Nation's scheduled removal of ownership cap to boost capital market opportunities

China's securities sector will likely see a bigger wave of foreign investment next year, as the scheduled removal of the foreign ownership cap will make it easier for global investment banks to grasp opportunities in the country's burgeoning capital markets, analysts said.

They commented after Japanese financial group Nomura Holdings' majority-owned securities joint venture, Nomura Orient International Securities, officially began operating in Shanghai on Friday.

This made Nomura the first global investment bank to set up and operate a majority-owned securities joint venture in China after the country raised the foreign ownership cap of securities ventures from 49 percent to 51 percent in April last year.

US bank JPMorgan also announced on Wednesday that its newly established securities joint venture in China had received regulatory approvals to start operations, while Swiss bank UBS AG increased its stake in its securities business in China to 51 percent in December last year.

"Global financial institutions have acted swiftly on the country's green light of foreign majority stake. They may even speed up expanding investments in China next year," said Liu Wenqiang, chief industry researcher with Great Wall Securities, a domestic brokerage.

China's fast-growing capital market provides a business opportunity that is hard for global investment banks to ignore, and they have "big potential in obtaining new customers", since Chinese residents are expected to allocate much more wealth in capital markets in the next decade, according to Liu.

In addition, returns on investments in China are attractive by global standards, as the country retains a promising economic outlook and a relatively stable level of interest rates, Liu said. This contrasts with a slowing global economy in which many economies have lower and even negative rate levels, Liu added.

US-based Goldman Sachs and Morgan Stanley, as well as Switzerland-based Credit Suisse, have submitted applications to the securities regulator to acquire majority stakes in their securities joint ventures in China, while Japan-based Daiwa Securities and Singapore-based DBS Bank are seeking approvals to set up securities joint ventures.

The China Securities Regulatory Commission, the country's top securities watchdog, said in October that China will allow 100 percent foreign ownership in securities businesses beginning on Dec 1, 2020.

French investment bank Societe Generale has disclosed plans to establish a wholly owned securities venture in China, while Goldman Sachs said it hopes to increase its stake in its securities venture to 100 percent in the next five years.

Zhang Deli, chief macroeconomic analyst at Yuekai Securities in Guangdong province, said the higher ownership would help lay the basis for foreign securities businesses to improve their performance in the Chinese market.

Previously, given the stake restriction on foreign investment banks, they encountered conflicts in corporate culture and management style with their Chinese partners and faced difficulty in fully putting their business strategies into place, Zhang said.

The CSRC also revised rules last year to gradually allow a larger business scope of securities joint ventures, which will help address another factor that used to subdue their development, he said.

Nomura Orient is allowed to operate brokerage, investment consulting, proprietary trading (where the securities firms invest their own capital for market gains) and asset management businesses in China. But it plans to apply for a license for underwriting and sponsorship a year later and become a fully licensed brokerage.

UBS Securities, the securities venture of UBS AG, has long been fully licensed, while JPMorgan, with its securities venture and asset management arm in China, is also allowed to operate all kinds of securities services in China.

"Foreign firms tend to have extensive international experience and are strong in areas such as proprietary trading, as well as fixed income, currencies and commodities, or FICC, business. Their presence will bring more competition and motivate local securities firms to better themselves, which will help energize the Chinese market," Zhang said.

As China's securities sector matures, business lines of derivative trading, asset management and wealth management services will become more important, and these businesses are exactly the areas in which global investment banks are good. This has given them a competitive edge in the Chinese market, according to a report from domestic brokerage GF Securities.

But foreign companies may be at a disadvantage compared with domestic players in terms of market channels and customer bases, the report said.

"It is likely for foreign players to take the lead in specialized business areas, but they still face the biggest challenge of localization, especially the integration with local teams," said Liu.

Future changes in regulations regarding mergers and acquisitions will influence the possibility of foreign brokerages becoming comprehensive market giants, as they will need to acquire domestic players to become comparable with domestic industry leaders in terms of asset scale, according to Liu.

Eugene Qian, then president of UBS Securities, said earlier that UBS AG is open-minded toward expanding investment in UBS Securities, while appreciating the strategic value of local partners and looking forward to the further acceleration of opening-up in this area.