In March, RBS signed a memorandum of understanding for the sale of its cash equities, ECM and corporate finance businesses in Asia. It was signed not with a western multinational, nor an Australian like Macquarie, but with Malaysia’s CIMB.

It’s nothing new that CIMB, like DBS further south in Singapore, is keen on regional expansion; over the years it has bought Singaporean broker GK Goh, Indonesia’s Bank Niaga, and most of Thailand’s SICCO Securities, and is in discussions to take a stake in Bank of Commerce in the Philippines. In our January edition, deputy CEO Charon Wardini Mokhzani spoke at length of the bank’s ambitions within Asean.

But there’s something symbolic in a local player taking on an entire regional suite of operations from a UK bank that has accepted it can’t make a sustainable business out of them. CIMB won’t yet comment on exactly what they’re negotiating to buy, but it appears to include investment banking, institutional and retail equities in Australia, Malaysia, Thailand, India, Hong Kong, China and Taiwan, plus global equities distribution reaching as far as Europe and North America. (It is understood that CIMB has passed on the Korean, Indonesian and Singaporean businesses that were also on sale, feeling it either already has the capability or doesn’t want it.) If it goes through, this is a transformational transaction not just for CIMB but for the reach of emerging market banks.

That’s not to say that it will necessarily work. RBS is getting out of these businesses for a reason: as Asia CEO John McCormick explains in our investment banking feature in this edition, equity businesses are expensive to run, don’t necessarily make much profit, and are exceptionally difficult to build into a top 10 franchise. It is barely a month since Samsung Securities, which some people believe has spent as much as $100 million on building a regional investment banking business out of Hong Kong, all but shut it down again after just 10 months.

But CIMB is not alone in believing that the way forward is a regional business exploiting synergies between multiple markets. In fact, it’s not even alone in Malaysia in thinking this way: last year Maybank bought Kim Eng Holdings, the Singapore-based regional brokerage, and has announced plans to grow its assets under management tenfold by 2015.

For these banks to be able to make their acquisitions work, it’s not so much a question of matching the league table standing of the multinationals, as having a cost base that will be sustainable. That may be challenging for CIMB, whose previous acquisitions have been of Asian enterprises with broadly similar cost structures to their own; while no slouch in the pay stakes, it is unlikely to have been paying the equivalent of western bulge-bracket ECM banker remuneration.

It’s also a deal that takes CIMB somewhat out of its Asean comfort zone. The most interesting place to watch will be Australia, which is where RBS had enjoyed the greatest success as an ECM house, ranking as high as fourth locally. On the plus side, any investment into Australia puts the bank closer to the vast pool of more than US$1 trillion of superannuation (pension) wealth, one of the largest pension fund sectors in the world, and a body of capital that needs diversification overseas, particularly to Asia. On the minus side, this will be the biggest cultural challenge CIMB faces in bedding in its new businesses.

The other interesting element about this deal is that it shows a trend many people have been waiting to see: cashed-up Asian businesses with balance sheet strength seeking to acquire distressed assets in the west. Nomura was clearly an example of this, but Japan is rather a separate case; a bank from an emerging market grabbing sell-off assets from a troubled western institution is different. It’s interesting that of the three final bidders for the RBS assets, two were from emerging markets, the other being CICC (the third, Scotia Bank, was attempting to link its mining businesses with the opportunity in China and elsewhere in Asia). With a sense of the European debt crisis having levelled, but with European banks still needing to sell assets to boost capital, we should expect to see more of these deals. The ways local banks take advantage of this moment of relative strength will define how banking in this region looks for many years to come.

When American International Group (AIG) raised HK$46.7 billion (US$6 billion) from a block trade in early March, it did several things. It provided the clearest sense yet that Asian equity issuance markets are reviving. It shifted almost half of AIG’s remaining stake in Asian life insurer AIA. And it introduced the world to the concept of a passive global coordinator.

First, the deal: an undeniable success. Although it priced at the bottom of the range with a maximum 7% discount to the stock, there is nobody in the Asian banking community who is complaining about the deal; there is instead relief that a big trade – indeed, the second biggest block trade ever in Asia after China Mobile – had been completed without catastrophe, giving confidence to brittle markets.

“The fact that we are able to do a $6 billion trade on an Asian underlying, and get it done robustly in a manner where the seller and the investors are happy, tells you about the depth of the capital markets here right now,” says Dixit Joshi, head of global markets equity for Asia at Deutsche Bank.

The deal traded down briefly in the aftermarket, but as Joshi says, “that was a buying opportunity for many investors”; the stock swiftly passed the strike again, outperformed the market, and remains well above the sale price at the time of writing. Dan Dees, co-head of investment banking for Asia Pacific at Goldman Sachs, says the deal “will give other people the confidence to enter these markets and do transactions.”

That said, one of the reasons that nobody in the industry has anything bad to say about the deal is that pretty much everyone in the industry was on it.  Deutsche Bank and Goldman Sachs were joint global coordinators and joint bookrunners, but alongside them were seven other banks, with Citi and Morgan Stanley as joint global coordinators, and Bank of America Merrill Lynch, Barclays Capital, Credit Suisse, JP Morgan and UBS as joint bookrunners.

It’s not in doubt that Goldman and Deutsche were the ones in charge of the deal; it’s below that level that the precise role gets murky. “They will all tell you they were on the ticket but ask them when they were notified,” says someone close to the deal. “On Monday morning they were told: the deal’s getting done, you’re getting a cheque.” By that time the deal was apparently half covered already through the leads speaking to investors on the Sunday.

Citi and Morgan have the titles of joint global coordinators, yet don’t appear to have been taking orders. “Passive global coordinator? That’s the worst twist of the knife, really,” says one banker, not on the deal. “It’s almost a contradiction in terms.” Citi and Morgan, in turn, are thought to be unhappy that some at the top of the syndicate have sought to exclude them from league table recognition; in fact, there is a long track record of bankers getting a share of the table credit for relatively small roles.

What’s this about? It’s not so strange to have multiple bookrunners on a deal as big as this, but in fact a recurring facet of Asian investment banking recently – ECM and DCM alike – has been a multiplicity of bookrunners appearing on reasonably small deals.

Bankers are not enamoured with this development. “Whereas you were part of a three or four handed deal, now you’re part of a seven, eight, nine handed deal, and the effective pressure on revenue is significant,” says Robin Phillips, head of global banking and markets Asia Pacific at HSBC.

Quite apart from the pressure on economics, bankers don’t like the fact that it reduces accountability. With two or three bookrunners, if something goes wrong, it’s easy to know who to blame. “Once you get beyond two or three, nobody is responsible,” says one banker. It makes it harder to put out a coherent message to investors. And international banks moan that when local banks appear – as is often the case on dim sum bonds, for example – they’re often there chiefly as investors rather than bookrunners, so they don’t really broaden distribution and also don’t step in to support the deal in the aftermarket. As Dees says (about the broader trend, and not the AIG deal): “There’s a perception that more banks equals broader distribution. The reality is quite the contrary. It can lead to the degradation of the quality of execution in deals, and most importantly the degree of accountability that bookrunners feel and need.”

So why is it happening? “It’s an easy give, from the company’s point of view, although it makes the deal much more difficult to manage,” says Phillips. “How do companies reward their banks? Expand the number of bookrunners.”

That said, the true global coordinators are still likely to get the lion’s share of a fee on any deal, and the precise economics are not always clear from the outside. “There are more bookrunners appearing both on ECM and DCM,” says Matthew Hanning, head of investment banking for Asia Pacific at UBS. “But some are more equal than others, if you want to be Orwellian about it. Doing the arithmetic by saying there used to be three and now there’s six so I assume your fee has halved – that would be the wrong arithmetic.”

Euromoney, April 2012

Asia is the future; that’s an article of faith in global investment banking. And there is no denying that Asia is where the growth economies are, the dynamic young populations, the most vibrant trends in trade and market development. But global bank HQs need to temper their expectations a little.

For all the promise of this region, investment bankers here face a host of challenges. Asian investment banking is unhealthily tilted towards equity capital markets, making it especially vulnerable to times – like the six months until early March – when those markets are closed. Within that, it’s far too focused on China, too. Competition from local houses is growing by the day; fees, already under pressure, are being sliced by an irksome trend of issuers putting as many as nine bookrunners on deals; and headcount costs are stubbornly high for good people at exactly the time that banks are being told by head office to slash bonuses.

See the article as it ran here: http://www.euromoney.com/Article/3005687/CurrentIssue/85141/Reality-bites-The-truth-about-investment-banking-in-Asia.html

A detailed study of revenue by Euromoney’s partner, Dealogic, allows us to paint the true picture about investment banking revenue in Asia.

It’s true that, over the last seven years, Asia’s contribution to investment banking revenue globally has grown, from 5% of the global pie in 2005 to a peak (so far) of 14% in 2010, before sliding back to 10% so far this year. It’s worth remembering, though, that the rising Asian percentage of global fee wallet really reflects the state of the rest of the world more than anything else: global fee revenue in 2011 was almost $10 billion lower than it was back in 2006. One need do little more than stand still in such an environment to shine.

It’s true, too, that Asian fee revenue has rebounded from the global financial crisis much faster than anywhere else – but it fell further along the way. US and European revenue figures peaked in 2007 and have never come very close to those levels since. Asia’s investment banking revenues halved in 2008 – a worse percentage fall than anywhere in the west – before their recovery.

But the bigger issue with Asia is just how heavily reliant on equity it is. “There isn’t a single person who doesn’t think ECM is the basic engine of profitability in investment banks in Asia,” says one of the region’s leading headhunters. “Look at the recent changes at Goldman,” he says, referring to the appointment of Dan Dees and Matthew Westerman as joint co-heads of ex-Japan Asia investment banking; both of them have ECM backgrounds. “When ECM markets are quiet, it’s a big problem for everybody.”

SUBHEAD Dissecting ECM

When markets are rolling, the dominance of ECM is just fine, and this is when Asia really does make a meaningful contribution to the global pie: 27% of global ECM revenue in 2010, a year in which it outpaced Europe by generating $5.6 billion of revenues. But the problem is, markets aren’t always rolling, and Asia – with relatively young and volatile markets, prone to fickle capital flight to the west – is vulnerable when it happens. Asian ECM revenue in 2008 didn’t even hit a billion for the entire street: the $973 million of fees represented a fourfold decline from the previous year.

“Asian markets are much more centred on ECM product, which is 70% of the street revenue opportunity,” says Matthew Hanning, head of investment banking, Asia Pacific, at UBS. “If you are very dependent on ECM and markets are difficult, then business is difficult.”

The picture varies from house to house. Based on public data available to Dealogic, some names do look particularly reliant on ECM. It accounted for 71% of Morgan Stanley’s revenue in 2010, and 64% in 2011, despite the new issue market shutting down halfway through the year. Goldman Sachs looks similar: 69% in 2010, 52% 2011. After that, the concentration gradually dilutes: UBS (65% 2010, 51% 2011), JP Morgan (64% 2010, 41% 2011), Deutsche Bank (58% 2010, 57% 2011), Credit Suisse (64% 2010, 41% 2011).

Why so high? “I don’t think that people focus on originating ECM activity because it’s a better fee pool and don’t focus on M&A or DCM,” says Hanning. “People chase what’s there.”

Dees at Goldman Sachs agrees. “I don’t think the reliance on ECM historically has been a misguided strategy for the street,” he says. “Because the other drivers of the banking business – debt capital markets, M&A and derivatives – were so nascent in their development, ECM was the dominant business. As a result, the business out here has risen and fallen based on the state of ECM in the past decade.

“Nobody had a strategy that isolated their whole business as ECM. It’s a function of market activity levels and the stage of DCM and M&A development.”

Intended or not, that’s what has happened. So with markets shut for months, how important is it that ECM comes back? “It’s vital. Vital,” says Rob Sivitilli, head of corporate finance and M&A for southeast Asia at JP Morgan, speaking before the AIG/AIA trade (see news http://www.chriswrightmedia.com/aig-sale/) gave a positive sign that markets were re-opening. “The ECM business makes up about 75% of the capital markets business in Asia, which in turn is two thirds of the region’s investment banking business.” Little surprise, then, that throughout the early months of this year, investment bankers have been looking with trepidation at the deals – mainly small, and mainly block trades – that have been testing the market. “What happens next in terms of this region’s IPO activity for the rest of the year is very dependent on executing some successful deals,” says Sivitilli.

Some banks talk about as many as 40 ECM deals ready to go in their pipelines, and they live in fear of somebody wrecking the market before it’s got going. As one banker puts it: “Some bonehead brings out a deal and it doesn’t go well, and it seizes up for everyone else.”

