Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

Hong Kong's IPO market has increasingly become a playground for Chinese banks. But as their role expands, they'd do well to keep half an eye on a regulatory probe that's ensnared two Western counterparts.

UBS Group AG and Standard Chartered Plc are being investigated by Hong Kong's Securities and Futures Commission over their role as joint sponsors in China Forestry Holdings Co.'s 2009 initial share sale, the Financial Times reports. Both banks have acknowledged being under investigation but haven't specified for what deal.

China Forestry, now in liquidation, was suspended from trading two years after its listing because of accounting irregularities. Having been the sponsors, or lead banks responsible for the overall management of the IPO and its documents, UBS and StanChart aren't only susceptible to as-yet-unknown fines, but the individual bankers who worked on the deal could be criminally liable.

For Western financial institutions, it's the latest blow after having weathered a rocky few years during which investment-banking revenue from the region has dropped.

Helping mainland Chinese companies go public in Hong Kong has traditionally been a large part of a bank's equity capital markets business. The city ranked as the world's top IPO market until a few years ago and still plays host to some huge transactions, including the $7.4 billion offering in September of Postal Savings Bank of China Co., the biggest globally since Alibaba Group Holding Ltd.'s record 2014 float.

But IPO fees are shrinking and Chinese banks, willing to work on the cheap, have been eating into Western banks' dominance.

The once unusual system of locking up a significant portion of a float by pre-sales to cornerstone investors -- typically large state-owned enterprises -- has also worked in Chinese banks' favor, thinning liquidity and handing well-connected financial institutions in Beijing and Shanghai deals that may otherwise have gone elsewhere.

Not a Pretty Picture
Banks in the Asia-Pacific region have seen investment banking revenue slide as the key businesses of underwriting shares and IPOs slumps
Source: Coalition
Notes: Data tracks the top 12 investment banks globally, Bank of America, Barclays, BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan, Morgan Stanley, Societe Generale and UBS.

Western lenders have also become increasingly nervous about getting IPO mandates through mates of mates. Ever since the U.S. Department of Justice and the U.S. Securities and Exchange Commission began looking into inappropriate hiring practices -- like charges against JPMorgan Chase & Co. of hiring princelings to win contracts -- the guard has gone up.

The rise of Chinese banks has been swift. Last year, Haitong Securities Co. ranked 17th in terms of Hong Kong IPO market share; this year it's No. 1. In fact, of the top 10 managers in 2016, eight are from China.

The Times They Are a Changin'
Of Hong Kong's top 10 IPO managers this year, eight are Chinese
Source: Bloomberg

It's not as if Chinese banks are immune from being wrapped up in the odd troubled new listing themselves. In May 2014, Hong Kong's Securities and Futures Commission fined ICBC International Capital Ltd. and ICBC International Securities Ltd. in connection with their role in the 2009 IPO of Shanghai-based Powerlong Real Estate Holdings Ltd.

As regulators start combing through past deals, they're bound to find other examples of impropriety that snares financial institutions from both sides of the globe. Given their bigger role, it's probably only a matter of time before Chinese banks begin to feel the heat too.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Nisha Gopalan in Hong Kong at

To contact the editor responsible for this story:
Katrina Nicholas at