China’s march to capital markets
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China’s march to capital markets

Global banks are finally getting full access to China’s capital markets. Regulators will let them own joint ventures outright as they roll out a host of services from forex to advisory to wealth management. For Beijing it’s a final frontier – and there’s no going back.

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Investment banking is getting real in China. In January 2020, as part of a trade deal with the US, financial regulators said foreign banks could apply to own their onshore securities businesses outright from April 1, eight months earlier than expected.

In doing so, Asia’s largest economy is finally opening the doors to its $21 trillion capital markets and forcing national champions such as Citic Securities and CICC to compete openly with the likes of JPMorgan and Goldman Sachs.

For now, the frustrations of the past are forgotten. Once foreign banks have the right licences, they can trade securities and commodities, and manage wealth and assets, onshore for local and international clients, all in their own names.

That’s the theory anyway. No one is confused about the scale of the task ahead. Making money in China is never easy. Beijing spent the last two decades either keeping foreign firms at bay or grudgingly handing out marginally expanded operating licences.

Even pioneers struggled. In 1993 Morgan Stanley was the first New York firm to open an office in China. It went on to build two onshore brokerages, first with CICC, then with Huaxin Securities, underwriting a slew of first-time China stock offerings both on and offshore. Yet its Huaxin joint venture posted a net loss of $99.8 million in 2018 on revenues of $175 million.

UBS is another trailblazer, courtesy of its 2006 bailout of troubled Beijing Securities. It renamed the firm UBS Securities and crucially won management control, despite only owning 25%. Yet the brokerage pocketed a profit of just $10.1 million in 2018, down 76.5% year on year, on revenues of $824 million.

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David Chin, UBS

In October 2019 UBS Securities was the first foreign bank to sponsor an IPO on Shanghai’s new Nasdaq-style Star Market, helping Haohai Biotech to raise Rmb1.5 billion ($212 million).

On the positive side of the ledger, Citi’s JV with Shanghai-based Orient Securities generated profit of $179.1 million in 2018. But even that number must be seen in context. Citigroup posted global net income of $18 billion in 2018 and $19.4 billion in 2019, making its China business a few generous drops in the bucket.

Every data point shows foreign firms lagging local rivals. Citic Securities, China’s largest investment bank by assets, posted net profit of $1.73 billion in 2019 and $1.33 billion in 2018. Compare that with the $1.5 million in net profit posted in 2018 by the seven largest foreign JVs combined. And the fact that, according to Dealogic, while China’s brokerages earned combined fees of $1.9 billion from all onshore equity capital markets deals in 2019, foreign banks generated revenues of just $106 million.

“Every international bank is tiny compared to local competitors,” admits David Chin, head of investment bank, Asia Pacific and China country head at UBS.

It’s a view shared by his peers.

“Onshore investment banking in China is dominated by local players, and I have the feeling it will stay that way,” says Shuntaro Nagashima, group head of international planning at Japan’s Daiwa Securities.

China needs sophisticated capital markets and investment banking solutions to support its economy, an economy which will at some stage become the largest in the world - Werner Steinmueller, Deutsche Bank

Is the market even worth the hassle? What if Beijing backtracks or drags its feet again in the light of Covid-19 and the risk of global recession?

Despite past events, that seems unlikely.

“China needs sophisticated capital markets and investment banking solutions to support its economy, an economy which will at some stage become the largest in the world,” says Werner Steinmueller, Asia-Pacific chief executive of Deutsche Bank.

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Werner Steinmueller, Deutsche Bank 

For that, it needs foreign help.

As the coronavirus ebbs in China, regulators are making a show of rolling out the red carpet.

On March 20, JPMorgan Securities (China), the US bank’s majority-owned mainland brokerage, opened for business, offering clients primary research, client advisory work, and sales and trading.

At the opening ceremony, Shanghai’s Municipal Office of Financial Services stated its “determination to further open its financial industry” to foreign firms.

