International investment banks: It’s all about China

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By:
Chris Wright
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International IBs pride themselves on the diversity of their business in Asia Pacific, but a bank without a decent China business in this region is nowhere. It is the engine of both regional and global growth.

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It’s important for us as a business to be diversified,” says Gokul Laroia, co-head of global equities and co-chief executive Asia Pacific at Morgan Stanley. “But our number-one priority here is China – and in my view is it is just getting going.”

You can see why. According to Dealogic, China accounted for 74% of ex-Japan Asia investment banking fees in 2018 and is tracking at the same amount for 2019. In debt capital markets, it accounted for 83% of fees last year. Even if Japan and Australia are thrown into the mix, China accounts for 51% of fees in 2019 to date.

Where China once tracked growth in the markets, now it drives it. Asia Pacific issuance in the primary bond markets has grown from $60 billion 10 years ago to a peak of over $400 billion in 2017, according to Bank of America; China accounts for $230 billion of the 2018 number. Year to date China accounts for $50 billion of $85 billion. At the same time, China’s domestic bond market has grown to be the third largest in the world, worth the equivalent of almost $13 trillion at the end of February. 

But the challenge with China is that the opportunity itself keeps moving, and banking models need to move with it in order to be well-positioned and relevant.

James Paradise, co-president and head of the securities division at Goldman Sachs, thinks of China businesses as having gone through three distinct phases.

The first came 15 to 20 years ago, the golden era of outward-bound state IPOs such as Petrochina and China Telecom (now China Mobile). 

These were massive, complex, frontier-spirited deals. On Petrochina, the $2.9 billion April 2000 IPO, led by Goldman and CICC, involved two years of advice from the banks. A whole new company was set up using 480,000 of China National Petroleum Corporation’s 1.5 million workforce and a clutch of its upstream assets. The China Telecom IPO, which not only brought an entire industry to international markets but did so on the day in October 1997 that the Hang Seng fell 10.2%, was at $4.25 billion the biggest Asian equity offer to that date. (It was full of cornerstone investors; some things don’t change.)

For Morgan Stanley, the standout was Sinopec, the three-way listing in Hong Kong, New York and London in October 2000, which raised $3.73 billion. 

“That group of deals made Hong Kong feel like a global financial centre,” says Wei Sun Christianson, Apac co-chief executive and China chief executive at Morgan Stanley. “It was a leap of faith, from both ends,” China and Hong Kong.

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The second stage, Paradise says, was the recapitalization and overseas listing of the big Chinese banks. The standout deal here was the listing of Bank of China (BOC) Hong Kong in 2002. Goldman, UBS and Bank of China International were the bookrunners, and UBS’s head of corporate client solutions for Asia Pacific today, David Chin, recalls the deal as one of the most important ever in Hong Kong.

It came against the backdrop of financial sector reform in China as the state tried to bolster its biggest banks by carving out non-performing loans – sometimes 30% to 40% of the loan book – and injecting new capital.

Chin says the bookrunners proposed that as a pilot scheme they should list BOC HK first, “as a test case for the entire Bank of China group”. 

It was complicated. BOC HK at the time operated under 12 different subsidiaries. Hank Paulson, later US Secretary for the Treasury but then running Goldman, refers to the deal and its complexity in his book ‘Dealing with China’. He paints the investment banks as being consultants as well as sponsors. It also required a private member’s bill to pass through Hong Kong’s Legislative Council.

Chin says: “Eventually it listed in 2002 and set the template for future Chinese bank reform, restructuring, the carve-out of NPLs, the restructuring of risk management, and finally for listings seeking to bring in international investors and increase transparency.

“From then onwards, banks have followed the same pattern.”

Final phase

So what is the third phase? For Paradise, it is the opening of the financial markets characterized in particular by the launch of the Hong Kong-Shanghai Stock Connect channel in 2014, allowing easier access to onshore stock markets from overseas than the existing Qualified Foreign Institutional Investor quota regime. 

“That will be remembered as one of the most important announcements of financial market reform,” says Paradise. “It moved the goalposts from needing approval and quota, to: now you don’t.”

