"On Friday, Chinese regulators confirmed that J.P. Morgan Chase & Co. (NYSE: JPM - News) and Morgan Stanley (NYSE: MS - News) have both been given the green light to set up shop in China's domestic securities market.
Like other investment banks looking to enter the China market, neither can look forward to an awful lot for now. They're both restricted to 33% ownership of a joint venture with a local partner. They can underwrite stocks and bonds, but they won't have the licenses to trade those securities in the secondary market. Even UBS AG (NYSE: UBS - News), whose UBS Securities is the most active foreign underwriter in China, made a net profit in 2009 of only around 109.2 million yuan ($16.5 million), according to publicly available data.
Foreign banks in general have struggled to build meaningful businesses in China. But the rules that hold back investment banks from doing more China business are unusually strict. Commercial lenders, by contrast, can set up banks in China that they own entirely, avoiding the perennial risk that their relationship with a joint-venture partner sours. In the asset-management industry, foreign investors can own 49% of a joint venture, giving them a bigger slice of the profits. The Street may have only itself to blame."