Ten days later, Goldman Sachs and Morgan Stanley were given the nod by the China Securities Regulatory Commission (CSRC) to increase ownership of their onshore joint ventures to 51%; both filed for approval to China’s securities regulator to do so last year.

Morgan Stanley Huaxin Securities, founded in 2011 and based in Shanghai, offers proprietary trading of bonds and investment banking services.

Goldman Sachs Gao Hua Securities, an alliance with Beijing Gao Hua Securities formed in 2004, provides M&A advisory and underwrites securities.

As to the question of whether or not China is worth the candle, the answer is an unequivocal yes. It already dominates Asia’s capital markets.

Fees earned by investment banks in China-led deals in 2019 totalled $7.17 billion, accounting for 75% of all Asia ex-Japan revenues, according to Dealogic. The onshore figure that year, $4.77 billion, was nearly double the size of the offshore one ($2.4 billion), underlining the scale of the opportunity for foreign banks advising mainland clients both at home and overseas. 

Onshore investment banking in China has grown faster than the offshore part over the past 20 years. The onshore fee pool is now around two to four times the offshore fee pool in every given year - David Chin, UBS

And the country has kept its foot on the pedal, even during the coronavirus lockdown. China accounted for 78% of all Asia ex-Japan ECM activity by volume in the first three months of 2020, according to Dealogic, and 77% of investment banking revenues. And those revenues are growing too.

“Onshore investment banking in China has grown faster than the offshore part over the past 20 years,” notes UBS’s Chin. “The onshore fee pool is now around two to four times the offshore fee pool in every given year.”

That reinforces the view that two Chinas are emerging.

One is a huge onshore market that caters to providers of everything from debt to derivatives, asset management to advisory.

The other is the offshore part of the portfolio, as banks serve the needs of China’s big corporates as they expand across the world.

That bifurcation is only likely to accelerate as the world emerges from coronavirus and multinationals cut their dependence on goods made in the People’s Republic.

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Shanghai vice mayor Wu Qing and JPMorgan China CEO Mark Leung at JPMorgan Securities (China) Company Limited's grand unveiling ceremony


Interviewed for this story, bankers were asked how much China would contribute to pan-Asia investment banking volumes – including Japan – by the end of the 2020s.

Responses ranged from 50% to 80% – not higher but never lower – startling given the relative youth of China’s capital markets and the fact that until quite recently the country didn’t have a private sector.

“Within 10 years, the majority of all Asia capital markets [activity] will be strongly China related,” says Toshiyasu Iiyama, senior managing director at Nomura Holdings and head of the Japanese firm’s China committee. “That share could actually be higher, depending on how fast China opens up its capital markets. Once the market is fully liberalized, the dynamism will kick in.”

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Toshiyasu Iiyama,
Nomura Holdings 

A senior banker at a US firm in Hong Kong says: “Within 10 years in Asia, of five managing directors working in every sector, be it TMT [technology, media and telecommunications], industrials, financial institutions or real estate, three will be mainland Chinese by origin. That is how important China will be.”

That might be egging the cake – but the point remains. China is the future of Asia’s capital markets, and foreign firms seeking a raft of new licences will surely get them. It will then be up to them to make it work.

Morgan Stanley hopes its longevity and record of getting pioneering deals over the line will keep it ahead of the pack.

“Those foreign banks with the agility to adjust to rapidly changing regulations and market practices, with deep experience in integrating international best practices, and the commitment to serving clients onshore, will be best placed to succeed,” says the firm’s co-chief executive of Asia Pacific and chief executive of China, Wei Sun Christianson.

Along with Morgan Stanley, Goldman Sachs and UBS are probably the gold standard in China. All have solid teams and strong brands. The trio – in that order – head Dealogic’s ranking of all China ECM deals completed onshore and offshore in the 2010s by foreign banks.

Goldman opened its first mainland office in 1994, making its name on deals such as China Telecom’s $4.2 billion Hong Kong-New York listing, which raised $4.2 billion in 1997 against the backdrop of the Asian financial crisis.

