Reuters reports (23 Jan) that Chinese investment banks are poised to trim a large number of employees and to shave back employee bonuses. These cut backs are the result of a decline in IB profits produced by a reduction in IPOs in China. China has gone without an IPO since September 21. The fact that the lack of IPO’s in China has lead led to, in several large companies, a 5% reduction in staff illustrates that Chinese investment banks are hugely dependent on IPOs to generate revenue. It is possible that the lack of IPOs will force many Chinese investment banks out of the market. Another possibility is that the lack of Chinese IPOs will allow many non Chinese banks to gain footing in the Chinese market. The logic behind this latter possibility is that many other banks, like JP Morgan or Goldman Sachs, offer numerous functions of than working on a company’s IPO. If non Chinese firms do in fact come control a larger part of the Chinese market, it is possible that China may experience a restructuring of their investment banking industry.
Is there a corporate bond market in China? My sense is, no, but I’ve not looked. What other functions can investment banks offer? Capital flows (investment by Chinese outside of China) are restricted. Other than IPOs, on occasion there may be a merger, but without IPOs, I suspect M&A is not a big deal either. There is some work setting up joint ventures, but my sense is that typically does not involve investment banks. Portfolio investment by non-Chinese individuals / entities is restricted. So it’s not clear to me that there is anything for foreign investment banks to do, either. But if I’m correct, then you certainly are safe in predicting further restructuring of the (domestic) investment banking business!
Ah, a couple stories on Bloomberg, the “Panda” bond market may be active — plus bonds by domestic entities. There’s certainly plenty of liquidity but also several ongoing accounting scandals (Caterpillar bought a contruction equipment company and now has a $500 million writeoff, the company had been cooking its books for years, due dilligence done poorly — while the US Amb under Bush sits on Cat’s board, someone who ought to know better but maybe Cat’s board is a rubber-stamp…)