On Wednesday, JPMorgan Chase & Co. (JPM) signed an agreement to form a joint venture with China’s First Capital Securities Co Ltd. The deal is part of the strategy to take share of a large part of the fees from the booming Chinese capital market. The deal is still subject to approval by the China Securities Regulatory Commission.
Under the terms of the agreement, JPMorgan will be able to underwrite initial public offerings (IPO) on the bourses of Shenzhen and Shanghai. However, the new entity will not be allowed to trade stocks in China’s secondary markets as new foreign-backed securities ventures are expected to be in gestation for about five years before they can apply for a license.
The Memorandum of Understanding (MOU) regarding the deal was signed in March 2010. JPMorgan will hold a 33% stake in the venture — the maximum allowed by Chinese regulators — and the remaining will be owned by First Capital.
Founded in 1993, First Capital is one of the largest brokerage firms in China with strong capital base and 12 branches nationwide.
JPMorgan was one of the highest ranked equity-related investment banks in terms of volume in 2009. Though the company has already acted as a bookrunner for IPOs and equity share sale in Hong Kong, this joint venture will help JPMorgan to foray into mainland China.
Apart from JPMorgan, other major U.S. banks that have entered the Chinese markets include Goldman Sachs Group, Inc. (GS) and UBS AG (UBS). In addition to these U.S. banks, European banks including Deutsche Bank AG (DB) and Credit Suisse (CS) have also entered the Chinese capital market and have been granted approval for getting into joint ventures though they are restricted to IPO underwriting.
Major U.S. banks like Bank of America Corporation (BAC) and Citigroup, Inc. (C) are also looking to launch joint ventures with mainland Chinese companies.
For the past few years, JPMorgan was in search of a partner and was said to be in talks with Liaoning Securities and Bohai Securities to enter Chinese market. The company already has a locally incorporated bank in the country which offers Renminbi products to local companies and has asset management and futures and options ventures. Additionally, it helps Chinese companies to capital and in mergers and acquisitions outside of the mainland.
JPMorgan’s first quarter earnings were reasonably good, as results were aided by the boom in its Investment Bank segment. The Chinese IPO market is growing by leaps and bounds while the U.S. IPO market has stagnated as a result of the financial crisis. Therefore, this deal will enable JPMorgan to foray into the emerging Chinese capital market and provide it with ample opportunities to increase its revenue base in an untapped capital market.
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