The Development of Investment Banking in Hong Kong - Research Paper Example

The Development of Investment Banking In Hong Kong Investment banking is a type of financial service dealings with creation of capital for other companies and co-operations. Investment banks underwrite new debts and equity securities for corporations. They also offer guidance to issuers of security and placement of stock. In addition, they foresee sales of securities in some cases. Investment banks also take part in the mergers, acquisitions, reorganization and broker trades for firms and private investors. A distinction feature between investment banking and commercial banking is that investment banks do not deal in cash deposits. Corporate finance is the fundamental aspect of investment banking; it also entails helping customers raise funds in capital markets. The banks also provide their customers with supplementary services such as market making, trading of derivatives, commodities as well as fixed income instruments. However there are some instances where the bank exists as a part of a commercial bank but as a chief commercial banker (Meyer 2012, p 234). There are two categories or classes of investment banks based on their mode of operation. This is more relevantly defined as branches of operation in investment banking. The first is simply referred to as the ‘Sell Side’; it carries out functions such as trading securities for exchange of cash or other securities. Under this section the bank facilitates transactions, and promotes securities and market making services. The other category is the “Buy Side”. It is concerned with the provision of guidance and advices. It deals with purchasing of investment services. Some of the organizations that deal with this category include unit trusts, insurance companies, private equity funds and mutual funds. The banking system can also be split into private and public functions. This comes to play when there is information barrier which makes the two sections separate since there is no information crossing to either sides of the system. The private section deals with private insider information; under no circumstance should this kind of information be disclosed to the public. The public section, on the other hand, deals with public information such as analysis of stock, which is suitable for public consumption. The origin of investment banks in Hong Kong can be traced back in 1865, when major financial activities were carried out by HSBC. This was a name derived from Hong Kong and Shanghai banking Corporation, who were the founding members of the modern group. The bank was owned by business communities of China cost in 1869. During this period financial trade in the region was not yet developed and most banking activities were still handled by Europeans or Hongs, instead of professional bankers. However, people began to venture in entrepreneurship raising the demand of larger and more sophisticated banking facilities and services. The citizens in Hon Kong particularly needed a specialized banking system, which was preferably owned and managed locally. After being colonized the British the colony has rapidly become a regional hub for trade in South Asia. Also due to its strategic location in gate way of China Hong Kong has become the most important financial centre in the world and attracting a huge number of investors from all over the world in its investment banking system (Tan 2000, p 34). The industry has been modernized and conditions set that would see investment banking flourishing. This is due to the low tax rates and also considerable economic rise are key factors that have lead to modernization of investment banking in Hong Kong. Hong Kong harbors the best investment banks in the region which have developed over the historic period of banking evolution. It provides regional leaders, with dedicated teams of professionals serving a wide range of clients. The investment banks are able to provide strategic advice and innovative solutions covering full spectrum of investment products. These products include mergers and acquisitions, joint venture, spin-offs, leveraged buyouts, dept capital offering, structured products and syndicate loans (Wilkins 2004, p34). Hong Kong houses largest international banks in the globe. It is ranked 9th largest international banking centre in the world, in terms of the volume of external transactions that it carries out. It is also the second largest in Asia after Japan. The main feature of investment banks in Hong Kong is characterized by the 3-tier system, namely licensed banks, deposit taking companies and restricted licensed banks. The Hong Kong investment banking sector is highly open, making transactions both locally and internationally very easy and convenient. The success of the sector is attributed to the non discrimination low tax regime. The banks are being taxed a minimum rate of 16.5% while the employees only pay 15% of tax, there is also absence of a variety of taxes which normally have negative impacts on investment in the sector (Subramanyam 2005, p 412). Investment banking in Hong Kong is dynamic and characterized by influx and a lot of transformations. The financial instruments have increased in complexity because of competitive intermediaries. There are no boundaries among the diverse financial institutions. Barriers between the financial markets have been removed, Increasing the complexity and competition within the individual investment banks. Investment banks of all sizes and strategies are transforming the industry by introducing new products and functions. These include risk management approaches, new international exchange and new financial markets. These banks are also associated with advance technology in their operation; they have developed specialized software which have been created specifically for financial advisory support. Most of the banks in the cities have employed electronic trading on their desks. Theses enable them to work in collaboration across the world and deliver the best solutions and advices to meet their client’s needs (Hines 2010, p 203). The Investment Banking division in Hong Kong is able to implement full suit investment banking transactions. These include fund raising, modeling and issuance of debt securities, capital market tools, finance rising through equity market instruments as well as initial public offering, private placement, rights issue underwriting, commercial and debt reorganization, mergers and acquisitions to structuring of mutual lending, project funding, loans syndication and infrastructure financing. The development of investment banks in Hong Kong is also characterized by stability review. This is where recommendations are made on how the banks can effectively discharge their duties. Using this process the banks take into consideration recent and likely future development in the banking system, these provide them with an opportunity to change the nature of market risks that are facing them. Through this they have been able to escape global crisis triggered by market problems in other countries such as the US. However the technique recommends further measure to be taken to ensure stability in the investment banking in Hong Kong. References McGiffert, C., & Tang, J. T.-H. (2008). Hong Kong on the move: 10 years as the HKSAR. Washington, D.C: CSIS Press. Hines, M. A. (2010). The development and finance of global private power. Westport, Conn: Quorum Books. Meyer, D. R. (2012). Hong Kong as a global metropolis. Cambridge [u.a.: Cambridge Univ. Press. United Nations. (2009). Foreign investment in Latin America and the Caribbean 2002. Santiago, Chile: United Nations, CEPAL, ECLAC. Tan, C. H. (2000). Financial sourcebook for Southeast Asia and Hong Kong. Singapore [u.a.: Singapore Univ. Press [u.a.. Subramanyam, P. G. (2005). Investment banking: An odyssey in high finance. New Delhi: Tata McGraw-Hill. Hong Kong Monetary Authority. (1997). Hong Kong Pacific powerhouse. Hong Kong: Hong Kong Monetary Authority. Wilkins, M. (2004). The history of foreign investment in the United States, 1914-1945. Cambridge, Mass: Harvard University Press. Read More