If at first you don't succeed, try and try again. That is the truism that both JPMorgan Fleming and the Shanghai municipal government have taken to heart. Just four months after the final, ugly demise of talks between JPMorgan Fleming Asset Management and Shanghai-based Huaan Fund Management to form a joint venture in funds management, JPMorgan has bounced back with Huaan's main shareholder, Shanghai International Trust and Investment Corporation (Sitico) to announce the creation of a fund management JV.

Sitico is the financing and investment arm of the municipal government and is 60% owned by Shanghai International Group.

Through JPMorgan Fleming AM's UK branch, the firm will take a 33% stake in the new company, the maximum now permitted by Chinese regulators. The agreement automatically lets them raise that position to 49% once that is allowed, expected at the close of 2004, as stipulated by China's agreement with the World Trade Organization. The firm will launch with Rmb150 million ($18.2 million) in paid-in capital.

It is a startling reversal for two sides that had maintained good working relationships, but had seen talks over Huaan end in public acrimony. Observers credit David Hsu, head of JF Asset Management in Asia, for convincing senior executives at the parent (read: New York) to reconsider a deal in China, with an assist from Clive Brown, head of JPMorgan Fleming's international business in London and a former JF Asset hand in Hong Kong.

These officials say the firm has always been committed to doing a fund management deal in China, but there was a point late last year when JF Asset Management's new masters in New York, following JPMorgan Chase's acquisition, had soured on the idea, say insiders.

This is a victory for the firm's Asia-level executives, however, who have worked with Sitico in various ways since JF Asset Management (pre-JPMorgan Chase) first explored a fund management JV two years ago, and believe it to be crucial to maintaining a leading presence in North Asia.

It is also a victory for Sitico and the Shanghai municipal government, which saw the JPMorgan-Huaan deal as its way of establishing the city as China's premier centre for fund management - a goal shared by many in the central government in Beijing. High fliers such as the city's then-mayor Chen Liangyu, who has risen to become Shanghai's Communist Party secretary, had praised the Huaan deal. Huaan and JPMorgan had been the first to declare their intention to form a joint venture, and with JPMorgan's help, Huaan had been the first domestic player to launch an open-ended mutual fund.

That deal broke down, however, partly because the multiple shareholders in Huaan failed to agree on terms. The strategy by both JPMorgan and Huaan management had been to force the other shareholders (including Shenyin & Wanguo Securities, Shandong Securities, Orient Securities and Zhejiang Securities) to sell stakes to JPMorgan. Meanwhile the New York side distrusted the rather more adventurous culture it had inherited with JF Asset Management.

But the working level relationships between JPMorgan in Asia and both Huaan and Sitico, which owns 30% of Huaan, remained good. The Chinese side recognized JPMorgan's help with Huaan and the commitment of the JF side to make a deal work, and the foreigners saw the willingness (whether derived from commercial or political pressure) at Sitico to revive it.

William Fu, executive vice president at Sitico in Shanghai, says, "JPMorgan spent two years in negotiations with Huaan to set up a joint venture, and it lent strong technological support to China's first open-ended mutual fund. The JV talks failed for a number of reasons. There are a lot of shareholders in Huaan and they couldn't reach a common viewpoint in pricing or the management structure.

"As the biggest shareholder, we saw it would be beneficial to continue cooperating with JPMorgan to develop the fund management business. It took three or four months to reach an agreement. Our talks were very rapid because both sides knew each other very well."

He adds under CSRC rules, no institution may control more than one fund management company, and own no more than two. Therefore Sitico will start negotiating with Huaan's other shareholders to sell part of its stake. Huaan will remain an important investment, and Fu envisages Sitico becoming its second or third-largest shareholder.

Clive Brown says negotiations with Sitico began around Christmas, when Sitico asked JPMorgan to consider a greenfield JV. The two sides signed the documentation on April 15 and filed the application with the China Securities Regulatory Commission on the 28th. Executives say the deal would have been finalised even earlier had it not been for the outbreak of the SARS virus.

David Hsu says JPMorgan will provide the president and technology support, while Sitico will fill the chairman's role. Initially JPMorgan claims two seats on the JV's board, Sitico three, and four for independent directors. When JPMorgan can raise its stake, it will get an additional board seat. He adds JPMorgan has yet to determine which of its staff will be seconded to the JV.

Once the JV gets the CSRC's blessing, it can start looking at product launches. Executives are vague on what they will concentrate on, although they say they want to provide equity open-ended mutual funds. Although the JV will market to institutional investors nationwide, it will concentrate its retail efforts on Shanghai.