Wall Street’s biggest banks face a harsh reality check in China

Wall Street giants are realizing that more than three years after China’s grand opening, their hopes of a windfall profit from the $60 trillion Chinese market seem to be less realistic than ever.

Goldman Sachs Group Inc., Morgan Stanley and other banks are scaling back their ambitious expansion plans as a deteriorating global political climate and President Xi Jinping’s willingness to sacrifice security for economic priorities rock the private sector. This has slowed down dealmaking. Senior executives, who declined to identify themselves while discussing private issues, said that the largest banks are considering more drastic job cuts.

Goldman Sachs has revised its projections for the five-year plan, after the business environment in China changed dramatically. Morgan Stanley has decided to hold off on building an onshore brokerage, instead focusing on the derivatives and futures business. This bet is worth about $150 million. People familiar with the matter said that Morgan Stanley is planning to cut jobs affecting 7% Asia-Pacific Investment Bankers this week. This will join JPMorgan Chase & Co. The firm joined JPMorgan Chase & Co. and other rivals to reduce the number of China-dedicated employees earlier this year. Earlier this year, many Wall Street giants were steadfast in their plans of taking on China’s huge banks on home soil. They were also more concerned with finding local talent for the expansion. Many firms are now realizing that they must rethink their approach to the world’s second largest economy. The business climate in China has declined significantly, and according to senior executives, the best time for the country to make outsized profits is over.

Mark Williams, finance professor at Boston University, said: “This new calculus increases the costs of doing business in China and lowers the rewards.” These global banks are susceptible to political action that could cause material financial harm to franchises and shareholders.

People said that while many banks around the world are cutting jobs, those in China are among the largest in recent years, and are often deeper than elsewhere. China’s economy has been struggling to recover after years of Covid restrictions, crackdowns and other measures on everything from private education to financial technology. Since September, China-related jobs have been lost by at least 100. Goldman let go more than 10 percent of its mainland workforce after increasing its headcount from 600 to over 1,000 to expand its business.

Goldman Sachs representatives, JPMorgan and Morgan Stanley representatives declined to comment.

China’s financial sector has undergone the biggest changes in decades. Foreign firms can now own insurers, banks and brokers, as well as asset managers. President Xi is trying to protect the economy against the worst slowdown since early 1990s due to a US trade dispute. State-owned firms are already well established in all of these sectors, having learned from their joint-venture partners over the years. This makes it difficult for international firms to compete.

Dick Bove, an experienced bank analyst at Odeon Capital Group, New York, said that “the Chinese banks completely dominate the market.” He added that domestic firms have “little requirement for American expertise” today.

International banks are facing a high-stakes market that has been viewed for years as the last frontier of big fees for everything from stock sales to mergers. JPMorgan, Citigroup Inc., Bank of America Corp., and Morgan Stanley will have a combined China exposure of $48, billion by 2022. This is down 16% compared to the previous year. In recent years, the banks spent over $4 billion to increase or acquire controlling stakes in securities and asset management joint-ventures. They were betting on future growth.Morgan Stanley’s number represents the total net exposure. JPMorgan and Citi are total exposure. Goldman, according to data available as of December 2020, had “cross currency outstanding” in the amount of $17.5 billion.

Wall Street firms are forced to maintain an ever-more delicate balance in the face of a geopolitical environment that is more fragmented. Everyone says the same thing publicly: China remains a huge opportunity, and there are no plans to withdraw, especially after so much money was already spent. Wall Street executives say that it is difficult to maintain a good relationship with both sides when tensions are constantly escalating. This could become more difficult as the US elections approach. China policy will be a major issue on both sides, resulting in even greater drama.

The people stated that as a result of this, bank executives have increased their scrutiny on credit and market risk, and are asking senior managers in Asia about their liquidity, and whether or not US sanctions could trap clients. They added that the further bankers are from China, their pessimism increases.

Wall Street banks had to factor in geopolitical risk a long time before, said Chen Zhiwu a professor of Finance at the University of Hong Kong Business School. The best scenario is for China to reverse its direction in the next five-years and return to a real open door policy and market reforms that will revitalize the business climate. It is a very unlikely but not impossible scenario.

Morgan Stanley has been pursuing China business from Hong Kong since years. The financial hub will remain the main beachhead, even as the bank builds up some onshore banks and asset management units. It also applies for research and marketing licenses. A person familiar with the matter said that China represented less than half of Morgan Stanley’s Asia-Pacific investment-banking revenues last year. This is down from 60% in previous years.

Wall Street firms are facing challenges on many fronts. Over the last decade, taking Chinese companies public in New York has been the biggest revenue generator. Xi tightened the listing rules in order to keep Chinese companies at home, while the US cracked down on Chinese accounting firms. This has put initial public offering on hold, and some bellwether shares such as PetroChina Co. along with the two largest airlines have sought delistings from New York.

In 2022, overseas Chinese equity deals fell to $19 billion, down from $120 billion the previous year, when UBS Group AG and Morgan Stanley topped rankings. Bankers say that while deals are picking up, many listings are not being completed because investors are reluctant or unwilling to pay, and Chinese firms are unwilling to list at a low price.

The global banks have made little progress in the fiercely competitive domestic market. Goldman was ranked 13th in China for stock sales last year, behind 12 local banks. After defaults by China property firms, the offshore bond market has collapsed, and underwriters such as HSBC Holdings plc and Goldman have seen their fees plummet.

Chinese investment overseas, another source for advisory fees, also has slowed. Chinese companies announced only $44 billion worth of deals in 2017, the lowest amount since 2008, and a small fraction of the $233 Billion peak reached in 2016.

Foreign companies are also under increased scrutiny, as authorities — worried about the flow of sensitive data — raid consultancies that perform due diligence on behalf of global investors. Beijing has also asked its state-owned companies to gradually end their relationships with Big Four accounting firms due to data security concerns. Investors were frightened by the recent announcement that a number financial data companies including Wind Information Co. stopped from providing detailed information about Chinese companies to their overseas clients.

According to a survey conducted by the American Chamber of Commerce this year, China no longer ranks among the top three investment priorities for US companies. Investors like Warburg Pincus cut their China dealmaking team, while private equity giants like Carlyle Group Inc. have also done the same.

Van Eck Associates Corp., a rival company, plans to shut down the remaining business it has in China.

Beijing officials have been urging foreign investment to help the economy recover from the long-term Covid disruptions. Premier Li Qiang – the No. In March, Xi’s No. 2 pledged to create a “broad area” for international companies. A top securities regulator reaffirmed China’s commitment to open its capital markets during a meeting in which he met with 10 international firms.According to a source familiar with the situation, JPMorgan is preparing to host three conferences this month in Shanghai, including the China New Economy Forum, and the Global China Summit. Chief Executive Officer Jamie Dimon will be attending.

Filippo Gori, Asia CEO of JPMorgan, told over 1,000 employees at a gala dinner held in Shanghai in March that the business might slow down in this year but to ignore the noise and keep focused on the long-term goals we have for China.

Williams, a professor at Boston University believes that the best thing for Wall Street would be for China and the US tone down their rhetoric and create a more amiable environment.

He said, “This is not likely to happen.” “Both sides have their hands on the banks, which are caught in a vice grip that is untenable.”

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