China at heart of two exhilarating decades

As we celebrate our 20th anniversary, FinanceAsia looks back over the past two decades and ponders what the next 20 years could bring.

Chairman Mao’s guiding ambition was to turn China into a global superpower. But he was famously never a numbers man and found ministerial reports an excruciating compendium of “dull lists, figures and no stories.” 

According to Jung Chang’s biography, one Soviet economic advisor concluded Mao had no “absolutely no understanding of economics,” after suggesting a timeline of “200 years or maybe 40”. 

Modern economists, by contrast, have tried to be very precise in their forecasts about China. Yet they have often proved to be just as wide of the mark. 

In 2001, Goldman Sachs coined the term Brics, but spent the rest of the decade having to continually revise its GDP projections after China massively outperformed expectations. 

At the end of 2015, China had a $10.87 trillion GDP compared to $860.8 billion in 1996 when FinanceAsia was first published. The median Asian country’s economic sensitivity to China’s GDP has doubled in the last couple of decades says the IMF.

Today it is the world’s second-largest economy in nominal terms and is expected to overtake the US towards the end of the next decade. Its re-emergence on the world stage after slumbering for almost half a millennia is the great story of our age. 

How the Chinese government runs its economy and society matters to us all. This article is about Asia, but China is its interlinking thread much to the chagrin of India, which should overtake it in population within the next five years yet has struggled to capitalise on its demographic dividend.

Ancient trading ties are being re-forged through the internationalization of the renminbi and the Belt and Road policy. The latter is re-opening swathes of central Asia, making it the physical link between East and West it once was at the time of the Han and Roman empires. On the flip side, the West’s ability to cope with its relative decline will be one of the great tests of the next 20 years.

Not everyone could see this 20 years ago. “When UBS merged with SBC in 1998 I remember one of my new colleagues telling me there wasn’t any point going to China because there was no business there,” said Peter Burnett, the Swiss bank’s former head of Asian investment banking and current head of North Asia corporate finance at Standard Chartered.

Burnett’s partner on many equity deals in the early noughties was Mark Machin, then head of Asian equity capital markets at Goldman Sachs and now president of Canada Pension Plan Investment Board. He recalls how Morgan Stanley lost the mandate for China’s first landmark privatisation to Goldman in 1997. “They didn’t believe China would privatise its major telecom company (China Telecom, now Mobile) at a time when even France had not,” he commented. 

The past 20 years have demonstrated it never pays to underestimate China but even country experts find it hard to comprehend the sheer magnitude of the numbers involved. The Chinese government estimates that the emerging megalopolis of Jing-jin-ji (encompassing Beijing, Tianjin and Hebei), for example, will house 130 million people by 2030. That mega city alone will be larger than Japan, currently the world’s third largest economy by nominal GDP. 

Former Federal Reserve Chairman Ben Bernanke once described the 1990s and early noughties as the great moderation. The great acceleration might have been more apt. 

However, Asia’s rise has not been a smooth progression. It has been punctuated by crises, led by the Asian financial crisis (AFC) of 1997 and the global financial crisis (GFC) one decade later. 

Asia has learnt the hard way that economies and financial markets rely on efficient capital allocation, long-term capital and the correct pricing of risk. Yet most of the people interviewed by FinanceAsia for this article believe plenty of governments are not heeding that lesson.

A second thread running through the past 20-years has been the rise of Asia’s middle class and their desire to put their newfound wealth to work. It has led to greater institutionalisation of savings, enabling the region to finance itself and increasingly export surplus capital to the rest of the world.

At the same time, regulators have struggled to manage these’ “animal spirits.” Enthusiasm for the latest hot new trend – telecoms,, fintech to name but a few - has frequently run well ahead of itself, or in the case of the AFC, beaten a hasty retreat. 


Back in 1996 hubris was everywhere, although this was only apparent in retrospect. The focus then was not China, but South East Asia and the tiger economies of Korea and Taiwan. 

Crony capitalism was rife and many family-owned companies had their own pet bank. One notorious example was Sjamsul Nursalim’s Bank Dagang Negara Indonesia (BDNI), where loans to affiliates totaled 90%. 

Revenue was earmarked for twin skyscrapers in Jakarta that would rival Hong Kong’s Bank of China Tower. But architect IM Pei never got to build them after BDNI and most of Indonesia’s 240 banks collapsed. 

