December 24, 2008 / 6:02 AM / 10 years ago

DEALTALK-Morgan Stanley, China in stalemate over JV

(For more Reuters Dealtalks, click [DEALTALK/]

By Michael Flaherty and Samuel Shen

HONG KONG/SHANGHAI, Dec 24 (Reuters) - More than a year after Morgan Stanley (MS.N) signed a joint venture deal with a Chinese securities firm, the bank and China’s regulators are in a stalemate.

While joint venture deals in China take a long time to finalise, this situation is different.

Morgan Stanley wants confirmation that the government will approve the license needed for its link-up with China Fortune Securities before the New York bank sells a stake in its existing Chinese banking partner.

According to sources close to the matter, Chinese authorities insist Morgan Stanley first sells the stake in that existing partner, China International Capital Corp, before they grant confirmation of a license for the Fortune joint venture.

The biggest hurdle to sorting out the issue is reluctance on either side to give in, according to people close to the matter. Sources interviewed for the article did not want to be identified because of the political sensitivities involved.

Morgan Stanley and the China Securities Regulatory Commission declined to comment for this article.

There is no sign that Morgan Stanley plans to abandon its agreement with Fortune. In fact, there is no expiration date with the agreement, a source close to the matter says, adding that the two banks have been cooperating since the December 2007 deal.

But, if China stands tough and the Chinese market keeps getting battered, Morgan Stanley will face some tough choices.

What the bank doesn’t want is to sell out of CICC and have its Fortune license linger, leaving it without any Chinese securities and investment banking partnership for an extended period of time. Morgan Stanley does have licenses with other Chinese entities relating to other parts of its business.

One obstacle Morgan Stanley is grappling with is trying to sell in the current climate. As an investment bank, it doesn’t want to shed its CICC stake for less than it thinks it’s worth.

Morgan Stanley paid just $37 million for its 34.3 percent piece of CICC when the Chinese bank was founded 13 years ago. CICC is now the country’s largest investment bank.

In March, Morgan Stanley failed to sell the stake due to price and disagreements with regulators, unnamed sources close to the deal told Reuters. It reportedly sought more than $1 billion. The sources were not authorised to discuss the deal publicly.

Putting a price now on the unlisted CICC is difficult in such a volatile market. One thing is for sure, however. Like any investment bank, it’s dropped in value in the last six months.

CICC has secured a leading market share of big China and Hong Kong IPOs in the past few years. But, while Morgan Stanley has profited from its role as the second-largest shareholder of CICC, it lacks management control of the entity.

Beijing currently bars foreign firms from having more than one investment banking venture and limits their holdings to one-third.

By partnering Fortune, Morgan Stanley would be able to exercise more control and appoint key positions in the new venture. That’s why it wants to move ahead with the venture.

“What Morgan Stanley needs in China is controlling power in its JV, not just short-term profit,” said Tian Liang, analyst at Ping An Securities Co.

“I think Morgan Stanley will eventually sell its CICC stake and focus on its China Fortune JV. It’s just a matter of time.”

Another party that may want the government to move quickly with a license is China Fortune. Small to mid-sized banks in China, like elsewhere, face stiff headwinds from a slowing economy. The bank likely wants a partner now, not later when things could get worse.

Last December, Morgan Stanley said China’s new sovereign wealth fund, China Investment Corp, agreed to pay $5 billion to the bank for equity units that will give it a 9.9 percent stake.

Shares of the bank have dropped 75 percent since the deal.


Like any seller that isn’t desperate, Morgan Stanley is likely to see where the first quarter goes before it makes a move. The bank, which nearly collapsed in the autumn, has had plenty to worry about beyond its China situation.

With Morgan Stanley in a waiting game for a license, Credit Suisse CSGN.VX has moved quickly to get its own China joint venture up and running. The Swiss bank reached an agreement in January with Founder Group, a Chinese securities firm, and is expected to launch soon.

What Western banks really want with these Fortune-style JVs is the ability to underwrite securities for China’s A-share market — a market that until earlier this year was booming.

Now is a tough time to enter. But few would argue with the premise that entering at this stage puts a Western shop in place when the stock market goes up again.

Morgan Stanley hopes to be there when it does. (Additional reporting by George Chen; Editing by Ian Geoghegan)

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