[HONG KONG] Private firms have overtaken state-owned companies this year for the first time as the biggest drivers of investment banking revenues in China - a sign of how Beijing's reforms are transforming private capital's role in the world's second-largest economy.
Nimble and boasting efficient management, these private firms are taking advantage of the Internet industry boom and business expansion ambitions to take a bigger share of the deal activity compared with state-owned enterprises (SOEs).
So far this year, about 78 per cent of the total value of Chinese stock market listings, rights issues and other deals has come from the private sector, Dealogic data shows.
This is up from last year, when the private sector accounted for less than half the total value of these deals. Between 2005 and 2010, when China's four largest banks and a slew of large SOEs were listed, private deals made up one-third of the value.
Private firms are also increasingly favoring foreign banks to advise on deals, undercutting the likes of China International Capital Corp (CICC) and China Galaxy Securities, which had built their fortunes on helping public entities to list and buy rivals.
The shift comes as Beijing steps up broad financial and economic reforms to make the economy more responsive to market forces. China's Communist Party said last November the government would accelerate the restructuring of SOEs. Measures include allowing private investment in areas such as banking, transport, education and medical care.
The US$25-billion US stock market listing in September of Alibaba Group Holding Ltd - the world's biggest ever - has largely contributed to this shift. Alone, it generated US$300 million in fees to banks.
Yet, the trend cannot be solely attributed to Alibaba. Companies such as pork producer WH Group Ltd, e-commerce giant JD.com and computer maker Lenovo Group Ltd were involved in nearly US$10 billion in combined stock and takeover deals.
Stripping off Alibaba, Chinese private deals have still accounted for 68 percent of equity capital market activity so far this year.
The trend is set to continue even though public assets are expected to come to the market as part of the Chinese government's effort to partially privatise some companies, experts say. "We will see spin-offs and repackaging of state-owned assets in the market place, but fundamentally the big change and the big swell is in the private sector," said Keith Pogson, managing partner for financial services at consultancy EY in Hong Kong. "There's nothing from the Chinese government to indicate a reversal in direction or anything else. That's likely to be the theme for some time." FEE GENERATOR The flurry of private-sector activity has turned China into a fee generator for investment banking.
Thomson Reuters data shows that banking fees in China and Hong Kong were 55 per cent of the US$8.74 billion made in Asia, excluding Japan, in the first nine months of 2014. This is up from 47.6 per cent a year earlier.
Fees in mainland China surged 54 per cent this year, making it the world's third-biggest fee-paying market after the United States and Britain. "These private sector companies are branching out to different products after IPOs - like M&A, equity-linked or debt - to grow their businesses," said Mervyn Chow, a Credit Suisse banker who worked on the Alibaba offering.
The emergence of China's private-sector companies is giving foreign banks operating in the country a new lease of life, lifting Credit Suisse, Morgan Stanley and UBS past Chinese rivals typically hired to advise state companies.
Alibaba hired six global banks including Citigroup Inc , Deutsche Bank and Morgan Stanley as lead managers of its offering. Several of them had also extended multi-billion dollar credit lines and advised the company on other transactions.
Other private-sector deals this year, such as JD.com's US$2.05 billion US IPO, the US$2.4 billion Hong Kong listing by WH Group and US$5.2 billion from two acquisitions by Lenovo, mostly involved international banks.
More of those deals are in the pipeline. Dalian Wanda Commercial Properties Co. Ltd, a shopping mall developer owned by billionaire Wang Jianlin, is gearing up for a US$6 billion IPO that would make it the largest in Hong Kong in four years. "Private companies are taking longer to go public, but at the same time they're getting bigger by market cap, stronger and (becoming) more mature companies when they go public," said Mr Chow.