This final phase has some almost giddy with optimism, while others are cynical and frustrated. 

Paradise is in the optimistic camp, despite the fact that the launch of Stock Connect was followed by a market crash through the summer of 2015 and a lengthy period of cleaning things up behind the scenes, coupled with a national imperative towards deleveraging. 

“But now it gets really interesting,” he says. 


The MSCI event is, to me, a real point of inflexion
 - Gokul Laroia, Morgan Stanley

Slowing growth has prompted a reinjection of liquidity, the state has tried to say encouraging things about private enterprise and every speech president Xi Jinping makes refers to financial market reform, an attitude matched by the new chairman of the China Securities Regulatory Commission (CSRC), Yi Huiman. 

“They have come out and said it,” says Paradise. “‘The economy is slowing, we need to grow, we don’t want to overburden the banks, we want to continue to squeeze off-balance sheet lending, and we therefore need a fully functioning equity and bond market.’ 

“I genuinely feel that if they believe what they are saying, we are about to make that flip from banking-financed growth to capital market-financed growth – and that is a game-changer.”

Peter Wong, chief executive of Asia Pacific at HSBC, also takes heart from what he has seen over the years. 

“The pace and scale of development in China has exceeded all expectations,” he says. “Twenty years ago it would have been hard to imagine the opportunities that exist in China today.”

For Laroia, Stock Connect is part of a broader structural process of technical convenience. Hong Kong will have a futures contract listed. 

“That to me is really significant,” says Laroia. “For anyone who wants to run a remote market neutral strategy this is critical. The moment you can do it, you can run a lot more money.”

Linked to Stock Connect came another moment of great importance: MSCI’s acceptance of onshore capital markets in its benchmarks. In February, MSCI announced it would increase the weight of Chinese A-shares (those listed domestically) from 5% to 20% in key benchmarks including the emerging markets index. There is a roadmap for it to reach full weighting, which would lead to A-shares accounting for 16.2% of the EM index and China overall more than 40%. 

“The MSCI event is, to me, a real point of inflexion,” says Laroia. “It took years to get from zero to 5%, then just a year from 5% to 20%, and 20% to 100% could be just a few years.

“When that happens, the amount of money involved would be such that people wouldn’t have a choice, they couldn’t have the benchmark risk.” 

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Gokul Laroia, Morgan Stanley

Morgan Stanley calculates $100 billion to $125 billion of capital inflows based on the 2019 inclusion events, and a further $100 billion for a similar landmark for including domestic bond indices in closely followed benchmarks. 

“And that’s just for this year,” says Laroia. “If MSCI went from 20% to 100%, it would be greater by an order of magnitude.

“For the first time, the stars are aligning: China is going to run a current account deficit for the first time in 25 years and it wants to attract capital.” 

Predicting the pace of opening, Laroia says, is always difficult: “But one decision we’ve made as a firm is that we have to pick and choose where we put our investment dollars. The firm’s senior management has China as a priority.”

“Like it or not, MSCI is a great validator,” says Paradise at Goldman Sachs. He also hopes it will change the composition of the market. 

“We still have a market which is, on a volume basis, 80% to 85% dictated by retail and 10% to 15% institutional,” he says. “As we start to get to a place where there is a change in tax policy, acceptance of mutual funds, upward pressure on corporate governance, we will also get more of a derivatives market, more hedging, more oversight. On a scale of one to 10, we are at two or three in terms of where this thing is in its development.”

Cynicism

Set against this optimism, others are more cynical, particularly anyone who has been involved in trying to get a securities joint venture to any meaningful level of success and control over the last 20 years. It’s one thing to acknowledge great growth in China, in both scale and sophistication; it’s another to be sure that one can participate in it.

Euromoney has written in great detail about joint ventures over the years, most recently after UBS’s approval to go to majority ownership. 

In March, JPMorgan and Nomura were both given approval to move to 51% of their joint ventures. HSBC (a special case) and UBS already have approval; next in the queue are thought to be Morgan Stanley and Credit Suisse. Some, notably Goldman, are thought to be waiting until there is a clear roadmap to 100% ownership before changing their stake. 

