Sands are shifting for Chinese IBs in Asia ECM
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Sands are shifting for Chinese IBs in Asia ECM

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China’s investment banks have leapt up the rankings in Asia ex-Japan’s equity capital market, even as some rivals beat a hasty retreat from the region, writes John Loh.

Their willingness to be aggressive on fees and a higher risk tolerance have allowed them to thrive in Asia’s ultra-competitive ECM landscape. But with the pool of mega IPOs out of China growing ever smaller, its homegrown banks are seeing the ground shift beneath their feet.

The pullback by a number of banks in North and Southeast Asia this year is by now a well-worn tale. CIMB, CLSA, Macquarie Capital and Nomura are among those that have announced cuts, alongside Standard Chartered and Goldman Sachs.

But the opposite is true for the Chinese banks in Hong Kong. Having hired talent from the bulge brackets and spent time polishing their deal-making prowess, they are in their best shape ever. 

“[Chinese banks] have come a long way in a short time,” said former investment banker-turned-consultant Philippe Espinasse. “In 2001 and 2002 they were nowhere to be seen. Except for BoC International and CICC, none of them were heavy hitters.”

But the market is different now. In 2014 Citic Securities, BoC, CICC and China Construction Bank took the 10th to 13th spots on the ECM bookrunner rankings for Asia ex-Japan ex-onshore China, with China Merchants Securities in 20th place, according to Dealogic.

Together they brought 126 deals worth $14.25bn in league table credit last year — double the $7.23bn recorded in 2013. Ex-onshore China, annual ECM volumes by Chinese issuers have nearly tripled since 2012 to $90.64bn in 2014. 

Natural advantage

In Hong Kong the Chinese banks have burnished a reputation for being shrewder than the competition, leveraging not only their deep relationships with Chinese corporates on the buy side, but also cozying up to potential issuers on the sell side.

“Chinese banks have a natural advantage when it comes to selling Chinese deals because they have the investor base and can push more aggressive pricing and valuations,” said a Hong Kong-based lawyer who has dealt with both bulge bracket and Chinese firms.

“The ECM desk of any bank lives or dies by its ability to sell a deal. Some of the bulge brackets, no matter how hard they try, just can’t sell Chinese deals to their international clients.”

The lawyer cited an instance where a bulge bracket firm was running a major deal and realised at the last minute that it would be left long of a trade. So one of the big Chinese banks was roped in and despite coming in at the 11th hour, it managed to cover half of the transaction.

On the brink

The Chinese banks are also benefiting from the regulatory pressure piled on bulge brackets, said industry officials. High internal thresholds mean that international investment banks have more hoops to jump through, curbing their deal-making prowess, said the lawyer.

These stricter standards have led to trades being shunned at the slightest suggestion of impropriety. A source points to an incident where a foreign bank dropped out of a transaction right before the A1 was to be filed, after the chairman of the IPO candidate was linked to a bribery investigation.

The chairman was cleared of any wrongdoing but by that time the company’s advisers had to start from scratch with the prospectus. “A Chinese bank would never have reacted so drastically,” the source said.

Yet cracks are starting to show in the low-fee model the Chinese banks have carved out. As competition gets fiercer, the tried-and-tested formula of being more aggressive than the next bank on underwriting risk will prove difficult to sustain.

In the view of one headhunter, that entire model is at risk of blowing up. “The Chinese banks don’t understand how to price risk and where that security should properly trade in the long term, which is why they can afford to be cut-price,” he said.

“Because they are so prone to mispricing risk they will always be stuck chasing the low-margin deals. The bulge brackets are a million times better. How do Chinese banks decide on pricing? They put one finger in the air and see where the wind blows.”

A banker at a Chinese bank roundly disagrees, saying bulge brackets have been just as guilty of biting off more than they can chew when it comes to risk. “I would say it comes down to the banker rather than the institution when this [being too risky] happens,” he said.

One reason why Chinese banks may have performed poorly on pricing, according to the headhunter, is that they don’t employ the right people to evaluate risk, even as they sell products that are highly commoditised.

Yet because data on the market share of trading by banks in Hong Kong is not disclosed by the stock exchange, it would be unreliable to make a broad judgment on the ability of Chinese banks to execute ECM transactions, bankers say.

Tide is turning

Industry watchers reckon that Chinese banks will have to start weaning themselves off a model of competing on fees and instead bolster other parts of the business, like distributing outside their traditional client base of Chinese investors.

And although the Chinese banks have decent trading platforms for stocks, it has not translated into market share, said Espinasse. This works against them when it comes to executing block deals, which require a strong understanding — and market share — of fund flows. 

Over the longer term Chinese banks will need to find a niche, said market participants. China Renaissance, for example, has a strong TMT focus, a platform it has used to land juicy roles in the high-profile listings of and Alibaba, said the lawyer.

Expanding beyond their comfort zone in Hong Kong is another option. “Given time I don’t see why Chinese banks can’t grow in the US or anywhere Chinese firms are keen to list. They can parlay their Hong Kong IPO experience elsewhere,” said Ronny Chow, a partner at Deacons, a Hong Kong law firm.

(For a longer version of this story, go to and read Changing tide for Chinese IBs in Asia ECM.)