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Investment Banking
Chinese investment banks face new headwinds
Slowing domestic bond markets have hit fee revenues for mainland groups
16 hours ago
by Laura Noonan and Don Weinland in Hong Kong and Gabriel Wildau in Shanghai
Booming debt markets and extravagant trading fees made China’s investment banks the envy of many global rivals for the last few years.
Not any more.
Revenues from China’s onshore bond market this year are down at half their 2016 level, partly because of government policies to discourage a dangerous build up in debt.
As a consequence, Chinese banks are losing ground on the global stage, according to a Financial Times analysis covering more than 60 institutions ranging from market leaders Bank of China, Citic Securities and Haitong to smaller ones like Dragon Securities and Hengtai Securities.
After more than trebling from 2013 to 2016, Chinese banks’ share of the world’s investment banking spending fell sharply in the first nine months of 2017, fee data from Dealogic show.
At the same time, the lucrative brokerage fees powering the Chinese banks’ sales and trading business — the industry’s single largest revenue source — have plummeted after deregulation led to brutal competition and falling fees.
Trading revenues for 33 mainland listed investment banks were 27 per cent lower in the first half of 2017 than a year earlier, according to the latest data from Wind Information compiled from exchange filings.
This kind of scenario that would prompt soul-searching and restructuring plans at western banks, where global prestige is highly-valued and sharp falls in business areas prompt alarm among shareholders and management alike.
But China’s bank executives tend to place more emphasis on how they are performing in their local markets than they do on global league tables. And by that measure they are doing better.
In China’s onshore bond market, they still take 95 per cent of the fees, up a touch from previous years, and in Chinese onshore equity capital markets, Chinese banks’ share rose slightly in the first nine months of 2017.
“Chinese investment banks don’t care about their league tables globally,” says one Hong Kong-based banker who has held senior roles in two of China’s biggest investment banks. “They will not play outside the region in any significant way.”
Chinese bankers are also more sanguine about short-term revenue drops and predict that the onshore bond market will ultimately rebound to its more lucrative past, when yields were lower and companies had more incentive to issue debt.
“I believe that bond yields in the onshore market have probably peaked,” wrote Chen Long, analyst at Gavekal-Dragonomics, a Beijing-based research company. “The financial tightening that drove yields up in the first half is also probably ending as the [macroeconomic] data become weaker.”
In Shanghai, where the big Chinese banks’ power centres are concentrated, and Hong Kong, where their offshore businesses are based, bankers talk of expansion rather than cutbacks.
Chinese brokerages need to carefully consider their entry points for foreign expansion. Europe and America already have a large batch of top-grade brokerages and investment banks. There’s no shortage
Shanghai-based professional services executive
“A focus area for Chinese securities companies is establishing an effective foreign fundraising platform,” says Zhang Jingwei, financial analyst at Northeast Securities in Shanghai. He predicts that mainland groups will then seek to grow their share of Chinese firms’ offshore fundraising.
“They’ve also pushed into asset management — either helping foreign clients invest on the mainland or helping domestic clients abroad,” adds Mr Jingwei. “This is the focus of their future development.”
A debt syndicate director at a Chinese bank based in Hong Kong says his firm is hiring locally and has just set up a debt syndicate desk in Singapore. “Most banks have been expanding in the first half of the year in this area,” he says, adding that his firm has hired “a few associate directors that once worked at global banks”.
Some Chinese banks have begun pushing into international markets to follow their corporate and private banking clients and are targeting both Chinese and foreign business in some Asian markets.
A spokesperson for Citic, the largest Chinese investment bank by revenues, says the 68 countries covered by China’s “One Belt One Road” investment strategy “clearly present great opportunity”.
Citic pursues European and US opportunities through CLSA, the brokerage it bought from France’s Crédit Agricole in 2013. CLSA pulled out of the US equities market in February because of challenging conditions, but it is preparing to rebuild.
“The US is a market [we are] considering beyond the current CLSA offering of Asian equity sales and trading,” the Citic spokesperson said. The group “is looking at what licences are needed to expand its business in the US.
In Europe, CLSA is “looking at opportunities” in commercial real estate.
The Chinese banks have had some early success abroad, including Citic/CLSA’s role as joint global co-ordinator for a US dollar bond issued by Indonesia’s MedcoEnergi.
But competitors and even some executives say there are limits to how far the Chinese banks can go internationally, despite their massive scale — they already include the world’s top four lenders by assets.
“Chinese brokerages need to carefully consider their entry points for foreign expansion,” says a Shanghai-based professional services executive who works with Chinese investment banks. “Europe and America already have a large batch of top-grade brokerages and investment banks. There’s no shortage.”
One Hong Kong based executive freely admits that his Chinese bank “can’t be global”. “We cannot compete anywhere except for Asia. And even in Asia we are quite limited.”
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