If banks are over-reliant on ECM, they are equally over-reliant on China. In 2011 China accounted for 54% of Asia ex-Japan investment banking revenue, a figure that has risen steadily over the years, from 29% in 2005. Within ECM, it is almost absurdly dominant: 70% of total Asia ECM revenue in 2010, and 66% in 2011. It also accounted for 67% of 2011 DCM fee revenue, and though less dominant, is increasingly the focal point of M&A as well.

Some say this is not so unusual. “It’s interesting to look around the emerging markets,” says Russell Julius, head of global banking, Asia Pacific at HSBC. “Everyone talks about Latin America’s promise, but Brazil is 80% of Latin America.” Similarly emerging Europe is dominated by Russia, the Middle East by Saudi Arabia and Africa by South Africa. “As an emerging market feature, where you’ve got to get right is a lot smaller than it used to be.”

But at a time when debate continues about how hard a landing China is facing, it’s not especially healthy to have such a concentration on one country.

SUBHEAD: Chasing the money

There must be a number of caveats to this data, though. To an extent, it’s natural that banks will go where the money goes: Morgan Stanley might have looked hopelessly lopsided in 2010 when only 29% of its investment banking fee revenue came from anything other than ECM, but it was also the top bank in Asia for overall revenue, pulling in $423 million. The banks behind it – JP Morgan, Goldman Sachs, UBS, Credit Suisse – all got at least 60% of their money from ECM that year. And even though 2011 was nothing like as good a year for ECM as 2010, because of the market closing in the second half of the year, it’s still those same banks at the top in overall fee earnings. Of the top five (Goldman, Credit Suisse, UBS, Deutsche, Morgan Stanley) only Credit Suisse got less than half of its revenue from ECM.

Besides, looking at those same league tables, the more diversified approach might look healthier in percentage terms, but it doesn’t put them at the top in overall revenue. In 2010 HSBC’s nicely balanced split of fee revenue – 32% DCM, 27% ECM, 21% loans, 20% M&A – was only enough to rank it 16^th in investment banking fees (having bolstered ECM, it moved up to seventh in 2011). Standard Chartered, similarly diversified, ranked 18^th in 2010, and RBS – which has since ditched equities completely – 25^th. Barclays, having not yet gone into equities by then, didn’t even make the table.

Still, the more pure-play investment banks are at pains to stress the diversification of their business. “Some banks are certainly highly leveraged to the equity business; for our part we have a very good balance between equity, M&A and other products,” says Kate Richdale, head of investment banking for Asia Pacific at Morgan Stanley. “When the IPO market is not firing on all cylinders, there is certainly an impact. But what we have seen is that other areas can make up the shortfall. Last year, when the IPO market slowed, our equity business shifted to focus on block deals.” Dees at Goldman – the other house most obviously linked with ECM – makes a similar claim. “We’ve always had an intention that our investment banking business in Asia would mirror the breadth and diversity of our investment banking business around the world,” he says. He argues it’s just a question of underlying securities markets maturing, driving issuance and therefore a more diverse range of investment banking work.

It’s also important to acknowledge that public deals aren’t the whole picture. “There are significant revenues in Asia away from what is publicly reported,” says Vikram Malhotra, co-head of investment banking for Asia Pacific at Credit Suisse. “There is a lot of work done with corporates which is part of investment banking but is undisclosed, because in certain cases you do a bilateral transaction. There are two buckets of revenue: the public and the private.”

At UBS, Hanning notes that ECM and China dominance simply reflects the evolution of a market. “It’s stage one of the privatisation of a country,” he says. State-owned enterprises and private enterprises form the IPO market and, since most start with 25% free floats, ample opportunity for secondaries when they need more capital. Widespread debt issuance, and M&A activity, tend to follow later, eventually shifting revenue composition. “Net net, the dominance of ECM revenue is probably going to come down,” says Malhotra. “ECM fees over time are going to be flattish, maybe slightly growing, but other fees will probably grow faster.”

SUBHEAD: New entrants, new departures

Be that as it may, the fact that new entrants are working their way into ECM reflects the fact that it is still seen as instrumental to fee revenue. The two obvious examples here are HSBC and Barclays, both of which, until recently, were best known in investment banking just for debt capital markets.

In 2009 a group of senior managers at HSBC, including Stuart Gulliver, Samir Assaf (head of global banking and markets) and Robin Phillips (who holds that role for Asia Pacific), “sat down and said that the equities business is something that we do need to be more relevant in,” says Phillips, prioritising certain markets like Hong Kong at first and ensuring that the secondary side was built alongside the primary.

HSBC has done this before and failed, at least twice, most obviously when it hired former Morgan Stanley man John Studzinski to build a global capital markets business in 2003; he was gone by 2006, and the ambitions too.

“If you contrast what we have done now with what happened in the early 2000s, the difference  is that we had a step by step plan over a three to four year period, rather than a ‘let’s go out and hire hundreds of investment bankers and make it work’ approach,” Phillips says. “You can’t change clients’ perceptions overnight. But clearly for us the Asia piece was absolutely critical.”

Partly this was a consequence of a change in the way business beyond investment banking appears to be awarded. “We’ve seen an evolution in the way that flow business is awarded. For example with payments and cash management mandates – and this is very high quality business – increasingly the buying decisions there are being made by the C-suite. So we needed that access, to get the buying decisions in our favour around the overall platform.”

In the last year, there has been clear progress, particularly in Hong Kong, where the bank was a bookrunner on seven of the 10 biggest IPOs in the city all year, including the well regarded Sun Art Retail, and has got on some important M&A deals such as CKI’s purchase of Northumbria Water in the UK. Today, Phillips bristles at any suggestion that HSBC is not talked about in the market as a force in equity and M&A. “Well we should be coming up in conversation now, based on the deals and the rankings we achieved in 2001,” he says. “If you’d made that comment 12 months ago I would have understood it. Today the perception is changing.”

Barclays, too, has sought to build an equity presence, which has yet to tear up any trees but which its management present as well positioned, and well timed, for when recovery comes. “We’re especially strong on the debt and M&A side, with a deep and experienced M&A bench. Our equity business is slightly younger, but continues to make good progress” says Johan Leven, co-head of corporate finance, Asia Pacific at Barclays Capital. “In terms of our revenue mix, we were less exposed to the equity business last year than some other firms,” presumably including his previous house, Goldman Sachs.

Moving in precisely the other direction is RBS, as its sale of cash equities and equity research has also removed it from ECM and M&A – and not, in this region, with any obvious delight about the situation. “It’s somewhat disappointing from a parochial perspective, because we were doing quite well,” says John McCormick, chief executive, Asia Pacific. He’s right: last year RBS was on the Queensland Rail IPO, for example, the biggest in Australia all year; in M&A it was on the biggest trade into Asia last year, SABMiller’s purchase of Foster’s Group. “The platform was credible and growing. But it’s a global game, a team sport, and the decision was taken that we couldn’t make it profitable as a whole.”

“We took a tough decision to pick our battle,” says McCormick. “What we are doing now is really to play on our strength,” including significant businesses from DCM to convertibles and derivatives, in addition to in addition to the flow business like rates, fixed income and FX in the broader bank.

Putting a brave face on things, DCM bankers there say they prefer it this way. “From the debt side it’s not a bad thing,” says one. “We’ve been subsidising that business in a big way for years. It’s not good for institutional colleagues but for us, it means our capital is more focused on the business we feel we do well.” Unsurprisingly, people in this camp argue that Barclays had the model right originally and should have stuck with it.

But can that be true, given what we see about ECM’s power in fee numbers? While McCormick naturally has a position to defend – and not one he asked for – of life as a non-equity house, he makes an interesting point.

“The fee income coming from advisory work is not a whole hell of a lot, certainly when stacked up against traded products,” he says. “What people never talk to you about is the net income produced from those businesses. It is rare for an investment banker to talk about his business in terms of net income, post all costs, all indirect allocations, post bonus, post tax.” So just because you might get 3 or 4% fees on an IPO doesn’t mean you make money from it? “Well, it’s many years ago that it was 3 or 4%. ECM is a multiple of DCM but I’m not aware of many investment banks who are making money in fully loaded M&A and ECM in Asia at this point in time.” McCormick makes it clear just how hard it is to run a profitable ECM business in a tricky market, even in Australia, which is the part of the region where it was highest ranked. “Let’s not forget 2011 was the lowest fee year in seven in Australia. To run a global advisory business, you will need to have a big platform with a team of investment bankers at all levels, running around globally looking for opportunities, and the fees aren’t coming in the door… we couldn’t see a sustainable way to give it an acceptable rate of return and that would take us from 12th or 13^th league table position globally now to top 10.”

It’s certainly true that working out the precise cost of an ECM business is very challenging. “We look at the ECM business in the context of the wider equities business, including sales, trading, research, capital markets; structuring, cash, prime and derivatives,” says Dixit Joshi, head of global markets equity for Asia at Deutsche Bank.

Similarly Julius at HSBC notes: “The trouble with defining the profitability of ECM is that the ECM business has the narrowest definition of costs – a dozen aggressive people making deals happen – and the very widest definition of revenues. For it to work you need research, banking settlement, roadshows, sales.” He says most firms split ECM revenue 50/50, half for distribution and research and half for execution and origination, with each party taking care of its own costs.

That being the case, is it too simple to say that ECM is essential because it its dominance of fee pools? “It isn’t that simple anymore,” says Julius. “It used to be.”

But however you cost it, it isn’t cheap. “An equity business is attractive, but an expensive business to run,” says Leven at Barclays Capital, who should know, having helped build one from scratch. “You need a big machine to do it and it’s an expensive machine to build with scale.” Debt transactions pay far lower – perhaps 20 basis points on an investment grade deal compared to as much as 4% on an IPO – but “there you have much more flow-orientated business.” (For a detailed study of Asian DCM, see our March edition.) “It’s much cheaper and quicker to execute debt deals for investment grade issuers than an IPO. If you work on an SOE in China, it can take two years before you get there. It’s a lot of resources for a very long time.”

M&A

Models vary for developing investment banking in Asia, but there are two common themes: boosting investment in M&A, and combining investment banking with ancillary businesses, particularly if there is a corporate bank to blend in.

“There’s a recognition that the reliance on the IPO business cannot last forever,” says Sivitilli. “When the music slows down you’d better have a diversified platform that includes M&A advice – which brings in all the ancillary business such as FX and markets – or you’re going to get caught with no fees.”

Hence M&A is one of the few areas where hiring is still taking place. “I don’t think anyone feels they have every single person they would love to have in M&A,” says one headhunter. Colin Banfield, for example, was hired from Nomura to build M&A at Citi; Jason Rynbeck brought a team across to Barclays Capital from ABN Amro; and HSBC brought George Davidson from London to head M&A in the region. “That doesn’t sound anything out of the ordinary: you would have thought you would have some to head M&A,” says Phillips. “But so many bankers in this part of the world, both country and sector, default to equity. Having someone who is thinking cross-border and wakes up in the morning worrying about M&A is particularly important.”

Lately this build-out has been slightly more in hope than chasing actual volumes. “The broad pick-up in M&A volumes you’ve tended to see out of previous crises hasn’t been as strong this time,” says Rynbeck at Barclays. But like all his peers, he’s hopeful. “Cross-border M&A is potentially very strong: there is a lot of liquidity in the region, domestic banks are in good shape, and Asian corporates are going to continue to feature reasonably prominently.” A relatively recent development is that Asia is a fixture in outbound M&A as much as inbound, and while there is continuing interest in Asian assets for foreign multinationals – Nestle buying Hsu Fu Chi, for example – it is just as interesting to watch Japanese consumer groups like Suntory and Asahi, or Indians like Reliance and Bharti, or any of a host of potential buyers from China, moving out into the west, particularly as distressed assets emerge in Europe. “There’s no question Asian buyers continue to be a very significant part of the buyside for transactions worldwide,” says Farhan Faruqui, global banking head Asia Pacific at Citi.

And M&A is not just about the deals themselves. It’s what else it leads to. “Barclays is traditionally a strong financing and risk management house,” says Rynbeck. “One of the reasons we developed our M&A platform was to build upon the strength of our existing client relationships, and enhance the breadth of the dialogue with clients. If the discussion with CEOs initiates at the strategic level, you naturally come in at an earlier point in the discussion, which means you are well established in any subsequent financing and risk discussions.”

Bankers love the extra work that comes with M&A. “If you’re talking about acquiring an entity, it’s a natural extension to talk about the funding of that trade,” says Hanning. “And if it’s covered for funding, the next discussion is from a risk management perspective. If you are crossing geographical boundaries, is there an FX risk for you? Is there an interest rate risk? They can be as important to our returns as working on the transaction.”

This view, on the face of it, works against the more pure-play investment banks, but they are enthusiastic too. “While some companies use commercial banks as M&A advisors because they provide a funding solution, the truth remains that clients still need the very best strategic advice, and work will always be there for the more specialist M&A houses with event funding expertise,” says Richdale at Morgan Stanley.

