China Opening Bank Industry as Bond Tables Show Dominance

  • UBS 29th, Citigroup 38th in managing onshore yuan note sales
  • ‘They’ve done a very good job of marginalizing foreigners:’ EY

China is increasing access to its banking industry from a position of strength, judging from the dominance of its banks in bond league tables.

UBS Group AG’s joint venture was the top foreign underwriter in onshore yuan notes in 2016, ranking 29th, with Citigroup Inc.’s venture at 38th, Deutsche Bank AG’s at 39th, Morgan Stanley’s at 41st and JPMorgan Chase & Co.’s at 46th. The five firms’ share totaled 2.3 percent in a market where sales rose 9 percent to 9.2 trillion yuan ($1.3 trillion). That came as Chinese banks rise up the tables in managing Asian dollar bond sales, amid a retreat from peripheral activities by global firms seeking to meet tighter capital rules.

Access to the world’s most-populous market looks set to become a flashpoint in 2017 with President-elect Donald Trump tweeting on Monday that trade with China is “totally one-sided.” While policy makers in Beijing ended last year with a vow to open the finance industry to foreign investment, they have waited until state-supported lenders are strong enough to maintain their dominance.

"The Chinese financial services markets will not be easy to penetrate,” said Roy Smith, professor of finance at New York University’s Stern School of Business. “Chinese connections, relationships, etc. will be hard to replace, plus there may be a resistance to using foreign banks except where they are expected to have a role, and even then growing capabilities of Chinese banks will enable them to increase market share.”

Foreign investment banks are limited to managing bond sales through minority-held joint ventures that have struggled to win licenses to lead underwrite notes regulated by the central bank, which oversaw 53 percent of corporate offerings last year. Only two commercial banks have gotten licenses to co-underwrite such securities.

The finance ministry said in November the 49 percent ownership limit will gradually be raised. The central bank, which is opening the interbank bond market to foreign investors, hasn’t replied to questions via fax on a schedule for such deregulation.

“Foreign brokers or banks have been restricted in so many ways from fully participating in the domestic markets whether in bonds or equities,” said Fraser Howie, the co-author of ‘Red Capitalism’ who has two decades of experience in China’s financial markets. “Market access is the real question which Trump should be focused on, not manufacturing jobs.”

Industrial & Commercial Bank of China Ltd. was the No. 1 manager last year of onshore bonds in the local currency, arranging 606 billion yuan of bonds, 10 times more than the 58 billion yuan by UBS Securities Co., the Swiss bank’s 24.99-percent owned venture. ICBC, UBS, Deutsche Bank and the Chinese ventures of Morgan Stanley and JPMorgan declined to comment. Citi’s local unit hasn’t responded to e-mailed questions.

Domestic Dominance

“They have done a very good job of marginalizing the foreigners,” said Keith Pogson, managing partner at Ernst & Young in Hong Kong. “It used to be regulation that was the dividing line in the phony war with foreign firms. But that war has been won. Domestic players are now dominant in balance sheets, distribution and origination. So China can afford to let the defeated sit at the table and eat a few scraps.”

In the $18.3 billion market for Panda bonds, onshore yuan note sales by foreign issuers, Goldman Sachs Group Inc.’s joint venture ranked No. 9 and HSBC at 11th. In IPO rankings, Citi’s venture at 21st was the best foreign manager.

While China sees the yuan as a global reserve currency, dollar, yen and euro bond tables all look more international. More than half the underwriters in the top 50 for greenback note issuance were non-U.S., including four Chinese firms. Morgan Stanley was the top-ranked yen debt underwriter in a top 20 that includes 11 foreign banks, and five U.S. banks make the top 20 for euro bonds.

JPMorgan said in a Dec. 16 filing it will sell its one-third stake in its Chinese securities joint venture. Australia & New Zealand Banking Corp. has agreed to offload its 20 percent stake in Shanghai Rural Commercial Bank Co., seeking to use its capital more efficiently.

“In the short term, I am not optimistic about the opening up of China’s capital market,” said Zhu Ning, deputy director of the National Institute of Financial Research at Tsinghua University in Beijing. “Chinese regulators are focusing more on preventing systemic risks.”

— With assistance by Judy Chen, Denise Wee, and Cathy Chan

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