For a quarter of a century, China's financial regulators have been fighting over whether to give global investment banks full access to their closely guarded markets.
The dispute still rumbles on. Only this month, a forum in Beijing heard from the vice-chair of the country's securities regulator that "our entire industry of 130 securities houses can't compete with one JPMorgan Chase".
Then just days later, the central bank issued a seemingly contradictory statement that Chinese financial institutions were "completely capable of coping with foreign competition".
At least part of the argument should be settled in 2020, when some of the world's top investment banks are expected to capitalise on a recent relaxation of the rules and take full ownership of their securities businesses in China.
Under pressure from the US to liberalise markets and on the heels of the China-US trade deal, Chinese officials said last week that from April, foreign banks could apply to take 100 per cent stakes in any joint ventures they are part of, moving the date forward from December in a rare act of regulatory acceleration.
In theory, unlocking full ownership will give overseas investment banks much broader access to China's US$21 trillion ($31.7t) capital markets.
In practice, the global banks will be up against emboldened domestic rivals who believe the onshore and overseas Chinese market should by rights be theirs. They will also be fighting for a fee pool that has shrunk significantly in the past four years as global uncertainty and the trade war have subdued activity in the market.
Across equity and debt capital markets, and mergers and acquisition advisory in China, investment bank revenues shrunk from US$7.8 billion in 2016 to US$5.9b in 2019, according to Dealogic. Overseas banks captured just 4 per cent of that, or US$266 million, last year, compared with 9 per cent, or US$728m, in 2016.
"This is such a huge opportunity, but can you get access to it?" said Todd Leland, co-president of Goldman Sachs in Asia-Pacific excluding Japan. "The reality is this is going to take a period of time: not weeks and months, but quarters and years."
The push for access in China has taken on greater urgency over the past twenty months as Beijing has dismantled various barriers to foreign access.
In April 2018, the securities regulator announced foreign investors could take majority stakes in securities joint ventures, having previously been limited to no more than 49 per cent.
That paved the way for last week's announcement that foreign companies could extend their stakes to full ownership.
UBS became the first foreign bank in China to increase its stake to 51 per cent in December 2018, taking majority control of Beijing-based UBS Securities. Nomura launched a 51 per cent-owned securities joint venture in September last year. JPMorgan did the same in December and is also pursuing several other business lines, such as a 100 per cent stake in a futures joint venture.
Morgan Stanley and Credit Suisse are still in the process of launching 51 per cent-owned joint ventures, and Goldman Sachs has applied to increase its stake in its joint-venture investment bank but has not yet been given public approval.
Increasing ownership levels to 51 per cent and higher will allow foreign banks to integrate their China revenues into their global earnings, delivering new returns to shareholders, some of whom have questioned whether their China businesses would ever pay off.
"This will take them to the next step in terms of showing improvements to investors," said Youssef Intabli, a research director at investment banking intelligence group Coalition.
"But let's not forget that there are still lots of things they can't do in China."
Initial regulatory approval is just the start of the battle to access the Chinese market: overseas banks have such a small part of the domestic market that they must focus instead on lines of business where local investment banks such as China International Capital Corporation and Citic Securities find it harder compete.
Citic Securities, in particular, dominates the Chinese investment bank league tables.
Between 2014 and 2019, a ranking of average revenues puts Deutsche Bank and UBS as the most successful overseas competitors — at number 17 for equity capital markets and number 21 for debt capital markets respectively.
M&A advisory is the sole bright spot for the foreign banks, with UBS, Goldman and Morgan Stanley all among the top six.
The domestic competition has pushed global investment banks to focus on their strengths in China.
"We're not going to compete head-on with domestic players but will focus on cross-border business," said David Chin, the head of UBS's investment bank in Asia-Pacific.
Alongside CICC, UBS sponsored Postal Savings Bank of China's US$4.7b initial public offering in Shanghai in December last year. It was also the first foreign bank to sponsor a listing on China's new tech-focused Star Market.
Some overseas banks have a long head start.
China's first overseas investment banking partnership dates back to 1995, when China Construction Bank and Morgan Stanley formed CICC. But management disputes later pushed Morgan Stanley to exit and, today, CICC is one of the largest Chinese challengers to foreign competition.
In 2004, Goldman Sachs' then chairman and chief executive Henry Paulson and Chinese financier Fang Fenglei launched an investment banking JV that stuck. Since then, the Wall Street bank has held management control over the venture, called Goldman Sachs Gao Hua, despite owning just a 33 per cent stake.
In much the same way, UBS has also had management control over its securities JV since the mid-2000s, after it bailed out the failing Beijing Securities. Both Goldman and UBS have secured a number of licences and more than a decade of experience that allows them to operate like fully formed investment banks.
Other competitors are still building up their capabilities.
One challenge for many investment banks is a shortage of skilled staff. Morgan Stanley has tried to address that problem by sending many of its top bankers to Morgan Stanley Huaxin Securities, a joint venture it launched in 2011.
"The securities joint venture leadership team are all Morgan Stanley secondees," said Wei Sun Christianson, Morgan Stanley's co-chief executive of Asia-Pacific and chief executive of China. "We've been able to focus on the core building blocks of the business, including culture, risk management and governance."
For those building new investment banks from the ground up, the process will take several years.
Japan's Nomura has been in China since the early 1980s, but won approval for a securities JV only late last year.
It plans to use the securities division to build a wealth management business that resembles how it operates in its home market, said Toshiyasu Iiyama, the head of Nomura Holdings' China committee and the executive vice-president of Nomura Securities.
"We've decided to focus on wealth management first and then expand to a wider focus later on," Iiyama said. "We will need a couple of years [to build a full investment bank]. Seems it's not going to happen this year."
Written by: Don Weinland and George Hammond
© Financial Times