By Michael Flaherty and Elzio Barreto

HONG KONG (Reuters) - A recent shouting match between senior bankers involved in Hong Kong's second-largest IPO so far this year illustrates the competitive squeeze on banks from Chinese companies offering incentives ahead of lucrative initial public offerings.

At a routine September 6 meeting of around 20 underwriters to China Huishan Dairy Holdings Co Ltd's planned $1.3 billion IPO, tempers flared between two bankers from HSBC (HSBA.L) and Goldman Sachs (GS), said people who were at the meeting and others briefed on the incident. One said the row escalated to the point where the Goldman banker threatened to have his HSBC rival fired.

Chinese companies are putting pressure on banks to woo so-called 'cornerstone' investors - big institutional names who agree to buy shares and hold them, thus boosting the offer's order book and profile. To better attract these investors, companies are increasing the incentives to banks that bring them in before the IPO, offering underwriters the promise of bigger financial rewards and more prominent roles on the deal.

For the company issuing stock, creating competitive tension is meant to ensure banks earn their underwriting fees, particularly in a market where banks are starved for choice. But investment bankers say the tactic can backfire, and could further jeopardize an already fragile stock offering market.

IPO volumes in Hong Kong have nearly doubled since last year to $5.3 billion, but proceeds are well below the peaks of 2-3 years ago. Last year was Hong Kong's worst for new listings since the global financial crisis in 2008.

"You get too many banks appointed on the transactions and the roles of these banks, and the economics, aren't really determined until a very late stage," said Philippe Espinasse, a former equity capital markets banker at both UBS and Nomura.

"What happens is you have a whole bunch of banks running around trying to get cornerstone orders without any coordination. They all come to the issuer saying: 'Look what we've got. We did more than the others.'"

Bankers shouting at each other is hardly new, and for the Huishan IPO's four joint global coordinators - Deutsche Bank (DBK.DE), Goldman, HSBC and UBS (UBSN.VX) - there's as much as $39 million at stake in commissions and incentive fees, Thomson Reuters calculations show.

But for the row to play out as and where it did is rare, said the people who were there.

TOO MUCH CREDIT

At issue was the credit HSBC said it should earn for its efforts in the cornerstone process compared to the other banks, the people said, noting HSBC had played a significant role in bringing in notable investors.