HONG KONG -- A looming U.S. threat to ban listings of Chinese companies on American stock exchanges could potentially swing hundreds of millions of dollars in fees toward mainland investment banks as businesses look at Hong Kong and domestic markets to raise capital.
Chinese banks and brokerage firms, including China International Capital Corp., CITIC Securities and Agricultural Bank of China, are among the biggest underwriters for greater China listings, as international banks increasingly are losing market share -- even in the global financial hub of Hong Kong.
"Inevitably, Chinese banks will account for an increasingly larger share of the fee pool," said Philippe Espinasse, a capital markets consultant and former head of equity capital markets at Nomura. "The political situation also means that some Chinese issuers may, perhaps, be reluctant to include some international, especially U.S., houses in senior underwriting roles."
Global banks such as Morgan Stanley and Goldman Sachs have not topped the Hong Kong fee pool for Chinese listings in four years, according to data compiled by Refinitiv.
While their role is limited in share sales on the mainland, they have so far taken comfort from bagging more than four-fifths of the fees on offer when Chinese companies list on the New York Stock Exchange or the Nasdaq. Chinese companies have paid advisory and underwriting fees for U.S. listings of $260 million annually on average over the past five years.
But moves by the administration of President Donald Trump and U.S. regulators are threatening that, too.
U.S. authorities revealed plans last month to kick out already-listed Chinese companies by January 2022 and block new share offerings immediately if they do not grant American regulators access to their audited financial records. Chinese companies have declined to share their documents, citing domestic laws that ban such access on the grounds that the statements could contain state secrets.
The U.S. crackdown comes at a time when authorities in Hong Kong -- the world's largest new listing market in seven of the past 11 years -- and mainland China have been easing new share-sale rules. Beijing also has implemented a series of stock market reforms in an effort to lure companies that otherwise would have gone to New York.
Chinese companies have raised $70 billion in Hong Kong, Shanghai and Shenzhen in new listings so far this year, according to Dealogic, rivaling combined volumes on the New York Stock Exchange and Nasdaq of $75 billion.
Mainland-based companies that already are trading in the U.S. have turned to secondary listings in Hong Kong. Technology conglomerate Alibaba Group Holding, online retailer JD.com, game developer NetEase and the mainland operator of KFC, Yum China, have collectively raised more than $20 billion since November last year.
To be sure, the fee impact will not be felt this year because some companies, including real estate portal Beike Zhaofang and electric-vehicle makers Xpeng Motors and Li Auto, have already listed in the U.S. in a bid to get in ahead of the proposed ban. They have raised a combined $7 billion so far this year, the most since Alibaba's $25 billion initial public offering six years ago, ringing in nearly $340 million in fees.
Other companies, however, including Alibaba affiliate Ant Group, have decided to sell shares on Shanghai's Nasdaq-style STAR Market, which was launched last year, and on the Hong Kong Stock Exchange rather than consider New York.
"Had Ant been a New York IPO like Alibaba, we would have had a massive fee bonanza," a person involved in the transaction said. "Firstly, the fees will be split as there is a Chinese sponsor in Hong Kong, and the Shanghai leg is handled entirely by Chinese banks. Second, the fees in Hong Kong can be as low as a third of what banks can get in New York."
Citigroup, JPMorgan, Morgan Stanley and China International Capital Corp., or CICC, are sponsoring Ant's IPO in Hong Kong, while CSC Financial is joining CICC as the lead for the Shanghai listing, where a greater amount of funds will be raised and more shares are tipped to be sold.
Alibaba's $25 billion IPO in New York in 2014, the world's largest offering at the time, netted Citigroup, Credit Suisse, Deutsche Bank, JPMorgan and Morgan Stanley $300 million in fees, filings show. The company's $13 billion secondary listing in Hong Kong last year brought in just $32 million.
Chinese companies have paid IPO fees of $338 million in the U.S. so far this year, equal to 4.9% of total proceeds. That compares with fees of $234 million or 2.3% of funds raised in Hong Kong, data from Refinitiv show.
Chinese banks' and brokerage firms' domination of the top 20 fee-earning banks in Hong Kong has steadily increased since 2016, according to Refinitiv. They collected 55% of the fees of the top 20 companies in 2016 and that measure has surged to nearly three-quarters now, the data show.
Investment bankers employed by Chinese companies are on track to outnumber those in Hong Kong with Wall Street and international banks, the Financial Times reported last month. Mainland companies in Hong Kong currently have 2,100 investment bankers, just a few hundred shy of the total working for Wall Street firms, it reported, citing data from the city's financial regulator.
"The geographic emphasis for listing by Chinese companies is transferring over to Hong Kong and the mainland," said Benjamin Quinlan, chief executive of Hong Kong-based financial-services consultancy Quinlan & Associates and former head of equity strategy for Deutsche Bank's Asia Pacific business.
"Chinese exchanges and Hong Kong are starting to challenge the New York Stock Exchange and Nasdaq -- pushing global banks to adapt their regional strategy," he said. "The biggest winner from this change will clearly be the tech-savvy Chinese investment banks."