​Tough going in China has global investment banks looking abroad

Global investment banks are looking beyond China, as their advisory businesses in Asia's biggest economy take a hit from a slowing deal activity and the rise of local competition.

But while Japan and India are emerging as appealing alternatives, industry players and observers warn that offsetting the slowdown in China will not be easy.

Over the past decade, global banks have played a crucial role in selling Chinese companies' stocks and bonds, in particular to offshore investors. In 2021, just three foreign banks -- Goldman Sachs, UBS and Morgan Stanley -- collected a total of $1.06 billion in fees from advising Chinese clients on deals.

So far this year, their total is just $203 million.

One reason for the sharp drop is political. Since 2021, Beijing's crackdown on the tech sector and tensions with the West have slowed the wave of Chinese companies listing in the U.S. And a clampdown on the property sector has put a halt to real estate giants issuing high-yield offshore bonds.

As of the first week of December, companies have paid a total of $5.28 billion in advisory fees to investment banks in China this year, according to data from Dealogic. That is down $7.57 billion from the previous year, though still more than the total for Japan, South Korea, India and Singapore combined.

But more than half that total went to just 10 Chinese banks. The remainder went to foreign and smaller local banks.

Increasingly, the Chinese companies that are going public in Hong Kong are doing so with the backing of domestic investors and those from the Middle East, while cornerstone investors, who have traditionally been Western players, are missing.

Morgan Stanley, Goldman Sachs, Bank of America Securities, J.P. Morgan, Citigroup and DBS still acted as joint bookrunners in the top five Hong Kong initial public offerings of Chinese companies this year, but their role in attracting new Western investors was less clear. For example, there was no cornerstone investor in the IPO of electric vehicle battery maker Rept Battero, a subsidiary of China's largest private nickel producer, Tsingshan Group. Morgan Stanley was a lead bookrunner.

For listings with China exposure, "You'd likely want a name like [domestic players] CICC or CITIC Securities, at least on the cover of the book, to cover your bases," said Kenneth Kan, founder of private equity firm Advan Capital and the former global head of business development for CITIC Capital.

Or, as the head of international investment banking at a Chinese investment bank handling Hong Kong IPOs said: "Why hire Morgan Stanley if no American investors are buying the shares?"

While headwinds continue to blow in China, Japan and India have emerged as two alternatives for fee-seeking banks, thanks in part to strong stock market performances in both countries.

Mumbai is set to lead the world in IPOs this year, while the Nikkei Stock Average hit its highest level since 1990. These markets give international banks much easier stories to sell to global investors compared with assets in the mainland and in Hong Kong, which is on track for a fourth consecutive year of decline.

For the international investment banking industry, the fee pool from advising IPOs, mergers and acquisitions and debts in Japan is twice the size of China, said Peter Guenthardt, head of Asia Pacific for global corporate and investment banking at Bank of America.

"I believe the amount of money that's flowing back into Japan will continue," Guenthardt said, citing corporate governance reform and a stronger yen outlook. "I believe that it's reasonable to assume that for the next couple of years, Japan could remain the largest [fee] pool in Asia Pacific," he added.

But venturing into new markets also has its potential drawbacks.

Companies in Southeast Asian markets, for example, will not pay comparable fees to China in the near term, experts say.

Meanwhile, the rush into India by bankers and deal sponsors following capital flows out of China is raising questions, according to Kan. "Is this some kind of a bubble?" he said. "We've kind of seen this story before, especially in places like India, where it sounds great on the surface, but once you peel back the layers, the political structure, the infrastructure, isn't like that of China," he said.

Competition for M&A deals is already heating up among banks across Asia, according to Simon Kavanagh, a partner at BDA Partners, a global investment banking advisory firm focused on Asia. In the second half of 2023, as deal flows slumped, the bulge-bracket banks in Asia started to relax their minimum fee thresholds and compete more aggressively for mid-market M&A deals, particularly in the $250 million to $500 million valuation range, Kavanagh said.

And then there is the other inescapable factor: the sheer size of the China market.