SUBHEAD: Models – it’s not just IB

Investment banking is never seen in isolation anymore. Deutsche was one of the leads on the AIA selldown by AIG. “Clearly that was a milestone investment banking transaction. But we quickly started looking at all the ancillary areas where our clients would need help,” says Joshi. “Who is taking down the stock, where are they going to get it financed, are we competitive on the financing and so forth. Six billion dollars of stock had to be placed. Some would be with people who needed financing, or who wanted to dispose of other stocks in their portfolio to make room for AIA, in which case we wanted to be able to say: send your trade our way.”

In Deutsche’s case, it’s a matter of meshing investment banking into the powerful markets business that is the bank’s true engine room in Asia and elsewhere. At other banks, the model is different again.

Citi integrated its corporate and investment banking businesses in 2009, and Faruqui now presents that unified approach as a point of difference. “We are positioning our business to be in the middle of the key flows with our clients whether it’s lending, derivatives, FX, interest rate products, M&A or capital markets,” he says. As one insider puts it: “a dollar in investment banking usually leads to 10 in corporate,” although equally it can flow the other way.

Citi, in fact, is one of the few places to have engaged in a significant build in recent years. Faruqui recalls the tail end of the crisis; “Hiring at that time was difficult because people either weren’t convinced or wanted to wait and see before making a decision to move,” he recalls. Not until the second half of 2010 did they start to arrive: Colin Banfield from Nomura, Gary Kuo from Barclays, Tony Osmond from Goldman, Rodney Tsang from BAML, Roger Zhu from CICC. “We didn’t overhire and we have not overbuilt,” he says. “We have demonstrated in the last 12 to 18 months that we can win and gain share.” He picks a good moment to make this claim: on the day of the interview, YTD league tables show Citi top in Asia Pacific ex-Japan ECM, second in announced M&A and third in G3 DCM.

JP Morgan has built a similar model based on synergies with asset management and corporate banking, both of which have been built heavily in Asia over the last 18 months. HSBC and Standard Chartered both have powerful corporate banking businesses and use the balance sheet where it helps, often in concert with investment banking.

Others are known for their particular skills. One rival banker refers to Credit Suisse as “like a super-boutique for Indonesia”, and it’s not intended as the insult it might seem: if there was ever a time to be known as an Indonesia specialist, it is surely now, when the country’s banks and corporates gear up for activity in issuance in the afterglow of the sovereign’s upgrade to investment grade. Helman Sitohang, the investment banking co-head, is Indonesian; also that Eric Varvel, the CEO of the investment bank globally, was once the Indonesia country head (as one rival banker says: “It helps to have a CEO who knows what Jakarta looks like right now”). Naturally, Credit Suisse argues that its Indonesian strength doesn’t mean it’s not equally proficient and active elsewhere in Asia.

Subhead: Fees

And what of fee pressure? Opinions vary. One senior MD, talking of DCM fees, describes them as “miserable. That hasn’t changed. It’s very, very low, way below where things would be in the US or Europe.”

This would certainly be a view shared by anyone doing business in India, whether on the debt or equity side; take a look at Coal India (Euromoney, December 2010), in which the six bookrunners of the US$3.46 billion IPO – the largest ever in India – got $34 between them, or ONGC (news section), which one very senior banker describes as “absolutely ridiculous. It doesn’t help the markets at all.”

Others disagree. “Fee compression is over, across the board,” says Sivitilli. “Banks are being much more disciplined.” He says JP Morgan recently walked away from an opportunity in which the client wanted to pay a lower rate; afterwards it found that several other international banks had done the same. “We’re seeing more understanding by clients, saying: we get it, we’re not trying to pinch for the last nickel. And in some cases, in M&A, I’m seeing fees moving up.” And not by a small amount: he thinks the premium on some deals relative to two years ago is 20 to 30%. Granted, M&A is the area with the greatest range of fee possibilities; buyside roles typically carry fixed fees, while sellside roles often involve incentive structures, for example. But he says the trend is clear.

Sivitilli puts this down to a change in the model for banks in Asia. “Many banks in Asia, for quite some time, were just focused on revenue,” he says. “But international banks, over the last two to three years, have migrated to a profits-based view. Most financial institutions in 2006 didn’t have a well-developed framework for assessing capital; shocking but true.” Headcount pressure has helped. “The discipline around hiring is driving discipline around fees.”

In ECM, Julius at HSBC thinks fees in Hong Kong at least are pretty good. “The good thing about the Asian business, especially in Hong Kong, is that it is the highest margin business because unlike anywhere else in the world with one or two exceptions, IPO fees in Hong Kong have the buyer and the seller paying: between 2 and 3% from the seller of equity, and 1% brokerage from the buyer.” Discretionary fees are becoming more common in ECM deals too.

But the big problem for bankers is not that fees themselves are falling, but that the number of ways the fees are split is increasing. The news story on AIA/AIG on page xxx discusses this in more detail, but generally in both ECM and DCM transactions it is becoming commonplace to see seven, eight or even nine bookrunners on one deal. This has led to some absurd titles such as – on AIG – the idea of a passive global coordinator. It splits fees among more bookrunners than was ever the case before, and isn’t healthy for the markets either, since it reduces accountability.

“One thing we’re seeing more of is multiple bookrunners on transactions, which wasn’t the case even 18 months ago,” says Richdale. “It does make things harder, but we are a differentiated bank providing differentiated service.”

Another, related problem is that as local players gain traction, the field is getting ever more crowded. “There are more and more players in the market,” says Julius. “Since Macquarie entered, you’ve also got the regional brokers like Haitong, Citic, Religare and Samsung [which has since dramatically scaled down its Hong Kong operations], then regional banks like DBS, OCBC and CIMB, and people who have bought other bits and pieces like Barclays and Nomura. That’s 10 new names.” Partly, this leads to the pressure to add more bookrunners. “There’s an intuitive grocer shop mentality towards bookrunners – ‘three or four for the price of one’ – but when it comes to actually managing the deal you can only have two or here. Otherwise there’s chaos and no responsibility.” And partly it adds to fee pressure.

“One difference we have here with other regions is that we have very strong local competitors,” says Sitohang at Credit Suisse. Korea has local champions, and China and India clearly do; Malaysia’s CIMB signaled its own regional ambitions with the purchase of many of RBS’s equity and corporate finance businesses (see op-ed); DBS is a strong regional player and the other Singaporeans are thriving too. “They will get stronger. The investment banking business in this region will grow, but locals will want a part of it too.”

Still, despite the challenges, one need only look at the region’s demographics to retrieve a sense of optimism. “Our expectation is that in the next two years we will see $3.7 trillion of GDP growth in Asia,” says Joshi. “I believe that we may see a multi-decade period of growth akin to post World War Two in the USA, when you had young companies being spawned to cater to new industries; existing companies becoming a lot later; and a capital market that had to develop and grow to meet their needs.” That’s what keeps people coming.

Box: China JVs

China’s domestic market is not just a matter of potential. It’s already arrived. Domestic corporate and government bonds combined have already become the second biggest domestic debt capital market in the world after the USA. The A-share market, too, though suffering a difficult year, is clearly a force.

For many years, foreign banks have sought to be part of this, which they can do by establishing joint ventures with local partners. Nine have been licensed so far.

To see how they’ve evolved, it is instructive to look at the first and the last. Putting aside the special cases of Morgan Stanley/CICC and CLSA’s venture with Fortune Securities, Goldman Sachs was really the test case for China JVs; its foundation in 2004 was structurally extremely complex, with two separate ventures, only one of which it legally has a stake in (it backed the other by funding a former employee to capitalize it and effectively hold it in trust on Goldman’s behalf); one holds underwriting businesses, the other research and broking. Those close to the structure at its foundation recall meeting 40 government ministers in 10 ministries to get it approved; these days a 33.3% foreign ownership in a JV, with the majority held by the local partners and a split of board seats between them, is the norm. Today local partners must be successful local houses, unlike the early days when Goldman effectively started from scratch and UBS (which followed in 2006) created a new securities company out of a flagging local brokerage called Beijing Securities.

Being first, and with this structure, Goldman has had time to integrate. “We manage the China business as part of our overall investment banking business,” says Dees. “We’ve tried to build one team which goes across Goldman Sachs and Goldman Sachs Gao Hua. What we’ve always wanted to avoid is having a domestic team and a separate international team. That to me would be a failure.”

But the more significant change has been the scope of business. Post-UBS, licences have been quite limited: domestic A-share and bond underwriting, and M&A advisory. In Goldman’s and UBS’s case, the permits included secondary trading, brokerage and research.

And this has proved crucial to the Goldman venture. There have been entire calendar years in which it has advised on no A-share or domestic bond issues at all. Since Goldman still leads in overall combined China ECM, it doesn’t much care; the venture itself makes most of its money out of secondary trading and commissions.

For newer ventures, that’s just not an option, and there are questions about how profitable – if at all – any of the ventures are. Comments about the JVs tend to be big on optimism and low on specifics. “The JV is doing well, the mandates are building up, there is a great team and we have good hopes for the JV,” says one investment banking head. And is it profitable? “I can’t comment on specifics.”

And they also tend to speak more in hope of knock-on effects of a China business than clear hope of profitability from the venture itself. Joshi at Deutsche, which launched a venture with Shaanxi Securities in 2009, says the A-share underwriting pipeline there is “deep, with a number of potential large deals coming.” But he is equally enthused about “the ancillary business we would like to develop in China,” in particular involvement over time in the rapidly developing futures market, the currency and rate products that can come out of the development of offshore RMB, or the development of ETFs. “Our JV is important for tapping A-share issuance, but we’re making sure we are focused on broader market structure developments in China as well.”

Similarly, the RBS venture – which will now become probably the only area where RBS is still involved in ECM, since that accounts for 90% of the venture’s business today – appeals to McCormick for reasons beyond the equity capital markets. “We are very keen to grow the fixed income component, our core area of expertise,” he says. “But as a global FX house, we see the RMB as hugely important. It will become a reserve currency, if it’s not already.” McCormick, too, has great hopes for futures business.

Still, investment banking fees are not bad domestically. Chris Laskowski, chief operating officer, global banking Asia Pacific at Citi, says that although large cap ECM fees in A-share issues are “tighter than Hong Kong”, on the SME side – in IPOs worth the equivalent of $50-150 million range – they can be as high as 5 to 7%. “It’s a very quirky market in that respect.”

DCM fees, says Faruqui, are “more attractive than the rest of the region. There is a huge surge in volumes in domestic issuance since the financial crisis dislocation. In the long term, this market has the potential to be as large as the US domestic market. You cannot possibly discount it at this point.”

And so to the latest venture: Citi Orient. It was a long time coming and there’s no doubt Citi needed it, for the same reason that everyone else – Credit Suisse, JP Morgan, Deutsche and the rest – needed one: because even if the venture itself doesn’t make money, it’s much easier to pitch if you can throw that domestic ability into the mix. Laskowski says the focus now is on getting the 1500 to 2000 SME relationships of the corporate bank looking at the IPO market, for example.

Asked what Citi learned from existing ventures, Farhan says: “It’s not about the agreements; it’s about the people. It’s about the partners on both sides of the table sharing a common vision and commitment to a successful partnership.”

And that’s a common lesson of the many ventures to date. As one banker puts it: “Some banks have thought they had the upper hand in a partnership. That’s irrelevant if the other guy isn’t listening to what you’re saying.”

BOX: The headhunter view

What do the region’s top headhunters think of the market? Not a great deal. The mood is not good following the bonus announcements of most banks in the early months of the year.

“While everyone intellectually understood their compensation was going to be coming down 30 to 40%, when people see the number on a piece of paper they tend to have a more visceral reaction than they thought they would,” says one. “While some are flat to last year, most are clearly down, and in most cases have a restricted deferred element to the compensation.

“Every banker is becoming a financial institution specialist and working out whether having 60% of their bonus in the stock of that bank is worthwhile.”

So who wins in that environment? “The large US money-centre banks are considered to be the best, with JP Morgan the standout because of its share price performance comparative to the street,” says one. People are newly optimistic about Citi in this respect, he says – since few feel its share price can get any worse – and always about Goldman Sachs, although “the question on everyone’s mind is how people make money now they’re no longer proprietary trading. They don’t have the answer but they know people will figure it out, and the people who figure it out first will probably be Goldman.”

Still, not everyone is convinced that there’s much upside in any bank stocks, arguing that price to book ratios – for US banks, currently between 0.9 and 1.1 times, typically – don’t make a compelling case for improvement.

In Europe, headhunters say Deutsche is the closest European equivalent in terms of its likelihood of recovery; “It’s always been a successful bank and the premier German bank, which is where the initiative lies.” UBS and Credit Suisse are still able to attract people, “but people don’t want to be at RBS or other UK banks, and certainly not French banks. They are very wary of any organization from an aggressively regulated environment.”

