“China plus one” – diversifying away from China to other countries – was the main theme in 2023 for investors and investment banks alike. Weaker than expected economic activity challenged the conventional wisdom that China would always be the key source of growth, and led to another annual decline in bond and equity issuance across Asia. The year saw fund outflows from China, and one index provider even produced a benchmark for bond investors looking to reduce their China exposure.
Chinese companies didn’t stop raising funds, accounting for 70% of investment banking revenue in Asia ex-Japan, but they did largely eschew the expensive offshore market in favour of raising low-cost funds in renminbi. While the onshore equity market saw some huge deals early in the year, Chinese regulators soon stepped in to try to support share prices by slowing the pace of primary issuance. Listings in Hong Kong slowed too, due to international investors’ pessimism about the Chinese economy.
That meant that investment banks needed to rebalance their resources away from the usual concentration on Greater China if they were to have any chance of success, as issuance volume declined in equities, bonds and offshore loans across Asia, and M&A activity slowed.
There were pockets of activity: Indian IPOs had a strong year, South Korean issuers kept the region’s G3 market afloat, and some event-driven Australian trades utilised funding from more than one asset class. Equity-linked bonds, one of the highest fee-paying products, made a welcome resurgence as issuers looked for ways to minimise their interest burden.
The burgeoning private credit market created competition for banks, but also opportunities to structure deals – most notably in India, where Goswami Infratech’s rupee issue blurred the lines between private credit and public debt.
Investment banks with a broad footprint – or those nimble enough to reallocate resources quickly – were able to limit the pain from a general slowdown in dealmaking and find new opportunities.
Chinese capital markets activity is bound to rebound in the short term, not least because US dollar rates appear to have peaked and traders are already pricing in cuts. But there are parts of the market, like high-yield bond issuance from Chinese property developers, that might never hit the old heights.
Fund managers will also be cautious about buying overseas-listed Chinese stocks, knowing that a flare-up of geopolitical tensions could cause a sell-off or even delisting. Cross-border M&A activity is likely to be muted too.
That gives banks a reason to differentiate themselves, and potentially find new sources of revenue, instead of chasing the same Chinese jumbo trades that could face any number of unexpected roadblocks or end up being onshore deals.
“China plus one” could turn out to be a good opportunity to direct international capital into different parts of the Asian market and find innovative ways to bring new kinds of deals.
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