For Wall Street banks hoping to play a role in one of Hong Kong’s biggest IPOs in years, the U.S. Department of Defense’s decision this week to add CATL to a list of companies thought to have links to the Chinese military could not have come at a worse time.
The company, the world’s largest maker of electric vehicle batteries and a supplier to Tesla, has been in talks with banks in recent weeks as it prepares plans for a secondary public offering in Hong Kong. The initial public offering will give the company, which aims to expand overseas, access to offshore funds, and Morgan Stanley estimates it could raise up to $7.7 billion.
Goldman Sachs, Bank of America, JPMorgan, and Morgan Stanley have expressed interest in working on the listing, two people familiar with the process told the Financial Times. The Shenzhen-listed company is expected to select underwriters ahead of a shareholder meeting on January 17, when the date and size of the offering will be discussed, one of the people said.
But the Pentagon’s move, which also added tech giant Tencent and Cosco, one of China’s largest shipping companies, to the list, threatens to change banks’ risk-reward calculations.
Although it does not directly impose legal restrictions on banks working with companies on the list, it will force banks to face a difficult reputational question: Can a bank finance shares in a company that the U.S. says has links to the Chinese military?
“Unfortunately, random blacklisting of customer names is becoming a more common feature of banking these days, which creates risk,” said Han Shen Lin, China country director at U.S. consultancy The Asia Group. “The most banks can do is to reposition their business and customer mix accordingly,” he added.
Speaking to the Financial Times, Lin said inclusion on the list “doesn’t carry the same weight as a sanction, but it’s close enough that banks can preemptively reduce exposure to these names just to avoid negative headlines.”
It is unclear whether U.S. banks will continue their participation following the Pentagon’s move. Goldman Sachs, Bank of America, and JPMorgan declined to comment, and Morgan Stanley did not respond to a request for comment.
Tensions lead to uncertainty in trade agreements
This action is the latest sign that U.S.-China tensions are dragging deals into more and more uncertainty. Any move to sever ties with companies on the list could be costly for banks. Tencent, in particular, is among the most important Chinese customers of U.S. institutions.
The tech giant’s parent company paid $524 million in investment banking fees between 2004, the year of its initial public offering, and 2023, according to figures from the London Stock Exchange Group. Morgan Stanley, Bank of America, Goldman Sachs, and Citigroup were the biggest beneficiaries of these payments.
Although Goldman Sachs was the third-largest recipient of fees from investment banking activities, CATL benefited less from foreign banks, with the lion’s share of its fees going to China Securities and CICC, according to LSEG data.
CATL and Tencent said they are planning legal action to challenge the Pentagon listing if talks with the U.S. Department of Defense fail.
Pony Ma, founder and chairman of Tencent, said the company was “neither a Chinese military company nor a military-civilian fusion company contributing to the Chinese defense industrial base.”
CATL said it had “never engaged in any military-related business or activity,” while Cosco said none of the companies on the list were “Chinese military companies” and that it would contact U.S. authorities “to clarify this matter.”
The move echoes the dilemma faced by banks in 2023 when Swiss agrochemical company Syngenta wanted to hire banks for its $9 billion initial public offering on the Shanghai Stock Exchange.
Banks were hesitant about whether they could work on the deal because the U.S. Department of Defense had placed Syngenta’s owner, state-owned ChemChina, on its list of “Chinese military companies.”
Bankers at Goldman Sachs, JPMorgan, Morgan Stanley, UBS, and HSBC lobbied for a role on the list, although Syngenta eventually canceled the plan.
CATL told investors that access to dollars was a key part of the rationale for the listing. The company had RMB 289 billion ($40 billion) in cash as of March 31, but China’s strict capital controls system means government approval is required for overseas direct investments above a certain threshold.
