An air of gloom surrounds the once vigorous involvement of foreign banks in mainland China’s Initial Public Offerings (IPOs).
Current figures reveal a low unmatched since 2009, signaling a relentless struggle for these foreign entities to maintain their presence within China’s increasingly secluded financial ecosystem.
In the present fiscal year, overseas banks have merely handled $297 million in new listings, constituting a paltry 1.2% of the total.
This number has toppled from 2009’s impressive 50% participation in total IPO values, reflecting the severe downturn in the banks’ impact in China’s burgeoning stock market.
A Struggle for Presence Amid Local Dominance
It’s noteworthy that among the 109 IPOs marking China’s extensive stock market in 2023, no US bank has partaken, despite these deals generating a colossal $26 billion.
The arena remains almost exclusively dominated by local banks, with Credit Suisse and Deutsche Bank as the solitary international players acting as bookrunners this year.
While foreign banks’ operations pale compared to their mainland counterparts, the data underlines a mounting challenge to sustain relevance in a swiftly evolving yet sheltered market with diverse regulatory and due diligence prerequisites.
Compounding the issue, stringent COVID-19 restrictions for the past three years have obstructed access to China, deepening the gulf between mainland affiliates and their global headquarters.
The landscape gets murkier in the face of intensifying geopolitical tensions between the US and China. This hostile climate casts a long shadow over foreign enterprises on the mainland, fostering complaints of disrupted communication channels.
Fraser Howie, an independent analyst and authority on Chinese finance, attributes this to a “post-Covid, cold war two world” crafted under President Xi Jinping’s reign.
With a labyrinth of licenses required to operate across various sectors in China, many foreign banks with securities enterprises grappled to stay profitable last year, according to a Financial Times analysis of their records.
A Mismatch in Due Diligence Standards and Business Models
A part of the problem lies in the higher level of due diligence foreign banks insist on, making them more cautious in working on Chinese listings. Unlike Chinese bookrunners, foreign entities strive to match the meticulous standards of a US offering, posing another hindrance.
On another front, the predominant reliance of Chinese listings on retail investors, rather than institutional investors, brings into question the compatibility of global banks’ traditional models with the mainland market.
This contrast necessitates a rethinking of strategies as the western model, reliant on selling shares to the same circle of investors, falls short in the Chinese financial landscape.
In 2019, foreign banks had a hand in approximately one-fifth of all funds amassed in Shanghai and Shenzhen, two of China’s largest stock exchanges. However, their share in this bustling marketplace has dwindled year after year.
While foreign banks continue to maintain onshore ventures, their involvement in domestic deals has been disappointingly sparse. This has stirred up debates on the path forward – whether to dive headfirst into these A-share mainland Chinese listing deals or to exit the business, thereby realigning resources.
The diminishing presence of foreign banks in China’s IPOs marks an epoch of changing tides. Faced with a challenging operational environment, these banks must rethink their strategies to navigate the unique complexities of the mainland market.
