Breakingviews - China’s gravy train will bypass Wall Street

An investor looks at an electronic board showing stock information at a brokerage house in Shanghai, China July 6, 2018. REUTERS/Aly Song - RC1CDAB1A6B0

HONG KONG (Reuters Breakingviews) - Investment bankers will have a great chance in 2021 to apply their well-honed skills at talking up opportunities and downplaying league tables. The easiest money from selling Chinese shares in New York is destined to fade. And profitably pushing further onto the mainland will be hard work.

Goldman Sachs delighted in December at being the first to strike a deal to own 100% of its Chinese onshore operations. Others are also building on their 51% stakes just as many local companies seek fresh capital. More than 800 of them are queued up to go public, KPMG reports, while others are selling additional shares to beef up balance sheets. It can be no coincidence that Beijing has widened access just as it encourages greater use of markets and less dependence on bank loans.

The most lucrative work, however, is in New York, where fees average about 5% of the amount raised. Those opportunities are increasingly threatened by Washington’s hostility, including efforts to delist Chinese companies that don’t allow American regulators to scrutinise audits. The new geopolitical order has helped make Shanghai’s STAR board the fastest-growing equity market. Initial public offerings there, however, require sponsors to back their clients financially – an extra layer of risk that makes U.S. and European firms blanch.

Banks generated some $6.5 billion in 2020 by selling shares for Chinese companies like financial technology outfit Lufax, according to Refinitiv. Foreign ones collected roughly a third of the sum, Breakingviews estimates. Despite dominating in Manhattan and competing in Hong Kong, they only claim about 5% of the mainland China market. Morgan Stanley’s joint venture worked on the $7.7 billion Shanghai listing of chipmaker Semiconductor Manufacturing International, but that was only enough for the bank to take 13th place in preliminary year-end domestic equity rankings to lead its overseas peers.

One of the old big ideas about expanding into China was to use their international networks to help companies find acquisition targets abroad. Such work is becoming increasingly constrained because of protectionist governments. That means finding fresh ways to crack the market. For the time being, it will be a harder slog for less money as the China gravy train makes fewer stops on Wall Street.

- This is a Breakingviews prediction for 2021. To see more of our predictions, click here


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