Headhunters also note the growing importance of institutions that have clear balance sheet liquidity, something that clearly benefits HSBC and Standard Chartered.

Headhunters say they don’t see much headcount reduction now, because as one puts it, “they did it all last year.” “Whether there’s another round would depend on the equity issuance market, I would think. But I can’t think of a single institution that didn’t trim last year.”

See also: http://www.chriswrightmedia.com/aig-sale/

If you’ve got a spare US$60,000, you can go and see Titanic for yourself – but not for much longer. This year’s expeditions in the Russian-built Mir submersibles, which will take dozens of tourists down to the wreck in July and August, are expected to be the last trips of their kind for the foreseeable future.

Aside from one-off charters, the main company that offers these dives is called Deep Ocean Expeditions. Expeditions take two weeks at a time, sailing on a support vessel from St John’s in Newfoundland, Canada, usually carrying 20 tourists who will dive. It takes about a day and a half to reach the dive site, and then the submersibles dive in pairs, with one Russian pilot and two paying passengers in each. It’s a long day, typically 10 hours all told, so the two week duration of the trip reflects the time it takes to get everybody down to see the wreck in suitable diving weather while still allowing the pilots time to rest and do maintenance.

See the article as it ran here: Titanic

One expedition team member this time, making his 11^th visit to the dive site, will be Don Walsh. Regular readers of DCM (“Deepest Man”, June 2010) will remember him as the only man alive who has been to the deepest point in the world’s oceans – Challenger Deep in the Mariana Trench, which he did in an odd-looking bathyscaphe called the Trieste in 1960. He dived on the wreck about 10 years ago.

The first thing one sees of the wreck is, as Walsh puts it, “the money shot: coming right up to that bow.” This, thanks in no small part to Jim Cameron’s movie, is much the most iconic sight of the wreck. Even after a two and a half hour descent almost four kilometres down, the pilots – currently Yvgeniy Cherniaev and Victor Nischeta, supporting chief scientist Anatoly Sagalevitch – are skilled enough to make it the first sight tourists encounter at the bottom. “The Russian pilots have spent more time on the Titanic than Captain Smith did,” says Walsh. “So once they land on the bottom they know exactly where to go.”

The Titanic broke in half on its way down, so the norm is to start at the bow, look at the front half of the ship, then follow a field of debris – “like somebody broke open a piñata and stuff fell out” – towards the stern, about 500 metres away. While anything made of wood, and any human remains, have long since gone, the hull is still largely intact, as are many of the fittings; Walsh recalls looking through windows on one of the decks and seeing the bathtub within the captain’s cabin. There are still artifacts, from champagne bottles to bits of clothing, pots and pans, that have survived well.

Visibility varies – though it makes no difference if you dive in the day or at night since all ambient light is gone by about 200 metres anyway. Walsh, a lifelong oceanographer, explains that the Titanic is on the sea floor just south of the Grand Banks, an east-west ridge sticking out from Newfoundland with the Labrador current bringing cold water from the Arctic Ocean southwards across the ridge. As the current rises over the ridge it picks up organic materials from the ocean floor, then sinks on the southerly side of the ridge where the wreck is. When that current is flowing strongly, visibility is impeded, but this is partly offset by the fact that the Mir craft dive in pairs, so one can shine light on what the other is looking at (this has proven enormously helpful for filmmakers like Cameron).

In the time Walsh has been attending the site, the pilots have reported a steady deterioration in the hull. Iron-eating organisms are feeding on the structure, creating rusticles – a word invented because of Titanic by Robert Ballard, who found the wreck in 1986 – and it is gradually falling in on itself. How long is left? “There are only guesses, but 30 years from now there won’t be anything to look at,” Walsh says. “The metal is being eaten up.”

That, though, is not the reason the trips to the wreck are stopping; instead that’s because the Russians need their submersibles back. “They were built for the Russian Academy of Sciences for academic research, but when they were finished the Soviet Union collapsed and over the years there was never enough money going into marine science in Russia to support this system full-time,” says Walsh. Consequently for years Russia has leased the machines out to “various treasure hunters and documentary filmmakers and tourists. But this has never been something they wanted to do.” Now it appears Russia has enough scientific work to support their use full-time. And there is not another set of submersibles like it anywhere in the world: other craft can go equally deep, but generally they require two crew and one passenger, which would push costs beyond the very high to the unattainable as far as tourism goes. It’s tourism’s loss: Walsh – who after all sank 11 kilometres in a metal ball too small to stand up in for his Challenger Deep record – considers the Mir submersibles “rather spacious: two couches, and window for each one, with a larger window for the pilot. I feel more discomfort flying on a 747 to Australia.”

“I guess my claim to fame is I had lunch on the Titanic,” recalls Walsh. “Halfway through the dive we landed nearby the bridge where Captain Smith was last seen and ate our sandwiches.” It’s not an experience many other people will ever have.

Discovery Channel Magazine, April 2012

In 1987 a young architecture student called Timothy Johnson, an undergraduate at the University of Minnesota, visited Chicago for the first time. He was overwhelmed by the mighty skyscrapers that rose, muscular, from the city floor – the Sears Tower, the John Hancock Center – and was both delighted and deflated. On his way back to the Midwest farmland where the tallest buildings were grain silos and water towers, “I was quite depressed, thinking I was born a hundred years too late,” he recalls. “Wouldn’t it have been great to be in a city like Chicago at the turn of the century, when it was all being built – when the US itself was being built?”

Then he went to Asia. “And then I realized: no, I was born at exactly the right time.”

See the article as it ran here: DCM-SKYSCRAPERS

Johnson went on to become a design partner for NBBJ, designing buildings including the Sail on Singapore’s Marina Bay, one of the tallest residential towers in the world, and he became chairman of the Council on Tall Buildings and Urban Habitat, the leading source of information on supertall towers.

A glance at the council’s data tells us that we are, without question, amid a golden age of skyscraper design and construction every bit as dramatic as 1930s New York, when the Chrysler and Empire State buildings created the world’s most iconic skyline, and the 1970s, when the World Trade Centre and Sears Tower (now the Willis Tower) traded world records. In 2011 alone, 88 buildings higher than 200 metres were completed, including 17 new additions to the 100 tallest in the world. In 2010 Dubai’s Burj Khalifa shattered the world record for tall buildings by 300 metres; it’s more than twice the height of the Empire State. And plans are well advanced for a building that will reach one kilometre into the sky.

Folly or function? The jury is out. All architects will make a strong practical case for going tall, but there’s no question that we do so too because it fires the imagination. “A super tall tower represents a meaningful step forward and a symbol of success and optimism for the future,” says Adrian Smith, the man who designed both Burj Khalifa and the tower that will take its record, the Kingdom Tower in Jeddah, Saudi Arabia. (A busy man, he’s also responsible for Shanghai’s Jin Mao Tower.) “We must always strive for greatness and find the means to attain it. If not, we will become irrelevant.

“If cities don’t continue to build and improve their conditions, they will die,” he says. “When we lose the spirit to reach for glory, we lose our soul.”

So how did we get here?

One can make a case for numerous structures as the first skyscraper, all the way back to the Pyramids of Giza. A man called Imhotep, who 4500 years ago realized that a thick and strong base was essential to building tall – hence the pyramids – is sometimes described as the world’s first structural engineer. Various Chinese pagodas and Gothic French cathedrals also fit into the tradition. “For all of recorded history, mankind’s fascination with structures that rise toward the sky has been constant,” writes Kate Ascher in The Heights: Anatomy of a Skyscraper.

But if we take as part of our definition that skyscrapers are commercial objects, designed to foster commerce and to make money in their own right, rather than just being tall structures, then our story really starts in America – and more specifically Chicago and New York in the 1880s.

That’s where the prompt to build high came from. Businesses in both cities were getting bigger but needed their offices to be downtown; since land was scarce, and land values rising, it made sense to go upwards if only to cover the costs. In Chicago, the need was particularly acute since much of the downtown area was leveled by fire in 1871.

At the same time, technology began to allow people to go upwards more efficiently. If all you do is build high with masonry, your walls have to get thicker and thicker until the lower floors have less and less space, defeating the point. But then came the internal steel skeleton, with cast iron columns within masonry walls; this allowed walls of tall buildings to be thinner, and therefore more space for commercial use, as well as greater natural light penetration. It’s widely accepted that the first building to do this on any meaningful scale was the Home Insurance Building in Chicago, designed by William Le Baron Jenney and built in 1884.

Better still, the era coincided with the mass production of steel; the price of steel dropped from $167 per ton in 1867 to $24 per ton in 1895, allowing it to replace cast iron as the backbone of new buildings. On top of that, the elevator, pioneered in the 1870s, made skyscrapers more practical, particularly when hydraulic power replaced steam (which still had plenty of use elsewhere, driving heating and plumbing systems). Even Edison’s light bulb, and the wider availability of electricity, played a role. “The modern skyscraper was very much a product of the Industrial Revolution – and of a myriad of its most transformative inventions,” writes Ascher.

With new buildings came new innovations. The first to be built exclusively on a steel skeleton was the Tower Building in New York. The first with a wire-braced frame, important for counteracting sway, was the Manhattan Building (which, oddly, was in Chicago). Next came the first to be built on steel beam-based cages: the Flatiron Building in New York, still one of the city’s iconic sights for its odd shape, fitting alongside the diagonal rise of Broadway. After that, Chicago rather ceded the race to New York when an 1893 law limited the height of downtown buildings to 40 metres, roughly 10 floors.

So New York took the torch, and how it ran with it! The turn of the century to the 1930s was one of the true golden eras of construction and the names of the buildings still stir the soul today: the Singer Building, the Met Life, the Woolworth; the Bank of Manhattan, the glorious Chrysler Building, and finally in 1931 the almighty Empire State. At 102 floors and 380 metres, with two million square feet of office space, it remains one of the city’s top draws and was the tallest building in the world for nearly 40 years. Helped by new methods such as concrete caisson foundations, braced frames to resist wind, and the idea of express elevators – all of them used when the Woolworth Building opened almost exactly a century ago in 1913, and still commonly used today – the sky really was the limit. This was an era of Art Deco style and bold corporate shenanigans; when the Chrysler went up in 1930, its fabulous spire was built in secret and raised from within the building in order to make sure that the Bank of Manhattan, being built at the same time, would not be taller. By 1930, 99% of the tallest buildings in the world were in North America, with just one exception in Sao Paulo.

Take a look at a photo from that period: flat-capped construction workers in vests, perched nonchalantly on beams reaching out into the sky, a cigarette and a hipflask instead of a harness. To look at these pictures is to see a city being built: not just its steel and cladding, but its soul.

But nothing lasts forever. Then came the Depression (the Empire State would be largely untenanted for years) and the Second World War. The imperative to go tall would not return for decades. But by the time it did, new technologies such as the glass curtain wall – cheaper, lighter, and allowing more pleasant working conditions – had made new ideas possible. A key architect in the late 1960s, when interest was returning to tall building, was the American Bangaldeshi Fazlur Khan of Skidmore, Owings & Merrill in Chicago. His idea of a tubed support structure, where instead of steel columns a tall building would be made of several load-bearing tubes, would be used in both the World Trade Center – the new world’s tallest in 1972 – and the Sears Tower in Chicago, which took the title in 1974 and would not give it up until (with some acrimony) more than 20 years later.

It was a brief renaissance; the oil crisis in the 1970s stopped tall buildings once again, and this time when they returned to the fray, they would have moved to Asia, and then the Middle East. And it happened quickly. 30 years ago the USA was the only place that mattered in a discussion of tall buildings. Today, only one US tower makes the global top 10 (the Willis Tower, in eighth place) and only three make the top 20. By 2020, there will be only one in the entire Western Hemisphere that makes the top 20, and that’s not even built yet: the new One World Trade Center in New York.

First the Petronas Twin Towers in Kuala Lumpur took, by some definitions, the world’s tallest title (see box), before Taipei 101 in Taiwan took it in 2004, the first building to pass 500 metres in height. Then all debate about tall structures, whether buildings, masts, towers or whatever else, was comprehensively ended by the truly extraordinary scale of Burj Khalifa in Dubai: 828 metres, 163 floors, and 320 metres taller than any other building on earth – that’s the same as an entire Chrysler Building.

And the future is already out there, written up in a glossy brochure. The Kingdom Tower will be the centerpiece of the $20 billion Kingdom City development in Jeddah; it will be “over 1,000 meters”, according to the architects, with a total construction area of 53,000 square meters, housing a luxury hotel, offices, condos, serviced apartments and the world’s highest observatory. The tower, the architects say, “evokes a bundle of leaves shooting up from the ground – a burst of new life that heralds more growth all around it. The sleek, streamlined form of the tower was inspired by the folded fronds of young desert plant growth.”

A kilometre? Upwards? The first question one always puts to architects is: just how high can you go?

