FinanceAsia: What are the prospects for the China investment banking market next year?
David Chin: We believe the market will be around $15-20 billion next year, although these will be off the back of relatively small number of very large transactions - Bank of China, China Telecom southern. The northern part will come later, possibly in 2003. On the secondary side, China Unicom will do both A-shares and overseas issues. China Mobile is considering doing China Depositary Receipts in China, and the Chinese oil companies will probably be financing their operations through the A-share markets.
He Di: China Merchants Bank and Citic Securities will also probably access the equity market locally. And next year, the corporate debt market will be very active. The government is really encouraging the development of the domestic debt capital markets. The power corporations and the Three Gorges Project are likely to issue bonds, and there will be new concepts such as municipal bonds. Next year and the following year will be very active.
Chin: In addition, all the domestic banks which need to recapitalize their tier 2 capital to help clear up their non-performing loans. So far they have been all equity driven, and this tier 2 debt issuance to bolster their capital adequacy levels will be for the first time in China.
He Di: Mergers and Acquisitions will be big, as we can see from the Huawei transaction, as banks and other companies raise foreign capital for their restructuring. That is the general trend, but concretely it all depends on how fast regulatory approval is given. In the financial sector, Bank of Shanghai has sold a stake to HSBC, and Bank of Communications is negotiating with certain foreign parties. Once we know the results of these negotiations we will have a clearer picture of what might happen in the future.
How big do you estimate the domestic corporate debt market next year?
Chin: $5-10 billion would be a conservative estimate. The Chinese government won't want this market to grow too fast.
So are you interested in setting up a joint venture in China to exploit these opportunities?
Chin: We are looking at this very actively. We need the domestic license. But it is a matter of how quickly we want to move, who we want to partner with and what the precise arrangement would be. The CSRC regulations are still very preliminary.
What do you think of the current regulations? Do you think the maximum 33% stake is too little? What would be an ideal level of control?
He Di: The government is driving the terms. Investment Banks can't afford to debate about whether they like it or not. They simply have to do it. The debate is now whether to find a weaker partner which you can dominate, or whether you want to partner with a stronger firm where you can rely on your partner to expand your business.
Chin: The new regulations also don't cover whether or not it's possible to acquire the secondary trading license. The regulations only specify you may apply for a primary market license through a JV. But we feel the secondary market is the most lucrative.
What do you think of acquiring a strategic stake in a company, bypassing the JV route?
Chin: That brings up the question of valuation, and a lot of securities houses are not transparent, as well as having a lot of hidden liabilities.
Also, it raise the problem of how to divide the activities which are permitted to foreign firms and those which aren't. So a JV in the permitted area is easier administratively.
What kind of partner are you looking at?
Chin: We wouldn't go below the top 12 firms. The rest are too small. The top 12 have differences in primary, research and asset management capability. You also need to look at how open they are to foreign idea.
It seems that asset management is the most urgent area for Chinese securities firms, since they are keen to grow fee income.
Chin: Yes, you want a partner where there is a suitable fit to both parties. So you need to cherry pick your partner depending on what the market and the regulations allow. In terms of asset management, we already have set up a venture with Guotai.
How big will the China market be for you on a global scale next year?
He Di: Globally, very small. But in Asia, very large. Hong Kong, Taiwan and China are increasingly integrated, so for us the Greater China region will be the key.
How will UBSW distinguish itself from the competition next year?
He Di: In the past two years we have succeeded in becoming one of the most important investment bank behind the US bulge bracket firms. We are the only global bank with European roots, which means being committed to long terms relationships. But Salomon Smith Barney, JPMorgan, CSFB and Deutsche Bank want to catch up. Only around 10 banks can seriously compete in China. We therefore have to be very focused on the big deals and bring a unique angle to the deal.
What kind of prospects will private companies have next year, in terms of IPOs?
Chin: In the next two years, there will be more and more private companies listed in Hong Kong. Private companies want to list abroad since they can use the presence of international investors as a kind of insurance against the government, but barriers are coming down to listing on both domestic markets as well.