Underwriting in China

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When the buffet is wheeled out, it is good to be at the front of the queue. Picture, then, investment banks’ envy of Goldman Sachs and UBS which – alone of the western fraternity – have snaffled Chinese licences just as the country prepares to unroll more than $50bn worth of initial public offerings.

Underwriting domestic currency A-share issues is nice work. Many of those in the pipeline are already listed in Hong Kong, so require none of the onerous restructuring work that once characterised Chinese IPOs. Risks are minimal. When the regulator’s primary role in life is to ensure that investors come away with a smile, there is little danger of being left with a slew of paper on your books.

Nor does pricing create much angst. China is experimenting with book-building, but the regulator still has the last say. In practice, that means issues are usually priced at a chunky discount to the Hong Kong-listed H-shares – in spite of the fact that A-shares usually trade at a massive premium.

Bank rank
Equity & equity-linked Asia Pacific offerings
Morgan Stanley274
Goldman Sachs313
Merrill Lynch466
Citi group541
Credit Suisse88-
Deutsche Bank91010
Macquarie Bank10129
Source: Bloomberg

Of course, underwriting issues in China is less remunerative than in many other markets. IPOs typically attract fees of 1-2 per cent. A combination of competition – foreigners have to tough it out with maybe four or five local brokerages on big deals and up to a dozen on mid-sized ones – and milestone mandates could squeeze that down to the lower end. Still, even 1 per cent of $52bn comes to five times the fees on Japanese IPOs so far this year, using Thomson Financial’s numbers.

Longer term, the first movers cannot count on clinching cast-iron relationships with issuers which will yield other mandates. Chinese companies are too commercially minded for that. Moreover, Beijing’s habit of shuffling heads of state-owned enterprises means you can spend years courting someone running a $200bn giant only to end up with the industry runt. No matter. Banks sitting on the outside would give their eye-teeth for even that opportunity.

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