Investment banks will be eagerly looking to Asia for business opportunities this year. The big United States investment banks, the so-called bulge bracket, which includes Merrill Lynch, Salomons, Morgan Stanley and Goldman Sachs, have always been alert to opportunities in Asia and in the mainland in particular. This year, investor interest in China is expected to grow as it continues to open up its markets in compliance with its World Trade Organisation commitments. Asia is already an outstanding performer in one main area of investment banking activity: raising equity market capital. After the boom year of 2000, when Internet stocks were still listing at high valuations to an eager investment market, companies worldwide raised US$277 billion in 2001, down 39 per cent. Last year, global equity capital raised was just US$208 billion, down another 25 per cent. Asia, excluding Japan and Australasia, has done far better. Asian equity capital raised did fall by 61 per cent in 2001 to US$22.9 billion, but last year the primary market bounced back, with about US$29 billion raised, a 26 per cent increase. The underlying Asian stock markets are likely to face more challenges this year, with global economic growth worse than expected, according to ING Financial Markets. However, ING said Asian stock markets were likely to outperform the rest of the world, reaching 17 per cent above their December 2002 levels in the second half. In the fixed income market, ING said there was high potential demand for Asian US dollar corporate bonds. About US$20 billion in new Asian dollar bonds are expected to be issued this year, and bonds worth US$5 billion are due to mature. Asia, and particularly the mainland, will continue to be a significant source of business for investment banks this year, according to Michael Carr, head of investment banking for Goldman Sachs. 'Asia is defying the global trend. It has shown growth in terms of capital raised as opposed to the rest of the world, where capital is coming out of the markets. The Asian stock markets are also outperforming those outside the region.' Mr Carr expects to see more Chinese state-owned enterprises come to the market this year. One highprofile deal (in which Goldman Sachs is not involved) is the listing of Sinotrans, China's national transport company. Its US$500 million offer is likely to be the first major initial public offering on the Stock Exchange of Hong Kong this year. In addition to state enterprises, Mr Carr expects some big, private mainland Chinese companies to access the international capital markets through Hong Kong this year. 'We will see a very significant handful of these deals, in substantially sized transactions,' he says. 'There is a very active hunger on the part of investors to participate in the growth in China.' Other Goldman Sachs predictions for the investment banking industry include more merger and acquisition activity related to China, involving both mainland companies investing externally and foreign companies investing inward under relaxed new business rules. The investment bank is also expecting further restructuring among Hong Kong companies as they struggle to grow in the slow economy. This year should see more transactions like the deal clinched by French group CSLA in December. It took advantage of new joint venture rules, becoming the first foreign investment bank to set up a venture with a local brokerage. The deal was made possible by regulations governing joint venture securities firms announced by the China Securities Regulatory Commission in June last year. As required under the regulations, CSLA will be a minority shareholder in the new venture, China Euro Securities, with Chinese partner Xiangcai Securities holding the majority 67 per cent. The joint venture will be licensed to underwrite A-share issues, among other investment banking activities, but will not be allowed to trade A shares directly in the secondary market, at least for the moment. Other foreign investment banks are keen to follow CSLA in getting their own joint venture deals, but the biggest players are mostly resisting the idea, preferring to control their own deals within their own corporate culture. A famous exception is Morgan Stanley, whose joint venture vehicle, China International Capital Corp, established as a special pilot project, has won many plum mainland deals. Another recent regulatory event of interest to investment banks was the December launch of the qualified foreign institutional investors (QFII) scheme. Once qualified, these special foreign investors are able to invest in yuan-denominated stock and bond markets. To play China's local markets, QFIIs need to meet strict qualification criteria and deal through an approved local broker. There are also restrictions on the sale of A shares by QFIIs. According to Schroders, foreign institutions are unlikely to become major A-share players in the near future, despite the opportunity of becoming a QFII, because of concerns over fundamental factors and corporate governance.