Hong Kong has created an immensely successful area for Chinese companies to list in, but reform is needed to ensure the initial public offering (IPO) market continues to operate smoothly says Morgan Stanley's Asia Pacific Co-CEO, Wei Sun Christianson.
In an interview to celebrate FinanceAsia's 20th anniversary, Christianson discusses how heavy use of cornerstone investors and enormous syndicates are affecting the market.
Christianson was one of several interviewees chosen for the role they have played shaping Asian financial markets over the past decades. In many ways her own progression to Morgan Stanley's most senior role in Asia mirrors China's rise on the world stage.
As she explains below, she only just escaped being sent to the countryside for re-education during the Cultural Revolution.
What are the greatest changes we’ve seen in the way Hong Kong and Chinese deals have been executed over the past 20 years?
With the risk of stating the obvious, there’s been immense change. Not just in terms of the size of deals and where companies are listed, but in terms of the bankers themselves and the speed and degree of localisation.
When I first arrived in Hong Kong in the early 1990s, the China-related capital markets were only just opening up. I’d been away from mainland China for 10 years studying in the US and there had been huge changes in the intervening period.
I remember thinking how incredible it was that a Communist government was even considering the idea of a stock exchange.
But I was very keen to be part of it because I really wanted to help my country reform and develop. I got a job with the Hong Kong Securities & Futures Commission (SFC) which was looking for people with a Chinese background and a non-mainland-Chinese passport.
One of the SFC and Stock Exchange of Hong Kong’s key successes at that time was the drafting of chapter 19A in the listing rules. It gave H-share investors separate voting rights, which was critical otherwise their vote would never have counted and they would have had no confidence in the market.
It was brilliantly executed and set the stage for so many Chinese companies to be floated in Hong Kong.
Tsingtao Beer was the first H-share company to be listed [in 1993], raising $100 million. It was actually supposed to be the second flotation, but Shanghai Petrochemical ended up being a dual listing in New York and Hong Kong and that took a lot longer to execute.
The lead managers were worried the Hong Kong market couldn’t handle a deal size of $377 million and pushed very hard for a dual listing. And yet only 13 years later, ICBC raised close to $22 billion from a dual listing in Hong Kong and Shanghai.
What about the bankers working on them? Your own trajectory has taken you from the Cultural Revolution to Asia Pacific co-CEO of Morgan Stanley. What do you think your younger self would have made of that?
It would have been inconceivable to me back then. But we have a saying in China that time creates heroes. It’s similar to the English expression: right time, right place.
I have been very, very lucky and never take that for granted. I was born in 1956 so I only just escaped being sent to the countryside to be ‘re-educated’. I was in the second batch of students who were allowed to attend high school again.
And then you went to university?
Not immediately. It was still very difficult to get in because entrance was based on political connections rather than merit. That changed in 1977 and I was also lucky that I opted for Beijing Language University where 80% of the students were foreigners learning Chinese.
They opened my eyes to the possibility of going abroad. But again I wasn’t able to go straight away. I ended up working for a government agency and was sent to the countryside on a rotation basis to learn to be a farmer for one year.
At that point, I applied to Amherst College in the US. I was the second student they took from mainland China. The first was a Qing dynasty official.
I was always driven by a desire to be educated and spend some time abroad. For a woman of my generation there was no ‘quote unquote’ typical career path, so I set my own.
What would you say to other young women facing similar circumstances in other countries?
I’d say just work hard and don’t listen to those who try and hold you back. I gave up everything to go abroad, and never gave up on my dream.
You’re from that generation of Western-educated Chinese bankers who came back with skills and expertise. When did you first notice homegrown Chinese bankers taking a more active role?
Early on in the noughties. Morgan Stanley was one of the first banks to establish a presence in China and one of the first to hire from China’s top universities like Peking University and Tsinghua. When I joined though, it was through the traditional rep office route and I ran the Beijing office.
In those days all the deal bankers were still based in Hong Kong, London and New York. They had strong technical skills but few cultural skills. All deal documentation had to be drafted in English and meetings were held in English with a translator present.