At the height of the crisis, Malaysian Prime Minister Mahathir Mohamed blamed Western speculators for his country’s travails and imposed capital controls. Many believe Malaysia should look closer to home to solve them (1MDB anyone?).

Capital misallocation ruled the day, compounded by too much debt that was denominated in a currency the region’s governments could not control (US dollars) and of very short duration (averaging less than one year).

“No-one saw it coming,” said Stephen Williams, HSBC’s head of global banking for South East Asia and pretty much the last man standing from pre-crisis Asian DCM. “US dollars cost companies half as much as rupiah bank loans even after factoring in a mild depreciation. But they hadn’t hedged and when foreign investors exited, their currencies fell through the floor.” 

Indonesia arguably suffered more than any other Asian country, as did its international creditors who found it extremely difficult to get their money back when one corporate after another hid behind the veil of Indonesia’s opaque legal system. 

“The AFC taught Asia about the risks of short-term borrowing against long-term assets,” commented Frank Sixt, finance director at CK Hutchison. “The region began to turn away from equity and bank financing towards the creation of domestic bond markets.”

Sixt himself was determined to demonstrate Hutch had market access and went to London to raise funds in sterling. He has regretted it every since. 

“The deal proved a point, but it ended up being costly,” he noted. “The bonds landed in about four sets of hands and we were never able to redeem them. The damn thing finally matured in December last year.”

In his book Breakout Nations, Morgan Stanley Asset Management’s Ruchir Sharma claims Indonesia has done a good job reforming its big conglomerates. Credit Suisse’s Asian CEO Helman Sitohang believes the rating agencies have not given the country the rating it deserves

“Indonesia has maintained excellent fiscal discipline and has a low debt to GDP ratio,” he argued. 

Indonesia still does not have full investment grade status unlike the Philippines, which achieved it in 2013 after working hard to build up its domestic debt capital markets. The Philippines has come a long way since 1996 when it was only just shaking off the vestiges of sovereign default after buying back its $1.9 billion Brady bonds through an exchange and tender offering.

In his book Sharma views two countries negatively; India, the country of his birth and Malaysia. Where India is concerned, he suggests companies continue to head abroad because of the difficulties executing business at home.  

In 2007, Tata Steel scooped up Corus for $14.85 billion, while Hindalco purchased Novelis for $6 billion and United Beverages acquired Whyte & Mackay for $1.2 billion. 

One of India’s biggest challenges is finding a better way to channel savings to fund infrastructure growth. “I do think there’s an important opportunity for India to deepen its domestic bond market, develop its CDS market and let Indian real estate developers issue Reits,” said Citi’s longstanding Indian CEO, Pramit Jhaveri. 


The AFC demonstrated the dangers of excess debt. Some bankers believe Islamic financing would not only solve this but also change the very nature of capitalism itself. Malaysia has successfully created an Islamic financing industry that some proponents think could change the very nature of capitalism. 

One of the industry’s key figures is Mohamed Rafe bin Mohamed Haneef who is now CEO of Group Islamic Banking, CIMB Group, but worked for HSBC in the 1990s and developed the concept for the bank. 

Malaysia launched the world’s first global sukuk bond in 2002. HSBC’s Williams and Haneef were team leaders for the $600 million deal, which created a shariah-compliant bond market that recorded issuance of $35 billion in 2015. 

Haneef believes Islamic finance can create a more equitable society. Potential profits would be shared between investor and manager rather than absorbed by a financial intermediary. 

“Banking will probably be the last industry to get Uberized, due to various entrenched state subsidies, but it will happen,” he maintained. “There’ll be a huge number of changes in financial intermediation over the next 20 years. But if it moves to a risk sharing model then banking by definition will become Islamic since it works on the same principle.”

Risk sharing is a concept well understood by Korea, which experienced an equally rapid collapse and re-birth as a result of the AFC.

StanChart’s Burnett remembers sweltering in his suit and tie under the sun’s glare at a meeting in Seoul after his client followed government instructions to save money by only switching the air-con on when the temperature reached 27 degrees celsius. Luckily, he was not asked to demonstrate his client focus by handing over his gold wedding ring as many Koreans did, so they could be melted down into ingots, which the government then sold on the international markets.

Over the years, FinanceAsia has collected numerous stories about the pain involved when bankers try to persuade Korean issuers where the market clearing level for their deals are. It often seems to involve a lengthy face-off, only resolved once the client’s cigarettes run out. 