“We had an opportunity a few years ago to design a building where the client’s requirement was that it was at least a mile and a half tall,” says Johnson. “We asked the question: why would you do that? The response was: we want to push human ingenuity. We want to see how far we can go. We send Space Shuttles into flight, we smash atoms apart, why can’t we do that?”

Nevertheless, there are practical limits along the way. Smith says he is often asked ‘how tall can you go?’ with the most common specific refrain being whether it is possible to build a mile high tower. He, too, has done investigational work on this. “The biggest challenge for a building of that height is the issue of elevators,” he says. “To get to the top, you’d have to transfer from one elevator to another at least two or three times, if not more, which would be extremely time-consuming. So that would be a significant limiting factor, and will have to be addressed by advances in elevator technology before a mile-high building is realistic.” Another challenge is the size of the base that is needed to support the structure. “Within the cavity of the building at the base would be a great deal of space, most of it nowhere near the perimeter of the building – ie, near windows. How would you use all that area? As a giant atrium? And if you did, would it make economic sense?”

Structurally, the big issue is wind resistance. Wind vortices build up vertically around buildings, which can have several knock-on effects; it can cause lateral movement, which can move the building uncomfortably for occupants; it can also cause wind effects on the ground that are problematic for pedestrians. “To combat this problem, we look for ways to confuse the wind, as we say,” says Smith. Wind tunnels make it possible to test structures very specifically and to tweak them to best effect. “With Burj Khalifa, we addressed the problem by developing a stepped pattern of setbacks. With Kingdom Tower, we sloped the building, meaning each floor plate is slightly smaller than the one directly below it.”

Meeting technical challenges is half the fun, and in some places they are more acute than others. When you are next in Taipei, do not miss the opportunity to go to the observation deck of Taipei 101, the world’s second tallest building. The views are great – Taipei’s surroundings are surprisingly hilly when you’re up high – but the really fascinating bit is not outside, but in: a huge 660-tonne steel pendulum called a tuned mass damper, suspended from the 92^nd to 87^th floors, designed by architects CY Lee & Partners to offset movements caused by strong winds or earthquakes. Elsewhere in the region, the Petronas Towers in Kuala Lumpur have the world’s deepest foundations, extending 150 metres down to deal with sharply sloping limestone bedrock beneath.

But it’s noticeable that the limitations architects refer to on further height are economic and practical: it’s not that they can’t be done, but that to do so would at this stage be inefficient. And this is an important point. Architects are at pains to point out that, whatever trophy value cities take from tall buildings, they still have an important role to play.

Johnson, for example, calls himself a “tall building junkie”, but when talking with DCM revises it to “a city junkie. I love urban environments: the density, the energy, the imperfect nature of a lot of things coming together at that scale.” He argues that in a time of exponentially rising population, much of it in poverty, the density of accommodation that comes with high rises is essential to supporting a reasonable standard of life. “How do we design for the people nobody’s designing for? You hear the argument that any building over 60 stories is just an inefficient ego trip. But if you put them in a collection to create a city, and building an infrastructure that’s more compact, that’s far more sustainable than a suburban model.”

City towers, he says, are certainly economically sustainable, otherwise they wouldn’t be built. “We have a building in construction in Dalian that’s almost 400 metre and I can guarantee you the owner’s not building it just for his ego. It’s going to make money.” But this sense of social sustainability is important too, he says; likewise, Smith argues “the tall building can address the needs of the future while having the least environmental impact, particularly in terms of land use. Skyscrapers are inherently sustainable because they accommodate a large number of people on a small footprint of land.” Elevators in a high-rise are 40 times more energy efficient than an average car, he says, while they also encourage the use of public transit and create more walkable cities. Finally, they create a catalyst for growth. “Petronas made little economic sense and sat two-thirds empty for several years after completion, but the worldwide attention it brought to Kuala Lumpur and to Petronas as an oil and gas company was very significant.” Burj Khalifa is doing the same in Dubai, he says.

Also on this theme, Johnson insists there is “an environmental opportunity” in building tall. “The skin of a building needs to do more. It needs to create energy. Possibly it can grow things.” When he was looking at the mile and half high project, one thing that Johnson was interested in was the considerable difference between the temperature on the desert floor – naturally, it was in the desert – and the top of the tower. “We were working with an engineering firm to create a kind of loop that would allow the use of that difference to create energy. Also, the taller you go, there’s more wind pressure: above 40 floors, that’s the driving force in the structure of the building. Why don’t we harvest that wind?” Other ideas include using elevators’ push and pull to create their own energy. “Elevators use 3 to 5% of the energy of an office building. It’s not huge. But you start with things like that.”

These ideas are already developing in practice. Smith highlights sustainable features on Burj Khalifa such as a condensate recovery system that collects about 14 Olympic-size pools of moisture annually for use in irrigation – “very significant in a desert climate”. And architects are learning all the time. “With every new supertall that gets built we add about 10 per cent to our body of knowledge,” he says.

One sad postscript is that while towers going up are iconic, so too are towers being brought down. When Al-Qaeda wanted to hit America with maximum loss of life and symbolism, it knew that bringing down New York towers would give the most powerful possible message. Equally, the message of recovery and rebuilding – and rebuilding higher – is highly symbolic for New York.

9/11 raised safety issues, for sure; Smith says one lasting impact is the appearance of places of refuge every 20 floors in new tall towers, with a higher fire rating. And Johnson calls for greater study of fire situations in buildings, and more prescriptive fire codes in some parts of the world where people are building tall.

But he adds: “I don’t think we should be planning on designing buildings that can withstand a terrorist attack of someone with a plane-load of fuel flying into the side of a building. Our optimistic human life would be over at that point.”

Sidebar: The rules

In 1998 the Petronas Towers in Kuala Lumpur became the world’s tallest buildings. Or did they? Chicago’s Sears Tower wasn’t giving up the title without a fight: its backers pointed out that if the antennae on its roof were included, then it retained the title, and furthermore it had a higher occupied floor.

The dispute brought the Council on Tall Buildings and Urban Habitat to popular attention, since this organization is, among other things, the arbiter of rules on height. These rules are surprisingly arcane. There are actually three recognized categories for height: height to architectural top, which includes spires but not antennae; highest occupied floor; and height to tip, including antennae, flagpoles or signs. So in 1998 there were actually three tallest buildings: category one was the Petronas Towers, two was the Sears Tower, and three was the tower of the World Trade Center with the antenna on the roof. Taipei 101 took the first two categories in 2004, by which time the third category had passed to the Sears Tower after the World Trade Center was destroyed; then all argument was comprehensively ended by Burj Khalifa, which didn’t just wipe the floor with all competitor buildings but also beat other things like towers and radio masts.

Johnson says these rules matter. “There’s a pride to it, a history of mankind to it. People ask: what is the tallest building? It’s like who is the fastest man or woman on the planet. It’s a part of human achievement that everyone is interested in. That’s why we do things like this, otherwise we’d still be sleeping in caves and hunting tigers.”

Sidebar: How did that get there?

Start with a big hole. No, seriously: there’s a lot of science in this, first with the blasting and excavation – which may require the underpinning of neighbouring buildings first – and then with a process called sheeting and bracing, which means securing the perimeter so that the sides of the hole don’t fall in. One consequence of the destruction of the World Trade Center was that people saw this usually invisible part of the process – the so-called bathtub, a diaphragm wall which was built to ensure that the surrounding earth, and ultimately the Hudson river, did not slide into the site. The bathtub survived the destruction of the buildings and is still there beneath the new towers and monument.

Piers, caissons or piles refer to foundations that link the base of the building to the bedrock beneath, which can be a long way down; the Petronas Towers foundations, built on a concrete mat deep beneath the ground, go down as much as 150 metres.

With foundations complete, structural steel is raised, followed by pouring of concrete slabs, fireproofing, and then curtain wall installation. Designs vary; tall towers today often use a relatively small number of columns attached to high strength concrete cores by big outrigger arms stretching horizontally across the building. The columns are attached to one another by belt walls encircling the perimeter of the building. This was the approach with Taipei 101, for example.

Ever wondered how the glass stays on? Unitized glass panels – those that have been assembled and glazed in a factory – are shipped to the construction site fully assembled and are lifted by crane. Workers guide the panel into place, then hang it from brackets installed on the building. They are then bolted into place and the joins sealed with silicone, caulking or gaskets.

Once the curtain wall is up on a particular floor, mechanical plant installation begins. Once the building is ‘topped off’ – reaching final structural height – then roofing installation beings. Traditionally, topping off is a cause for celebration, with the final beam often accompanied by a flag or a fir tree. Often that beam is painted white and signed by steelworkers and designers. Next come the elevators (this may have started already on lower floors), and finally tenant fit-out.

Construction management is no mean feat: as many as 75 different subcontractors can be involved on a construction. It’s a sign of their efficiency that businesses can move in to buildings well before they are complete; at the ICC, Hong Kong’s tallest tower, bankers at Morgan Stanley were doing deals on the lower floors while there were still bits of steel and glass poking naked out of the top of the tower, not even close to structural completion.

Sidebar: What’s your favourite?

What buildings do leading architects admire? Adrian Smith opts for the city where he works: Chicago. “I admire the John Hancock Center in Chicago for its bold, strong statement, its simplicity and its adherence to the orthogonal character of the Chicago grid,” he says. “To me, it represents ‘the City of Big Shoulders’ in the Carl Sandburg poem.”

Timothy Johnson nominates three, including one of Smith’s: the Pearl River Tower in Guangzhou, which fits his sustainability themes with two slots that funnel air through the building, among other innovations. “It’s one of the clearest examples of how the drivers in society today can form a building.” He also nominates the wonderful HSBC headquarters in Hong Kong – “turning the building inside out, what an amazing way to look at the building” – and the Commerzbank Tower in Frankfurt, a visionary green skyscraper which crates sky gardens in atriums on nine different levels.

Sidebar: How to visit

Here are some of the region’s tallest buildings and how to visit them

TAIPEI 101 (NT$400, 9am-10pm daily)

One of the easiest in the region to visit. Ticket booth is on the fifth floor of the mall in the tower. Observatory includes an indoor section with views across Taipei, and a smaller outdoor observatory higher up, as well as a chance to see the huge steel pendulum suspended in the upper floors to dampen wind and earthquake movement.

PETRONAS TOWERS, KUALA LUMPUR (RM50, tickets on sale 8.30am daily except Monday)

Not a great arrangement. You have to queue first thing in the morning, then are told when to come back later in the day for your visit. The skybridge between the two is OK but the tour is to the lower level of the bridge, meaning you can’t see much upward.

JIN MAO TOWER, SHANGHAI

The 88^th floor observation deck is a great spot not just for the view outward across Shanghai and to the neighbouring skyscrapers, but because of the view inside 40 floors down into the atrium of the Grand Hyatt Hotel.

BURJ KHALIFA, DUBAI (AED100 for general admission of AED400 for immediate entry; 10am to 10pm Sun-Wed, 10am-midnight Thur-Sat)

You can either buy a ticket and be told when to come back, or pay four times as much for immediate entry to the world’s highest observation deck, called At The Top, 124 floors up.

And here’s one most people can’t visit: Abraj Al Bait, or the Mecca Royal Hotel Clock Tower, has reached structural completion at a reported 601 metres, which will make it officially the second tallest building in the world (and the tallest hotel, with the largest clock face, five times bigger than Big Ben) when it formally opens this year. But most of the world’s population will never see it; the entire city of Mecca is off-limit to non-Muslims.

ROADTEST

Fidelity Japan Fund

Who runs the fund? Fidelity. One of the world’s largest fund managers, and probably the one most renowned for building in-depth expertise on the ground in the countries in which it invests. Portfolio manager is Nick Price.

The basics: Japanese equities. Aims to beat Japan’s TOPIX index over five years.

The process: Uses a concentrated, high conviction portfolio with a bottom-up stock selection approach – that is, looks for individual companies that are undervalued. Uses Fidelity’s Tokyo analysts. Top holding is GREE, a Japanese social networking service.

The bottom line: Numbers, in line with the market itself, look hideous: -11.56% a year over the last five years, on average. There’s not one single positive performance number from one month to five years, or even since inception in 1996. But more and more analysts are beginning to take a contrarian position and call for a rebound in Japanese stocks. It’s about time.

Fees: 1.15%

Verdict: Japanese stocks have traumatised investors for years now. But if you believe a long overdue rebound is on its way, this fund will catch it.

NEW FUND

Self Super Insurance

What is it?

Not a fund, but a method of insuring your self-managed super fund

Insuring it against what?

Costs of ATO audits, investigations and prosecutions, civil penalties, trustee disputes, loss of documents, excess contribution tax assessment notices, beneficiary disputes…

Hang on, why do I have to worry about all that?

