Global & Domestic Investment Banks in Hong Kong
The landscape for investment banking in Hong Kong is bifurcated into global banks and domestic banks.
For investment banking business involving major Cross-Border M&A or debt or equity issuances for marquee Chinese companies, the global banks will generally dominate – although Chinese banks are now rapidly climbing up the league tables, coupled with a robust Corporate Banking Offering.
The global banks are the Bulge Brackets and Elite Boutiques (investment banking advisory only, with no debt or equity capital markets), while the Chinese banks are a mix of the investment banking arms of state-owned commercial banks as well as Chinese brokerages such as Haitong Securities, CICC and CITIC / CLSA.
|Bulge Brackets in Hong Kong||Select Major Chinese Investment Banks|
Bulge Bracket and Elite Boutique banks try to retain as much of their global branding and best practices as possible while following Chinese business culture and etiquette.
Senior management tends to be a mix of expatriate bankers and Mainland Chinese relationship managers with a shrinking pool of Hong Kong local heads.
The exchange of emails and business discussions are generally conducted in English while Due Diligence and informal conversation are usually in Mandarin.
In contrast, Mandarin is the predominant language used at domestic banks as one would expect.
Hong Kong as a Global Financial Hub
Hong Kong has long been considered to be among the top three global financial centers, trailing behind only New York and London.
However, Hong Kong as a financial hub has increasingly gained more importance due to being the main beneficiary of China’s GDP growth and economic expansion.
China GDP Per Capita in US Dollars (Source: The World Bank Group)
Hong Kong Equity Capital Markets (ECM)
Capital Raising in Hong Kong
Most notably, Hong Kong has become a major player in the global equity capital markets and regularly competes for the top Initial Public Offering (“IPO”) crown, which is determined by the highest dollar volume of IPOs through its exchanges.
In 2019, Hong Kong beat out the Nasdaq for the IPO crown in part due to the mega-listing of Chinese conglomerate Alibaba Group. The listing of Alibaba raised around $12.9bn, enabling the Hong Kong stock exchange to surpass the Nasdaq.
Hong Kong Poised to Reclaim IPO Crown in 2020 (Source: Reuters)
Currency Considerations in Hong Kong
While China’s revenues from Investment Banking Advisory are shared by Shanghai, Shenzhen, and Beijing (and potentially Macau later), Hong Kong serves a unique role in Chinese markets due to the use of Hong Kong law, dual language requirements in Chinese & English, and the Hong Kong Dollar, which is pegged to the US Dollar.
These elements give global institutional investors comfort versus Mainland Chinese securities, where the legal frameworks are still under the developmental stage and the investing process is more opaque.
For Chinese companies to have unrestricted cash offshore, the natural path for capital raising goes through Hong Kong.
Chinese companies have domestic access to capital through the Shanghai and Shenzhen markets, but this is denominated in Chinese Yuan or Renminbi (CNY or RMB).
This is also known as “onshore capital,” which is defined as capital that stays within Mainland China. There are strict capital controls by the Chinese government to keep onshore capital onshore.
China’s large economy has become increasingly attractive to institutional investors as their securities gain widespread acceptance.
Theoretically, Chinese stocks and bonds being given higher weights in global and emerging markets indices should result in higher buy-side demand and accordingly more investment banking business.
Cross-Border M&A involving Chinese corporates will also continue, in spite of the shift away from historical hotspots in developed markets owing to geopolitical issues.
Investment Banking Recruiting in Hong Kong
Mandarin Language Proficiency
The pool of candidates chosen to get into investment banking in Hong Kong comes from a mixture of US and UK target schools.
The recruiting process has remained very competitive over the years, as there are a limited number of spots servicing major Chinese firms and multinational corporations based in Asia.
In recent years, proficiency in Mandarin to work in the Hong Kong investment banking industry is no longer optional, but a necessity to be considered a viable candidate.
In the past, good grades from a top university such as Wharton or Cambridge would be a ticket to an interview while local languages were a plus (but not an absolute requirement).
Today, recruiting for investment banking in Hong Kong has changed drastically, as Mandarin is now a strict requirement for nearly all banking roles.
In contrast, the trading floor is still primarily English speaking, although having an extra language weighs very favorably in the selection process.
It is almost impossible to get into an entry-level analyst or associate role without fluency in Mandarin outside of niche product groups or without unique expertise in a particular industry. Certain coverage groups will look for Korean or Indonesian speakers.
However, the upside is that given the growth in Chinese markets, there are a lot more jobs available – even for graduates from non-target schools.
US Investment Banking Target Schools List
Hong Kong banks place a large importance on university prestige but especially for universities in the UK, candidates do not need to necessarily apply through an undergrad degree for analyst roles.
But rather, graduates with master’s degrees are welcome for investment banking analyst roles.
US Target Schools for Hong Kong
|University of Pennsylvania|
|University of Michigan|
|University of California, Berkeley|
|Massachusetts Institute of Technology (MIT)|
UK Investment Banking Target Schools List
UK Target Schools for Hong Kong
|London School of Economics (LSE)|
|University of Oxford|
|University of Cambridge|
|University College London|
|Imperial College London|
China Investment Banking Target Schools List
For Hong Kong specifically, the predominant target school for investment banking is the Hong Kong University of Science and Technology.
But inclusive of all Mainland China target schools, the list includes:
Mainland China Target Schools for Investment Banking
|Shanghai Jiaotong University|
Hong Kong vs. New York IB Compensation Differences
In Hong Kong, the Salaries and Bonuses are comparable for the Bulge Brackets and Elite Boutiques (EBs with a global presence) to New York.
