As 2009 draws to a close, investment bankers are focused on bonuses, league-table standings, and of course: what will happen next year. Similar to the rest of the economy, the biggest issue on many bankers’ minds is China.
While the American and European economies stalled, and investments dropped, it is full steam ahead in China where construction continues to boom, and new metro centers are popping up seemingly every day.
Banks with teams in Hong Kong, or with branch offices in mainland China, are already reaping lucrative fees from Chinese companies purchasing everything from commodities to auto industries. But, this material financing is just part of the puzzle. The biggest piece of the bank opportunity in China remains in the investment banking field, underwriting. Dealing Yuan denominated stocks and bonds is a coup for any firm, though difficult to participate it – they can only be undertaken by ventures that are at least one-third Chinese owned.
While IPO’s in Hong Kong often fetch 2.5% to 3.5% of fees on the value of the deal, IPO’s in China’s domestically listed shares can take month, with only a 1% to 2% fee value. But, just as in manufacturing, economies of scale dictate that it is a volume game.
Next year, Shanghai is set to surpass Hong Kong as the Number 1 market by funds raised, with as much as 380 billion yuan ($55.7 Billion) in deals, as estimated by Ernst & Young. It is also expected that foreign companies will be allowed to list there next year, which will push this total much higher.
Bank of America (NYSE: BAC), Citigroup (NYSE: C), J.P. Morgan Chase (NYSE: JPM) and many more are seeking what is known as an “onshore presence”, which means Beijing will allow them to handle yuan-denominated IPOs and new bond issues.
The handful already allowed include Morgan Stanley (NYSE: MS), which owns 34% of China’s oldest such venture, China International Capital Corp.; Goldman Sachs Group (NYSE: GS), which set up Goldman Sachs Gaohua Securities Co. in 2004 with China partner and rainmaker Fang Fenglei; CLSA Asia-Pacific Markets, the regional broking arm of Crédit Agricole; UBS (NYSE: UBS); and last year’s new entrants, Credit Suisse Group and Deutsche Bank.
While the regulations are fierce, and potential stumbling blocks are plenty, virtually every firm wants in to China. The rational goes that if you are not in China, you’re not part of the capital-raising mechanism at the beginning of the 21st century in the world’s fastest growing market – and missing the biggest opportunity there is.