Citi abandoned its venture with China Orient Securities and will start a new one from scratch. BAML never launched one in the first place and is also thought to be waiting until there is a clear path to full ownership before doing so.

Those who have watched home-grown mainland institutions grow to a level of untouchable size while they have been restricted in the wings, never being entirely sure about when and how things might change, remain cynical. 

“We have to accept that this is the environment which we fight in every day,” says one banker. “Our framework doesn’t allow us to do everything that the local banks do. We know that every day we wake up and we go against not a dozen but 100 competitors. The quicker everyone accepts that, the better it will be for everyone.”

Another banker raises more fundamental issues: “The problem with the capital market in China going forward is not the players, it’s the soft infrastructure.” 

The regulators, this banker says, do not have enough power for enforcement since there are no court systems and class actions cannot be started. “There is one pillar missing and it is the judicial system. There is nothing the regulators can do.”

Laura Cha, chair of Hong Kong Exchanges and Clearing (HKEx), is in a unique position to judge the development of the mainland, having served at senior levels in both Hong Kong’s Securities and Futures Commission and China’s CSRC; her perspective is measured.

“It probably hasn’t gone as far or fast as people had hoped, and the main reason is that reform is not easy,” she says. “The market is a very big and complicated one with issues that we, in Hong Kong, as a more mature market, did not have to deal with. CSRC does have to face myriad complicated issues that make their work more difficult.” 

One is the sheer number of retail investors. When she was at the CSRC, there were 70 million accounts; now about 200 million are investing. 

“Retail investors are fragile, so they react to sentiment,” she says.

There is also the question of how they, like all investors, will be protected as China continues to evolve. 

Christianson, generally a great optimist on China, says: “While people are focusing on access and the level playing field, I think equally important is to look at the next step, and that is the standards and the procedures, so that everyone from international firms to retail investors in China can be protected. 

“That should be the top priority.”

Even on the mainstay of China investment banking business for the last 20 years – outbound from China, such as equity and debt capital markets issues in Hong Kong – there is widespread acceptance that the glory days are gone. 

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David Chin, UBS

“In one of those large Chinese bank IPOs, a lead bank could earn up to $100 million,” says Chin at UBS. “That is almost unthinkable these days.” 

That said, there are more deals and in greater variety; and banks have adapted not to be wholly reliant on IPOs, with more diverse product suites. 

Where once the key to a successful China business was the ability to take state-owned enterprises (SOEs) to international equity markets, that is very much yesterday’s story. 

“As a percentage of market cap, SOEs are going from over 50% to around 30%,” says Laroia.

Another banker adds: “I can’t remember the last time we worked on an SOE.” 

The last such deal of importance was China Tower, which felt like a throwback when it came to a market now dominated by names such as Alibaba, Meituan and Xiaomi instead of China Mobile, CCB and Petrochina. With the change in issuers has come a change in bookrunners too. Now local players like the Hong Kong arms of the big four banks, and securities houses such as Guotai Junan and Haitong, dominate the league tables. 

In ECM, “it’s quite clear that the new economy companies have very much dominated issuance,” says Bruce Wu, co-head of equity capital markets for greater China at Citi. 

This is very much a China theme. As examples he refers to iQiyi, a Netflix-like video streaming service that raised $1.05 billion in a convertible the night before we meet; Nio, the electric carmaker, which raised a $650 million convertible only four months after its US IPO; and e-commerce company Pinduoduo, which raised over $1 billion in a secondary offering in February. All are from the mainland. 

Banks have positioned for this for some time. Wu himself, while based in New York, used to focus on Citi’s North American healthcare ECM business with a focus on life sciences. 

“There are going to be more and more of these companies trying to come to market, and sophisticated industry knowledge will become more and more critical to understanding them, valuing them and telling their stories.”

That said, Christianson notes that business evolution is not just the preserve of the private sector. 

