Chinese brokerages are having a bumper year for equity deal-making, with Ant Group’s multi-billion-dollar initial public offering poised to boost their showing in the global ranking to the best in at least two decades.
China International Capital Corp is leading the push, thanks to a bevy of Chinese deals, an economy that is shrugging off the pandemic and a liberalisation of local capital markets. CICC is set this year to vault above US stalwarts Goldman Sachs and Morgan Stanley once Ant completes what is set to be a record US$34.5 billion ($47 billion) IPO in Hong Kong and Shanghai, according to data compiled by Bloomberg.
As a group Chinese securities firms will take up nearly half of the top 50 underwriting spots as they are enlisted by local companies seeking to capitalise on the nation’s recovery from the coronavirus pandemic. A flaring up of tensions between the world’s two superpowers that has increased scrutiny of Chinese names in the US has also prompted a wave of additional listings in Hong Kong by firms including Netease and JD.com.
“The robust pipeline in China compared to elsewhere in the world has sent leading Chinese brokers to the top of the charts,” says Wang Jiyue, a former banker and the author of The Star Market Way, a chronicle of China’s new Nasdaq-like trading venue.
Twenty-four of the world’s top 50 underwriters this year are from China, up from 15 in 2019. Together they held a combined market share of about 31%, compared with 18.5% last year. That is the biggest share in records going back two decades.
CICC has a prominent role in Ant’s offerings on the mainland and in Hong Kong. It along with Chinese rival CSC Financial are jointly leading in Shanghai, while a number of US investment banks are on the Hong Kong deal, including Citigroup, JPMorgan Chase and Morgan Stanley.
Chinese brokerages will continue to raise their profile, says Stephanie Tang, head of private equity for Greater China at law firm Hogan Lovells. “Some of the banks see themselves as quite important bridges between the Chinese market and the international market.”
Bouncing back
China has firmly beaten back the spread of the coronavirus, with the economy rebounding by 4.9% in the third quarter and its stock market recently topping US$10 trillion in value. Business in the financial hub in Shanghai is largely back to normal, with traders and bankers in the office and travelling to see clients as Europe and the US still struggle.
Authorities have also relaxed regulations for the onshore market since last year, including extending an IPO registration system from Shanghai’s STAR board to Shenzhen, waiving limits on valuations, and removing quotas for foreign investors.
IPO deals in the Asian nation jumped about 60% this year, double the rise seen in the US, according to data compiled by Bloomberg. Chinese companies have raised more than US$98 billion from first-time share sales at home and offshore this year, on pace to exceed the 2010 record after Ant completes its IPO, according to data compiled by Bloomberg.
At the same time, more Chinese companies are bringing back listings to Hong Kong, giving brokerages from the mainland a better chance to compete with well-entrenched global banks in the Asian financial centre.
“Many IPOs in Hong Kong are from mainland Chinese companies in which Chinese brokers have more participation,” says Shen Meng, director of Beijing-based boutique investment bank Chanson & Co. “American brokers, which dominated the Hong Kong IPO market previously, are only taking part in a few ultra-big deals now.”
Despite their showing on the league tables, China’s brokerages are still minnows compared with their Wall Street peers. The 131 registered firms in the nation have the combined assets of Goldman Sachs.
Zou Yingguang, a managing director at Citic Securities, said at a conference last week that China must set up its own top investment bank to enhance its competitiveness and clout in global markets. Goldman Sachs derived 40% of its revenue from overseas markets, while China’s top five brokerages only got an average 10% from their international operations, he says.
“While Chinese brokers have made progress, they still lag far behind in asset scale and innovation ability,” he says.
Chinese regulators have called for the creation of an “aircraft carrier-sized” brokerage to take on the foreign competition expected with the opening up of the nation’s financial markets. The state owners of the country’s two biggest securities firms, Citic Securities and CSC Financial, have held talks on a potential merger, which would create a US$100 billion firm.
In the meantime, continuing reform of the local market may extend the nation’s IPO boom and further boost local brokerages. The China Securities Regulatory Commission said this month it plans to expand the registration-based IPO mechanism to all first-time offerings “at an appropriate time”.
“The registration-based IPO reform has galvanised the market,” says Dong Chen, deputy president of Changchun-based Northeast Securities Co. “In the domestic market, foreign banks are no match for Chinese brokers in winning mandates.” — Bloomberg
