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The odd story of Morgan Stanley’s involvement in China International Capital Corp is approaching its final chapter. Following Monday’s confirmation by the China Securities Regulatory Commission that it had approved Morgan Stanley’s plan to sell out of the domestic investment bank, the US house will finally be able to do two things: realise a colossal windfall on an investment, and get on with building a domestic investment banking joint venture it can control.

What to make of CICC? On one hand it has been a triumphant venture. Launched 15 years ago, it has become a tremendously powerful institution in Chinese investment banking, consistently among the leaders in debt and equity underwriting terms, and among the top dogs from securities sales and trading to asset management, private equity and brokerage. China itself could scarcely have hoped for more from it.

From Morgan Stanley’s perspective, it can also argue the venture has been a success, but in a rather different way than it had imagined. Back in August 1995, when Morgan Stanley set up the venture with China Construction Bank and took a 34.3% share, the hope was that the US bank might eventually increase its stake, or at the least be able to steer its direction. Over the years, the reverse happened: Morgan Stanley’s influence in management faded, particularly when the then-premier Zhu Rongji’s son, Levin Zhu, took over. It has been clear for at least five years that Morgan Stanley’s stake in the business has been passive.

Viewed in that passive light, it has been a remarkable result. Morgan Stanley is understood to have put in just $37 million at the venture’s foundation, though clearly the subsequent investment in terms of resources has been considerable; it is expected to make $1 billion from its sale if, as is believed, KKR and TPG, take on about 20% of the holding and existing shareholders take the rest. That is among the greatest returns on a mainland China investment ever seen.

The problem is that it has been a millstone as much as a milestone for Morgan Stanley. It didn’t buy in for it to be a passive investment. That was never the point. Had it been able to sell out five years ago and launch a new investment bank joint venture then, there would have been no lasting damage. But one circumstance after another intervened: political and, most unfortunately, markets. The bank has been trying to sell its stake for at least three years but the efforts were derailed by the financial crisis. And it has not been permitted to launch a new investment banking joint venture while still holding its stake in CICC.

In the meantime, other houses have stolen a march in the race to set up a meaningful presence in domestic investment banking. The houses that got all the breaks, in terms of being allowed to try out new areas ahead of the rest of the field, were Goldman Sachs and UBS, and to a lesser extent CLSA; their ventures took some hammering out (the ownership structure around the various Goldman Sachs/Gao Hua businesses continue to be somewhat labyrinthine today) but they have resulted in powerful businesses, active across a range of areas of banking, in which the international partners may not have overall majority holdings but do have management control.

Many others have followed them in, but over time, the breadth of the new licences has been eroded. By the time Deutsche and Credit Suisse were licensed, they were only permitted to do debt and equity underwriting and M&A advisory, not areas such as trading and brokerage (believed to be where Goldman makes the larger part of its revenue) or private banking. Morgan Stanley, which is certainly not stupid, has had the groundwork in place for its own venture for years: China Fortune Securities is likely to launch its venture with the US bank pretty much as soon as the CICC stake is sold. Morgan Stanley is expected to have about one third of the stake in the venture, but greater management control. But it isn’t yet clear if this venture will be given the opportunity to go into the areas Goldman and UBS already have. And even if it does, as a new venture it will need to start from a much lower base to establish its reputation in local terms.

Set against that is the intellectual and reputational capital Morgan Stanley must have gleaned from its time in CICC, even if in recent years it had little involvement in its day-to-day activities. The Chinese state has long memories about its relations with foreign partners, and when Morgan Stanley does leave CICC it can point to its association as having helped to build a best-in-class, international standard Chinese investment bank. That won’t be forgotten. It just would have been better for everyone if all this had happened five years ago.

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