Sinopec was Morgan Stanley’s first major Chinese privatisation mandate. How does that deal demonstrate the changes we’ve seen?
It was a massive restructuring, an M&A deal and an IPO introducing international strategic investors such as BP, Shell and Exxon Mobile all rolled into one transaction. And it was all done in just 18 months. I rarely took a weekend off.
It was also a different technological age with no WeChat or email. Clients didn’t really believe in conference calls that much either.
Everyone needed to be on the ground. So we were all based in Sinopec’s Beijing HQ. These were also the days when China was a much poorer country and there was no heating in the building even in the depths of winter.
All the lawyers were on one floor, the accountants on another and the bankers on yet another. Everything was done in person and meetings were huge.
China’s international privatisations initially relied on international investors who in turn demanded a China premium. When did you notice this changing?
Chinalco’s IPO (Aluminium Corp of China) really sticks in my memory because I was working on the roadshow documentation in 2001 when I saw the World Trade Centre collapsing on TV.
When we launched the deal there wasn’t a single other capital markets transaction out there. But it was very successful and didn’t have a China discount.
I remember one fund manager in Edinburgh telling me he couldn’t place Beijing on a map but it didn’t matter because he liked the company’s business model and placed an order.
Back then there were only one or two bookrunners on IPOs. Now deals routinely have enormous syndicates such as the 29 lead managers on WH Group’s first attempted listing in 2014. How difficult has this made life?
The way deals are syndicated really needs to change. It’s a serious issue.
Execution suffers when there are too many banks on a deal because no one is properly incentivised and no one is accountable. Large numbers of banks also make communications difficult.
What about cornerstones? Are they strangling the IPO market?
They’ve become very popular in the last 10 years. Initially, it was about leveraging strategic names to give other investors comfort.
Now we often see little known names with no strategic value. Issuers think cornerstones help to de-risk their deals and like being able to allocate to people they know.
But these deals aren’t liquid in the secondary market and that ultimately harms the issuer. In some situations the cornerstone tranche go up to as high as 40-50% of the deal.
That might ultimately harm the issuer as these deals aren’t liquid in the secondary market due to the six-month lockup period.
What about China’s domestic equity markets? What did the 2015 stock market crash signal about future reform?
I think it’s important to remember it took New York and London 200-odd years to create sophisticated financial systems. I’m hopeful Shanghai and Shenzhen will be at that stage when FinanceAsia celebrates its 40th anniversary.
At the moment capital allocation is clearly not as efficient as it could be. Equity markets still only account for 28% of total financing, or 47% when combined with debt. The remaining 53% is all bank lending.
Increasing the number and weight of domestic and foreign institutional investors is important. Foreign investors only account for 2% of market turnover, while retail dominates accounting for 80%.
There are certainly lots of opportunities, but there’s also a long way to go before the market becomes more institutionalized.
What do you think the Chinese economy will look like in 20 years time? Will it get old before it gets rich?
I think it’s very hard to predict what China will look like in five years let alone the next 20 given the speed of transformation we’ve seen over the past two decades. But China’s changing demographics means it needs to continue developing and reforming.
But it does seem clear the economy will be bigger and more balanced, supported by a more developed financial market. The population will be older, but richer. Higher urbanisation and lower pollution will be declared significant achievements.
The key challenge is how successfully the government can shift the growth model towards consumption. A few years ago, it was 35%. Now it’s 60%, which is not bad.
In six years, China will have 630 million middle class citizens, twice the number in the US. How they spend their money will shape the next couple of decades.
And over the shorter-term, how worried should we be about the slowdown?
It’s been exaggerated and overplayed. Simple maths means China had to slow down.
Its GDP is now $10 trillion so the denominator is too big to maintain previous growth levels. Even if China grows by 5% per annum, it’s still contributing 30% of global growth: more than the G3 countries combined.
Look at Japan. It’s the third largest economy in the world, but everyone thinks 2% GDP growth would be fantastic. I think we need more perspective.
On balance what have the past 20 years told you about where China may head now?
Back then it was never clear that China could open up and transform itself so successfully, creating such a huge capital market in the process. It gives me confidence it will continue in the same direction.