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THE CHINA COLUMN: i-banks v commercial banks

If you want a great career at a foreign financial institution in China, it has to be an investment bank. Correct? Well, in terms of generating headlines this year, the i-banks have certainly been busy:

– JP Morgan forms China IPO joint venture with First Capital Securities

– RBS seeks approval to set up securities joint venture in China

– Macquarie forms joint venture with Heng Tai Securities

– Citigroup signs partnership with Zhong Yuan Securities

– Morgan Stanley joins hands with Hua Xin Securities

The key message here is that foreign investment banks are accelerating tapping the mainland’s capital markets. Arranging IPOs in China is a lucrative business. Last year the mainland bourse raised US$31bn in stock market listings, which is more than any other country in the world, according to the Financial Times.

Among those fund-raising activities, foreign investment banks have played an important role. They successfully helped large Chinese firms raise money to fund their further expansion. The most recent example is Agricultural Bank of China’s (ABC) dual Shanghai/Hong Kong listing. Goldman Sachs and Morgan Stanley are two of the key underwriters and should the offering exceed $21.9bn, it would be the world’s largest IPO, grossing about $450m in fees.

Barriers for i-banks

PricewaterhouseCooper’s 2010 Foreign Banks in China survey shows that Goldman Sachs, Morgan Stanley, JP Morgan and UBS are the four international giants in mainland investment banking.

But these firms still face severe entry barriers and a relatively tough regulatory environment. For example, Chinese regulatory bodies have strict requirements for information such as “wealth source”, which means foreign banks will lose investors who are not willing to disclose the source of their income.

As Beijing takes gradual steps towards the opening up of financial services to international banks, new foreign-backed securities ventures will still need to wait about five years before applying for a license to trade stocks. According to the Financial Times, in the past two years, European banks including Deutsche Bank and Credit Suisse have been granted permission to launch mainland securities joint ventures. Meanwhile, Morgan Stanley and Bank of America Merrill Lynch are still looking to strike deals.

Opportunities for commercial banks

However, in China, there is a relatively clear line between investment banks and commercial banks in terms of their businesses and services. As you know, foreign investment banks are more experienced in dealing with big institutional investors and operating in mature financial markets. They therefore have a very limited focus on the Chinese retail banking market. This has to some extent created a space for foreign commercial banks – such as HSBC, Standard Chartered and Citibank – to expand their businesses.

In a recent CNBC interview, HSBC’s Chairman Stephen Green said the bank will grow in profit and size in China as the economy expands and capital markets continue to open up. He also emphasised that there’s no country which is strategically more important for the bank. In the PwC’s survey, HSBC topped the brand-recognition list, followed by Standard Chartered and Citi.

Young Chinese graduates don’t just want to work for the likes of Goldman Sachs and JP Morgan – firms which have been traditionally considered glamorous employers in the West – they are equally attracted by expanding commercial banking brands like HSBC.

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Comments (1)

  1. HSBC has been saying they are going to list in Shanghai for years … wondering when this will eventually happen …

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