Hopefully you never will, but the focus on compliance of trustees and SMSFs has never been greater than it is today. Additionally, with reforms washing through the whole superannuation industry, SMSFs included, that compliance burden is likely to get worse. There were over 11,000 ATO audits of funds in the 2011 financial year and 15,000 notices related to excess contributions.

In a sense, you could argue this product meets a commonplace need: that SMSF investors know exactly how to run their investments, but have no clue about their compliance and legal responsibilities.

What’s not covered?

Well, certainly not any losses your fund makes. There’s also the usual period of cover restrictions (such as an audit that commenced before you started cover), and any professional fees around the standard annual SMSF audit required by law.

Who is Self Super Insurance?

That’s the trading name of Consult Insurance Solutions, which is a new general insurance broker. Ultimately your coverage comes from QBE.

What does it cost?

Options start at $175 and are tax deductible, but increase according to the scope of the coverage you want. For example a fund founded in 2004 in NSW, with reasonably generous coverage limits, would cost $262.37, according to the site.

GIZMO

ZAGGfolio

We have previously featured case/keyboard combos that link to iPads and turn them into something approaching a laptop. We return to the theme because this one’s really good. Made of carbon fibre, it’s mighty strong; it has a built-in stand to hold the iPad2 in landscape or portrait orientation; and has a removable keyboard, with its own rechargeable battery, which links to the iPad via Bluetooth so you don’t have to have it physically connected to it. It even comes with some iPad 2 specific shortcut bottoms such as volume, home, cut and paste, and music playback.

One might ask whether turning an iPad into a laptop defeats the point of having an iPad in the first place. But for those who love their Apple gizmo but want to simultaneously protect it and link it with a keyboard, this is a good device.

www.zagg.com

FUND WATCH

Eley Griffiths Group Small Companies

It’s often said that small caps is one of the areas where good active managers can add the most value, and so it seems looking at this fund. It beats the benchmark convincingly over all timeframes from one to five years. That’s probably no consolation to investors who have held it for one year (heavily down) or five (flat), but that’s the nature of small caps: volatile and dramatically up or down. You don’t buy them for stability.

Sector splits look very different in small cap funds to large caps. Instead of banks hogging the fund, this one goes chiefly into basic materials, industrials and consumer cyclical. Top holdings are mining and services company Ausdrill, West Australian gold production and exploration company Regis Resources, and compliance services group SAI Global.

Participants:

Yvonne Phe Kheng Peng, Managing Director, Markets, AmBank Group

Yeoh Seng Hooi, Small and Medium Enterprises Association Malaysia

Dato’ Shahril Ridza Ridzuan, Deputy Chief Executive Officer, Investment, Employees Provident Fund

Puan Sharizad Juma’at, Managing Director and CEO, AmanahRaya Investment Management (ARIM)

Moderator: Chris Wright, Asiamoney

Asiamoney: What do Malaysian clients want and need in terms of FX and risk management tools?

Yvonne Phe, AmBank: In this volatile market, especially over the last year, the FX market has frequently not moved in a usual way. There have been sudden big gaps up and down, which have hindered a lot of business operations. If you’re an importer, an exporter or a fund manager with underlying currencies in different denominations, then there are techniques banks can offer to help hedge FX exposures more effectively. We have a team in Ambank who are constantly engaged with clients in different industries, trying to understand the business and offer solutions to protect investment returns and profit margins by hedging.

AM: And what are clients telling you? Is the volatility making this a particularly difficult time for them?

Phe: In volatile markets clients are typically more risk-averse and would like to protect what they have. Clients know what they want to do as in business – where they should invest, what business they should venture into – and the most important thing for them is to protect their margins. They are very willing to listen in order to make sure they don’t have more uncertainty in the financial aspects of what they are doing, and to minimize the risk they are facing. We talk to some clients about hedging through forwards, which means the cash can be due in a few months or years time; and for some clients our research team will explain what our views are, and if they concur with that view there are strategies we can provide to limit downside.

The EPF is the most influential institutional investor in the country – and you’re growing your international assets. What do you need in currency and risk management?

Dato’ Shahril Ridza Ridzuan, EPF: At the EPF we manage the retirement savings for the workers of Malaysia. Our total assets are about RM450 billion plus. We’ve made a conscious decision to move some of that money to global markets, and we are roughly 14% invested outside Malaysia, and expect that to grow to 20%.

Depending on the asset class, we take views on the impact of foreign exchange movements and the risk of those movements.  The prime example would be fixed income: we believe it has a higher percentage of volatility from FX so we try to hedge it 100% back to ringgit. That way we can just focus on the credit and the yield. In the property market, when we invest overseas, we prefer to have between 40% to 60% hedging on those assets. The difference there is we have the opportunity to hedge through onshore financing, which serves multiple purposes: firstly as a hedge in terms of local currency credit versus local currency returns; secondly to manage our tax exposures in those countries; and thirdly as yield enhancements, as some form of debt leverage.

AM: Can the currency, in certain areas, be a potential source of returns – something you take a view on?

Shahril: We don’t take a view on currency as a yield in itself, we use it more as risk management. We’re not in the business of investing in currencies purely for gain. We use it as a means of protecting ourselves against movements in those currencies. The types of FX we are involved in are forwards and hedging, not pure investments in currencies.

AM: How do you hedge?

Shahril: When it comes to pure hedging contracts we work with a number of the banks in the market. We have a fairly transparent process in working out the best rates we’re going to get, and how many points we are going to pay for the contracts. We are well serviced by all the banks in Malaysia, including the multinationals. Property tends to be more onshore loans that we arrange; the last one we did was sterling, for buildings we invested in in the UK. A group of international banks did a club deal for us to raise the money.

AM: Is this a particularly challenging time, given what is going on in developed world currencies?

Shahril: It is a volatile time of course: you can see that movements in the forex rates have been increasing, and that does have an impact in terms of how we time our entry into certain markets. A year and a half ago, when we started to move into the UK, we had to take a view on where the pound was in relation to its long term averages against the ringgit and dollar. And we’re looking at a deal in Australia, where the A$ in particular has been volatile. A lot of your eventual total returns will depend on exactly at which point you buy into the currency, because you’re going to be holding those assets for a long period of time.

AM: There are high hopes in Malaysia for growth in the SME sector. What sense do you get from the SMEs you represent?

Yeoh Seng Hooi, SAMENTA: For SMEs, the biggest issue is volatility. When you talk about FX risk management, a lot of SMEs maybe don’t take that into account. Why? It could be because of their speculative, entrepreneurial nature. But their strategy tends to be: do nothing. Times have changed, and they do have awareness of simple strategies like forwards, but don’t know much about swaps and options. That needs to be improved through greater education and awareness.

Another issue is the bargaining position of SMEs with their customers. A couple of years back when the euro was strengthening against the dollar, it would make sense for an exporter here to be selling to a customer in Europe in euros – but they don’t have the bargaining position to dictate the currency, and European customers would still want to buy in dollars. So they don’t benefit so much from fluctuations. Also, even if they trade in another currency – for example, selling into China and trading in yuan now – they’re still buying goods or raw materials in dollars, so have to hedge that position as well.

Having said that, although they like to be a bit gung-ho and speculate a bit, SMEs should still hedge at least their costs. Some like to take no action, allowing market forces to dictate. More of them should be aware of the instruments available to mitigate these risks: SMEs should not be relying on forex gains as a profit motivation. It should be a risk management strategy rather than hoping to have extra gains because of fluctuations – it could go the other way and wipe out their gains.

AM: How can they be encouraged to do so? Does it come from greater exposure to foreign exchange?

Yeoh: Banks have roadshows where they go round working with chambers and associations like ourselves; recently we did one with AmBank, talking not just about forex risk but trade risk. As times change SMEs have more awareness of the risks that affect them. Now at least they tend to have accountants, rather than just an entrepreneur who decides everything, and they tend to look at some of these issues. But there is still a big need to educate.

AM: And when SMEs do want to use FX product, are the products they need already there, or do you need to see more from the banks?

Yeoh: Availability of forex lines is still wanting in the SME community. I don’t know about Malaysia but in Thailand, Siam Commercial Bank says SMEs only hedge 20% to 30% of their forex transactions; it would be good to get that up to about 50%.

Forex lines are not just dished out to SMEs immediately when you become a client of the bank. This availability is something banks should look into, especially for SMEs involved in international trade.

AM: Let’s hear from the investment management industry.

Puan Sharizad Juma’at, CEO, AmanahRaya Investment Management: ARIM is a licensed fund manager under the Securities Commission (SC), managing about RM7 billion in funds across multiple asset classes: equities, fixed income, alternatives, real estate, cash and funds. We work on client mandates, in two types: direct mandates from institutional funds, and retail funds under the SC’s guidelines. Retail funds are allowed to invest up to 30% in foreign assets, and in direct mandates it depends on the clients. We are currently managing ringgit and non-ringgit investments in equity, fixed income and real estate.

Our primary objective is to safeguard and preserve the value of clients’ investments. When it comes to hedging, these two mandates must be treated differently. Direct mandates for investment in non-ringgit assets would normally come with a hedging policy; in retail funds, we will work within SC’s guidelines and policies. Depending on the client’s sophistication level, we will work with them to arrive at an appropriate hedging strategy. There are no hard and fast rules about hedging policy: it depends at the end of the day on the objective of the funds. Most of hedging positions are for fixed income and funds, where the underlyings may be a mix of assets

AM: Do investors in Malaysia tend to want large overseas exposures?

Sharizad: You have a lot of investment options. For wholesale funds, we have to work within SC’s parameters and we do note SC’s concerns and objective: to protect the public at large. We also have 100% foreign funds, but under wholesale, and mainly from our sophisticated category of investors.

There are issues with retail funds when we enter into hedging transactions with financial counterparties – we don’t have much of a free hand to determine what would be the best hedging structure for the fund mainly due to availability of credit lines. For example, one of our biggest clients is our holding company, who we handle as a direct mandate. If we enter a hedging structure for them, the counterparty signing the document is the holding company, not the asset management company, and it’s easy for them to get a credit line. If we want a one year forward or a cross-currency swap over three or five years, we’ve got the flexibility to work for the best interests of the fund. But for a retail fund, the counterparty would be the asset management company, and banks are not so comfortable to give that flexibility to us because we have to go back to the trustee to get approval. At the most we can do a one year forward, which may not be the best hedging structure for the fund.

AM: So the reason you don’t have greater choice in hedging strategy is not the availability of product, but of lines?

Sharizad: Yes, for our retail funds mainly. The whole idea of entering into hedging positions is to preserve the value of your investments, and in the current environment you may not think one year is enough. If I only have a one year position when I think five years is best, that’s not the best hedging strategy for the fund.

AM: Yvonne, how do you respond to that?

Phe: This is a much talked about topic. The contentious issue with ISDA [International Swaps and Derivatives Association] and documentation is: who is the legal entity of the fund? In retail funds it’s the trustee, but the execution and operation is done by the investment manager. It has to be the trustee who signs. In Malaysia the trustee role is not as robust as elsewhere; there is a gap where trustees are not willing to take additional, legal roles, and engage in a tripartite agreement where the trustee, bank and investment manager can all sign. That’s the normal process overseas.

At AmBank, we extend certain credit lines – granted, they are short dated, because of the uncertainty in the legal documentation. We would like to extend more to small businesses but legal counsel say: you can’t claim anything here without a tripartite agreement. It’s Catch 22. We have raised this with regulatory bodies. If we want to deepen hedging and engage the fund management industry to do more, then they need to be able to exercise their view. We are constantly looking at resolving this gap.

AM: What needs to change for you to give her the products she needs? Is that in the hand of the regulators?

Phe: It’s not the regulators, it’s in the hands of the trustee. Typically a trustee is a bit sticky in signing a legal document.

Puah Sharizad, does that make sense to you?

Sharizad: From a bank’s point of view, we will provide as much information and documentation as we can. As an institution I have gone through the process of negotiating ISDA terms and limits – importantly we want to know what else does a bank require from us and our trustee?

Phe: It’s the same ISDA documents we are talking about, just made tripartite in terms of signing it. Internally, we are looking at relaxing terms for funds in particular so we can extend further, bridge that gap, increase the tenor of hedging. Because ultimately the deeper the liquidity and the more participants, the better the pricing to the client. If nobody participates it becomes a one way street. It’s a win-win situation to have more participants in contracts on a long-dated basis because the spread will narrow quite tremendously.

AM: How about Mr Yeoh’s comment about the availability of lines to SMEs?

Phe: The SME sector is a key pillar that all banks would like to have. All banks are willing to look at their credit lines and say: you should have an FX line, because SMEs are subject to FX fluctuations. If a client agrees with our view, we say: how about you buy insurance? Risk management is all about insurance – paying something so you don’t become subject to a particular risk. Some SMEs will say they’re not familiar with option strategies, but we say think of it as insurance: if rates go up to such and such, you are protected. An option strategy means a small premium up front – or collecting one sometimes – and although you might not enjoy the upside as much as you would, you are protected. We tell clients: you don’t have to hedge 100%, do 50% or whatever you would like to do.

