Gorman says he’ll be looking for 51pc ownership in the mainland, but admits the change in Beijing’s policy came as a ‘pleasant surprise’

PUBLISHED : Monday, 13 November, 2017, 8:30pm
UPDATED : Monday, 13 November, 2017, 11:33pm

Morgan Stanley’s global chief executive James Gorman said on Monday his bank would look to increase its stake in its mainland China investment banking joint venture to 51 per cent, and take control of its operations.

But he admitted being taken by surprise by last week’s decision that China plans to remove foreign ownership limits on banks while allowing overseas firms to take majority stakes in local securities ventures, fund managers and insurers.

Gorman’s decision to target a controlling 51 per cent makes Morgan Stanley the first global investment bank to announce explicitly its intention to take a majority stake in its mainland business, following last week’s announcement that the previous 49 per cent ownership cap would be lifted.

“I would certainly hope so,” said Gorman, when asked by the Post whether Morgan Stanley intended to up its stake in Morgan Stanley Huaxin Securities to 51 per cent.

“A global corporation of the size and stature of Morgan Stanley should control its destiny.”

China to ease ownership limits on foreign joint ventures in finance sector

China’s move is being read as a major step towards the long-awaited opening of its financial system. The new rules will effectively give global financial companies unprecedented access to the world’s second-largest economy.

International banks currently are not allowed to carry out investment banking activities on the mainland in their own right, and have to operate though joint ventures with mainland securities brokerages.

Non-Hong Kong-based bank stakes in the joint ventures had been capped at 49 per cent, but on Friday China’s deputy finance minister Zhu Guangyao said that the cap would be raised to 51 per cent, and abolished altogether in three years.

“It [the new policy] came as a pleasant surprise to me,” said Gorman.

“We had just moved to 49 per cent. Had we known this was coming, we would have tried to get the additional two per cent.”

Morgan Stanley launched its joint venture with Huaxin Securities in 2011. This year it increased its stake in the JV from 33 to 49 per cent, following an earlier liberalisation of the rules.

And now, the US investment banking giant clearly wants to gain control of the firm.

“This is the first time the intent that you can control your own destiny by owning 51 per cent has been put out there. That is an incredibly important step,” said Gorman.

Huaxin Securities did not respond to requests for comment.

In the past a major gripe of international finance houses involved in joint ventures in China has been a lack of operational control on the mainland.

This is the first time the intent that you can control your own destiny by owning 51 per cent has been put out there. That is an incredibly important step
Morgan Stanley chief executive James Gorman

“Without control, international banks have struggled to integrate their joint ventures in China with their global businesses,” said Benjamin Quinlan, CEO of financial services consultancy Quinlan & Associates.

“The foreign banks have not got much out of being a sleeping partner and just taking dividends, as, so far, these joint ventures have not made much money.”

Foreign banks praise new rules that remove China ownership handicap

Some big international players have previously withdrawn from their joint ventures over the tight control issues.

In 2007, BNP Paribas sold its stake in BNP Paribas Peregrine Securities to its then-partner, Changjiang Securities, and, in a statement at the time, a spokeswoman cited as problems in the working relationship between the French bank and its Chinese partner as the reason for the sale.

UBS and Goldman Sachs, two of the earliest banks to set up joint ventures on the mainland, have operational control of their business but the banks that followed them were never able to replicate this.

In 1995, Morgan Stanley set up CICC, the first joint venture investment banking firm on the mainland, with China Construction Bank and other partners.

Morgan Stanley initially had the right to appoint CICC’s chief executive, however, it lost this in the early 2000s, and later, in 2010, sold its stake in the bank.

Gorman also said Morgan Stanley now plans to expand its operations in mainland China beyond just investment banking.

“On the mainland over time we would like to have multiple lines of business. That’s what we have done, for example, in Japan, Australia and Hong Kong, and that’s what we should be doing mainland China.”

Morgan Stanley globally currently offers wealth management, asset management, sales and trading in fixed income and equities, and investment banking services.

The bulk of its mainland business is generated from the last of those, but Gorman said he hoped this would change.

“In future [our business in China ] would look more like our business in the other large economic zones around the globe that Morgan Stanley competes in.”

“If China is going to truly open up it should reflect what the other opened economies should look like.”