Its co-president of Asia Pacific, Todd Leland, has publicly expressed his commitment to owning 100% of Goldman Sachs Gao Hua at the “earliest opportunity”. It’s an ambition shared by most of its peers, including Morgan Stanley.

Under a five-year plan announced last year and running until 2024, Goldman has said it will inject hundreds of millions of dollars into its onshore business. Over the course of 2020, it aims to apply for asset management and wealth management licences to run alongside its markets, advisory and investment banking businesses.

Ahead of the game

UBS is also ahead of the game. In late 2018 it was given the nod to raise its stake in UBS Securities to 51% – the first foreign firm to be granted the honour. The next step is securing sole control.

UBS Securities has offices in Beijing, Shanghai and Shenzhen.

Citi is in a slightly different position.

It expects to exit its joint venture with Orient Securities in the second quarter of 2020, then to apply for a series of licences allowing it to trade securities, futures, foreign exchange and commodities.

Christine Lam, chief executive of Citi China, says operating in China “is no different to any other large market – our priority is to replicate what we can do for clients in the US or the UK, or out of Singapore, for our global and local clients. China is a strategic priority for Citi globally.”

Deutsche Bank hasn’t announced any new plans with Zhong De Securities, its alliance with Shanxi Securities. But in September 2019 the German bank was given the right to act as a lead underwriter on all forms of onshore bond sales.

The type-A licence, issued by interbank bond market regulator Nafmii, grants Deutsche greater access to China’s $13 trillion debt market, putting it on an “equal footing with domestic banks in the debt capital markets,” says Deutsche’s Steinmueller. “We have hired people for the syndicate team, and are up and running and pursuing our first deal. We have a great deal pipeline and we see tremendous opportunity here.”

On April 17, Credit Suisse was granted approval to become majority owner of its onshore JV, Credit Suisse Founder Securities (CSFS), raising its stake in the brokerage to 51% from 33.3%.

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Wei Sun Christianson, Morgan Stanley

Beijing-based CSFS sponsors and underwrites government and corporate bonds, as well as A-share stock offerings. Since October 2016 it has run a broking business in Qianhai, part of the southern city of Shenzhen.

China won’t just be a second or third home to US and European firms – Japan wants to play its part too.

It’s easy to forget that until it was elbowed aside by Wall Street in the 1990s, Tokyo was Beijing’s chief financial ally.

When Bank of China floated a ¥20 billion ($180 million) samurai bond in 1985, it was led by Nomura. When Citic printed its own ¥30 billion samurai that year, it turned to Daiwa Securities for help.

Those deals mattered at a key moment in China’s development and the country never forgets a favour. In November 2019, Nomura Holdings secured a licence from the CSRC allowing it to run its own onshore securities trading, proprietary trading, investment consulting and asset management businesses.

The new outfit, Nomura Orient International Securities, overseen by chairwoman Qing Yu and chief executive Dongqing Sun, is 51% owned by Nomura, with the rest controlled by two investment vehicles, Orient International Holding and Shanghai Huangpu Investment.

Nomura’s Iiyama says its onshore investment banking business is “going to be a slow build out.”

The firm wants to be a full-service brokerage within five years, by which time it aims to have offices in Shanghai, Beijing and Shenzhen.

Qing, a well-known figure in Beijing who worked in the finance ministry for 20 years, was a pivotal figure in China’s inaugural yen-denominated bond, printed in 1994. Nomura led that deal and the two sides have stayed in touch with each other ever since.

“Our deep relationships in China have been built over many years,” notes Iiyama.

Daiwa Securities is a rare returnee, having terminated its joint venture with Shanghai Securities in 2014 after years of underperformance. Now, it is back.

In September 2019 it filed to own 51% of a new brokerage, with the rest controlled by Beijing State-owned Capital Operation and Management Centre, and Beijing Xicheng Capital. Both are investment vehicles controlled by the capital’s municipal government.

