Investment Banking in China, Briefly
This week I’m going to try to give a high level view, based on my personal experiences, on what the investment banking industry is like in China. There are obviously similarities to the U.S., but also a number of key differences as well.
There are basically 2 distinct flavors of investment banks in China: the huge guys, and everybody else.
The huge guys group does include all the bulge brackets we’ve all come to love, but they really don’t have much of a share in the market here. China is dominated by the domestic banks and securities firms.
Everybody else is, well, everybody else. Some of the bigger international “middle market” firms are supposedly here with an office, but my they aren’t doing much beyond maybe a cross-border M&A deal here and there. There are also small international-run “boutiques” that also focus on cross-border M&A.
In terms of new issuances, China is all equity. There technically is a bond market, but it’s quite small and underwriting is dominated by the mainland houses. Developing an active bond market is one of the goals of the CSRC (the Chinese securities regulator), but it’s not here yet. Bloomberg had a good article the other day about the current situation of the bond market in China.
The mainland exchanges, located in Shanghai and Shenzhen, list only the largest private and state-owned companies. Foreign companies cannot list on Chinese exchanges, and outside of a program called QFII, foreign investors cannot buy shares on mainland exchanges either. This leaves a few options for smaller Chinese companies to raise capital: list in Hong Kong, or try to go public overseas.
Attempting to go public overseas is often more appealing to the average mainland business owner then trying to do so in Hong Kong. Hong Kong investors have a bit of a natural suspicion toward anything Chinese, so to fill the gap, a number of “boutique investment banks” popped up in the mainland to facilitate overseas listing for small Chinese companies, with dubious results.
China is in theory undertaking reforms to allow more companies to list on its exchanges, and to allow more foreign investment in yuan-denominated debt and equity. Whether or not this actually happens is a different story. I think the biggest hurdle for reform in the Chinese financial markets is the widespread fraud that permeates every aspect of the industry here, from insider trading to accounting fraud.
My question is: Even if you could, would you invest in a company listed on a Chinese exchange?
Comments
I would not invest in
I would not invest in companies listed on Chinese exchanges until they straighten out their accounting issue. However, i wouldn't mind flipping Chinese equities if the opportunity arose.
"Well, you know, I was a human being before I became a businessman." -- George Soros
As of now I probably would
As of now I probably would not want to invest, or if then only a rather small amount out of my allocation for risky investments. All the accounting fraud is really a huge turnoff , and with their plans to exclude foreigners from working at those acct. firms I doubt its gonna get any better, plus u never know when the government is gonna screw with u
I am doing an internship for
I am doing an internship for an institutional QFII fund in shanghai, and from what I saw, the fraud part is very true for Chinese banks (not really that much at oversea corporates). People don't do M&A a lot here; they just mainly focus on IPO since they can raise a large amount of capital in a relatively short period of time by, you know, making some "minor changes" on there balance sheet. The same does local PE.
Insider transaction are also common here. However, if you live in China then you may probably like what's going on here, simply because you put money into your pocket. 2 months ago the government claimed to have more QFII allocation for oversea companies, so the market is going to be more and more regulated in some ways. But it's true that you can only do HFs in HK.
Questions to the OP : 1) As
Questions to the OP :
1) As most of the large SOEs have completed their public offerings in the past, will the HK market slow down in the future??I think the HK market was a major beneficiary amid the Chinese companies' IPO boom. But that is all coming to and end. Without IPOs, what else are their edges???
2) Do you think HK's offshore RMB market will grow exponentially in the future??How would you compare it between the ascent of the Eurodollare market back in the 60s??
sanjose04: Questions to the
Questions to the OP :
1) As most of the large SOEs have completed their public offerings in the past, will the HK market slow down in the future??I think the HK market was a major beneficiary amid the Chinese companies' IPO boom. But that is all coming to and end. Without IPOs, what else are their edges???
2) Do you think HK's offshore RMB market will grow exponentially in the future??How would you compare it between the ascent of the Eurodollare market back in the 60s??