Yeoh: Of course theoretically SMEs should be looking at that, but still there is the speculative nature of them. They should be aware that a 10% movement could wipe out their profits: in a volatile market, it can happen.

But in terms of availability of forex lines, banks are trying to do something, but it’s usually packaged together with a credit line which involves collateral and has to be assessed from a credit perspective. If you are manufacturer, it’s easy to provide collateral because you have assets; traders don’t tend to have such assets to pledge. But they still need forex lines.

I know a certain multinational bank in India where there is a dedicated forex advisory desk for the SMEs. The big boys have their professionals who will be working on all their risk management for them, but SMEs need hand-holding and support. I think banks should have dedicated forex advisory desks here to introduce SMEs to various instruments.

AM: One assumes availability of lines and collateral are not issues for the EPF, but what issues arise from your sheer scale in terms of liquidity, particularly as you go more international?

Shahril: Liquidity is still an issue. At the scale we operate on, it is not that easy to get enough commitment from the banks, particularly from the currency pairings we are in. It is relatively easy to get ringgit-dollar pairs, but we have investments in a variety of markets such as Indonesia and Thailand. It’s not easy for us to get a ringgit-baht or ringgit-rupiah hedging pair, not in the volumes we do. We tend to work with banks in a two-stage way: hedge ringgit-dollar, then get banks to do the second leg, dollars to whatever currency we are looking at. It is cumbersome, and a result of the lack of a liquidity pool.

Over time, as we put more money into the market, we are trying with the banks to make sure there is enough liquidity and commitment available to allow us to continue to do what we do – 100% hedging on fixed income and onshore funding for other assets. Onshore funding is fine, we have access to banks willing to work with us on that; it’s more cross-currency swaps where there are limitations.

AM: We hear so much about growing intra-Asean flows; will that fix the situation?

Shahril: I think it will. As more trade is done on the commercial side, it will provide liquidity for us as well. It’s a two way thing: as the industry grows, so does the ability of counterparties.

AM: Malaysia is the most sophisticated Islamic finance market in the world. How does that affect forex risk management?

Shahril: Whether Islamic or conventional, we view assets as part of a pool. The EPF as a whole is essentially a conventional fund, because we don’t provide a Shariah-compliant pool of assets separately for contributors. But 35% of our assets are Shariah compliant and we’ve been working on increasing that percentage; also the conventional side is operated on an ethical screen similar to Shariah. There’s probably a big degree of overlap so the total volume of compliant assets is probably much higher.

We have funded a couple of asset managers with Shariah-compliant mandates for global fixed income, and they are investing now. From an FX point of view we don’t treat it any differently; we hedge it using forwards and cross currency swaps. Global Shariah is predominantly a dollar market so there’s no problem with liquidity of contracts, and locally it’s ringgit based, plus the Malaysian Shariah market is the biggest in the world anyway.

AM: How about in the asset management industry?

Sharizad: Some of our funds are Shariah-compliant. There is an issue with hedging: we have looked at several proposals from the banks but we need to find out whether the hedging structure is acceptable to our Shariah committee. The market as a whole is still working towards an accepted hedging structure for Shariah products. Many structures are index-related, and our Shariah council is still trying to digest if that is acceptable. Hedging strategy or product for Shariah investment is still pretty limited and we would like to see some improvement on that.

As a fund management company, when we launch a fund we want to make sure it is well taken up, so the market reach is very important to make it an Islamic fund, because it can cater for both – hence the importance of this Islamic hedging requirement.

AM: Is this an issue for SMEs?

Yeoh: SMEs welcome all kinds of facilities. So when banks like Bank Islam offer them credit lines, if it’s on attractive terms they will be more than happy to have another option they can tap, whether Shariah compliant or not.

AM: Yvonne, where are we up to with Shariah compliant hedging strategies from the banks?

Phe: We do have simple Islamic hedging strategies for clients, but as Sharizad pointed out, there are different interpretations of whether they are Shariah compliant. In Islamic products, whether FX or rates or sukuk, there are generally accepted Shariah principles we can use. Plain vanilla Islamic FX, profit rate swaps, commodity murabaha – that can all be done. But when it comes to more complicated strategies like index-based, it comes down to whether the Shariah council deems them acceptable. If you talk about hedging strategies, it’s a derivative, whether you like it or not; it has to derive from somewhere. How do you them structure it to make sure it is compliant? Also you can have a product in the Asia market where if you go to the Middle East you might find it’s not acceptable there. Different scholars have different thoughts. We’ve yet to see common ground on interpretation.

AM: Let’s talk about the ringgit itself. It has gone from restriction in the Asian financial crisis to being steadily more open and is now almost, but not quite, completely unrestricted. What will or should happen next?

Shahril: For us, the issue of whether the ringgit is fully liberalized or not has minimal impact on our ability to put money out for investment. If you talk to other people in the industry, they say there is no impact on them either: anyone with a genuine need to convert ringgit has no problem. It’s a misconception that there is a restriction on people’s ability to move money in or take it out – that hasn’t been the case for some years. There is no barrier to anyone like us.

The direction now is more about looking at where the flows are coming from. We are seeing a great deal of interest from overseas investors who like the stability of yields in markets here, especially those in Islamic investments. Foreign participation in fixed income has topped 30% now. The danger of course is if there is a sudden pullback, a de-risking of people’s views, but that is not just Malaysia-specific but applies to most emerging markets.

AM: That’s the big question. Bank Negara claims Malaysia can withstand flows in and out much better than it used to, because the financial markets and banking sector are much stronger and deeper now. Is that the feeling around the table?

Phe: If you look at the different phases of what we have gone through from the 97 crisis to subprime in 07 and then now, the flow of funds is always very fluid. They chase here when money can be made, and that’s normal. In Malaysia, and the region, looking at FX there are huge movements. We have seen that in one month we can swing below 3 to the dollar and above 3.2. Why? Is it movements of funds or external factors? Typically it’s always external, because that causes investors to change their asset allocations. We can’t ignore the fact that liquidity in the market, and whether we can sustain it, is not always about our own financial system or economy.

Yeoh: The main concern for SMEs is about stability. You have short term euphoria when you benefit one way, but over the long term it’s the stability of the currency that’s important. If you try to ride volatility and make extra gains, it can work both ways. Especially with the international trade environment being so competitive, you should take a risk management strategy and protect your downside – because that’s why you’re in business, not to speculate, but to make money from your business.

There’s also the changing importance of trading partners. We’re trading more with China and Asean countries, so how the ringgit fares against the yuan is an important consideration. There are a lot more bilateral currency arrangements between countries now, and more options instead of just trading against the dollar. We already have an FTA with India, for instance.

AM: In practice are Malaysian businesses making much use of the new opportunity to settle in RMB offshore?

Yeoh: From what I know, not so much. We are still buying raw materials in dollars, and some Chinese sellers are asking for dollars rather than RMB. But there’s an opportunity for trading in RMB to grow.

Phe: From one year ago we can settle trades using RMB-ringgit cross-rates. That tells you Bank Negara is encouraging people to settle trades using the cross-quote rather than a two-stage dollar-ringgit and dollar-yuan cross. That helps to minimize costs. Statistics from the regulator show that 30% of bilateral trade with China is settled in RMB direct to ringgit. This is encouraging.

Central banks are looking to minimize volatility, and cutting the dollar out of the equation helps to stabilize currencies for the Asian region. We’ve also contributed to the code we have to put in Reuters screens, so clients see that, call us, and we will clear the trades. It’s still cumbersome in documentation; there’s a lot of work behind the scenes to make sure it is a trade-related invoice and so on.

Sharizad: So far we have no investment or exposure in RMB but may be looking at such investments if the opportunity arises.

AM: Does the internationalization of the RMB represent an opportunity for the EPF?

Shahril: We are not that heavily invested in RMB denominated assets. That may change in time as we have more openness. A lot of our exposure to China is indirect, via Hong Kong or resources in Australia, or manufacturers in the US who export to the Chinese market. So our exposure to China is still dollar denominated. For international fund managers and private equity managers, it is still easier for them to think in dollars than RMB; it’s easier than having to hedge a RMB-ringgit pair where there is no liquidity. Khazanah has already done one issue in RMB which went very well; but we are not in the business of investing in currencies and are ambivalent about the RMB just for the purposes of getting RMB exposure.

Question from floor: Many hedging positions are subject to mark to market, and one of the biggest concerns of our clients is that doing so may hit the P&L. In Malaysia we have not yet fully implemented FRS139 [a new accounting standard]; do panelists see this as a concern?

Shahril: We are FRS139 compliant and we do mark to market our forex exposure. For us, it’s important to have a forex risk strategy to manage the impact on our P&L. It’s fine if the underlying asset is in dollars and you take a hedge for a similar value. And it makes a lot of sense for a retirement savings fund like the EPF to look at ways to reduce volatility in price and asset fluctuations.

Yeoh: For most SMEs exposures are usually shorter term, three or four months, so it makes more sense for them to just go into a position and cover it. For trade positions, it’s not that relevant.

Phe: From the bank perspective we are FRS139 compliant. From a client perspective we do see a lot of requests in terms of mark to market positions we have to give prices to. Incorporating mark to market into a P&L is something we look at closely with clients, because ultimately auditors have to agree with how they publish their accounts.

Sharizad: We are managing client mandates which generally are all mark to market, usually on the FRS139 requirements. Normally a client would be very much aware of the impact on the book, so normally we break it down into two parts when we report, whether the numbers are coming from the underlyings or the hedging position.

Question: Does FX volatility affect the local banking market and competition?

Phe: If you look at recent volatility in the market there was an example last year during the euro crisis when we saw swap points move to the left – meaning the risk is building – and the FX swap market on the short end of the curve, up to one year, totally closed down. No-one dared to quote. The market just closed. For a week, nobody was there with a direct cross. Then there is a ripple effect going back to all the clients.

AM: How does the new Financial Sector Blueprint from Bank Negara Malaysia affect you all?

Shahril: Hopefully it’s an opportunity for the market to grow in terms of sophistication, availability of product and pools of liquidity. That will allow people like us to take advantage. As we grow out assets overseas, the question is whether the banking industry can keep up in providing risk management capability. We intend to get to 20% non-ringgit assets by 2014, and by then our AUM will be about RM540 billion, so you’re talking about RM100 billion of non-ringgit assets. The ability to manage the forex volume of RM100 billion is uppermost in our minds right now. A portion of that will be offshore-funded, so that’s fine; but there’s an opportunity for banks to grow here in this direction.

Yeoh: It is positive that local banks are going regional – for example in emerging markets like Cambodia, Vietnam, Burma and Indonesia. That’s positive: you can have a friendly banker who knows your track record there. We are concerned about what happens to the other currencies we trade with, such as the dong or the Burmese kyat; it all has implications for the buying power of customers and the ability to repatriate funds back to Malaysia. If we have good bilateral payment arrangements, that becomes less risky.

The usual complaints would be around the availability of lines, but the SMEs themselves also have to change their mindset in terms of financial management and coming out with proper audited accounts to help them get access to available funds. With that, hopefully we can ride on the momentum of growth. FTAs are very positive and improve access to markets, creating new opportunities.

Sharizad: When you talk about the evolution of the fund management industry, we would like to see Malaysia as an Islamic financial hub. This is where we have the edge over other markets. But it is not without challenges: we have mentioned harmonization, where we have not seen much improvement at the international level. Malaysian scholars may champion initiatives on Shariah-related products but when you want to go international, you need more international participants to make it happen.

Phe: Looking at the masterplan, the regional footprint is key. For us at AmBank, we have ANZ as a partner bank and we leverage on the international connectivity and the presence they have across the group to work with clients, whether on the trade side or retail banking, for example. That is where the international connectivities are: leveraging on the footprints of partners.

2011 was a pivotal year for the evolution of the dim sum bond market. Its scale grew dramatically, its range of issuers and tenors was transformed, but perhaps more importantly its whole nature changed from a frontier-spirited market in which any deal could be launched regardless of rating, to one with a more healthy balance between issuer needs and investor demands.

A large part of this evolution came from the fact that a mutual fund industry has begun to gather pace alongside the bond market itself. In December 2010, there were just six offshore RMB funds, with less than RMB800 million under management between them; one year later there were 34 funds with more than RMB4 billion under management. It is the sort of increase that almost makes percentages meaningless (467% in number of funds, 407% in assets), and reflects a market moving from infancy to a form of maturity.

Another sign of growing maturity in the industry is the fact that some diversity is already developing in fund type. There are more funds outside Asia than inside (18 to 16), although mainly this is partly just a function of domicile; HSBC’s RMB Bond Fund, for example, with around US$500 million under management, is domiciled in the Cayman Islands, but so far is chiefly populated by investors in Asia (though its new Luxembourg-domiciled UCITS-compliant fund will reach to a broader audience, particularly in Europe). 10 of those 18 are in the Caymans, seven in Luxembourg and one in Ireland; all portfolio management is done in Asia.