Daiwa hopes to secure an operating licence early in the fourth quarter of 2020, but its group head of international planning Nagashima admits the process “may drag on until winter.”

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Economic colossus

Not long ago China was a single-track market, where foreign JVs were restricted to underwriting stock offerings and doing a spot of trading. Now it’s a financial and economic colossus run by technocrats desperate to emulate the power and prestige of Wall Street.

“China wants and is moving towards a large and fully professional and international-facing capital markets system, but a key prerequisite for that to happen is a freely transferable renminbi,” says Steinmueller.

But Beijing wants to do more – and foreign firms know it.

For proof, take a look at the operating licences they covet most. JPMorgan is focused on delivering its global product lines to clients onshore, notes the US bank’s China chief executive Mark Leung.

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Mark Leung,

“Anything that is critical to our global and local infrastructure for us to stay competitive we will do,” he says. “So if you look at asset management, wealth management, investment banking, corporate banking, commercial banking, all of these are where we have a strong global presence and where we see the market opening up here and as important to get in.”  

UBS’s Chin says the Swiss bank will put the bulk of its resources to work expanding its reach into “markets, banking, research and wealth management”, while Nomura’s Iiyama has his eye on opportunities with high net-worth individuals.

“Wealth management is a huge opportunity,” he says. “The A-Share IPO market is very crowded and difficult to get into, particularly as a new foreign entity.”

Daiwa’s Nagashima wants to secure four operating licences spanning investment banking, broking, asset management and proprietary trading.

“Investment banking is the main focus, but does not mean the other business areas will be disregarded,” he says. “Our aim is to act as a bridge between China and the world, and in particular with Japan.”

For many firms the chief focus beyond investment banking is on asset management and wealth management – and for good reason.

McKinsey projects the onshore asset management business to be worth more than $5 trillion by 2022, with the entire market, including trust firms, funds and insurers, to surpass $22 trillion in value the same year, generating $70 billion in annual revenues.

On April 16, the China Banking and Insurance Regulatory Commission issued draft rules set to open up China’s $3 trillion trust industry to foreign investors.

The article that requires foreign firms to have at least $1 billion in assets registered onshore at the end of the previous year – a rule that has long hampered inward investment –  has been cut.

Wealth management is another no-brainer.

China accounted for 57% of all assets in Asia at the end of 2018, according to Boston Consulting Group.

Our focus in China is to be complete but not comprehensive - Mark Leung, JPMorgan

Real estate consultancy Knight Frank reckons China had 373 billionaires at the end of 2019 – a 206% rise in five years. Some of that wealth has found its way out of the country to the likes of London and Singapore, but most is still tied up onshore in stocks, funds and real estate, or lying around in deposit accounts.

China knows it must find ways to manage better what it has onshore – and foreign firms can help, though no foreign institution can do it all, nor would they want to.

“Our focus in China is to be complete but not comprehensive,” says JPMorgan’s Leung. “We are not going to do everything. It’s about putting our products on the ground in the right context and remaining focused on where we can add value to global clients coming and to Chinese clients.”

Perhaps the stiffest challenge in the years ahead is not securing the right licences but a tussle for talent that may become an all-out brawl.

While banks are cutting staff in most markets, in China they’re scurrying to hire.

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As part of its five-year plan Goldman aims to double headcount to 600 by 2024. UBS will also double staffing levels, hiring 400 new people over the next five years.

“Given how miniscule our market share is right now, it would bring us closer to something we aspire to,” says Chin at UBS. “It’s not overambitious.”

The bank plans to hire locally and to relocate bankers to the mainland from Hong Kong and Shanghai.

Nomura’s Iiyama says the bank will boost its headcount to 200 by the end of 2020, then to 400 in 2022 and 500 in 2023. By then it aims to offer a full gamut of services, largely to Japanese clients working onshore, including wholesale banking, equities and fixed income trading, and asset and wealth management.

Daiwa’s team is on track to grow to 100 by the end of 2020, from 20 at the start of the year.

But it is one thing to find the people you want and quite another to convince them to join.

