The State of Chinese Investment Banking


In the most populous country in the world, Investment Banking has yet to realize its true potential as a monumental market for international firms. IB in China is dominated by domestic banks and securities firms, with international bulge brackets not having much of a share. However, strong growth and a few gems encourage the hopes that international firms have for the market. The question I seek to answer in this post is "What is the current state of IB in China, and what will the near future bring?"

Market Structure

As I mentioned above, the market for IB in China is basically split into two divisions: domestic banks/securities firms and everybody else. The bulge brackets don't have much market share, and there are a few international middle market firms and smaller boutiques that maintain offices in China, but only perform the occasional cross-border M&A deal.


New capital issuances in China are almost entirely equity. This is due in large part to the immature Chinese bond market (see bonds section below). Within equities, however, the relative proportion of funds raised from IPOs in Greater China versus total equity funds can be seen in the chart below.

The 2011 relative increase in non-IPO equity funds is counter to the trend we saw pretty much everywhere else in the world. In London, IPO fund proportion increased from 26% to 54% and the NYSE saw an increase from 18% to 24%. This can be partly explained by London and NYSE suffering during 2010 and thus having a stronger bounce back as businesses sought to recapitalize.

Market Performance

In 2003, 32 IPOs totals $7.2 billion. In 2007, 101 IPOs were worth a record $34 billion (keep in mind, the Shenzen, Shanghai, and Hong Kong exchanges had a huge bubble then). In 2012, IPOs slumped to an 11 year low of $6.6 billion, down from 2011's $12.3 billion.

IPO advising firms earned by Wall Street firms, once the biggest contributor to profits for Wall Street firms in Asia, closely followed the IPO drop, sliding 53% from 2011 to $1.1 billion. Compare this figure to 2010, when Wall Street earned $3.5 billion in advising fees.

Pay for management and employees of Wall Street firms has slipped as well. Barclays cut 15% of its regional workforce in M&A, ECM, and DCM divisions in late January. For those lucky enough to keep their jobs, the "China premium", which refers to the additional pay recieved by bankers familiar with the lanuage and business culture of China, has slumped as well. “The very big ticket items of the past -- mega public- sector IPOs, vast restructurings -- appear to be behind us,” Ken Courtis, founder of Tokyo-based advisory firm Next Capital Partners Co. and former Asia vice chairman at Goldman Sachs wrote in an e-mail. “In investment banking, salaries and bonuses are related to the volume business, and it’s a revenue game.”


The bond market in China is tiny. At 4.2 trillion yuan ($666 billion), the corporate bond market is equal to 9% of GDP. In the US, the $7.9 trillion dollar fixed-income securities market is equal to about 50% of GDP.

In 2012, the China Securities Regulatory Commission (CSRC), the equivalent of the U.S. Securities and Exchange comission, took action to develop an active bond market. One of the things they did was to allow HSBC Holdings plc to underwrite non-financial debt. HSBC is the top underwriter of "Dim Sum" bonds in Hong Kong. Dim Sum bonds are denominated in yuan and are attractive to foreign investors who want exposure to yuan-denominated assets but are restricted by China's capital controls from investing directly in domestic Chinese debt.

However, foreign institutions have a lot of difficulty consistently getting in on the big deals. Jim Antos, a Hong Kong-based analyst at Mizuho Securities Asia Ltd. said "It’s awfully hard to see a foreign bank getting in, in a big way, in the early stages because the large local institutions are going to have to dominate to ensure that it works. A Chinese corporate would feel they have a better chance of success with a big local institution. That’s the law of the jungle."

But the market is growing, as indicated by increasing revenues. Last year fees from bond underwriting reached a three-year high of $919 million.

The Future

Banks will need to diversify in order to rely more on fees from other services, including structured deals and high-yield bonds (once the market matures). According to I Search Worldwide, banks with only IPO coverage and execution services may be forced out of the market entirely within the short term unless IPOs pick up again.

A leading indicator of sorts for the IPO markets is equity market performance. As well as good performance in the first quarter of 2013, recent hints at stability, such as the recent improvement in the global manufacturing purchasing managers’ index, rising factory output in China and better trends in US housing, exports and employment are important for capital markets, including IPOs.

As Premier Wen Jiabao sets a growth target of 7.5% for the coming year, and China seeks to wean itself off foreign investment and exports that have fueled its explosive groth the past three decades, bankers are quite optimistic of the opportunities the development of the private sector will bring. "Some of these privately owned firms will become global players, raising equity, debt, and doing M&A. They will challenge the status quo," said Next Capital's Ken Courtis.