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As international banks shrink in China, a new breed of banker emerges

The landscape of investment banking in China is changing. It used to be all about global banks in the noughties. The likes of Goldman Sachs, Morgan Stanley and J.P. Morgan all dominated deals across ECM, M&A and DCM and the smaller Chinese players lacked the expertise to compete.

Not any more. The macro environment of banking has changed a lot in the Greater China region, especially since the 2008-09 financial crisis. Local securities firms, aided by a booming domestic stock market, have quickly narrowed the gap with their global competitors. According to data provider Dealogic, Chinese brokerages take up eight positions in the top ten fee earners in terms of Chinese investment banking revenue in the first half of 2015. There were five global banks in the ranking last year.

“I think the days of dominance by western investment banks for Greater China on IPO, debt issues and M&A deals are slowly coming to an end,” says Alistair Ramsbottom, managing director and founder of the Blacklock Group, a Shanghai-based executive search firm.

It used to be all about networks

Previously, global banks would hire senior Chinese bankers with an extensive network of client relationships, including those going along well with China’s largest state-owned enterprises. Bankers like UBS’s David Chin who worked on the Bank of China’s IPO, and Credit Suisse’s Zhang Liping who took part in the IPO of Industrial & Commercial Bank of China, were popular in the industry.

However, there are only a limited number of such clients, and a limited number deals like that. After more than ten years, deals with these clients have almost dried up, forcing banks to look for other revenue streams. Meanwhile, as China and U.S. authorities step up efforts to tighten regulation and fight corruption, banks are increasingly cautious about deals that are brought in purely by networks.

“There will be more challenges for the foreign banks while the financial and regulatory environment in China becomes more complicated,” points out Rio Goh, China country head for recruiters Morgan McKinley, although he maintains that the ability for senior bankers to bring in deals are still important.

“Global regulation has become tougher for investment banks, and this has put a lot of limitations on banks’ business development,” says a Shanghai-based executive director at a foreign investment bank, who asked not to be named.

Weighed down by such regulation and compliance concerns, global banks are currently in retreat in China, leaving plenty of room for Chinese local players to catch up.

Domestic issues for domestic players

But Chinese banks don’t have everything in their favour. The domestic regulatory environment is evolving rapidly too. To use IPO as an example, China is undergoing a dramatic change from “approval system” to “registration system”, which would lead to a set of totally new requirements on bankers. “Certainly the sponsor licence is not so popular in China as several years ago,” notes Ramsbottom, referring to a must-have licence under the old “approval” system.

In addition, Chinese banks are not just competing for the domestic market anymore. They are looking overseas and want to eat into global banks’ lunch as well. Some of the leading ones, such as CITIC, Haitong, Guotai Junan and Huatai have already marched into Hong Kong, where they either have listed or are recruiting aggressively. This is spurred on by the “Shanghai-Hong Kong stock connect” since November 2014.

Global banking businesses need bankers with global experience. This is what these Chinese banks are short of. “They went into global markets in the hope of doing global business, only to find that they are unable to handle it,” says the anonymous executive director. “Simply speaking, they will need their bankers to have more global experience.”

It’s just a cyclical business

Finally, banking, as an industry, is heavily reliant on economic cycles. The Greater China region, just like Asia, has experienced a few decades’ of economic boom time, a bandwagon investment banks have made sure to jump on. Now the question is, what to do when the economy has slowed down?

Many have chosen to leave banking altogether. “I’ve seen many bankers leaving,” says the anonymous executive director, “some of them have gone to the buy-side, some others have gone into industry.”

However, industries themselves have evolved along with the economic growth, something bankers need to also be aware of. “As the traditional industries are being challenged by the digital and internet sectors, more and more bankers need to adapt to the changing market environment,” advises Goh of Morgan McKinley.

“Many senior bankers are now considering their own careers and are more and more open to opportunities in non-traditional investment sectors,” he adds.

For those who opt to stay in banking, Zhangkai Huang, an associate professor of finance from the School of Economics & Management at Tsinghua University, suggests that they should be “adaptive” and “inalienable”. Yet he also admits that finance and banking is “more about the general trend in economy” and “there is not too much an individual can do” if the entire sector is facing a hard time.

“Throughout Asia, it’s normal for banking going downhill now,” says the anonymous executive director. “Banks will resume recruiting on a large scale once the economy picks up.”

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