Banks win in China by running slowly
According to the Chinese adage, "failure is the mother of success". Over the past two decades, investment bankers - never the type to accept failure lightly - have learned to live by that maxim when seeking business in China.
The wheels of Chinese bureaucracy turn so slowly that it can take years, and a number of setbacks, to get a large state-owned company to list on an overseas stock market - the mainstay of investment banking business in China.
Goldman Sachs is believed to have first approached the Chinese government over listing the international operations of Bank of China in 1996, six years before the lender eventually launched its initial public offering in Hong Kong.
"Winning an IPO in China is the most labour-intensive work we do anywhere in the world," says one senior Hong Kong-based banker.
Investment banks have to spend years cultivating government officials and company executives before they can claim a high-profile scalp and a multi-million dollar fee.
In the next few weeks, China Construction Bank, the first of the big four state-owned lenders to list, is likely to appoint Morgan Stanley as the main adviser on its $5bn-plus IPO in New York and Hong Kong.
The main reason why the US bank is likely to win that landmark deal is that for the past nine years it has contributed significant amounts of people and money to an investment banking joint venture with CCB. "Morgan Stanley did not win CCB in [this month's] presentations, but during the preceding decade," says an executive at a rival investment bank.
Competitors including Goldman Sachs, Credit Suisse First Boston and UBS have worked hard to get close to the other large banks expected to be listed (see graphic) and were not even invited to bid for the CCB mandate.
And despite pressure from impatient Wall Street bosses and expectant shareholders, most of the pre-IPO work - which includes wining and dining, expensive gifts and professional advice - is done for free.
Last year, investment banks shared some $200m in fees for IPOs of China-based companies, according to estimates by the research firm Dealogic - not nearly enough to compensate them for their expenditure on people and entertainment.
"It's very difficult for any single deal to be profitable," says a Hong Kong-based banker. "But we do it for the prestige, to build our credentials in China and for the follow-up business."
When Bank of China decided to sell a 10 per cent stake in its Hong Kong-listed subsidiary last month, it chose Goldman Sachs and UBS - the two advisers for the 2002 listing - as underwriters and paid them a fee estimated at between 1 and 2 per cent of the $1.88bn sale.
The long lead times needed to enter the inner sanctum of Chinese capitalism pose problems for those investment banks that have lost, or have never had, the ear of Beijing's power brokers. Some, such as JP Morgan, Deutsche Bank and Citigroup, are fighting hard to catch up.
JP Morgan is believed to have asked Henry Kissinger, US secretary of state in the Nixon administration, to lobby the Chinese government over CCB. Deutsche Bank is reported to have enlisted the help of Gerhard Schr
