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News that the Chinese securities regulator is set to lift a 10-month ban on initial public offerings has had western investment bankers sitting up straight and adjusting their ties. Some banks are in the local market already, through joint ventures. Many, including Citi, JPMorgan and Bank of America, are not. All covet a seat at the table.
Chinese secondary share sales account for over two-fifths of Asian (ex-Japan) equity capital markets volumes so far this year, according to Dealogic. In bonds, China’s share is just over half. More than $50bn of debt has been raised so far this quarter – already the biggest haul ever. And now that the Chinese regulator is tidying up IPO pricing lawsbringing them closer to international norms, being part of the securities market seems all the more desirable.
Well, yes and no. The reforms – designed to eliminate giant first-day pops, thereby improving overall market efficiency – might serve to drive out some of the dozens of smaller brokerages that underwrite speculatively, hoping for quick flips. That, in turn, may improve pricing power. Banks have tended to take between 1 and 2 per cent of a big equity deal in fees, and 50 basis points on debt – both well below western conventions.
But foreign companies should still advance carefully. Of the half-a-dozen overseas outfits licensed to operate in Chinese securities, only one – UBS – has made a real success of it.And that owes more to luck than design: its joint venture with Beijing Securities, struck in 2007 with a 20 per cent stake in the equity trading department and in effect management control, probably can’t be replicated under revised laws governing foreign participation in Chinese domestic securities companies.
The regulator continues to issue new licences sparingly: only Credit Suisse and Deutsche Bank have received licences to operate in China since a moratorium was lifted a year ago. And, even with a smaller set of competitors, margin enhancement is far from guaranteed, as China still sees its financial system as a utility to assist the productive economy.
How annoyingly old-fashioned.
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