Great leaps forward

China completed its takeover of the Asian capital markets in 2016 – at least in terms of numbers. Combining debt and equity in all currencies, nine of the region’s top 10 underwriters are Chinese. Where four global banks ranked among the top 10 in 2015, only HSBC – arguably the most Chinese of the global banks – managed that in 2016, ranking ninth on the Thomson Reuters league table.

The step change in 2016 has come from the growth in outbound investment from China, sluggish deal flow elsewhere in Asia and the continued growth of China’s local capital markets.

“The rise of the Chinese banks is a trend that has been discussed for quite a number of years, although I think that there is a marked difference this year compared with the last,” said Alan Roch, head of Asia debt syndicate at Australia & New Zealand Banking Group.

“Most of the pipeline in Asia has been overwhelmingly in China in the past year, which plays into the strengths of the Chinese banks because of their relationships in the mainland. I think this is a trend that is likely to continue.”

Samson Lee, head of debt capital markets at Bank of China International, argues local arrangers have benefited as their onshore clients have expanded.

“I think it’s primarily due to a change in the market landscape. In the last few years, the amount of international DCM business from China as a proportion of overall Asia revenue has grown significantly,” he said.

“At the same time, whereas previously most of the issuers were central SOEs, which may have favoured the foreign banks, we’ve seen more private corporate and domestic SOEs lately coming to market.”

Rethinking ECM

In equity underwriting, mainland brokerages Haitong Securities, China Securities and Guotai Junan Securities now rank among the top 10, displacing bulge-bracket banks such as Goldman Sachs and UBS.

“A lot of our peers were previously concerned about the Chinese banks establishing a foothold in the debt capital markets but what we’ve actually seen is more Chinese brokers entering the equity market as a result of business in Hong Kong,” said an ECM banker at a major international bank.

Whereas, previously, global investment banks benefited from a steady stream of listings from some of China’s major state-owned enterprises, the number of new offerings from this sector has gradually started to dry up, and the ones that do look overseas are now looking to reward mainland relationship banks with IPO roles.

This trend has coincided with a steady decline in the role played by global institutional investors in the Hong Kong capital markets with the influence of friends and family corporate investors from the mainland rising

“The problem lately for the western banks is that the foreign institutional investors have lost interest in the Hong Kong IPO market,” said Henry Shi, head of corporate finance at Haitong International, currently the top arranger of Hong Kong IPOs in 2016. “The reason the Chinese banks are top of the league tables is their connection to investors, particularly the Chinese corporates.”

“Most of the Chinese banks, including Haitong International, also provide financial support to the subscribers for an IPO. Some of the western banks do provide this also but it’s usually from their private banking arm rather than their investment banking division.”

The importance of mainland relationships has also inflated the number of bookrunners on recent deals. For instance, Postal Savings Bank of China appointed 26 bookrunners for its US$7.4bn IPO in September, even though it sold 77% of the shares to six cornerstone investors.

“Bookrunner roles perhaps don’t mean as much as they used to,” said an ECM banker. “It’s obviously great for league table roles but it’s usually only the joint global coordinators and sponsors that get paid on any deal.”

DCM down

A similar trend is playing out in the debt capital markets, where Asian issuers traditionally needed to appeal to US and European fund managers in order to sell international bonds. The outflow of Chinese money means that many mainland companies can now issue dollar debt without the help of global underwriters.

“The immediate repercussion is that they have changed the landscape for fees,” said ANZ’s Roch. “They are willing to work for lower fees in order to build market share offshore, which is obviously attractive from an issuer’s perspective.”

Western bankers argue that clients still value their research, distribution and secondary market capabilities, but acknowledge these factors are a secondary consideration for a number of Chinese issuers.

“There is a lot of dollar liquidity in China and the Chinese banks are willing to buy US$100m of debt on the condition that they are given a bookrunner title,” said one banker. “Although western banks remain competitive, it does cause problems.”

Chinese bankers argue they are competing on more than just fees and balance sheet.