Many think this bullheadedness relates to the country’s historic dominance by Japan and China. But bankers also hail Korea’s ability to thrive from creative destruction. 

MBK Partners’ Michael B. Kim describes the AFC as a revolutionary period for his country. “Korea literally transformed itself overnight from a country hostile to foreign capital to one, that embraced it.” 

Kim was responsible for one of the AFC’s most symbolical transactions – the sale of KorAm Bank to a foreign private equity buyer (his then company Carlyle Asia Partners) and its subsequent purchase by a foreign bank (Citi) in 2004.

Since then, Kim and partners have established their own private equity firm and last year completed Asia’s largest leveraged buyout to date, the $6.5 billion acquisition of Tesco’s Korean Homeplus business. Kim said the deal highlights the localisation of Asian finance. 

Morgan Stanley’s Asia CEO Wei Sun Christianson agreed Asian finance has become more local and like Kim is its living embodiment. 

This year marks the 50th anniversary of the Cultural Revolution and Christianson only just escaped being sent to the countryside for “re-education”.

She was among the second year of students allowed to attend high school again, although she had to wait some years before the introduction of a merit-based system enabled her to go to university. Post graduation, the countryside exerted its grip once more and her government employer sent her to a farm for agricultural training.

Determined to become a professional, she managed to get to Amhurst College in the US instead: its second ever mainland student (the first being a Qing dynasty official). 

Christianson and her generation have done much to bring ideas back to China. “The speed and degree of localization has been immense; not just in terms of bankers, but the deals themselves,” she explained. “I remember working on Shanghai Petrochemical’s $377 million IPO in 1993 when I was at Hong Kong’s SFC.”

The lead manager among the investment banks on the deal pushed very hard for a Hong Kong and New York listing fearing Hong Kong couldn’t absorb that amount of paper she continued. “And yet only 13 years later, ICBC raised $21.93 billion from a dual listing in Hong Kong and Shanghai.” 

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Asia’s ability to finance itself is having a big impact on who tops the league tables. Back in 1996, FinanceAsia bore witness to the death throes of British merchant banking. The likes of SG Warburg and Jardine Fleming had been Asia’s dominant force until their mainly family-owners sold out.

Their place was taken by the Americans and to a lesser extent the Swiss. Mark Machin attributes luck, persistence and a lack of sleep in propelling Goldman to the top of the Asian league tables. “Back then most of my pitch books revolved around explaining who Goldman Sachs was and what an investment bank did,” he recollects.   

The Americans entrenched themselves just as China’s privatisation programme kicked into gear and the dual listings they sponsored were the perfect solution at a time when China’s capital markets were too immature to handle them. The IPOs for China MobilePetroChinaSinopec and Bank of China Hong Kong were the kind of landmark deals it is hard to imagine the global equity capital markets will ever see the likes of again.

The international banks also made the investments of a lifetime through their pre-IPO stakes in Chinese banks, although this too only became apparent with hindsight. Fred Hu, now chairman and founder of private equity firm Primavera Capital Group was then Greater China chairman at Goldman. 

He recalls the uphill battle he undertook to persuade a reluctant Hank Paulson and later Goldman’s board that it made sense for the bank to plough the largest foreign investment China had ever seen into ICBC.

Convinced the Chinese economy was entering a sweet spot and a fervent believer in the talents of ICBC’s president, Jiang Jianqing, he deliberately ‘embellished’ the Chinese translation of a letter to ICBC where Goldman promised to discuss the matter internally. His belief and the bet paid off, with Goldman raising $9.85 billion after divesting a stake it originally purchased for Rmb18 billion in 2006.

When Chinese deals initially came to market, they required a country discount, with nationality eclipsing industry fundamentals. Morgan Stanley’s Christianson cites Aluminium Corp of China’s (Chalco) December 2001 Hong Kong and New York IPO as one of the first to change that. 

“I remember a Scottish fund manager telling me he couldn’t place Beijing on a map, but it didn’t matter because he liked this company’s business model and placed an order,” she said. 

The early noughties were the high watermark for ADRs and GDRs particularly for Korea and Taiwan’s capital-hungry tech companies. For Burnett the turning point came with the $1 billion dual Seoul and New York listing of TFT-LCD producer LG Philips in 2004, which UBS led alongside Morgan Stanley.

