Wall Street Need Not Fear China's Banks. Yet
The great overseas push by China's investment banks has gone as far as locking up IPOs in Hong Kong. Beyond taking public some big names on their doorstep, they've made little headway in toppling Wall Street's Asia lead, and that's unlikely to change soon.
The major institutions, led by the likes of China Merchants Bank Co. and China International Capital Corp., have come a long way. They now dominate Hong Kong initial offerings as underwriters after decades in the shadow of UBS Group AG, Goldman Sachs Group Inc. and Morgan Stanley. In the last two years, the top five Hong Kong IPO underwriters ranked by deals were all Chinese.
That's not enough, however.
Chinese banks haven’t extended their strength in IPOs to the broader equity capital markets, which include convertible bonds, private placements and follow-on offerings. Block trades, which can be arranged overnight or within a few hours, involve fewer banks than the average Hong Kong IPO (which might take years to come to fruition), and can be big money-makers. Many Hong Kong block trades have just one or two bookrunners, compared with perhaps 20 banks for an IPO in the city.
Broaden the perspective to the whole Asia Pacific region, including China, Japan and Australia, and the only Chinese bank to make it into the top 10 as an underwriter of equities and equities-linked deals is Citic Securities Co. -- in sixth place, data compiled by Bloomberg show.
Morgan Stanley reigns in Asia Pacific equity and equity-linked trade advice, followed by Goldman Sachs. It's notable that the Chinese tech deals that created a Hong Kong IPO frenzy in 2017 -- from ZhongAn Online P&C Insurance Co. to China Literature Ltd. -- all had Western banks on the underwriting slate.
Chinese banks have also failed to stand out in advising Asian companies venturing overseas. That was the case even in a year of relatively robust Chinese offshore M&A -- robust, that is, until Beijing clamped down mid-year.
While Chinese banks are flush with deposits and are famed for lending money 1 to win merger mandates, they still lack the sophistication to navigate regulatory minefields overseas. The Committee on Foreign Investment in the U.S., a national-security regulator, is hard enough for Western banks to read -- as Citigroup Inc. found in advising Ant Financial on the failed bid for MoneyGram International Inc. A mainland bank would really have its work cut out.
Chinese investment banks are hobbled by Beijing's push-pull strategy on lending. Until last year's restrictions on funds leaving the mainland, they were encouraged to back almost any overseas acquisition. Now, they're limited to lending offshore for the handful of deals that receive Beijing's blessing.
The banks have run into trouble gauging investors' appetite for risk, and lack the institutional-investor reach to sell overnight block trades. Even if they could line up buyers for an overseas share sale, mainland money would be held back by capital controls.
Western banks, by contrast, have the kind of access to institutions that can help raise money even for embattled companies: Goldman Sachs received hundreds of millions of dollars in fees for managing Toshiba Corp.'s emergency share sale in November, with David Einhorn's Greenlight Capital and Daniel Loeb's Third Point as investors.
Chinese banks will at some point dominate Asian deals, especially as domestic companies keep growing. But if 2017 is a guide, it's far too early to call the demise of Wall Street's bulge-bracket firms in the region.
Bank of China has been the top bank for loans in Asia Pacific outside Japan for three years running.
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