But it is true to say that the mandate of the funds varies.  Some of the funds, particularly those from subsidiaries of Chinese institutions, have tended to focus at the more high yield credit end of the spectrum, playing in the high-return securities that characterised the birth of the market, when names whose credit rating would probably be BB or lower if they had a rating at all were able to raise funds in reasonable size. Others, particularly those launched out of Singapore, have a mandate that allows them to look at low rated funds but in practice typically don’t; Barclays, for example, which launched a UCITS-compliant fund in Singapore in April 2011, requires that the fund’s holdings will always be investment grade, on average. That fund’s approach is to give RMB depositors a bit extra without risking the whole lot. HSBC and Fullerton can venture into high yield under strict criteria, vetted through a credit analysis platform.

One interesting approach in new funds has been to mix RMB bond exposure with other asset classes. The UBS RMB Fixed Income Fund, for example, can only investment in investment grade bonds, and must maintain an average duration below three years, but can put up to 20% of its assets into US dollar Asian investment grade credit and hedge it back to RMB. That is intended to get around the fact that the universe in the RMB offshore bond market is still relatively small. It can also invest in RMB deposits, so that it can invest in futures where the portfolio managers believe they represent a better potential return for the portfolio.

Fullerton Asset Management in Singapore also has an RMB fund which can invest up to 25% in Asian dollar paper, giving more liquidity and greater investor choice. It is likely that this model will fade once there are sufficient securities in RMB to make proper diversification possible.

Flows into new products have, unsurprisingly, been very strong in a new market, but not exclusively so. As figure 2 shows, some locally domiciled funds, from United and Manulife, experienced negative net new flows in 2011, though they were unusual; Ping An’s fund represents the reverse experience with US$224.5 million of NNF between late April and November and just one single day of net redemptions along the way. A look at that chart also shows that funds have had mixed success in building critical mass, with Haitong (the first mover) and Ping An way ahead of some established names one would have expected to do better, such as ICBC and CCB.

One reason that some funds have suffered outflows is because of a major change in the view of the currency itself in the latter part of 2011. Originally, many investors bought into RMB bonds somewhat indiscriminately because of a belief that the currency would appreciate against the dollar (and therefore the Hong Kong dollar too, since the two are pegged) by about 5% per year, come what may. Following global volatility in September, that view started to change; most analysts today predict 3 to 4% growth with a lot more volatility. That has started to change the view on the bond market from a pure currency play to one in which careful analysis is necessary, and seeing that, some investors have opted to do other things with their money. On top of that, the widening of credit spreads on many bonds during that period reduced performance and caused some investors to pull out, though equally this could be said about more or less any fixed income market.

Another sign of growing maturity is the quality of the names involved. Alongside the biggest names in Hong Kong and China – names like Haitong, Hang Seng, Citic, Ping An and of course HSBC, most of them early movers – have come some of the biggest names one has come to expect in any important debt market: Schroders, UBS, Barclays, BlackRock. Their presence, and the buyer base they represent – broader than just Greater China and Singapore, and going beyond retail to institutional and high net worth – is a further illustration that the market is finding its feet and becoming credible.

All mutual funds in this area face challenges. There still aren’t really enough issues. Getting allocation into the right issues is a problem. The secondary market is illiquid. The curve is improving – a recent China Development Bank issue went to 15 years – but largely concentrated in the short end. The swap market, though also improving, remains weak, which impedes issues from foreign issuers who don’t need the RMB for local purposes but hope to swap it out. There are still too many issuers without the covenants they would expect to need in dollar issues. And there’s not really a suitable benchmark. But it’s likely that a year from now, all of these things will look better, and that the existing funds will have been joined by many others.

MANULIFE AM

• The Manulife China Dum Sum US$ High Yield Bond Fund launched in July. It was notable for being the first dim sum fund to be launched in Taiwan, playing on the thawing of relations between Taiwan and mainland China which allows Taiwanese investors (and institutions) to put money into Chinese securities.
• It started well, hitting US$137 million in assets under management in its month of launch. Unfortunately, that proved to be bad timing; after modest increases through September, the world entered a period of enormous volatility that hit bond funds worldwide. Between September and October the fund suffered $18.7 million outflows, followed up with $8.2 million in November and $10.7 million in December. By the end of the year it had US$113.1 million under management, considerably less than in its month of launch.
• September and October were a period of poor performance in all bond markets – pretty much all asset classes, in fact – but declines do appear to have stabilised in the last three months, despite the fact that performance has lagged dim sum ETFs in that time.
• The fund is touted as offering exposure to high yield bonds, but it is illuminating to note that its top holdings, when last disclosed, were often not high yield. The largest holding when last disclosed was Chinese government bonds, followed by Export-Import Bank of China, then GLP (a real estate group part owned by Singapore’s GIC sovereign fund), Cofco and Sinotruk. Only the last two, and arguably the last one, really fit the bill.
• Manulife offers two funds in Taiwan, with a second one – Manulife China Offshore Bond A – launched in November, and attracting AUM of $93.1 million by the end of the year. This appears to be aiming at a more investment grade approach.

One of the most striking capital market stories last year was the evolution of the dim sum bond market from a currency play, in which absolutely anybody could issue regardless of their credit quality, into something more mature. “18 months ago we were seeing B-rated issuers doing deals that were 13 or 14 times oversubscribed,” says Rod Sykes, head of debt capital markets for Asia Pacific at HSBC. “That has changed and we have a very different dynamic now. People are doing a lot of credit analysis, looking at relative value, and doing all the homework they would do if they were in a G3 market.”

Augusto King, co-head of debt capital markets for Asia at RBS, adds: “Investors now are looking for investment grade names, a covenant package, and pricing that reflects the reality of what the issuer brings to the table.” That’s good, he says. “The last thing you want is a market that is growing in an undisciplined way.”

Despite this newfound prudence, the market is showing no shortage of groundbreaking transactions, with two standing out in the early part of the year. First, China Development Bank priced a 15-year deal on January 12, easily the longest yet achieved in this market. In a sign that, for all the increased investor scrutiny, the market can still offer attractive funding, CDB paid only 4.2% for its RMB1.5 billion issue.

Then in February America Movil, the Mexican telecoms group, became the first Latin American name to issue in CNH and, more significantly still, the first SEC-registered deal. This marked the first time an investor in the US onshore, without any international money to put to work, could participate in a primary CNH deal. About 26% of the deal was placed into the US and just under 20% into Europe – by far the greatest distribution outside Hong Kong to date.

Other shifts have been structural. The National Development and Reform Commission has placed a cap on the amount that onshore banks can borrow in dim sum, an aggregate RMB25 billion between 10 state and regional banks. Previously, bigger state banks such as Bank of China and ICBC were looking to set up huge programs that could potentially have been that big in their own right. “I think that should be positive,” says Hital Desai at Credit Suisse. “There were fears that there would be masses of supply from Chinese state banks wanting to take advantage of liquidity, take the funds onshore, and lend it out again. China is going to allow some of that liquidity to flow back, but not all of it.”

In another development, Swift, the global payments system, put in place a new mechanism allowing members to complete trades with each other even if the offshore RMB market becomes unusably illiquid. This is an interesting contingency move, since it indicates that at least some bankers are concerned the market could seize up – it is, after all, still the subject of capital controls limiting flows between onshore and offshore markets.

Reflecting this concern, some bankers do still appear uneasy about just what the dim sum bond market really is: a market predicated on a currency that isn’t, strictly speaking, real, just an oddly behaving offshore counterpart to an onshore currency.

“My concern with the dim sum market is that it’s a construct: it’s not driven by fundamentals of investor demand and issuer need,” says one banker. “It’s driven by the central government in China wanting to experiment with how people can use their currency. It has created an artificial currency.”

Others are alarmed by the appearance of six or even eight bookrunners on a single dum sum deal, many of them local Chinese banks that also serve as cornerstone investors. “That’s just a loan,” says the banker. “You can call it a bond. But it’s a loan.”

There’s also the fact that a lot of investors, particularly fund managers who launched products around September, are heavily out of the money following the widening of the bonds in the second half of last year. “It has left a bad taste in a lot of investors’ mouths that a lot of the bonds they bought last year are trading below par,” says Desai. But that’s something of a quid pro quo for the nature of the market changing and the investors themselves becoming more pragmatic. “Currency appreciation has come off the boil, tempered by the fact that you are now seeing dedicated dim sum funds with five to 10 year investment horizons. You’re seeing it emerge as an asset class, rather than just a play on currency appreciation.”

There are plenty of other challenges the market still faces. “The swap market is not particularly liquid,” says Stephen Williams, head of capital markets for Asia at HSBC. “But it’s getting better. This time last year there wasn’t a market at all.” RBS reckons the swap market is operational up to three years, but most liquid between one and two; Duncan Phillips, director, Asia debt syndicate at Citi, adds that “the deliverable cross currency swap market itself remains fairly thin, especially at five years and above.”

Still, despite challenges, there’s no denying the exceptional pace of growth in this still-young market. “The dim sum market is a bit of a misnomer,” says Mark Leahy at Nomura. “This is going to be the EuroRMB market ultimately, and will challenge the Eurodollar market. The CNH market has grown far beyond even the most optimistic outlooks.”

Citigroup is to be allowed to issue credit cards in its own name in China – the first time a western bank has been permitted to do so, in a development that raises a lot of interesting questions.

Strictly speaking, Citi is the second foreign institution to be allowed to do this – Bank of East Asia was first – but as the first major global banking powerhouse, it is a very significant step, for several reasons.

The macro perspective is to look at this in light of a US complaint to the World Trade Organization that China is failing in its WTO obligations in financial services. Until Citi, no US (or European) companies had been permitted to issue their own bank cards in RMB, nor had card specialists such as Visa, MasterCard or American Express been allowed to process card transactions on the mainland. Instead, foreign banks have had to co-brand with a Chinese partner in a joint venture, and to execute payments through a state-backed electronic payment entity called China UnionPay Data.

This, the US complains, is despite a pledge China made when it joined the WTO that its debit and credit card markets would be opened to foreigners by the end of 2006. Consequently one reading of the Citi announcement is that China is ready to meet those WTO obligations and open its financial services industry further than it has done in the past.

A more micro perspective would ask what’s so special about Citi. Like other banks with card businesses, it had set up a JV in China, with Shanghai Pudong Development Bank; that venture has been issuing cards since 2003. Citi says that “coinciding with the move”, Shanghai Pudong will continue to be responsible for that venture; Euromoney understands that Citi sold its half of the venture to Shanghai Pudong, conditional upon the Chinese partner lending its support to Citi’s own application to get a licence in its own name.

It’s notable, too, that the credit card licence comes within weeks of Citi getting regulatory approval for its securities joint venture on the mainland with Orient Securities, to become Citi Orient Securities. Like most other JVs bar the earliest movers Goldman Sachs, UBS and CLSA, this will allow Citi to conduct securities underwriting in the Chinese domestic debt and equity markets as well as M&A advisory. The two new approvals in aggregate mean that for the first time Citi now has the same franchise on offer in China as it does everywhere else. “It means we’ve now got the entire Citigroup franchise built out in China,” Stephen Bird, CEO for Asia Pacific at Citi, tells Euromoney. “The corporate bank, a retail bank in 13 cities, an investment bank [for domestic underwriting] that will go live in the summer, and now our own credit cards. Citigroup’s whole range of business lines will be active in China.”

This is a turnaround, since although Citi’s corporate and consumer banking operations in China have long been impressive, the delay in securing an investment banking JV has been a conspicuous gap.

It’s tempting to wonder whether the sudden improvement in Citi’s China licensing arrangements reflects a near decade of success in the Shanghai Pudong JV, or the fact that Citi didn’t sell its stake in Guangdong Development Bank during the global financial crisis when numerous other westerners did.

There’s surely no question that helped, but Citi was not the only one to hold the line. Which brings us to another tantalising question: why Citi before HSBC? HSBC did not sell any of its 19.9% stake in Bank of Communications (nor its stake in Ping An) during the crisis, and is at least as much a fixture on the mainland as Citigroup – with 110 mainland branches it is the largest foreign bank in China. One assumes a licence will follow for HSBC, which has offered co-branded credit cards in China since 2005 and now has 20 million cards in circulation, has 10 senior personnel seconded to BoCom’s Pacific Credit Card Centre unit, and is awaiting regulatory approval for a new joint venture company to extend that cooperation.

It’s certainly a business that competitors won’t want to miss out on. According to the People’s Bank of China, mainland banks (including JVs) issued 268 million credit cards as of September 30 2011, representing a 20% leap year on year. Mainland Chinese people discovering plastic indebtedness is big business.