On November 19, US automaker General Motors returned to public trading on the NYSE, with Agricultural Bank of China’s investment banking arm acting as an underwriter in the $23.1bn IPO. This was the first time a Chinese investment bank had taken part in an IPO of a large American company. Is this a clear sign that Chinese IBs are becoming more competitive against their Western rivals? And if so, can they attract the best bankers to join their ranks?
One thing for sure is that Chinese securities firms are starting to make more money from core investment banking activities in Asia – including ECM, DCM and M&A advisory – than some of the global rivals. According to figures from Dealogic, CICC, CITIC Securities, Bank of China and Ping An Insurance’s own securities firms are all in this year’s top-10 league table for core investment banking revenues to October 15. CICC ranks fifth, surpassing global giants Deutsche Bank and Credit Suisse. This is a scenario most would have thought impossible just a few years ago.
The country’s capital markets have enjoyed $79bn worth of completed IPOs so far this year. To Chinese investment banks, which have little presence outside their home market, this is the perfect opportunity to leverage their domestic advantage and out-earn their foreign rivals. Moreover, some foreign investment banks lack the onshore securities JV license that allows them to engage in A-share deals. And due to regulatory constraints, many overseas firms can only focus on the listings of large state-owned enterprises, which puts them at a disadvantage when negotiating fees with the SOEs.
But before we get too carried away
According to The Wall Street Journal, when the impact of underwriting domestic IPOs is removed, Chinese investment banks drop out of the top-20 Asia ex-Japan ECM league table.
Some bankers who used to work for Chinese investment banks tell me that it may take another 10 years for China’s IB to really catch up with their Western rivals and become credible global players. This also constitutes one of the most important reasons why some experienced bankers are still hesitant about joining a PRC firm. Chinese investment banks lack the global distribution networks and relationships with global investors critical to winning large IPOs and debt issues.
They probably also need to take a culture check if they are truly interested in the whole “becoming international” business. The transparency of the industry and the systematic structure of operations do matter to most professional investment bankers. Last but not least, whether Chinese investment banks can pay as competitively as Goldman Sachs, Morgan Stanley, JP Morgan or Deutsche Bank will ultimately decide if they can hire senior bankers to originate and execute the deals.
Put simply, the key question is whether China’s IBs can move closer to international practices. According to one global recruitment firm based in Shanghai, the biggest puzzle right now for Chinese investments banks is where to find the right people to join them. This will continue to be a key challenge in the years to come.