War for talent

Over the last 20 years China’s economy has become a machine, pumping out new billionaires every month, not to mention billions of dollars of fresh securities, yet talent hasn’t kept pace. That presents a problem for banks keen to hire hundreds of investment bankers, wealth managers, analysts and traders.

The problem isn’t at the pointy end of business. Most big banks employ a power-player or two: Chin at UBS, Leung at JPMorgan and Christianson at Morgan Stanley.

The problem lies further down the pyramid. Graduates from the best business schools still hanker to join the best Western banks. They have cachet and clout, as Euromoney found when quizzing some of the country’s top MBA students in Beijing in late 2019.

This group of graduates of a top domestic business school all saw the world the same way. They wanted to join one of JPMorgan, Morgan Stanley or Goldman Sachs, the only names that came up over the course of a two-hour conversation that spanned everything from finance to football.

But there was a problem – they all wanted to live in New York, London or Singapore; anywhere but mainland China.

“I’ll come back in 10 years when I’ve made my money,” was a common refrain.

That puts banks in a bit of a pickle. Some want to hire a few dozen bankers each year; others, a few hundred.

“The war for talent is amazing,” says a Shanghai investment banker. “Imagine a country with 1.4 billion people and not enough talent in a key industry. But that’s the reality.”

Head-hunters in Hong Kong and Shanghai are working overtime to meet their clients’ needs. It isn’t easy, given they all want the same thing: bankers who are, notes Chris Wong, head of China at recruiter Selby Jennings, “not only good on paper, but who have necessary experience and exposure to the market. It is a must to have good technical skills and an ability to present well.

“The perfect candidate, the ‘unicorn’, does exist, but how likely is that person to want to move?” he asks.

High demand

An additional problem is that most good China-focused bankers “know their value and are in high demand”, he says, not just from investment houses but from big-tech and private equity.

This quest for the best is tricky, as banks are exacting and finicky employers.

“Talent identification and retention is an important part of our business,” says Morgan Stanley’s Christianson. “Offshore and onshore, not only are our people highly capable, bilingual and bi-cultural, they also have deep experience and long records of service at Morgan Stanley and highly value professional integrity.”

“It is difficult,” adds JPMorgan’s Leung. “The challenge is to find global citizens who share the right culture with technical and local context. We are trying to deliver the firm on the ground with some China characteristics so that order can’t change; we have a focus on culture and integrity.”

He says the US bank’s ability to grow its business onshore “is based on the speed of regulatory opening-up and our ability to hire the right people.” 

Just because the market offers tremendous opportunities, it doesn’t mean you should over-expand or invest too far ahead of the actual business opportunity - Wei Sun Christianson, Morgan Stanley

But finding even one person with strong local connections and an ability to navigate China’s political and regulatory landscape isn’t easy. And that’s just one side of the coin: bulge-bracket lenders also want talent with a certain urbanity and ability to communicate in English.

“In Hong Kong, it’s a lot easier to hire – to fill an MD position I know where to look and how to hire,” says UBS’s Chin. “It’s very different in the mainland, partly because the talent pool suitable for an international firm is small.”

That is forcing head-hunters to look in all sorts of unlikely places.

“We have to be creative,” says one recruiter. “We’ve looked in the World Bank, at Chinese politicians with international exposure, at China’s development banks.”

One expert asked to fill a senior role for a Western bank compiled “an incredibly random list that looked in all sorts of unusual of nooks and crannies,” says the recruiter. “The person we found was strongly local, knew regulators, had some international experience and could present quite well to the board. He wasn’t an obvious choice, and 10 years ago he probably wouldn’t have been, but the world has changed.”

Some hires are a logical next step on ladder. In September 2019 Deutsche announced Jeffrey Peng as its new head of China wealth management, based in Shanghai.

Peng was previously at Bank of Singapore, the private banking arm of OCBC Bank, where he built its asset management division and onshore securities business.

