Wall Street faces life in China’s second tier

MELBOURNE, June 1 (Reuters Breakingviews) – Jamie Dimon is this week experiencing in person the conundrum of doing business in China. The JPMorgan (JPM.N) boss flew into Shanghai to head up a trifecta of confabs the U.S. bank is hosting in the city. It’s his first trip to the mainland since he had to apologise for joking that his institution would outlast China’s Communist Party. It’s also his first visit since the pandemic.

At least one of the Shanghai gatherings is so popular that almost twice as many people signed up for it compared with the previous in-person event in 2019; JPMorgan closed new registrations weeks ago. The interest is at odds with the slowdown Wall Street firms are experiencing in China. Even when deal flow picks up, these usually dominant financiers now accept they are unlikely to become more than second-tier players in the world’s second-largest economy.

Recent earnings reports from U.S. investment banks defy the sober mood among China-focused financiers. Though bulge-bracket firms only report Asia-wide figures, more than half of their regional revenue typically comes Greater China, which includes the mainland, Hong Kong, Macau and Taiwan. Morgan Stanley’s (MS.N) Asia revenue in the first three months of the year was almost 40% above the final quarter of 2022. It was the region’s third-highest contribution ever, due in large part to China, finance chief Sharon Yeshaya told investors in April. Goldman Sachs’s (GS.N) Asia top line was up 14% quarter-on-quarter.

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Yet the euphoria sparked by China easing Covid restrictions late last year has faded. Dimon is being confronted by a slower economic recovery, stock markets near their lows for the year, U.S. institutional investors largely sitting on the sidelines, and tense relations between Beijing and Washington.

Deals are in short supply. Companies going public in Hong Kong have raised $2 billion so far this year, per Dealogic. While that’s just a tenth less than the same period in 2022, around a third came from just one offering, the $675 million listing of ZJLD (6979.HK). As a maker of baijiu liquor, the KKR-backed (KKR.N) company should be relatively isolated from both domestic and international ructions. Yet its stock closed 18% below the offer price on its first trading day. The deficit has since widened to 34%.

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Private equity firms are having to rejig their approach, too. Souring international relations make limited partners wary of putting money into anything too China-focused. Stephanie Hui, the head of Goldman Sachs’ private equity business in Asia, on Tuesday told a Hong Kong conference that while she used to go to the United States to raise funds, now “I only go to the States to see my boss.”

It’s true that investment banking activity is slowing almost everywhere. Announced global M&A of $1.1 trillion so far this year is down two-fifths from the same period in 2022. The amount raised in initial public offerings worldwide has dropped 37% over the same period, Dealogic data show. And Wall Street banks are trimming jobs in China, as elsewhere. Morgan Stanley is laying off investment bankers in China as part of a global cull of around 3,000 people, or 5% of its workforce excluding financial advisers. Bank of America (BAC.N) has advised around 40 bankers in the region, most focused on China, to find other roles in the company. Goldman Sachs and others are weighing redundancies.

Yet the cyclical downturn masks a broader shift: the Wall Street investment banks that dominate dealmaking in most developed economies have so far failed to crack China’s domestic investment-banking market where local institutions like Citic (0267.HK) and China Securities (6066.HK) reign supreme. Of the $56 billion in revenue the local industry raked in last year, Goldman brought in the most of its U.S. peers at just $80 million, per local filings cited by the Financial Times. That’s not much to show for, in some instances, two decades of developing relationships and building a franchise. “Doing local business for local clients is just not our forte,” one Hong Kong-based executive told Breakingviews.

Granted, U.S. banks earn most of their China-related revenue in offshore centres such as Hong Kong. But their financial exposure remains tiny. JPMorgan had just $14 billion at risk in the People’s Republic at the end of March, a tenth of what it has at stake in Germany, for example, and a fraction of its $3.7 trillion balance sheet. Morgan Stanley’s total China exposure is just $3 billion.

More welcoming Chinese regulators may help these figures to grow. In the past few years JPMorgan, Goldman and others have taken full ownership of several joint ventures in investment banking and asset management they had set up with Chinese partners. That will allow them to serve mainland clients more effectively.

The real money will continue to come from intermediating capital flows across borders. Starbucks (SBUX.O), Apple (AAPL.O) and other multinationals with big operations in China need banking services like cash management, loans and currency hedging. Chinese companies venturing overseas need international lenders and advisers on their side, too, as the domestic banking powerhouses have for the most part had little success expanding overseas. At some point Hong Kong IPOs and cross-border M&A are likely to perk up. And if JPMorgan’s impending Shanghai summits are anything to go by, overseas investors have not entirely given up on owning Chinese securities. Many of those trades flow through the Hong Kong bourse’s Stock Connect links to the Shanghai and Shenzhen exchanges.

Yet those opportunities remain in the future. Greater China accounted for perhaps 8% of Morgan Stanley’s top line last year, assuming the region contributed three-fifths of the bank’s Asia revenue. Those numbers are similar for Goldman and JPMorgan – and have not varied much over the past five years or so.

In the meantime, geopolitical tensions will weigh on capital flows and corporate activity. That in turn will keep up pressure on profit margins; Goldman’s pre-tax profit as a share of revenue in Asia fell by more than a third to 21% last year. Nevertheless, the possibility of making even modest gains in a big capital market remains too good to pass up. That’s why, for all the current challenges, Wall Street banks will keep plugging away in China – unless Washington or Beijing explicitly tells them to leave.

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JPMorgan Chief Executive Jamie Dimon landed in mainland China on May 30, his first visit since before the pandemic.

Bank of America has told around 40 bankers in Asia to look for new roles in the organisation, Reuters reported on May 25. Most of the affected workers are in junior roles or in China equity capital markets, with a few in banking and markets.

Morgan Stanley may reduce its staff in the Asia-Pacific region by as much as 7%, with China-focused investment banking businesses taking much of the hit, Bloomberg reported on May 16. A day later Bloomberg added that Goldman Sachs and other rivals may follow suit; the news organisation also reported that Morgan Stanley is delaying plans to build a brokerage on the mainland and that Goldman has revised downwards its projections in its five-year plan for its business in the country.

Editing by Peter Thal Larsen and Katrina Hamlin

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