Foreign investment banks face missing out on tens of billions of dollars worth of deals as Hong Kong-listed mainland firms increasingly tap domestic markets for funding, according to analysts. On Friday, H share Tianjin Capital Environmental Protection said it would raise 1.2 billion yuan (HK$1.12 billion) in domestic funding rather than seek support from Hong Kong investors, citing lower costs. The Tianjin-based sewage water treatment company plans to launch a yuan-denominated A-share convertible bond. It is the first Hong Kong-listed mainland company to announce plans to tap domestic funding after China cut interest rates last month. Tianjin Capital chairwoman Ma Baiyu said: 'We chose to raise funding in the domestic market because the cost of capital is much lower in China, especially after the recent rate cut.' Two weeks ago, on February 20, the central bank cut average lending rates by 50 basis points and deposit rates by 25 basis points. It was the eighth domestic-currency interest rate cut since May 1, 1996, but the first in more than 2.5 years. The reduction brought the one-year deposit rate to 1.98 per cent and the one-year lending rate to 5.31 per cent. Tianjin Capital has proposed to set a coupon rate of only 1.12 per cent per annum for its five-year convertible bond. Assuming the bonds are fully converted, the dilution effect would be only 2 per cent. 'If the bond were issued in Hong Kong, the conversion price would be only about HK$2, while in China, the conversion price would be about HK$9. The dilution effect would be at least four times higher if they raise the money in the Hong Kong market,' said BNP Paribas Peregrine director Joel Chang, who was also financial adviser to Tianjin Capital on its 3.8 billion yuan restructuring in December 2000. Tianjin Capital's move is bad news for foreign investment bankers. Analysts believed the rate cut would push more mainland companies - which are already in favour of domestic equity issuance due to higher valuations in the Chinese stock market - to raise funds domestically. Companies such as China Mobile and Shanghai Industrial Holdings are actively seeking to raise money by issuing China depositary receipts, while firms such as China Unicom and PetroChina are seeking to tap domestic capital through A-share issues. Minister of Information Industry Wu Jichuan has suggested that the two new fixed-line operators to be formed by breaking up incumbent China Telecom could list on the domestic market rather than overseas. Foreign investment banks are not allowed to participate in domestic bond and equity issues. BNP Paribas Peregrine is unable to share in the commission fees on Tianjin Capital's 1.2 billion A-share convertible bond issue due to its foreign bank status. International investment banks such as Morgan Stanley, Goldman Sachs and Merrill Lynch are said to be aggressively lobbying China Telecom and China Netcom to float their multi-billion dollar initial public offering plans in Hong Kong and New York markets to participate in such deals. Mr Chang said China's financing market still offered promising potential to foreign banks after the country's accession to the World Trade Organisation. However, foreign banks would need to link with domestic players to enjoy the promising prospects of China's capital market. That explains why most foreign banks are eager to set up joint ventures with domestic banks. BNP is set to announce details on a joint-venture investment bank this week.