“As private entrepreneurs are taking over in certain sectors, the SOEs are evolving as well,” she says. When she talks to chief executives in traditional sectors, she says, all they talk about is technology. “Traditional companies which are technology-enabled will probably become the biggest technology companies.” 

Some may spin off assets, creating opportunities for private-sector funds to buy in and expand, but then again SOE reform is complicated. 

Christianson says: “We are involved in some of these restructuring ideas, but the challenge for these reforms is how can these subsidiaries obtain their autonomy from their parent companies and make their own decisions?” 

Bankers are now watching closely the new technology innovation board on the Shanghai Stock Exchange, due to launch later this year, to see what sort of threat it might pose to Hong Kong – and whether or not they can now get involved with it themselves.

Paradise has studied the rules and requirements and finds them “pretty sensible”. 

“People joke about this idea of the Nasdaq of China,” he says, “but I’d be careful of dismissing anything in China.”

Goldman was on the Xiaomi IPO that was supposed to be accompanied by the first-ever launch of China depositary receipts, or CDRs. One reason the CDR part didn’t happen was because of requirements the CSRC wanted to impose on Xiaomi limiting multiples of valuation, in order to protect retail investors. On the tech board, Paradise says, that valuation ceiling is gone.

One institution watching the new board closely is HKEx, which has launched its own chapter for pre-revenue biotech companies. 

“It remains to be seen,” says Cha. “I can see that obviously they are going after some of the companies we would like, and at the end of the day it’s up to those companies to see where is the more attractive market. I have no doubt Hong Kong will continue to be one of the region’s most attractive markets.”

Changing landscape

If China dominates the ECM fee pool, that is nothing compared with DCM, thanks to a combination of steady investment-grade issuance and the fact that China utterly dominates high yield. 

DCM today is unrecognizable from 20 years ago – and not just in terms of scale. 

“We’ve seen a trend towards more RegS issuance, which is a sign of a maturing and deepening market,” says Devesh Ashra, co-head of debt solutions at Bank of America. 

That, in turn, reflects a far stronger buyer base in Asia. 

“The entire landscape has changed here in Asia,” adds Amit Sheopuri, head of Asia DCM at Citi. “Back in 2001, if you asked yourself what was there in the Asian debt markets, it was very thin: some hedge funds, most pricing decisions carried out by New York because they drove the entire transaction.” 

Sheopuri remembers bidding for a deal for a leading Asian conglomerate around 2004 and having to spend two weeks “just trying to get comfortable with a 10-year RegS offering for an Asian credit.”

Those days are gone. 

“When we do roadshows in Asia, whether 144a or RegS, these are global roadshows,” he says. “It’s not just like talking to Asian hedge funds here – it’s BlackRock, Fidelity, Allianz Bernstein, you name it.” 

Sheopuri is taking an Asian credit to market as we meet and says that while some asset managers wish to meet in the US, also “some are saying: ‘There’s no need, we’ve got it covered here.’”

These are Asian themes, but they have helped to elevate China debt issuance. So many of the landmark issues these days – Tencent’s $5 billion three-tranche bond sale in January, including a 20-year tranche yielding less than 4% a year, Alibaba’s $7 billion issue a month earlier at maturities from 5.5 to 40 years and Bank of China’s green bonds – come from the country. And there is so much volume. 

“It has got to a size where just the refinancing will keep banks busy every year,” says Chin. 

The dramatic rise of high yield in China, from about 2004, is a signature DCM theme; and this perhaps represents a counterpoint and a reason for alarm. 

“When you have seen so many one- and three-year deals coming out, it could spook the markets when they come up for refinancings and call options,” says Sheopuri. “Markets have been volatile, and I don’t expect that to change.”

But not everyone is concerned about the health of the market. 

“There is quite a high bar to come to the offshore markets,” says Ashra. 

It is different domestically, where there were 100 defaults in China in 2018. 

“That sounds a big number,” Ashra says. “But zero is not healthy either because of what it implies. Last year, there have been only two technical defaults in the G3 markets from Chinese issuers.”

Chinese money

Across the board, the biggest change has been the role of Chinese money. 

