Foreign banks drop out of initial public offerings in China

The participation of foreign banks in initial public offerings in mainland China has fallen to its lowest level in more than a decade, a sign of difficulties finding a foothold in the country’s closed financial system.

So far this year, foreign banks have only added $297mn worth of new listings, or 1.2 per cent of the total. The ratio is lower than for any full year since 2009, when Dealogic began collecting the data, when banks comprised about half of total listings by value. Last year’s 3.1 percent represented the third-worst year on record.

Not a single US bank has been involved in 109 IPOs on China’s sprawling stock market in 2023, where a total of $26 billion has been raised in deals that often attract heavy demand from domestic investors. Only Credit Suisse and Deutsche Bank have acted as book runners this year.

While foreign banks’ operations are dwarfed by those of mainland competitors, the data reflect their struggle to maintain a meaningful presence in a fast-evolving but untouched market with varied regulatory and due diligence requirements. Severe COVID-19 restrictions over the past three years limited access to the country, increasing the distance between mainland subsidiaries and their overseas headquarters.

In 2019, foreign banks were involved in about a fifth of all money raised in Shanghai and Shenzhen, home to the country’s two biggest markets, but that proportion has fallen every year.

“I am amazed that every week there are (billions of dollars worth) of IPOs in Shanghai, and the banks underwriting them are almost exclusively domestic,” said a senior executive at a global bank in Asia. to be nominated.

“(Global) banks have onshore ventures, yet we are involved in (few) of the domestic deals. Something needs to happen – the big banks either have to get involved in these A-share (mainland Chinese listing) deals need, or we should give up business and stop allocating resources.

The weakness also comes amid worsening geopolitical tensions between the US and China that have put a chill on foreign businesses on the mainland and prompted complaints of communication breakdowns.

“This is the environment that Xi Jinping has created,” said Fraser Howie, an independent analyst and expert on Chinese finance.

“It is not that the rules say (no foreign banks) or that there is a real risk. It is that it may be easier for an issuer not to have a foreign bank and just deal with Chinese bookrunners.

Foreign banks require multiple licenses to operate in different areas in China. Many in the securities business struggled to make a profit last year, according to an analysis of their data by the Financial Times.

Another factor is concern about due diligence on the part of foreign institutions. Several executives at global banks said they were often hesitant to work on Chinese listings because their internal processes found it difficult to meet the level of due diligence required.

“I work on the basis of what we would do if this was the US offer, and that is my standard,” said a top official in the Asian investment banking arm of a global bank. “I want a list of your top 50 customers and I want to do independent due diligence calls on them. (In China) I’m not sure they’re going to go through the same independent due diligence that a western bank would.

In addition, Chinese listings rely less on institutional investors and more on retail investors than the US, meaning the traditional models of global banks are not well suited to the mainland market, the banker said.

“A lot is sold to retail, so you really need a retail brokerage platform to sell these deals,” he said. “The business model that Western banks run, where you sell[shares]to the same 100 or so investors every time, doesn’t work.”

The participation of foreign banks in initial public offerings in mainland China has fallen to its lowest level in more than a decade, a sign of difficulties finding a foothold in the country’s closed financial system.

So far this year, foreign banks have only added $297mn worth of new listings, or 1.2 per cent of the total. The ratio is lower than for any full year since 2009, when Dealogic began collecting the data, when banks comprised about half of total listings by value. Last year’s 3.1 percent represented the third-worst year on record.

Not a single US bank has been involved in 109 IPOs on China’s sprawling stock market in 2023, where a total of $26 billion has been raised in deals that often attract heavy demand from domestic investors. Only Credit Suisse and Deutsche Bank have acted as book runners this year.

While foreign banks’ operations are dwarfed by those of mainland competitors, the data reflect their struggle to maintain a meaningful presence in a fast-evolving but untouched market with varied regulatory and due diligence requirements. Severe COVID-19 restrictions over the past three years limited access to the country, increasing the distance between mainland subsidiaries and their overseas headquarters.

In 2019, foreign banks were involved in about a fifth of all money raised in Shanghai and Shenzhen, home to the country’s two biggest markets, but that proportion has fallen every year.

“I am amazed that every week there are (billions of dollars worth) of IPOs in Shanghai, and the banks underwriting them are almost exclusively domestic,” said a senior executive at a global bank in Asia. to be nominated.

“(Global) banks have onshore ventures, yet we are involved in (few) of the domestic deals. Something needs to happen – the big banks either have to get involved in these A-share (mainland Chinese listing) deals need, or we should give up business and stop allocating resources.

The weakness also comes amid worsening geopolitical tensions between the US and China that have put a chill on foreign businesses on the mainland and prompted complaints of communication breakdowns.

“This is the environment that Xi Jinping has created,” said Fraser Howie, an independent analyst and expert on Chinese finance.

“It is not that the rules say (no foreign banks) or that there is a real risk. It is that it may be easier for an issuer not to have a foreign bank and just deal with Chinese bookrunners.

Foreign banks require multiple licenses to operate in different areas in China. Many in the securities business struggled to make a profit last year, according to an analysis of their data by the Financial Times.

Another factor is concern about due diligence on the part of foreign institutions. Several executives at global banks said they were often hesitant to work on Chinese listings because their internal processes found it difficult to meet the level of due diligence required.

“I work on the basis of what we would do if this was the US offer, and that is my standard,” said a top official in the Asian investment banking arm of a global bank. “I want a list of your top 50 customers and I want to do independent due diligence calls on them. (In China) I’m not sure they’re going to go through the same independent due diligence that a western bank would.

In addition, Chinese listings rely less on institutional investors and more on retail investors than the US, meaning the traditional models of global banks are not well suited to the mainland market, the banker said.

“A lot is sold to retail, so you really need a retail brokerage platform to sell these deals,” he said. “The business model that Western banks run, where you sell[shares]to the same 100 or so investors every time, doesn’t work.”