Global economists and Asian investment bankers share one common trait: they’re all praying for the health of China’s economy.
The country’s fortunes are fundamental to the pace of global GDP growth and are the catalyst for Asian investment banking activity. Put simply, if Chinese companies do a lot of deals, investment banks in the region have a good year. But the reverse is also true.
Worryingly, Chinese growth is still slowing. The central government forecast economic growth for 2015 of 6.9%; most economists predicted something closer to 6.5% and believe it could slip under 6% in 2016.
Off the back of this slowdown, investment banking fees for Asia ex-Japan have fallen. As of early December, year-to-date revenues for core investment banking stood at $6.8 billion versus $8.2 billion for 2014, according to data provider Dealogic.
At the same time China’s debt levels rose to around 280% of GDP in 2015, according to consultants McKinsey & Company. Loans, bonds, and shadow financing raised purely to cover interest payments would hit Rmb7.6 trillion ($1.2 trillion) in 2015, up 5% from 2014, local brokerage Hua Chuang Securities said in November. And with the economic situation deteriorating, bad debts look set to increase.
That could yet yield more deal flow. Tackling the country’s bad debts requires debt restructurings and liability management, increased securitisation, and capital raising, plus mergers and acquisitions. Meanwhile, vigorous private enterprises are still seeking capital and consolidations to grow.
So for investment bankers everything is still to play for.
“If the financing market remains hot, we will continue to do very well in fundraising,” Jeremy Choy, co-head of China Renaissance’s M&A practice, told FinanceAsia. “If the market cools down, it will be increasingly difficult for some companies to get financing, forcing them to think about alternatives, including M&A.”
Deal activity will ultimately depend on Beijing’s tinkering. The government’s liberalisation of margin financing inflated an equity bubble throughout the first half of 2015 – only to be followed by a crash, a desperate government intervention, and a clampdown on leverage. The authorities then shocked the market with a renminbi devaluation in August. Today the stock market has stabilised but issuers and investors can expect 2016 to include plentiful helpings of government manipulation and market volatility.
China’s ongoing anti-corruption campaign has also ensnared increasingly high-profile individuals, including Yao Gang, one of four vice-chairmen of the China Securities and Regulatory Commission. These investigations could limit capital-raisings by state-owned enterprises.
Outside of China, Southeast Asia’s resource-reliant economies have felt the pinch of falling prices, which crimped their deal-making. That’s unlikely to change.
India could be Asia’s brightest spot. The World Bank predicts its economy could grow 7.5% in the 2015-2016 fiscal year.
However, investment banks have been hoping for years for Indian companies to raise capital and acquire more heavily in Europe and Southeast Asia. The administration of Prime Minister Narendra Modi is cutting red tape, but has failed to introduce radical reforms or ease many regulatory bottlenecks.
For investment banks in 2016, the biggest issue may be finding a new crutch to support their businesses.
For years now, aspiring equity issuers (particularly from China) have assigned multiple banks to arrange their deals. This predilection has expanded into bond issues and, to a lesser extent, major corporate restructurings.
That could prove especially challenging in 2016, with US interest rates hikes potentially crimping bond issuance and posing questions for equity-raising too.
To bolster their revenues, the banks need fees from non-traditional sources. In 2015 these were margin financing and private equity placements. If they fall away, the banks will need a new trick to continue covering Asia effectively.
“You need 200 investment bankers to cover all of Asia [ex-Japan],” said the head of Asia investment banking at one international bank, who declined to be named. “So if you only earn $200 million you’ll not be happy.”
In the hunt for fees, the eyes of Asia’s investment bankers remain fixed on China.