“It demonstrated the depth of domestic liquidity and soon after, these companies stopped needing to do ADR’s,” he noted.

However, since Focus Media delisted itself from the Nasdaq in 2013 almost 50 Chinese companies have followed suit, hoping to relist in their home country where valuations are much higher. However, in another example of how markets can run ahead of themselves, the China Securities Regulatory Commission is currently trying to clamp down on their efforts to bypass the 800-strong IPO queue via backdoor listings.

One constant about China is not just the size of the numbers involved but the impact they have when their full force is unleashed at once. If 1.3 billion people decide it is the time to invest in equities there is likely to be a problem. If they decide the best way to do that is on margin, there is likely to be a very big problem, as the country discovered in 2015 when the CSI 300 index doubled in the space of one eight month period and halved in the space of the next.

The government has tried to keep its finger in the dyke through gradual liberalisation and pilot programmes. But the desire to get rich often trumps history’s sobering lessons and China has now had a stock market crash every decade, plus a very significant debt overhang to work its way through. 

China’s capital markets and its bankers have become more influential, but the aforementioned torrent of people and money is increasingly overwhelming neighbouring Hong Kong too. Many believe Hong Kong’s IPO market has become dysfunctional and wonder why the regulator is not intervening to limit the impact of cornerstone investors.  

Cornerstones were first deployed during China Telecom’s IPO in 1997 to comfort investors such a large deal could be absorbed by the market. But over time, the percentage they are allocated has become extremely large.

Machin worked on the China Telecom IPO and now says, “It’s questionable whether you can call some of these deals IPOs anymore. Some are effectively placements to connected people.”

“The whole process needs to be better managed,” added Burnett who first handled cornerstones on MTR Corp’s privatisation in 2000. “The bookbuilding process should determine the valuation, not the cornerstones otherwise issuers won’t get the best deal even though it may feel like they have greater security.” 

Christianson further flagged the subsequent lack of secondary market liquidity and the swelling numbers of banks hired to sell IPOs; and Morgan Stanley should know after grappling with 28 other bookrunners on WH Group’s 2014 listing

The deal failed miserably and was resurrected with just two leads: Morgan Stanley and BOCI. “It’s a serious issue,” Christianson said. “Execution suffers when there are too many banks because no-one is being incentivised properly.”

One CFO who could offer IPO and bond debutants a primer in managing syndicates is Frank Sixt. CK Hutchison has long been renowned for paying sensible fees. 

He said, “Before each deal we outline our definitions of success in terms of size, pricing and aftermarket performance. We maintain a flexible fee structure, rewarding banks that outperform and reducing fees for those that don’t. It means we’re less vulnerable to bait and switch tactics.” 

 One of the reasons why there are such unwieldy syndicates is because every Chinese bank and brokerage now has an international offshoot, sometimes multiple ones competing against each other. BOC, for example, has three DCM syndicate desks. 

And they are not in Hong Kong, London and New York. Just in Hong Kong - in the same building, but on different floors and separated by far more than Chinese walls. 

How successful Chinese banks will be able to internationalise is one question which keeps international bank CEOs awake. As the Chinese economy gets richer its institutions will have capital to deploy and the firepower to take over ever-larger competitors. 

Western investment banks have been enormously successful implanting themselves all around the world in part because they are staffed and run by people from all over the world. Will Chinese banks be able to follow suit and if not, will that harm their international prospects?

One domestic market Western banks have long had their hearts set on is China’s with varying lack of success. HSBC recently became the first to apply for majority ownership of its proposed joint venture, although Goldman and UBS have effective operational control of theirs. If America’s domestic capital markets are anything to go by they are likely to continue struggling to make an impact.

“Will they ever be a top five bookrunner?” mulled HSBC’s  Williams. “Not in the short to medium term, but the pie is so large it won’t matter.” 

At the end of 2015, China’s domestic bond market had Rmb48 trillion ($7.3 trillion) outstanding. This not only makes it the world’s third-largest market in absolute terms, but year-on-year growth of 35% also represents the highest on record anywhere.  

Yet it is still only 65% of GDP compared to America’s 200% ratio, suggesting much higher growth over the coming decades as bank lending loses its dominant role. Williams believes that as Asian countries become increasingly self-financing, only locally embedded investment banks will thrive. 