Last year I interned at one of said boutiques for 8 months (study abroad and subsequent summer internship - fucking loved it by the way) and I know there are a lot of US firms; the firms that you have never heard of are actually massive corporations, that are pursuing a HK listing (instead of NYSE etc.) while initiating operations on the Mainland concurrently. So yes, maybe Chinese-owned IPOs will slow somewhat, but I don't see any significant decline in activity in the near future.
Disclosure:I just graduated and am unemployed, so take my comments with a can of Morton's salt.
"The problem with Socialism is that eventually you run out of other peoples money"
- Margaret Thatcher
sanjose04: Questions to the
Questions to the OP :
1) As most of the large SOEs have completed their public offerings in the past, will the HK market slow down in the future??I think the HK market was a major beneficiary amid the Chinese companies' IPO boom. But that is all coming to and end. Without IPOs, what else are their edges???
2) Do you think HK's offshore RMB market will grow exponentially in the future??How would you compare it between the ascent of the Eurodollare market back in the 60s??
1) Good question. I think Hong Kong's biggest advantage is its strong legal system. The legal system in China is constructed solely to uphold the rule of the Communist Party, and you will never get a fair judgment in a Chinese court if you are a foreigner.
I also think central Asian countries present an opportunity. Within the past two years, the HKSE established a listing framework for mining companies, something the Australian and Toronto exchanges already have.
2) Take this with a grain of salt, since I'm not really up on the currency markets. I know London has stated they want to become a center for offshore RMB trading. As the RMB becomes more freely convertible, obviously the market will grow in all the currency hubs, but I think growth will be biggest in HK since its closest to China and all the current trading is being done here anyway.
See my other WSO blog posts
I'm interning at one of
I'm interning at one of China's biggest VC firm (its a SOE) and i must say some of the projections made by the private companies I've looked at is ridiculous, for example:
year 1 gross profit 20 mill
year 4 gross profit 400 mill
A lot of IPOs made in China are also based on "relations", in a meeting i had my team's investment manager was basically telling us how an private firm reaches IPO and there's a lot of "Guy A knows guy B, Guy B knows Guy C who works for the CSRC, I also happen to know guy C so this venture should pass no problem"
Some people say you don't do
Some people say you don't do as much modeling in china.. which can be true. But for the firm I worked for, I had to do extra modeling to TRIPLE check the projections for companies using several modeling approaches to be extra sure the targets were reasonable...
There is also the issue of
There is also the issue of purchasing positive press pre-IPO or paying to have negative press silenced, as documented by Caixin: http://english.caixin.com/2012-06-07/100398287.html
"Dishonesty in China's investment world likewise plays into some company decisions to try building investor trust through news distortion by, for example, paying financial newspapers to publish glowing reports about an IPO plan. Others pay Internet search engines to scrub archives, or hire public relations or law firms to help them work with media outlets to sanitize company history."
I've been in China a bit less than three years now. Drank the kool-aid for a while, but have since turned major skeptic about pretty much everything that transpires.
olafenizer: The mainland
The mainland exchanges, located in Shanghai and Shenzhen, list only the largest private and state-owned companies. Foreign companies cannot list on Chinese exchanges, and outside of a program called QFII, foreign investors cannot buy shares on mainland exchanges either. This leaves a few options for smaller Chinese companies to raise capital: list in Hong Kong, or try to go public overseas.
When I was working for a PE in Shanghai, we spoke to some companies who were listed on or considering a listing on the Shenzhen GEM exchange, which is a second-tier exchange for smaller companies in China. Valuations on the GEM exchange tend to be huge, although I believe liquidity is often a problem. Still, it is worth pointing out that there are domestic listing options for smaller enterprises.
[Removed as I accidentally
[Removed as I accidentally posted twice]
Also important to note that
Also important to note that IPO'ing in US as means to raise capital is probably indefinitely suspended for Chinese companies until some agreement is reached between the SEC, Chinese government and the Chinese arms of Big 4 auditors.