HNGO KONG this is where China meets the outside world. The territory has long been a training ground for mainland Chinese bankers hoping to conquer the planet. But recently, it is the Wall Street banks that are being educated in Chinese practices. As mainland companies came to dominate initial public offerings (Initial Public Offerings) and bond issues in the territory, continental methods have also crept into the underwriting process behind the transactions.
Western banks have decried the change, saying it hampers price discovery. Global investors are also angry with what they say are inflated stock and bond offerings. Hong Kong Securities and Futures Commission (SFC) attempts to resolve the conflict. He published a consultation document that proposes to codify Western standards. The results of the consultation are expected in the coming weeks and could add a new set of rules to the SFCexisting code of conduct for bankers. Whatever the outcome, it is sure to spark controversy.
The process of bringing a Initial Public Offering or an obligation to investors is generally defined by many unwritten practices shaped by the market in which the transaction is entered into. The culture of Hong Kong investment banking has borrowed heavily from the Eurobond market that developed in London in the 1970s and 1980s. The securities issuers generally appointed a lead bank among the syndicate. institutions signing up for the operation at an early stage in the process. The role of banks and the purpose of their commissions are clear. Importantly, the lead bank can advise the company on pricing and allocation of shares to investors. This is to ensure that the demand for titles is real. The setup also appeals to investors experienced in valuing securities and excludes speculative liquidity.
All of that has changed, however. Today, many companies, mainly those from mainland China, only assign roles to banks at the last moment, allowing a melee of investment banks to vie for supremacy – and fees – in the syndicate. In some recent bond deals dozens of banks have found themselves on the ticket, each giving up for a small fee. Instead of a coordinated pricing process, the result is a confusing price discovery.
Banks knowingly accept inflated orders, driving up the price of the security. In one case the SFC found that the heads of a Initial Public Offering union disseminated misleading information that overstated the demand for actions. In debt transactions, some banks submit “X orders ”that do not disclose the identity of their customers and make it more difficult to assess actual demand. It is these new practices that Hong Kong regulators want to push back, while recognizing old ways as best practices.
Many global banks support the establishment of a set of standards. “We all need to sing from the same hymn sheet,” notes one banker. The continent’s institutions, however, have a different story to tell. They say that the criticisms of Western rivals mainly reflect the sour grapes. Chinese companies have gone from issuing around $ 20 billion in we– Dollar-denominated bonds in 2011, or about 1% of global issuance, to about $ 209 billion in 2019, or 6% of the global market, according to Dealogic, a data provider. They also made Hong Kong one of the biggest Initial Public Offering places for a decade. Mainland banks have climbed the rankings for such offers during this period. It is natural, says a banker from one of these companies, that they have more control over market practices.
the SFC is in the unenviable position of having to choose sides. Its proposed rules implicitly reject the rampant influence of mainland financial institutions and could disadvantage Chinese companies seeking to raise capital in Hong Kong and their mainland bankers, while giving Wall Street banks and global investors an edge. No wonder, then, that he took the matter of a code reluctantly, after years of lobbying from global investment managers and banks. But there are worst-case scenarios imaginable for the regulator, such as one in which opacity slowly engulfs the market and investors see little distinction between Hong Kong and the mainland. ■
This article appeared in the Finance & Economics section of the print edition under the title “Clash des cultures”