While expenses related to renting in Hong Kong are similar to New York, the after-tax income is much higher in Hong Kong (15% flat tax).
And the all-in compensation, when compared to London, is actually higher in Hong Kong.
At domestic banks in Hong Kong, salaries are much lower and more in-line with commercial banks in the US for all-in compensation. However, bonuses may be multiples of the base salary in good years.
China IPO and Cross-Border M&A Activity
Investment Banking Trends in China
M&A Regulatory Hurdles
Currently, there are numerous prominent Chinese tech-giants listed on US exchanges such as Alibaba, JD.com, Tencent, Pinduoduo, Meituan, Tencent Music Entertainment, and IQIYI.
While Chinese outbound M&A (i.e. Chinese buyers purchasing overseas assets) was a large business a few years back – especially at high premiums (buyers paying a large premium over the current share price or industry trading multiples), factors such as the trade war and protectionism / national security have reduced the appetite for Chinese foreign investment in developed markets.
Due to external factors, investment banking in China has gradually skewed towards the equity capital markets.
Likewise, a string of excessively leveraged purchases and fear of capital flight has made Chinese regulators crack down on major acquisitions overseas.
With plenty of dry powder in the market (i.e. cash on the sidelines), much of the work done in an investment banking group in Hong Kong will be supporting equity raises.
Dual-Listings on Hong Kong & US Exchanges
A recent trend involves doing a second IPO at home when a Chinese company (predominantly technology sector) has already listed in New York.
These Chinese companies effectively become dual-listed in both Hong Kong and New York.
Baidu Secondary Offering in 2021 (Source: Financial Times)
As shown in the news article above, Baidu has also recently joined the group of US-listed Chinese tech companies (such as JD.com) that have sought secondary placements in China.
Technology Sector (TMT) in China
To properly reflect China’s ascendancy in the global economy, coverage and execution teams in Hong Kong can be massive – especially in hot sectors such as Technology, Media & Telecommunications (or “TMT” – with prominent Chinese TMT names including Alibaba, Tencent, Meituan).
Ant Financial IPO Blocked (Source: WSJ)
For example, Ant Financial, the spin-off of Alibaba’s FinTech division was set to IPO in 2020 before unexpectedly being halted by the Chinese government only a few days before the official date of the issuance.
Ant was set to raise $34.5bn through IPOs in Shanghai and Hong Kong exchanges, giving it a total market capitalization of $315bn.
If it were not for the sudden anti-trust probe into Alibaba and the regulatory investigation into founder Jack Ma, the listing would have been the largest IPO in global financial history (and even set to exceed the Aramco IPO).
Chinese Governmental Interventions
These types of occurrences in China, which have become quite common, bring attention to the amount of regulatory risk present in domestic Chinese companies.
An example of this was shown when Baidu was fined by the Chinese government for making an acquisition without following the protocol of notifying governmental authorities.
In particular, the influential nature of the Chinese government’s legislation on domestic companies is an important area of risk for those with an international presence (e.g. listed on US exchanges).
For example, a recent report by Bloomberg speculated that there was a preliminary plan in the works by the Chinese government that would enable them to govern and manage all the data that Chinese companies collect.
Chinese Joint Venture Proposal for Shared Data (Source: Bloomberg)
The level of oversight and involvement of the Chinese government could potentially act as a constraint on the ability of domestic companies to expand through organic and inorganic means, as international data security becomes a greater hazard that regulatory bodies watch out for.
US / China Geopolitical Issues
National Security & Accusations of IP Theft
The topic of national security and accusations of data theft involving China has been an international issue for the past decade.
The conflict between the two nations made headlines last year throughout the controversy concerning short-form video sharing application, TikTok, due to its ownership by ByteDance and the alleged ties to the Chinese government.
In addition, the US placed sanctions on telecom conglomerate Huawei under the basis of intellectual property and trade secret theft, as well as fraud and espionage.
The back-and-forth continuous allegations and increased oversight from the Federal Communications Commission (“FCC”) could further establish significant barriers that restrict M&A and foreign investments between the two.
Holding Foreign Companies Accountable Act
In March 2021, the U.S. Securities and Exchange Commission (SEC) administered a new law called the Holding Foreign Companies Accountable Act, which would identify dual-listed Chinese companies and require SEC compliance and the submission of documentation for auditing by US agencies.
US authorities have publicly stated Chinese companies would be delisted from US exchanges if they refuse to comply with local accounting rules and standards.
An example of the pitfall of less stringent regulations for overseas companies was seen in the case of Luckin Coffee, which was caught inflating revenue by more than $300mm in 2019 (and subsequently delisted by the Nasdaq).
Restricted US Investments into Chinese Companies
Furthermore, US investors were barred from holding stakes in Chinese companies with suspected ties to the Chinese government and military.
These allegations have led to three dual-listed Hong Kong companies (China Telecom, China Mobile, and China Unicom) being delisted by the NYSE in January 2021 following an executive order by President Trump.
On the matter of the validity behind the claims made by prominent business figures such as Peter Thiel and the lawsuits from US-based companies such as Motorola and Cisco with accusations of IP theft – it is not our place to say.
Nonetheless, the continuous geopolitical tension and conflict between the two nations during the ongoing global tech race (e.g. 5G roll-out, A.I. development, space exploration) is a trend to keep close tabs on in the coming years.