Can JPMorgan Dominate China?

JPMorgan's attempt to gain 100% control of its Chinese securities company will most likely be successful as China recently agreed to open its economy to more foreign investment. In January of this year, the United States and China signed a trade agreement ("the "Trade Agreement"), which eased a trade war between the two countries. (Jacob Pramuk, CNBC) The Trade Deal requires China to abide by certain commitments, which include opening its foreign market. (Bloomberg News) China is expected to eliminate its foreign equity limits, which will allow US-owned services to participate in the securities market as full owners of firms as opposed to partial owners. Id. JPMorgan's history in China – and China's willingness to open its economy – makes JPMorgan’s plan to fully own its venture a strong possibility.

In 2017, the Chinese authorities began to ease their control over foreign investment rules. (China Banking News) The shift allowed foreign asset managers to own 51% stakes in their Chinese joint ventures. Id. Foreign ownership of companies was traditionally limited to 49% in a joint venture with a Chinese company, but China has increasingly become comfortable with its domestic firms’ ability to handle competition from foreign companies. (Bloomberg News) In 2018, China announced that it planned to remove ownership caps by 2021, but the Trade Deal expedited the removal as China is currently expected to eliminate ownership caps in 2020. Id. Many companies like UBS Group AG (“UBS”), a Swiss bank, responded to the news by announcing attempts to seek full ownership of their joint ventures once the ownership caps are eliminated. (Chad Bray, South China Morning Post) In addition, China plans to allow global investment banks to operate without its complete interference by December 1, 2020. Id.

In 2004, JPMorgan and Shanghai International Group entered into a joint venture to create China International Fund Management Co., Ltd (the “Joint Venture”). (JPMorgan) Once the ownership rules changed in 2017, Shanghai International Trust auctioned a 2% stake in the Joint Venture to the public, and the stake was acquired by JPMorgan in August 2019. (Cheng Leng and Sumeet Chatterjee, Reuters) In December 2019, the China Securities Regulatory Commission (“CSRS”) approved the auction giving JPMorgan majority control over the Joint Venture. (Daniel Ren, South China Morning Post) On December 30, 2019, Bloomberg reported JPMorgan was intending to further increase its holdings to 100%, and JPMorgan reportedly filed with the CSRS to buy more of its Joint Venture. (Bloomberg News) If approved, JPMorgan will become the first foreign firm to have complete ownership of its Chinese securities firm. (Zachs Equity Research, Nasdaq)

China appears fully committed to opening its markets. Vice President of the U.S.- China Business Council disclosed China announced significant commitments to the Trade Deal and it already implemented many changes. (Lucille Liu and Jun Luo, Bloomberg News) Foreign companies like UBS and Nomura Holdings, Inc., a Japanese holding company, already hold a majority stake in their ventures, while other companies are in the process of applying for a 51% stake. Id. Currently, it is unclear whether the application process with the CSRC will move straight to the 100% hurdle, but early signs indicate foreign investors will be treated as domestic companies. (The Star Online) Dong Dengxin, director of the Finance and Securities Institute at the Wuhan University of Science and Technology, explained licensed foreign institutional investors “will receive basically the same regulatory treatment as domestic players once the expanded investment scope is enforced.” Id. In addition, there is a strong consensus among the Chinese government and financial regulators that opening the market will strengthen the support for the real economy. Id.

The likelihood that JPMorgan will gain 100% of its Joint Venture remains high if China continues to open its economy to foreign investors. Currently, China’s futures markets are dominated by approximately 150 domestic players, and the market was worth almost $30 trillion in 2019. (Zachs Equity Research, Nasdaq) By 2030, the removal of ownership caps is estimated to bring in an additional $9 billion in annual profits to the commercial banking and securities sectors in China. Id. These numbers combined with JPMorgan’s relationship with China creates a strong likelihood that JPMorgan will obtain full ownership of its Joint Venture, and China will enter a new stage in development.