Wall Street banks, struggling with years of declining revenue from Asia, will be hoping two market-opening measures by China at the weekend finally spell a return to boom times. They're likely to be disappointed.
HSBC Holdings Plc's achievement in becoming the first foreign bank to control a mainland securities joint venture, coupled with the launch of China's bond-connect program with Hong Kong -- both announced as the city celebrated the 20th anniversary of its return to Chinese sovereignty -- ostensibly promise a much-needed boost to business.
Here's why that won't happen. First, it's true that HSBC's majority stake in its Chinese brokerage will allow the London-based (though Hong Kong-founded) bank to take the lion's share of profits when it underwrites equity and debt offerings, advises on deals and (the biggest windfall of all) trades domestic bonds and shares.
Its 51 percent holding in a venture with Qianhai Financial Holdings Co. will be envied by rivals. JPMorgan Chase & Co.'s frustration with its minority status in a partnership with China's First Capital Securities Co. prompted the New York-based bank to pull out after six years. For all their global heft, Goldman Sachs Group Inc. and UBS Group AG, perhaps the most successful overseas investment banks in China, haven't managed to gain control on paper of their ventures.
But as in every alliance, the key lies not just in having a say, but in picking the right partner. Look at any list of the top Chinese investment banks, dominated by firms such as Citic Securities Co. and Haitong Securities Co., and you won't find Qianhai Financial there. While the HSBC brand could win some wealth management clients, the lender hasn't made any significant inroads in Chinese investment banking.
Next, bonds. Issuance in Asia's once-fledgling bond market has reached records this year, thanks to surging Chinese sales of U.S. dollar notes.
Bond Connect will make yuan-denominated domestic debt, which has generally been shunned in favor of Chinese dollar notes, more alluring. The program essentially gives foreign investors easier access to one of the world's biggest bond markets, since buyers via Hong Kong won't need an onshore license.
That will certainly lead to bigger inflows and increase the 1.78 percent of Chinese debentures currently in foreign hands. But worries about rising defaults and difficulties in getting money out of China will continue to hamper demand.
A deeper problem is an issue that dogs Wall Street throughout Asia: competition from cheaper local banks for IPO and bond business. One edge Western banks do tend to have is their greater sophistication.
Securitization remains relatively rare in Asian bond markets despite the boom in issuance. The process of packaging assets into tradeable securities has helped Western banks globally reap gains from FICC (fixed-income, currencies and commodities) trading -- making it the biggest chunk of their investment banking businesses. That's why, even as banks' first-quarter global revenues rose from a year earlier, Asian fees kept falling.
Revenue of the top 12 Western investment banks in the Asia-Pacific region dropped to $6.7 billion in the January-March period, from $6.9 billion a year earlier and $8.9 billion in the first quarter of 2015, according to data provider Coalition.
Headcount reductions have resulted at the regional operations of institutions including Goldman Sachs, Barclays Plc and Standard Chartered Plc. Western banks in the region cut jobs by 7 percent in the first quarter, compared with just 2 percent in the U.S., according to Amrit Shahani, research director at Coalition.
China should be praised for opening its markets further. But for overseas investment banks, the changes may be coming too late. Local brokerages have built up unassailable heft, while M&A remains hampered by capital controls and Chinese banks in Hong Kong appear to be winning the contest for initial public offerings. Western banks' expertise in arranging complex deals is one bright spot that will yield advantages as fixed-income markets become more sophisticated, though probably not enough to change the equation.
Wall Street may need to get used to being on the retreat.
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