Many large global investment banks are still committed to developing in Hong Kong, with a total of thousands of employees in Hong Kong.
The Chinese market has become a Waterloo for Wall Street investment banks, forcing them to reassess the prospects of Hong Kong's investment banking business.
Over the past decade, European and American investment banks have prospered in Hong Kong, helping hundreds of Chinese companies raise funds by selling stocks and bonds in the international market. During the pre pandemic economic boom in China, these investment banks also earned profits from cross-border acquisitions and investment consulting businesses. Even in the increasingly tense political situation between China and the United States, this' money making train 'has made Wall Street an advocate for encouraging more contact between the US and China.
Nowadays, such days have undoubtedly become a thing of the past, and the harsh reality of 2023 is ahead of us.
The issuance of high-yield US dollar bonds by Chinese companies has dropped to zero, and the Hong Kong IPO market is stagnant. The long-term decline in the Hong Kong stock market has also suppressed other trading activities. The benchmark Hang Seng Index has fallen by a cumulative 10% this year, marking the fourth consecutive decline for the entire year.
This year, the fee income earned by investment banks from Chinese companies trading outside of mainland China is likely to drop to the lowest level in at least a decade. For the industry, 2022 has already been a bad year. Investment bankers privately admit that there is no turning point now. Many large international investors are no longer willing to purchase Chinese stocks or bonds, and the slowdown in the Chinese economy and tightening regulations have put pressure on many domestic companies.
According to Dealogic's calculations, investment banks this year only received $539 million in fee income from transactions denominated in non RMB currencies involving Chinese companies. Chinese companies mostly raise funds overseas in US dollars or Hong Kong dollars; The Hong Kong dollar adopts a pegged exchange rate system to the US dollar.
In 2020, Hong Kong's IPO activity was bustling, with many Chinese companies issuing US dollar bonds. According to Dealogic, the trading advisor received approximately $3.75 billion in fee income that year.
According to insiders, banks including Citigroup, Goldman Sachs, and Morgan Stanley have collectively laid off dozens of investment banking personnel engaged in Chinese trading. These banks are also laying off employees globally, but the US market has performed well and there have been signs of an increase in IPO activity in recent months.
Despite numerous companies retreating from Hong Kong, large US investment banks are still committed to developing in Hong Kong, with a total of thousands of employees in Hong Kong. This week, many top executives of multinational banks will attend a summit organized by the Hong Kong Monetary Authority in Hong Kong.
Many of these banks are also trying to delve deeper into the mainland Chinese market in order to win more transactions from mainland corporate customers.
Jamie Dimon, CEO of JPMorgan Chase, said when asked about his recent trip to Chinese Mainland at a meeting in New York in September this year, "We provide services for Chinese companies going global, and we intend to continue to do so as long as we do not violate European or U.S. sanctions." He added: In terms of our own business, the risk return situation could have been considered very good, but now the risk return has become relatively good. Among them, the risk situation is poor
Part of the reason for the decline in trading activity in China is cyclical, but some reasons may be persistent. The high interest rates in the United States have reduced the attractiveness of high-risk investments, including Chinese stocks. The economic expansion momentum in China is slowing down, which will affect the growth prospects of many companies. Chinese regulatory authorities have also increased the difficulty of companies going public both domestically and internationally.
Greg Guyett, CEO of Global Banking and Markets at HSBC, stated that companies hoping to list in Hong Kong have a long queue, but listing activity may continue to be suppressed until US interest rates stabilize and uncertainty in other parts of the world decreases.
In an interview, Guyett said, "I am optimistic about Hong Kong as a financing center." He added, "There will be some companies that are unwilling to list in New York or London, and the flow of funds from China will continue to make Hong Kong attractive
Investment bankers are already lamenting that China's total revenue pool from transaction fees is shrinking, and as more banks compete for transactions, they have to accept a smaller share from the smaller cake.
Kevin Kwek, a partner in the financial institutions department of consulting firm Kearney, said, "The situation in China... will not improve soon." He believes that some global banks will reduce their business activities in Hong Kong or shift resources to other Asian markets with more trading opportunities.
While some US banks are continuously reducing their IPOs and other transactions, the share of Chinese investment banks in the Hong Kong stock and bond underwriting market is increasing.
Andrew Pritti, a senior analyst for Neuberger Berman's sustainable equity team based in New York and a focus on US financial companies, said, "Doing business in the Chinese capital market is still important because there are some businesses there, but I don't think there are any opportunities for larger banks there
The connection between Wall Street and China can be traced back to the early stages of China's acceptance of capitalism. For example, in the late 1990s, then Chinese Premier Zhu Rongji invited multiple US investment bankers, including former Treasury Secretary Hank Paulson, to help China reform its heavily indebted banking system. Paulson was a rising star at Goldman Sachs Group at the time.
American banks subsequently underwritten the first overseas listings of some of China's largest banks and state-owned enterprises in New York and Hong Kong. A few years later, Wall Street investment banks sold the growth stories of Chinese internet companies to Western investors. Alibaba was heavily listed in New York in 2014, raising $25 billion and generating approximately $300 million in fee revenue for consulting firms.
From 2019 to 2022, Alibaba and other technology companies returned to Hong Kong for listing, with Western banks playing an important role. Over the past five years, these Western banks have also helped dozens of Chinese banks, real estate developers, manufacturers, and retailers issue over $700 billion worth of US dollar denominated corporate bonds.
Since 2021, Chinese real estate developers have experienced dozens of corporate bond defaults, leading to the complete depletion of US dollar bond issuance by high-risk companies in China. This year, even the scale of investment grade corporate bonds issued by Chinese companies has decreased.
Many Chinese stocks are currently at multi-year lows, and for US banks, some transactions have now become prohibited, just like a Chinese company's IPO being included in a US export ban.
IPO fees in Asia are not as generous as in the United States, where companies typically pay underwriters a fee of over 5% of the fundraising amount, except for large transactions with lower commissions. Chinese and Asian companies typically pay less than 3% of the transaction size.
I don't think there's anything that can bring equity capital market revenue back to the past level, "said Eliot Fisk, a former executive at JPMorgan Chase in Hong Kong and currently working as a consultant, referring to fee income from equity capital markets. One reason is that there are not many highly valued large companies in China planning to go public in the near future.
In the absence of heavyweight transactions from China, transactions from other Asian regions such as India and Indonesia have helped fill this gap. But the problem is, the fee income for these transactions is not that high.
Taking IPOs in Southeast Asia as an example, this includes the listing of Indonesian companies in the electric vehicle supply chain. This year, the total amount of financing for the first listed transaction in the region exceeded $5 billion, compared to approximately $4 billion in Hong Kong's total listing financing. According to Dealogic's data, banks only earned $80 million from IPOs in Southeast Asia.