Markets

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

China typically doesn't do things by halves and that attitude extends to its debt capital markets. Not everyone is going to be happy, though.

JPMorgan Chase & Co. said on Monday that it has won approval, alongside BNP Paribas SA, to underwrite bonds in China's interbank market, where about 90 percent of securities are issued. It's another step in the nation's economic opening, coming about six months after foreign banks were permitted to trade debt in the same venue.

For Beijing, it's a good get. The New York-based bank has topped the investment grade bond underwriting tables in the U.S. every year since 2009 and was No. 1 in high yield last year, according to data compiled by Bloomberg. BNP has ranked fourth for European bonds for the past two years and seldom fallen from the top 10. China's National Association of Financial Institutional Investors, or NAFMII, is certainly bringing in the pros.

About time, too. China's corporate bond market is already the world's second largest by issuance and could soon eclipse the U.S. The $926 billion offered onshore last year was equivalent to two-thirds of that in America and almost four times what was sold in 2010.

Catching Up
China is already the world's second largest corporate bond market, and it's growing fast
Sources: Bloomberg, SIFMA

Despite its size, market standards aren't comparable to those in the West. While China has plenty of credit-rating companies, until recently they scored pretty much everything AAA. Investors also have only started to become more discerning, demanding higher yields for similarly graded bonds with longer tenors versus shorter ones.

Curves Showing
Only after a string of defaults have corporate bonds onshore started to exhibit a clearer term structure, with higher yields for longer maturities
Source: Chinabond, Bloomberg

Authorities look to have come to the conclusion that what they need now is some serious external expertise, and naturally, hearts on Wall Street are beating slightly faster as investment bankers consider what big figures might be involved.

Bank investors, however, shouldn't get too excited. To begin with, fees for Chinese deals are notoriously low and getting any traction in the local market will probably require a significant investment that could outpace potential profit for years to come. By the time foreign institutions' domestic operations reach critical mass, Beijing may likely have leveled the playing field, letting everyone else in too and partly eroding any first-mover advantage.

Doing business in China is also all about relationships. Local banks have been lending to local companies for hundreds of years. Breaking that comfortable bond will require a lot of effort, and JPMorgan might want to be twice as careful considering it last year paid about $260 million to settle allegations it hired children of China's rich and powerful to win mandates.

That the biggest U.S. bank is about to get more active onshore in China is great news ... for China. For JPMorgan shareholders, not so much.

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

To contact the author of this story:
Christopher Langner in Singapore at clangner@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net