How Morgan Stanley Makes Money in China

Last week an executive director of Morgan Stanley Huaxin Securities gave a lecture in our university and I learned a lot about how Morgan Stanley makes money in China.

Morgan Stanley is one of the two oligopolies in investment banking, with its rival Goldman Sachs. They are worth $60bn each, which equals to top 10 securities in China combined. Morgan Stanley opened a joint venture with a Chinese local securities company Huaxin and established Morgan Stanley Huaxin Securities in 2008.

It has diversified business including stocks, bonds and financial consultancy.
1) Stock (equity): underwriting and sponsorship.
2) Bond (fixed income): issuing underwriting, sales transaction, investment analysis, etc.
3) Financial consultancy: M&A, asset management.

MS’s main business in China is still “brokerage business”, which means commission fees. Next to commission fees is so-called “self-operated business” such as asset management and investment banking. Asset management becomes increasingly important. In the global market, MS’s asset management takes 30-50% of its revenue. However, in the Chinese market, it only comprises 15%. It will reach the same level as the global market in a short period of time.

Though MS is an investment bank, investment banking only takes 10-15% and is continuously shrinking. I-banking is regarded as a minor business in MS, for it doesn’t generate significant profit. It is solely for branding by making big deals and promoting some famous company listing. IPO environment is getting increasingly harsh in China. During the past 15 years, IPO has ceased 9 times due to the regulation of the government and financial shenanigans. The IPO queuing is increasingly long, which has 200 companies waiting to be examined. The bankers call it “IPO stuffed lake”. And the passing rate reduced from 90% to 50%. IPO market value is calculated by 23 times P/E ratio.

Currently, MS focuses on refinancing and financial consultancy. Mergers and acquisitions (M&A) are quite hot in recent years. M&A includes industrial integration, cross-industrial and cross-border M&A.
There are big problems facing i-banks. The biggest one is the financial crisis. Three of the Big 5 i-banks ten years ago only left 2 after 2008. And 10 big i-banks in China a decade ago all disappeared. The pressure on bankers is huge. As a banker of MS said, the competition in the i-banking industry is not comparing who lives better but who lives longer.

Most of i-banks have 5-stage hierarchy: analyst (AN), associate (AS), vice president (VP), executive director (ED), managing director (MD). From junior analysts to senior VP and MD, they all have to work 80 to 100 hours per week. The hourly wage of a junior in MS is actually no higher than average employees outside the i-bank.

The future business of MS in China are mainly four aspects:
1) Non-brokerage business, such as financial product, financial consultancy, asset management and cross-border M&A.
2) Joining Chinese Depository Receipt (CDR). A typical CDR is Shanghai-London Stock Connect.
3) Developing proactive asset management.
4) Financial technology (Fintech).

The bottom line:
The financial industry is not as good as we think of. If you cannot take the pressure, don’t enter it. Though the financial industry is well-paid, making a vast fortune is usually not from finance. Do something you enjoy.