So far, so normal: yet Peng will report to Rose Zhu, president and chairman of Deutsche Bank (China). Her colourful career includes a stint as personal translator to president Xi Jinping – the kind of role one rarely finds on LinkedIn feeds.

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Local partners

Not all firms have a recruiter on retainer. Nomura is relying on local partners to fill its top roles.

“Our mainland team is very localized,” says Iiyama. “Out of 100 people or so there, there are no Japanese nationals, though we have a Japanese national at the director level. I believe that is the way to be successful in China.”

He says his new hires “know the country inside and out. Their world is China, they see what’s going on at the governmental level, at the corporate and regulatory levels, what people in the street think.”

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Shuntaro Nagashima, Daiwa Securities

That approach can work, given that once you eliminate the language factor, the talent pool, notes Daiwa’s head of international planning Nagashima, “is huge”.

He adds: “The people I have hired so far [in mainland China] are talented and experienced. Most of them are mainlanders, but some are returnees who have trained in places like London.”

Ten years ago, the answer for some was to hire a so-called ‘princeling’ with links to the Party or big state firms. That helped boost deal volume, but when US regulators called it bribery, the fines came tumbling down the pipe.

“These days, even if you haven’t done anything wrong, if there is a whiff of the ‘princeling’, no bank will want to know you,” says a recruiter.

Some might look to hire from domestic brokerages, but even that isn’t a great solution.

A senior position at a Citic or a CICC, notes a mainland investment banker, “offers a mainland banker name-recognition, power, kudos, remuneration. You can earn $1 million there as an MD and double that or better with bonus.”

Why give that up for the stress of a new, more complex job at a bank your clients may not know?

Foreign banks are willing to pay for the right name. In January 2020, Credit Suisse hired Wang Jing as its new head of mainland China private banking, prising her from China Merchants Bank.

Wang is on a reported $2 million a year plus a bonus of $1.5 million. She will report to China chief executive Zhenyi Tang, hired last year from Hong Kong brokerage CLSA, on a salary of $2 million, rising to $10 million after bonuses.

Move to China

Then there is the task of convincing bankers, whether mainland émigrés or foreigners, to move to China. The top rate of income tax is 45% in the People’s Republic, against 22% in Singapore and 15% in Hong Kong.

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Franck Petitgas,
Morgan Stanley International

Even if you convince a banker to overlook that, many are put off by any number of issues, from language and cultural barriers to urban pollution. The fact that Covid-19 is the latest in a long line of pandemics to emerge from the country “won’t have helped”, notes one banker.

But these are problems with solutions. For foreign investment banks, profitability will stem from “having greater scale, a broader array of products and solutions, and the necessary licences” in place, says Franck Petitgas, head of Morgan Stanley International.

Will global banks ever catch up with local peers, from Citic Securities and CICC on down? Not in the short term.

“There will always be a gap between the foreign and local players in China,” says UBS’s Chin. “You only need to look to the US as a classic example. Why did European banks find it so tough to crack the US market after decades of big investment? There are many reasons, but ultimately domestic investment banks will always enjoy a natural competitive advantage.” 

But China is a 100-year marathon not a 10-year sprint. Banks that hire well out of graduate school and then train and retain their best talent will always hold an advantage over rivals.

So will those who retain business discipline and keep costs under control.

“Just because the market offers tremendous opportunities, it doesn’t mean you should over-expand or invest too far ahead of the actual business opportunity,” says Morgan Stanley’s Christianson.

Coronavirus may dent China’s economy, but the West will likely be hit worse.

In Washington, a defensive US administration is self-isolating, not just medically but economically, as it lashes out against globalization. Europe, too, errs increasingly on the side of protecting its big firms against ‘foreign’ – read Chinese – competitors.

Meanwhile China, a once-sealed country, moves sharply in the other direction, flinging open its doors to foreign capital and investment banks, in an attempt to upgrade its economy and to get the best out of its markets, corporates and vast pool of national savings.

If you were a global investment bank, where would you put your money, resources and talent to work?

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