“Whether it’s traditional asset management money, alternative asset management, insurance, trusts or hedge funds, Chinese investors’ money has become a real force in recent years,” says Wu at Citi. “If you were to rewind 10 or even just five years, if Chinese issuers wanted to do large deals offshore, there would be material reliance on these large global institutional investors in order to get these deals done. Today, when you look at an order book, you will see many lines that are all Chinese names. Some haven’t been around for that long, but they’ve managed to gather significant assets under management.”

One sees this in many areas: the development of domestic pension funds, the growth of the state-owned asset managers like China Orient, the rise of private-sector asset managers in China, the growth of private wealth and the steady climb of private funds such as Hillhouse and Primavera

“This pool of Chinese money is just going to continue to grow like wildfire, and it is being put to work both onshore and offshore,” says Wu. 

This is particularly true in high yield, where some bankers estimate that Chinese money accounts for 50% to 60% of the market for new issues. 

Sheopuri at Citi doesn’t put a number to it, but says: “Some of the high-yield deals that are getting done are not just international institutions. There is a lot of Chinese money coming through and driving these transactions.”

Naturally, the activity of Chinese capital is equally important onshore. 

“The onshore market itself is going to end up absorbing a lot of capital formation that today relies on international capital markets,” says Wu. “Big deals are getting done domestically: big IPOs, big private placements, convertibles. The depth and breadth of that market is becoming more and more competitive with international capital markets.”

M&A advisory has gone through a great deal of evolution in recent years. A few years ago, it was a bonanza of headline deals like ChemChina’s $43 billion bid for Syngenta. Now deals like that are off the table, partly because China no longer allows them to happen in the light of debt problems at firms such as Anbang and HNA, and partly because the US blocks anything remotely sensitive involving US assets, through the Committee on Foreign Investment in the United States. That doesn’t just mean US businesses; it means anything with US operations. 

Inbound acquisitions – global companies acquiring footprint – have declined too. 

“I can’t remember the last time we worked for someone looking to buy a stake in Asia,” says one banker. 

Now, China business is much more about global companies rationalizing what they have, selling to private equity, or sometimes domestic consolidation, although that’s not great for fees. 

Bankers still say they are busy, but it’s not like it used to be. 

“At one time, nine out of 10 of our deals were for Chinese companies,” says one banker. “Now nobody takes them seriously because it’s not clear they can do anything.” 

Even in Asia, as the Belt and Road Initiative has grown, there is pushback on the degree of Chinese influence in their markets. 

And what about the fees? 

It is generally argued that fee trends have been getting worse in ECM and DCM for years, but Wu at Citi argues that “there was an improvement in that trend last year” on ECM. That is because many deals were SEC-registered IPOs and follow-ons, which Chinese houses find it hard to argue their way on to and may not be licensed to try anyway. 

“On SEC-registered transactions, the bookrunner line is usually less crowded,” says Wu. And fees there are somewhat comparable to US fees, which is to say, materially better than they are in Asia. Still, he admits Hong Kong deals “have definitely suffered from a crowded line up and a lot of fee compression and dilution.”

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On both ECM and DCM, international bankers have complained for years about the sometimes ludicrous number of bookrunners applied to deals. The gold standard of this was WH Group, a Chinese pork producer, which axed a planned $6 billion IPO in 2014 despite (or perhaps because of) having 29 banks on the deal. 

“The number of bookrunners has multiplied and a lot of other houses have come through on the back of their balance sheet,” says Sheopuri. “It is tough, because you have local securities houses, local and regional banks, and they want to flex their muscles. They are willing to offer balance sheet to win mandates.” 

There is a view that some maturity is coming back to the market. 

“The reason you put a lot of bookrunners on a deal is to throw someone a bone and maybe recognize a lending relationship,” says one banker. “Or, worse, people don’t understand capital markets and think they will get more demand.” 

But that is changing. 

“It was a learning process people went through,” says this banker. “Now there are more sources of capital, you don’t need to put a commercial bank with no capital markets business as a bookrunner just because it’s lending $100 million. It is becoming more rational. Now a deal is truly being run by two or three people.”

