Exploring the Struggles of Foreign Banks in Mainland China’s IPO Market
In recent news, foreign banks are experiencing their lowest involvement in initial public offerings (IPOs) in mainland China in over a decade. From January to August of this year, foreign banks were involved in just $297 million in new listings, or 1.2% of the total. This percentage is lower than in any full year since Dealogic began collecting the data in 2009. In comparison, banks were involved in about half of total quotes by value in 2009. Last year’s percentage was 3.1%, the third worst year on record. This decline in foreign banks’ operations is concerning as it reflects the difficulty of maintaining a meaningful presence in a fast-moving but isolated market.
Overseas Banks Struggle With Varying Requirements and Limited Access
The closed nature of China’s financial system and its varying regulations and due diligence requirements poses difficulties for overseas banks. The severe Covid-19 restrictions over the past three years have also limited access to the country, increasing the distance between mainland branches and their overseas offices. Although overseas banks’ operations are dwarfed compared to mainland competitors, the data reflects their difficulty in maintaining their foothold.
US Banks Absent from China’s IPO Market
In China’s vast stock market, which has raised over $26 billion to date in deals that often attract massive demand from domestic investors, no US bank was involved in the 109 IPOs in 2023. Credit Suisse and Deutsche Bank were the only banks that acted as bookrunners this year. This lack of involvement by US banks illustrates the heightened geopolitical tensions between China and the US that have chilled foreign business on the mainland and led to grievances of communication disruptions.
Due Diligence and Regulatory Concerns
Due diligence by foreign institutions is also a concern for foreign banks, with several global bank executives saying that they were often reluctant to work on Chinese listings. It is difficult to perform the level of due diligence required by their internal processes. For example, a senior executive at the Asian investment banking arm of a global bank said that he needs a list of the top 50 clients and wants to give them independent due diligence calls, but he is not sure if they will go through the same independent due diligence that a Western bank would.
Relying on Retail Investors vs Institutional Investors
Unlike the United States, Chinese listings tend to rely less on institutional investors and more on retail investors, meaning that traditional global banking models are not suited to mainland markets. “A lot of it is retailed, so you really need to have a retail brokerage platform to sell these deals,” said a banker. “The business model run by Western banks, where you sell [shares] to the same 100 or so investors every time, it doesn’t work.”
Additional Piece: The Struggle for Foreign Banks in China’s Complex Financial Landscape
China’s unique financial system presents challenges for foreign banks, particularly when it comes to navigating regulations and due diligence requirements for IPOs. As China’s economy grows and changes rapidly, the country’s financial system is continually evolving, making it challenging for foreign banks to keep up.
Additionally, limited access to China due to pandemic-related restrictions has made it even more difficult for foreign banks to maintain a foothold in the country. As a result, foreign banks’ operations are reduced compared to mainland competitors.
Although Chinese listings tend to rely on retail investors rather than institutional investors, foreign banks still have a role in making these deals happen. However, this requires them to adapt their business models to suit the unique demands of China’s market. This means putting more resources towards retail brokerage platforms to sell deals to retail investors.
Furthermore, due diligence protocols present obstacles for foreign banks entering the Chinese market. The level of due diligence required is often difficult to achieve with Western banks’ internal processes, making it challenging for them to work on Chinese listings.
Conclusion
Foreign banks’ struggles in the Chinese IPO market reflect the country’s unique financial landscape and regulatory environment. Due diligence concerns, difficulty navigating regulations, lack of access to China, and the suitability of global banking models are among the challenges facing foreign banks. However, these challenges also present opportunities for foreign banks to adapt and establish a foothold in China’s market.
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Foreign banks’ involvement in initial public offerings in mainland China fell to its lowest level in more than a decade, a sign of the difficulties they face maintaining a foothold in the country’s closed financial system.
So far this year, foreign banks have been involved in just $297 million of new listings, or 1.2% of the total. The proportion is lower than in any full year since Dealogic began collecting the data in 2009, when banks were involved in about half of total quotes by value. Last year’s 3.1% represented the third worst year on record.
No US bank was involved in the 109 IPOs in Chinain 2023’s vast stock market, where a total of $26 billion has been raised to date in deals that often attract massive demand from domestic investors. Only Credit Suisse and Deutsche Bank acted as bookrunners this year.
While the overseas banks’ operations are dwarfed compared to mainland competitors, the data reflects their struggle to maintain a meaningful presence in a fast-moving but isolated market with varying due diligence and regulatory requirements. Severe Covid-19 restrictions over the past three years have limited access to the country, increasing the distance between mainland branches and their overseas offices.
In 2019, foreign banks were involved in about a fifth of all funds raised in Shanghai and Shenzhen, home to two of the country’s largest stock exchanges, but that percentage has declined every year since.
“I’m amazed that there is [billions of dollars’ worth] of issuance for IPO in Shanghai every week and the banks that underwrite them are almost exclusively domestic,” said a senior executive of a global bank in Asia, who declined to be named.
“THE [global] banks have onshore initiatives, yet we seem to be involved [few] of internal agreements. Something has to happen: the big banks have to get involved in these A-shares [mainland Chinese listing] agreements, or we would have to leave the business and stop having resources assigned to it.
The weakness also comes as heightened geopolitical tensions between the US and China have chilled foreign business on the mainland and led to grievances of communications disruptions.
“This is the environment that Xi Jinping has created,” said Fraser Howie, an independent analyst and Chinese finance expert, who pointed to a “post-Covid, cold war second world.”
“That’s not what the rules say [no foreign banks] or that there is a real risk there. It might be easier for an issuer not to have a foreign bank and only deal with Chinese bookrunners.”
Foreign banks require more licenses to operate in different industries in China. Many of those with securities businesses struggled to turn a profit last year, according to an Analysis of their data by the Financial Times.
Another factor is concern about due diligence by foreign institutions. Several global bank executives said they were often reluctant to work on Chinese listings because it was difficult to perform the level of due diligence required by their internal processes.
“I trade on what we would do if it were a US offer, and that’s my standard,” said a senior executive at the Asian investment banking arm of a global bank, who declined to be named. “I need a list of your top 50 clients and want to give them independent due diligence calls. [In China] I’m not sure they will go through the same independent due diligence that a Western bank would.”
In addition, Chinese listings tend to rely less on institutional investors and more on retail investors than those in the United States, meaning traditional global banking models are not suited to the mainland market, the banker said.
“A lot of it is retailed, so you really need to have a retail brokerage platform to sell these deals,” he said. “The business model run by Western banks, where you sell [shares] to the same 100 or so investors every time, it doesn’t work.”
https://www.ft.com/content/07a3cfba-33ef-4268-a880-6241e1f791af
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