China’s mainland is the new battle ground for global banks. Goldman’s new vice chairman Mark Schwartz is set to be based in Beijing, and others will follow. Mainland exchanges account for the majority of this year’s initial public offerings in Asia. The challenge for global banks will be finding their niche, and adequate talent.
As the mainland gains, Hong Kong suffers. Global banks are making selective cuts in Hong Kong, especially in equities. Morgan Stanley’s mainland Chinese joint venture already has around 150 staff despite being just a year old, according to a person close to the matter. UBS, the only foreign bank with a Chinese brokerage license, has transferred a managing director from Hong Kong to Shanghai to build an 80-90 person research team.
Fees are dictating the shift. China’s A-share investment banking fees almost quadrupled since 2007 to $2.2 billion, now making up half of overall China-related banking revenue, up from less than a fifth in 2007, according to Thomson Reuters. This trend is even more evident this year. Three mainland exchanges have taken up 66 percent of Asian IPO proceeds, while in Hong Kong, IPO proceeds have fallen 90 percent year on year.
As the markets loosen up, China will get more attractive. Global banks have already been told they can take up to 49 percent stakes in their joint ventures, and can apply for secondary market licenses after two years of operations, versus five years before. Once Shanghai finally opens its new market for foreign companies, global banks will have a new edge against local securities firms.
There are challenges ahead. Deals are smaller in China, and reputational costs can be high. Local bankers may have good connections on the ground but lack technical skills. Transferring talent from abroad is costly, and high taxes and heavy pollution make people less willing to move to China. Still, if the money is to be made in Beijing and Shanghai from now on, banks and bankers have no choice but to adapt.