Slowdown

It would be remiss not to mention the US-China trade war, but as many of the chief executives interviewed confirm, it’s not yet making a huge difference and is perhaps something of a decoy. 

“Everyone will tell you, the bigger issue in the region actually is not the trade war,” says Piyush Gupta, chief executive of DBS. “It’s China deleveraging. The China slowdown is real, there is no question.” 

China is attempting to squeeze out excess capacity while maintaining fiscal stimulus for the broad economy, a difficult trick. Is it getting it right? 

“This is the right thing for them to do, conceptually. Can they pull it off is a different thing. The general thesis is right,” says Gupta.


It is in such an interesting phase of development right now; I want a ring-side seat rather than studying it five to 10 years later
 - David Chin, UBS

Another tricky theme to read is the BRI. Geopolitically important and with a massive potential scale, it is not yet an obvious happy hunting ground for foreign banks in China. They are not getting involved in the funding, nor is much ancillary business yet flowing through.

Ultimately China is all about scale. And the prize is big. Paradise’s background is on the securities side. Today, he says, foreign houses account for less than 1% of what happens onshore. 

The bull case is that market reform happens swiftly, brings more liquidity, but with a drop in turnover rates as retail becomes less dominant in an increasingly institutionalized market. If, by joining that institutional march, foreign broker-dealers can get up to 10% to 25% of the market, their outright volumes in a market that currently trades about $150 billion a day will be sizable. 

“The plain vanilla A-shares brokerage business can be very substantial,” he says, and so can derivatives, prime brokerage and financing principals. For that case to work out, a community of onshore hedge funds would have to grow – which is not an unreasonable expectation – and domestic brokers need to consolidate. 

So what makes a good China strategy? 

“I would say be very patient and select your bets,” says Chin at UBS. “China has been opening up for the last 20 years, but the pace is beyond anybody’s control. The direction is always towards liberalization, but long periods of time can be a frustrating wait. So, if you have first-mover advantage, it is sustained for a long period of time.” 

It is an environment stimulating enough to have hauled Chin at UBS back from a couple of years out in academia. 

“It is in such an interesting phase of development right now. I want a ring-side seat rather than studying it five to 10 years later,” he says.

The early days

In the early 1970s, China generated no potential business as it underwent the Cultural Revolution. It wasn’t until Deng Xiaoping started talking about the ‘Open door’ policy that opportunities began to emerge.

Even then, it was problematic. Jardine Fleming was the first foreign house to get a broking licence in Shanghai and it then got another in Shenzhen, so it was ready to help when the Kuwait Investment Authority said it wanted to put long-term money into China. 

“We said: ‘It’s difficult, we don’t have that expertise,’” recalls Alan Smith, chief executive at the time. “And there aren’t stock markets.” But Jardines gave it some thought. “Nobody else has that expertise either, and we do at least know something about Hong Kong, and we’re right on the doorstep.”

So in 1987 the KIA funded a company called JF China Investment Company, which started out with $30 million, most of it from Kuwait. It was hard to deploy. 

“We looked at 100 deals, rejected them; another 100 deals, did one.” Eventually they did 10. “And every single deal went wrong in one way or another.” 

Jardines did so with quite flamboyant originality. One idea was to make a foie gras investment in Guangdong province, on the clever thesis that the Chinese loved ducks but didn’t like foie gras. Jardines would buy the ducks and the feed, give them to Chinese farmers under the supervision of a Frenchman who knew ducks, and take only the liver, leaving the rest of the duck to the farmers. 

“After four months, the ducks should have been getting fat, but we went up there and they weren’t,” Smith recalls. “It was too hot and the ducks were sweating, and when they sweat the liver doesn’t grow. So we had to buy an air conditioner.”

Buying air-con for Chinese ducks was not prohibitively expensive, but raised another problem. 

“We went back the next week and the air-con had gone. The mayor didn’t have air conditioning and he didn’t see any reason why the ducks should have it.” 

Jardines eventually gave up on the ducks.

Worse still was a fish farm they funded on the Fujian Coast, this time under the supervision of a Norwegian. 