“In the immediate term, fees will continue to be an important factor. But most experienced issuers view the quality of service as the most important determining factor,” said Lee at BOCI.

“In the past, there was a feeling among some issuers that they had to hire foreign banks for distribution but that’s no longer the case. To take BOCI as an example, we have hired a number of experienced fixed income bankers and have high quality distribution capabilities to Asian and international investors.”

Haitong International also has ambitions far beyond Hong Kong and China.

“As far as the first tier of Chinese investment banks is concerned, we have a very different strategy to some of the smaller brokerage firms,” said Shi. “We are attempting to strengthen our research and distribution capabilities globally.”

“For Haitong International, we now have research and sales distribution in London, New York, Tokyo, Singapore, Hong Kong and very soon Mumbai. It will take time to build up our expertise in this field but we are making progress towards our goal of becoming a globally relevant investment bank.”

Hiring and firing

The increasing competition from Chinese banks and brokers has prompted a number of investment banks to reconsider their position in Asia and, in some cases, downsize.

Cuts at Goldman Sachs suggest the US investment bank does not expect its share of the Asian fee pool to rebound significantly. UBS, which has fallen from second to 12^th in the ECM league tables for Asia Pacific ex-Japan, has replaced its regional management and shifted more resources to M&A and sector coverage. Three senior debt bankers also left in November.

Bank of America Merrill Lynch has also scaled back in some areas, while European lenders Barclays, Deutsche Bank and RBS have made more dramatic cuts.

“The bulge bracket banks aren’t doing as much recruitment as they used to as deal volume and revenue are both down,” said John Mullally, director for Hong Kong and Shenzhen financial services at recruitment firm Robert Walters.

“It’s likely that we will see more banks exiting some lines of business. If they don’t have a decent enough share of the market, it’s becoming increasingly difficult to justify maintaining a presence in certain business areas.”

Chinese banks, however, have shown little interest in poaching talent from their western rivals.

“I can’t think of a single western banker who’s moved to a Chinese bank in the last year,” said a Hong Kong-based headhunter who specialises in senior placements.

“Chinese financial institutions have not hired more than a handful of westerners in the past 10 years and generally speaking, the reason the number is small is, to be frank, a lot of the western bankers have found them difficult places to operate due to cultural and language barriers.”

Strategic shift

For the international banks, the rise of Chinese banks and securities firms and the erosion of investment banking fees – particularly on the equity capital markets side – is particularly worrying.

“It’s certainly a lot tougher for international banks, especially when you consider the various rules and regulations coming out of local regulations and Basel III, for example, along with the costs and returns involved in deploying a firm’s capital,” said Marshall Nicholson, head of equity capital markets for Asia ex-Japan at Nomura.

“I don’t think the theme of being everything to everyone applies anymore,” he added. “When you look beyond your local markets, international or regional banks must deliver specialisation, value added advisory and sales distribution to become valuable to clients. Local players at the same time are developing similar services from a domestic base.”

Several western banks have established brokerage joint ventures in the mainland in search of business in the fast-growing onshore market.

The vast renminbi bond market is proving especially attractive as capital borders come down and more overseas issuers and investors look to increase their presence. S&P estimates that out of US$25.5trn in outstanding corporate debt in Asia, China’s corporate debt market accounts for around US$16.1trn.

So far, however, strict limitations on ownership and management have proven a challenge, and these joint ventures have yet to rival local securities firms in terms of profitability.

Given the disproportionate role Greater China plays in both the equity and debt capital markets, few market participants expect Chinese competition to retreat any time soon. That presents some global arrangers with a conundrum: continue to offer a full range of services in Asia, at the risk of losing money, or refocus on a more profitable niche, at the risk of alienating global clients.

One source admitted his bank saw it as vital to maintain a presence in Asia even if this does not immediately translate to revenue, or if that revenue is booked elsewhere.

SoftBank’s recent US$6.6bn Alibaba exchangeable bond, for example, involved a Japanese seller, an underlying Chinese issuer, and was mostly bought by European and US institutional investors. None of the lead managers were Chinese.