Resilience and Renewal: A Brief Overview of The Evolution of Investment Banking in East Asia
Significant transformations have occurred since Reagan's supply-side policies, and the onset of globalization sparked a surge in growth for emerging Asian economies, catching many by surprise. The largest investment banks were quick to capitalize on this rising tide as capital trailed the expansion of trade. Even amidst the Asian financial crisis of 1997, which jolted cities like Hong Kong, Bangkok, Singapore, and Shanghai, financial flows resumed their journey toward economies that many believed were still poised for the secular trend of a century.
Today’s situation sharply contrasts these past ambitions. Despite sustained upward trends expected for the investment banking market worldwide, East Asian markets are expected to peak in 2024 with revenues of US$7.31B. The concerning proponent involves a projected CAGR of -7.42% through 2028, ultimately resulting in a US$1.94B decline.
China
Geopolitical Headwinds
Though volatility has spread across southeast geographies, China represents the locus of concern faced with the difficulties of a slow COVID-19 reopening, a faltering real estate market, and structural deflation. While uncertainty in capital markets is a function of many inputs, geopolitics carries significant weight in emerging markets. Beyond the legislative elections, which will be held in South Korea, Japan, the Philippines, and Singapore in the coming two years, political analysts fear present worldwide conflicts may signal similar developments in Asia.
In global terms, Russia’s invasion of Ukraine, along with the Israeli-Palestinian conflict, has reinforced concerns of hegemonic instability. With respect to Asia, China’s current expansionary behavior in the South China Sea has encouraged consensus to recall its long-standing relations of tension with Taiwan.
Economic Headwinds
Economists are similarly negative, citing China is no longer the primary factor-driven economy in the region, with cheaper labor increasingly accessible in neighboring economies such as Vietnam. Deglobalization, consistent with the recovery of US industrial production, has instigated a nearshoring trend that will similarly tilt activity away from China.
Regulatory Compliance Headwinds
Another reason for concern revolves around apprehension on regulatory compliance and data security while operating in Mainland China. With Hong Kong no longer being the economic powerhouse and ‘Gateway to the West’, combined with regulatory compliance issues, the pull factors for continued M&A focus are more desirable elsewhere. Chinese companies that are going public via Hong Kong are predominantly put on a pedestal and funded by domestic and Middle Eastern investors, thus compounding onto the preexisting trepidations from Western companies. These are emphasized due to known involvement and ownership of China’s software giants, such as Tencent and WeChat and how they can influence their strategic decisions. Although there are designated Special Economic Zones where capitalism flows freely with minimal governmental interference, foreign investors and firms will remain weary of potential compromises of their intellectual property.
In 2023, four of the top six leading unicorns by valuation are Chinese (ByteDance, ANT Group, Shein, WeBack). For example, in the past couple of years, ByteDance, the parent company of TikTok, has been notoriously known for controversies involving unwarranted data collection of American users. Although direct parallels cannot be drawn to multinational corporations with offices in Chinese megacities, many still remain weary. However, with the technological evolution in Asia growing in reputation, tech-specific investment banking services, whether primarily tailored to IPOs or venture capital, will be increasingly important.
Ultimate Impact on Investment Banking in China
The investment banking industry has already started to shift, with multinationals looking beyond China due to the constant rise of domestic competition and dwindling numbers of acquisitions. Goldman Sachs, UBS, and Morgan Stanley are critical to selling Chinese companies’ stocks, and firm activity in China saw a steep decline from US$1.06B in 2021 to just US$203M in 2023, using advisory fees as a proxy. However, as of December 2023, fees from Chinese investment banks are still more than “Japan, South Korea, India and Singapore”. Chinese companies experiencing major layoffs have created widespread pessimism for foreign banks.
Trends Beyond China
Beyond the People's Republic, the volume of M&A deals is expected to increase in Japan after growth of 12% from January to November 2023, defying downward trends out of China. Dealmaking since 2019 has steadily increased due to low-interest rates and will continue increasing due to the central government implementing ‘supportive policies’ in the near future to draw more willing buyers. Additionally, Japan is introducing the revised “Nippon Individual Saving Account”, a tax-free investment program for individuals that allows the government to further utilize approximately ¥1,000t of cash and deposits to thereby increase competition for M&A amongst asset management firms. This implementation will undoubtedly boost the volume of domestic investments but could create a nationalist attitude amongst the Japanese population.
Although the rapid growth and intensification of competition in principle would appeal to Western firms, other factors, such as long-term population forecasts, may turn some heads. The population of East Asia’s financial powerhouses in South Korea, China, and Japan is expected to continue to decrease to 48.121 million, 1.313 billion and 106 million, respectively, by 2050. The working-age population in each respective country is expected to shrink significantly, signaling an urgent need to compensate for the future lack of domestic consumption and labor. Automation and artificial intelligence can make services, including digital banking, peer-to-peer lending, and data analysis, more efficient.
Conclusion
In summary, all of these factors represent both bleak and optimistic futures. The investment banking market in Asia faces an unpredictable future due to various factors, be they geopolitical, economic, regulatory, technological, or demographic. Political tensions within the region and globally introduce risks that could disrupt economic stability. The technological evolution in Asia brings both opportunities and challenges, requiring investment banks to continuously innovate and adapt to changing market dynamics. The risk of technology compromising company’s data, intentions and intellectual property increases weariness of investment. Regulators should increasingly focus on ensuring transparency, stability, and investor protection within the financial sector. Additionally, population projections, particularly the shrinking working-age population in East Asian countries, pose unique challenges where flexibility and resilience are paramount for investment banks to navigate successfully. While the future remains uncertain, proactive adaptation to emerging trends and leveraging opportunities will be key for investment banking firms to thrive in the dynamic Asian market.
Notes:
Various analyses of revenue projections for both the worldwide market and Asia paint incredibly different pictures. Statista Market Insights shows the global investment banking market yielding revenue projections of US$0.35t in 2024 along with a 1.40% CAGR through 2028, whilst Mordor projects a growth rate of 2.10% CAGR through 2029. The major gaps in CAGR truly showcase the unpredictability of the market.
However, the United States remains the economic powerhouse of the industry, as the top five leading investment banks by revenue are American multinational investment banks, with a combined market share of 30.7%.