Timothy Sifert
IFR Asia
THE CHINA DIVISIONS of global investment banks have endured some very senior staff turnover in the past few months. Much of the exodus is the typical aftermath of the annual bonus season, including the increasing trend of bankers following the trail of better pay from the sellside to the buyside.
Yet, whatever different reasons these mainland experts might have for moving from one bank to another, these bankers have one thing is common: they will all be starting their new jobs in a very different China market than the one in which they started their careers.
China investment banking has been through a major rewrite, and the once all-important Old China Hands have had to learn some new tricks to stay relevant.
Strong Beijing connections still matter more for the big global banks than, say, Washington connections do in the US. But advising Chinese companies is far more complicated than it once was. As PRC authorities continue to allow more market forces into the economy, the foreign banks have had to adapt, too, by providing more financing options. At the same time, a crackdown on corruption on both sides of the Pacific means some unwelcome attention for firms that employ the most closely connected bankers.
It’s not just about who you know – what you know has become much more important.
It’s an old story now that foreign investment banks went to China in the past decade or so in search of fast money only to come away very disappointed. Some earned more than their keep early on, thanks to being first on the ground. Bankers still talk about those big trades, like China Telecom’s 1997 IPO, with something like the nostalgia others will probably reserve for Alibaba’s new issue a decade from now.
But, overburdened by regulations and cultural differences, foreign banks have found Chinese securities a hard market to crack.
Overburdened by regulations and cultural differences, foreign banks have found Chinese securities a hard market to crack
ATTEMPTS AT INVESTMENT banking joint ventures have yielded middling results at best. Six out of the 10 securities JVs between foreign and Chinese firms turned a profit last year. That’s one more profitable JV than the year before. Yet those firms, minority owned by foreign institutions, still reported a combined net loss of Rmb51.73m (US$8.29m), according to the Securities Association of China.
Some Wall Street executives must be thankful that the often maligned Chinese regulators still ban foreigners from majority stakes in banks, no matter how much they say to the contrary. Who wants a bigger stake in a loss-maker, even if it also gives you more control?
Yet those same executives have more than their JVs to think about these days. China banking franchises have evolved and matured, as onshore and offshore business has grown and diversified.
Perhaps that is why senior China bankers have been so antsy this year. Among the several appointments in recent months, Bank of America Merrill Lynch hired Alex To from Morgan Stanley, where he was chairman of China investment banking. He will be BofA’s co-head of China global corporate and investment banking, as well as head of China investment banking.
JP Morgan earlier this year hired David Li from UBS. At the Swiss bank he was chairman and country head for China. He is slated to start next month, and will be based in Beijing as senior country officer.
These bankers step into their new roles at a time when firms are beginning to think differently about China, that is, just like any other in the portfolio of business lines.
Morgan Stanley, for example, restructured its China investment banking coverage model just over a year ago. China bankers now have specific sector responsibilities, reporting into global industry teams, as they do in other regions. In the past, these bankers were thought of as China specialists, not oil-and-gas or consumer experts.
THAT TYPE OF thinking is also reflected in Credit Suisse’s recent appointment of Steven Wang as head of consumer, retail and healthcare for Greater China. It’s a newly created position.
Those three sectors are China’s future, many investors say. Indeed, those same investors no longer talk about the PRC in terms of what type of “landing” they expect: hard or soft? They talk about which sectors will prosper in either scenario. And banks follow that money.
Then there’s the increasing number of asset classes or securities offered. IPOs are only one, albeit lucrative, part of an investment bank’s possible revenue streams from the country. G3 bond sales from China now make up the majority of the Asian market, excluding Japan. And investment banks are falling over themselves to get a bigger piece of the Dim Sum market.
The country’s big banks, meanwhile, are beginning to use the local and foreign capital markets more effectively. Asset-backed securities are now appearing in size. And then there are the tens of billions of dollars of bank capital securities that are expected to hit the markets in the next year.
Putting together a multi-billion dollar offering of undated loss-absorbing Additional Tier 1 bonds requires more of a banker than good mainland relationships. Banks know this. Connections may get them the meetings with the right decision-makers in Beijing. But being able to explain the complex financial mysteries such as Basel III rules – in Mandarin or in English – is more of an asset than ever before. It’s a new market.
