Almost a year and a half ago, U.S. banking giant JPMorgan Chase & Co. (NYSE:JPM) sold a relatively small stake in a relatively small securities firm doing business in China.
President Donald Trump had been elected but not yet inaugurated, yet companies and consumers alike were certain the inexperienced politician could only worsen an already-tense trade relationship with the political frenemy.
In retrospect, owners of JPM stock might be wishing the firm hadn’t been so quick to let go of that piece of China’s securities market. Not only has Trump at least set the stage for new-and-improved trade cooperation, China itself has opened its doors — metaphorically speaking — to invite foreign investors and partners in.
JPMorgan is wasting little time walking through them.
Hello (Again) China!
The company told current and prospective JPM stock holders on Monday, via an announcement, that it had applied for a license with China’s securities regulator to set up shop in that country. JPMorgan Chase will own 51% of a securities-related joint venture there — the most the nation-state will presently allow from foreign investors, up from a cap of 49%.
The new venture will be a full-service operation, too, with the company explaining it would double its investment research of Chinese companies, as well as offer investment banking services to organizations ready to raise funds.
The move comes as a bit of a surprise following November’s decision from China to open up its financial markets to overseas backers that was only called into question in April by Asia’s Securities Industry & Financial Markets Association (ASIFMA).
ASIFMA suggested the implementation of new, restrictive rules that would ultimately keep names like JPMorgan and rivals like Goldman Sachs Group Inc (NYSE:GS) and Morgan Stanley (NYSE:MS) out of the market.
ASIFMA’s arguments weren’t strong enough, but they still represent the prevailing sentiment from some slivers of the industry. Better still, China’s President Xi Jinping explained at the time the limit to foreign ownership was official raised and that he hopes to have that cap lifted altogether within three years.
JPMorgan has already said it will ultimately seek outright ownership of the venture if and when that happens. If China’s economy continues to grow, though, that financial market may be a much more competitive one at the time.
What’s at Stake?
Much like China itself, the country’s financial markets are tough to get a read on. There’s enough data in hand, however, to compel owners of JPM stock.
First and foremost, IBIS World estimates that the country’s investment banking and securities brokerage industry alone is worth $131 billion per year.
Its growth pace is a modest 2.8% as of the latest look, but that figure may have been tempered by the fact that it’s been difficult to get capital into the country in the first place, and then put it to use via public exchanges once there. The country’s commercial banking industry, meanwhile, is worth nearly $600 billion.
More important, with greater access to foreign investors against a backdrop of 2017’s GDP growth rate of 6.9%, China may be at a proverbial tipping point for an explosion of its financial industry.
It’s also a win-win, according to ASIFMA’s managing director of international policy and advocacy, Peter Matheson. Hedging the group’s efforts from just a month earlier, he explained in April:
“Let’s not think of this as some example of economic benevolence. Allowing foreign financial firms to own their businesses in China is good for US firms and the US economy, and China’s economy, too.”
Bottom Line for JPM Stock
A reason alone to buy JPM stock? No. The Western Hemisphere is still where the bulk of JPMorgan Chase’s money will be made for the foreseeable future.
On the other hand, China offers growth potential no other region can offer anytime soon, and planting a seed now is a smart move even if it takes three years (or more) to start seeing green shoots.
More than anything, it’s just something for JPMorgan stockholders to put on their radar as a long-term back-burner project, and hope it doesn’t become too much of an expensive distraction. And, hope trade relations with the United States don’t sour in the meantime.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.