On Friday, Morgan Stanley (MS) announced the launch of its joint venture (JV) with the Chinese securities firm China Fortune Securities Co., better known as Huaxin Securities Co. The new entity will be known as Morgan Stanley Huaxin Securities.
In China, foreign banks need to form JVs with local companies in order to enter the emerging equity and debt markets. Morgan Stanley had received the approval for the JV from the China Securities Regulatory Commission (CSRC) in January. The company has a 33% stake in the JV, the maximum allowed to any foreign company by the Chinese regulators. The registered capital of the JV will be 1.02 billion yuan ($157.5 million).
The JV will allow Morgan Stanley to underwrite bonds and stocks in the fastest growing Chinese markets.
Morgan Stanley stated that Huaxin Securities chairman Wang Wenxue would be the chairman of the JV, while Yang Kai, a managing director of Morgan Stanley, would be the chief executive officer.
According to China’s regulatory laws, a foreign company can form one JV with a local firm at a time. So, in order to form the JV with Huaxin Securities Co., Morgan Stanley exited its earlier JV with China International Capital Corp (CICC) in December 2010. The company had launched its JV with CICC in 1995.
Apart from Morgan Stanley, other U.S. companies, such as Goldman Sachs Group Inc. (GS) and UBS AG (UBS), have also formed JVs in China. Additionally, on May 30, Royal Bank of Scotland Group Plc (RBS) commenced its JV with Huaying Securities.
Furthermore, on June 2, Citigroup Inc. (C) announced that it would form a JV with a Chinese firm, Orient Securities. The company informed that the JV, which is still subject to regulatory approvals, would start its operation in 2012.
The Chinese securities market has proven to be quite lucrative in recent times. While the Chinese equity market has dominated the global initial public offerings (IPO), accounting for nearly 27% of the 2010 volume, the bond market has grown thrice since 2008 to $449 billion last year. Considering such prospects, Morgan Stanley is expected to successfully cash in the untapped Chinese securities market.
Though the current JV will not be immediately accretive to the Morgan Stanley’s financial results, there will be ample opportunities for the company to increase its revenue base in an unexploited capital market.
Currently, Morgan Stanley’s shares have a Zacks #4 Rank, which translates into a short-term 'Sell' rating. However, over the long term, we maintain our "Neutral" recommendation on the stock.
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