Pentagon blacklisting of CATL poses dilemma for Wall Street banks | USAEMALL.com

For Wall Street banks hoping to play a role in one of Hong Kong’s biggest listings in years, the US defence department’s decision this week to add CATL to a list of companies deemed to have links to China’s military could not have come at a worse time.

The world’s biggest maker of electric-vehicle batteries and a supplier to Tesla has been meeting banks in recent weeks as it draws up plans for a secondary listing in Hong Kong. The initial public offering would give it access to offshore funds as it seeks to expand overseas, and Morgan Stanley has estimated it could raise up to $7.7bn.

Goldman Sachs, Bank of America, JPMorgan and Morgan Stanley have all expressed interest in working on the listing, according to two people with knowledge of the process. The Shenzhen-listed company is expected to pick the underwriters ahead of a shareholder meeting on January 17, one of the people said, where the date and size of the offering are due to be discussed.

But the move by the Pentagon — which also added tech giant Tencent and Cosco, one of China’s largest shipping companies, to the list — threatens to change the banks’ risk-reward calculus.

Although it does not directly introduce legal restrictions on the banks’ ability to work for the companies listed, it will force them to confront a difficult reputational question: can a bank underwrite shares for a company the US has said is linked to China’s military?

“Unfortunately, client names randomly appearing on blacklists is becoming a more common feature of banking these days, and that adds risk,” said Han Shen Lin, China country director for US consultancy The Asia Group. “The most banks can do is reposition their business and client mix accordingly.”

Inclusion on the list “doesn’t carry the same weight as a sanction, but it’s close enough that banks [may] preemptively cut exposure to the names just to avoid negative headlines,” Lin said.

It is not clear whether the US banks will continue their involvement in the wake of 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. 

The action is the latest sign of how US-China tensions are increasingly throwing deals into uncertainty — a marked change from previous years when global banks made huge profits in Hong Kong by helping fast-growing Chinese companies list overseas, many in the US.

Any move to cut ties with companies on the list could be costly for the banks. Tencent in particular has been among US institutions’ most important Chinese clients.

The tech giant’s parent company paid $524mn 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, BofA, Goldman and Citi were the top beneficiaries.

CATL has made less use of foreign banks, with the lion’s share of its fees going to China Securities and CICC, although Goldman is the third-largest fee earner from its investment banking activities, according to the LSEG data.

CATL and Tencent have said they are planning legal action to challenge being placed on the Pentagon list if talks with the US defence department fail.

Pony Ma, Tencent founder and chair, said the company was “neither a Chinese military company nor a military-civil fusion contributor to the Chinese defence industrial base”. CATL said it had “never engaged in any military-related business or activities”, and Cosco said none of the companies listed were “Chinese military companies” and that it would engage with US authorities “to clarify this matter”.

The move echoes the banks’ dilemma in 2023 when Syngenta, a Swiss agricultural chemicals company, sought to hire them for a planned $9bn initial public offering on the Shanghai exchange.

Banks agonised over whether they could work on the deal because the US defence department had placed Syngenta’s owner, state-owned ChemChina, on a “Chinese military companies” list.

Bankers at Goldman, JPMorgan, Morgan Stanley, UBS and HSBC had lobbied for roles on the listing, though Syngenta eventually called off the plan. 

CATL has told investors that access to dollars is an important part of the rationale for its listing. It had Rmb289bn ($40bn) of cash as of March 31, but China’s strict system of capital controls means it must get government approval for overseas direct investment above a certain threshold, which can be an arduous process.

Pointing to CATL’s use by global carmakers might help bankers justify working on the deal, especially if they add a “major disclaimer” to documents about the listing, according to one adviser not directly involved.

“I mean, their batteries are in the Ford Mustang,” said the adviser.