Hong Kong’s second handover

, , China, Hong Kong, Secondary listings

HONG KONG (Dow Jones Investment Banker) – It would be a landmark: Chinese brokerage CITIC Securities Co. Ltd. has reportedly appointed Bank of China Ltd’s Bank of China International (BOCI), China Construction Bank (CCB) International and Industrial and Commercial Bank of China (ICBC) to lead its forthcoming share offering and listing in Hong Kong, said to be around US$2.5 billion.

If confirmed, it would be the first time a US$1 billion-plus share offering in Hong Kong was conducted with no international houses at the bookrunner level. It would prove how much Chinese securities houses have matured and have attained global capabilities – at least when it comes to Chinese equities. It would also be a snub for CLSA, the Asian brokerage unit of France’s Credit Agricole S.A., with which CITIC is currently negotiating an investment banking and brokerage tie-up.

(Click HERE for Bloomberg story, “Citic Securities Said to Snub Foreign Banks in Stock Sale,” on 29 April 2011)

Chinese brokers reign supreme as underwriters in the Mainland’s markets. Among international houses, only JV units of Goldman Sachs and UBS have so far made inroads, after receiving licenses to operate there since 2004. Other global players have been largely excluded from China’s lucrative underwriting bounty. Deutsche Bank and Credit Suisse and, over the last few months, JPMorgan, Morgan Stanley and Royal Bank of Scotland, have only more recently been able to negotiate securities joint ventures. Those have enabled them to underwrite shares in Shanghai and Shenzhen, but so far with limited results.

IPOs on Mainland stock exchanges are pretty much exclusively distributed to domestic investors, both institutional and retail, save for 109 Qualified Foreign Institutional Investors (QFII) that are allowed to participate in China’s onshore securities markets, subject to investment quotas.

By contrast, large IPOs and equity offerings by Chinese issuers offshore – including in Hong Kong – have traditionally been the preserve of international investment banks, as transactions greater than several hundred million dollars need to be distributed more broadly across the world’s major markets, usually by way of institutional private placements. Chinese banks weren’t equipped to do that because many of their traditional institutional clients are restricted in their investments abroad. Only 92 Qualified Domestic Institutional Investors (QDII) are currently able to invest in securities outside of China.

In a short space of time, however, Mainland brokers have made significant inroads in Hong Kong’s markets. So far this year, four houses – BOCI, BOCOM International (the investment banking arm of Bank of Communications), CICC (a traditional player in share offerings by state-owned enterprises) and CITIC Securities – have made it into the top 10 of underwriters’ league tables there.

Chinese brokers have now learned most of the industry tricks from their global counterparts, and can offer credible offer-structure and syndication capabilities alongside securities distribution and sales networks. In some cases, they even have sizeable wealth management arms.

"The East Leaps Forward, The West Is Worried (1958)"

Their sell-side research capabilities still lag behind those of the global names. The 2010 analyst rankings for Asia compiled by Institutional Investor did not include a single Chinese broker in a No. 1 position, either for Hong Kong or China, nor for industry sector research.

However, what these houses lack in research they more than make up through a more aggressive appetite for risk, their willingness to use their sizeable balance sheets and their access to clients in China. They have also learned how to leverage corporate banking and lending relationships, which, in most cases, eludes their international counterparts still traumatized by the credit crunch and obsessed by short-term ROCE ratios. While the first Hong Kong IPO denominated in yuan, by Hui Xian REIT, was disappointing, in the long run Chinese houses also stand to benefit the most from the convertibility and the yuan’s wider use in international capital markets.

Increasingly, they are becoming able to match compensation levels too. Haitong Securities’ CEO Lin Yong was recently quoted, saying how keen he was to pay the levels of compensation required to hire top bankers from U.S. and European houses in Hong Kong.

(Click HERE for Bloomberg story, “Haitong to ‘Pay What’s Needed’ to Lure Hong Kong Bankers from Global Firms,” on 25 April 2011)

These changes parallel what happened in Europe over the last two decades. This is how BBVA and Banco Santander S.A. came to dominate the ECM landscape in Spain and how UniCredit did the same in Italy. The scale of what’s happening in greater China, though, should make the bulge bracket herd stop and take notice.

Bankers be afraid: The East is red – more than ever before.

(Philippe Espinasse worked as an investment banker in the U.S., Europe and Asia for more than 19 years and now writes and works as an independent consultant in Hong Kong. Visit his website at Readers should be aware that Philippe may own securities related to companies he writes about, may act as a consultant to companies he mentions and may know individuals cited in his articles. To comment on this column, please email [email protected]).

[This article was originally published on Dow Jones Investment Banker on 3 May 2011 and is reproduced with permission].

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