“We got a message,” Smith recalls. “Bad news about the farm. The fish have drowned.”

Jardine Fleming would go on to great success in mainland business. But not just yet. Eventually the senior management realized that so much time was being spent on the fund for little gain that they put the remaining money on interest (rates were about 8% at the time) until they had got the principal back and returned it to Kuwait. 

“We said: ‘Thank you very much. Here’s your money back.’”

How Asia’s banks take on China

For Asia’s regional banks, China presents an interesting challenge: not their core competency but impossible to ignore.

Among the Asian banks keen to take on China are the Taiwanese, who have naturally faced an additional challenge in the shifting geopolitical environment, specifically the cross-straits relationship. 

“That’s the only thing we cannot predict,” says Daniel Wu, president of CTBC bank in Taiwan. “Taiwanese financial institutions are probably behind the Europeans and the US by a quarter century in China, and that’s simply because of the cross-straits relationship.”

But Wu wants to make up for lost time. “China is where we want to grow.” He was delighted when foreign ownership limits eased and believes the bank can take advantage. Since CTBC only has four branches on the bank side, plus a leasing company and a consumer finance company, growing organically is probably not going to move the dial. 

“Organic takes forever,” Wu says. “Maybe they only allow you to open one branch or two in a year.” 

HSBC has 170 branches in mainland China.

Therefore he is looking at acquisition. “We have some targets on the radar screen,” he says. He also hopes that new technology will enable him to penetrate the market despite the relative lack of branches. 

“There are things we are working on right now where we might couple with either a big e-commerce company or a big bank to do something together, whether on the securities or the bank side.” 

But what is the quality of targets like? He suggests a city commercial bank, but there are grave concerns about asset quality in some of these, much of it not visible on the balance sheet. 

“Banking business is our core,” Wu says, “and we have done very good due diligence for all the dust under the blanket that we can find out. But of course asset quality is something we need to be aware of.” 

As for the cross-Straits challenge, he says: “As long as we have the green light to go, we will go faster. Hiccups may happen that we need to deal with. But from my observation, with this administration the cross-straits relationship is kind of frozen, but both are still open to economic exchange.” 

Asian banks have to pick their targets in China. 

“China is a difficult market,” says Wee Ee Cheong, chief executive of UOB. The bank has 16 branches in China, doing two lines of business: southeast Asian customers going to China and Chinese customers coming to southeast Asia. “Dealing with the local Chinese in China, we have a very small exposure,” he says. 

One interesting step UOB took came in 2011 when it set up a dedicated team called the foreign direct investment advisory unit, supported by the Singapore government, “because they think we can do a better marketing job than them.” 

UOB tied up with law and accounting firms and several government agencies, and set up a model to help companies from overseas – including China – to come to southeast Asia, creating a one-stop shop for their needs, from banking to taxation and law. 

So far the business has attracted more than 2,100 companies from different parts of the world – about 50% from China. In the first instance, UOB doesn’t charge advisory fees, hoping that the client will then develop needs they will take to UOB that can be monetized. Wee says the capital flows through to the bank have been about S$137 billion ($101 billion).

This business has turned out to be extremely well placed for the Belt and Road Initiative. 

Greater China appears to have come right for DBS just as the region’s economic environment is worsening. Between 2009 and 2018 the bank trebled net profit from Hong Kong and quadrupled it from the rest of greater China. The timing doesn’t bother DBS chief executive Piyush Gupta. 

“It’s an $11 trillion country, and if it doesn’t grow at 6%, it will grow at 4%,” he says. “These ups and downs you’ve got to live with. If you start to think: ‘China’s going through a year of slowdown, my game’s over,’ then you’re really not looking long term.

“Think about it like this,” he adds. “If you had the opportunity to build a franchise in the US 100 years ago, would you have taken that chance, knowing that there’s going to be a Great Depression at the end of the 1920s, that everything was going to collapse and that World War Two would then come? With complete hindsight, would you have invested regardless? Of course you would have. Because if you hadn’t been in the US in the last century, you would have been nowhere. China’s like that.”