Foreign banks’ participation in initial public offerings in mainland China has fallen to its lowest level in more than a decade, a sign of their struggles to gain a foothold in the Asian nation’s closed financial system.
Since the beginning of the year, the number of foreign banks participating in new listings in China has accounted for only 297 million USD, equivalent to 1.2% of IPO value.
That’s the lowest ratio since financial platform Dealogic began tracking the data in 2009, when banks accounted for about 50% of all IPOs. In 2022, that figure is also at 3.1%.
Geopolitical tensions
None of the 109 IPOs that have marked the expansion of China's stock market so far this year have involved foreign banks, despite the deals generating a whopping $26 billion.
The Chinese arena is still largely dominated by local banks, with only two foreign banks, Credit Suisse (Switzerland) and Deutsche Bank (Germany), acting as underwriters for these operations.
Credit Suisse is one of two banks that have participated in IPO activities in China so far this year, but only as an underwriter. Photo: Seeking Alpha
“I was surprised that there are billions of dollars worth of IPOs in Shanghai every week, yet the banks that underwrite them are almost exclusively domestic,” said a senior executive at a global bank in Asia.
While foreign banks' performance is dwarfed by mainland rivals, the data shows they are struggling to maintain a presence in a rapidly growing market that is shielded by various regulatory and due diligence requirements.
In addition, strict Covid-19 restrictions over the past three years have hampered access to the Chinese market, further deepening the gap between mainland branches and their global headquarters.
The situation became even more gloomy after the geopolitical tensions between the US and China escalated, causing
This hostile atmosphere casts a shadow over foreign businesses on the mainland, prompting complaints of disrupted communication channels.
“There are no rules prohibiting foreign banks from participating, nor are there any real risks. The point is that it is easier for a company to issue shares without foreign banks and only deal with domestic underwriters,” said Fraser Howie, an independent analyst and expert on Chinese finance.
Procedural problems
One reason foreign banks are reluctant to participate in IPOs in China is that they require multiple licenses to operate in different sectors in the country. Many brokers struggled to make a profit last year, according to a Financial Times analysis of data.
In addition, strict due diligence requirements for foreign banks also force them to be more cautious in their listing activities in China. Unlike Chinese banks, foreign entities must meet the meticulous standards of a U.S. offering, creating another obstacle.
On the other hand, Chinese listings tend to rely heavily on retail investors, rather than institutional investors, which means that traditional global banking models are not entirely suited to the mainland market.
A man wearing a face mask walks inside the Shanghai Stock Exchange building in China. Photo: Reuters
In 2019, foreign banks accounted for about a fifth of all funds raised in Shanghai and Shenzhen, home to two of China’s largest exchanges, but that share has been falling every year.
While foreign banks continue to maintain domestic ventures, their participation in onshore transactions has been disappointingly sparse, sparking debates about whether to continue participating in mainland China A-listings or exit the business and reallocate resources.
The declining presence of foreign banks in Chinese IPOs marks a major shift. Faced with a challenging operating environment, these banks are having to rethink their strategies to navigate and adapt to the complexities of the mainland market .
Nguyen Tuyet (According to Financial Times, Cryptopolitan)
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