However global banks have been stymied by their inability to monitor cross-border flows thanks to legacy IT systems that cannot talk to each other. The compliance and IT costs to fix this are a major factor weighing on profitability.

Basel III, Dodd Frank and the Volcker Rule have also bumped up costs, while breaking open broking commissions has made a lot of investment banking research unaffordable. 

China does offer an example of another way to keep costs down:  ICBC’s Jiang is the world’s longest-serving bank head and the most successful in terms of profit growth. In 2015 he was paid $85,000, just 0.3% the level of JP Morgan CEO Jamie Dimon. 


A more drastic answer to costly bankers are robots. The idea of the singularity (the ultimate M&A deal: a merger of humans with machines creating non-biological intelligence) may seem far-fetched and yet how far has technology changed over the past 20 years.

Machin recalls being extremely jealous that SG Warburg was the first to get email in the mid 1990s. One banker who worked at Warburg said there were two internet-enabled computers in the Hong Kong corporate finance division back then. 

One was a Reuters’ terminal and the other a shared computer to access emails. Since many bankers did not know how to use it, they got their secretaries to print off emails, hand-wrote a response, then handed it back.

What might the technological world look like in 20 years? Increases in processing power mean computers have caught up with algorithms devised many years ago and at the end of last year one of Google’s DeepMind computers beat a Go champion for the first time. 

CK Hutchison’s Frank Sixt is unsurprisingly a big proponent of technology given his position at one of the world’s largest telecom companies. He believes the sector will become the originator and servicer for the fintech revolution and shared economy. “AI-led interfaces will be everywhere and it’s highly probably customer relations will be handled by a sentient hologram.” 

Machines will become traders. “It’s hard to say whether it will be more or less volatile, but the transmission mechanisms for market events will certainly be different,” he posited.

HSBC’s Williams is not so sure the red jackets draped over the backs of chairs will disappear from HSBC’s trading floor. “I don’t think regulators will be comfortable with machines replacing humans,” he predicted. “There’ll still be a role for intermediaries. Investors like talking to a person and if there’s one thing humans want it’s someone else to blame when things go wrong.”

Indeed, the AI debate cuts to the very heart of what it means to be human. Professor Maggie Boden, author of AI: its nature and future, thinks we are many years from creating a computer that can think like a human. 

“There are a number of Carebots on the market, which are supposed to recognize emotional states and respond in an appropriate way,” she remarked. “But if, for example, an old lady explains that her husband once cheated with her best friend, can a computer ever really understand what the depth of that betrayal means to a human? These are deep philosophical issues that won’t be solved for a very long time.”


Over the immediate term, all the interviewees for this article suggested we should be far more concerned about the world’s debt overhang and negative yields, plus humans’ need to blame an “other.” 

The popularity of US Republican candidate Donald Trump demonstrates there are plenty of people outside of Asia who feel their children will not have a better life than they did. 

China launched its going global policy in 1999 and in 2004 Lenovo’s takeover of IBM’s PC division demonstrated how its companies were becoming global players. But only one year later, US anxiety dressed up as security concerns torpedoed CNOOC’s $18.5 billion bid for Unocal. 

While few would disagree with President Xi Jinping’s crackdown on corruption, many worry about the concurrent clampdown on China’s civil society. 

Fred Hu acknowledges the risks, but maintains China’s rise is a peaceful one and is not worried about its slowdown and ageing population. “China today is completely plugged into the world economy and this will act as a powerful constraint on hyperbolic nationalism.”

Michael B. Kim also adheres to the view that economics trumps politics and believes Asia is forging a path where strong regimes create sound economies and then facilitate the democratic rights the West often takes for granted.

“China’s support of UN sanctions against North Korea was a very significant step driven by economics,” he claimed. “I’ve always maintained Korea will be re-unified in my life-time although now I’m in my 50’s that doesn’t leave much time.”

Mark Machin is amazed how well the world has coped with China’s rise so far but remains a firm believer in the fact, “we’re all home-sapiens and no different from one another whatever our nationality.”

And he added, “Asia’s wealth generation is a great thing. The West can compete by improving educational standards.”

What would Chairman Mao have made of it all? “I think it’s fair to say he would’ve had mixed views,” concluded Fred Hu with a heavy does of understatement. “Mao was a revolutionary and he wanted China to command global respect. The irony is that it is being done through market-oriented reforms rather than social engineering.”

¬ Haymarket Media Limited. All rights reserved.
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