Wall Street Investment Banks Face Bleak Prospects in China

The entrance of the New York Stock Exchange with the Wall Street sign on Sept. 16, 2008. Stan Honda/AFP

Recent data from Dealogic shows that wall street investment banks face bleak prospects in the Chinese market. Lucia Dunn, an economics professor at Ohio State University, says that the Chinese Communist Party (CCP) will never deal with them in a Western-standard fairway.

After lobbying the Trump administration to sign a trade war ceasefire agreement with the CCP, Wall Street was thrown a sweet pie by the CCP, allowing foreign banks to operate wholly owned subsidiaries in China. According to the U.S.–China trade agreement, the CCP authorities lifted the foreign ownership limits in the mutual fund and securities industries on April 1, 2020.

However, after more than three years of financial involvement in China, Wall Street giants now find that learning from their joint venture partners, Chinese state-owned enterprises have entrenched positions in the financial sector that foreign firms simply cannot compete with.

According to data from Dealogic, the top 10 underwriters of IPOs in China this year and last year did not include any foreign banks. In 2018, half of the top 10 were foreign banks, including Goldman Sachs and Morgan Stanley.

As of June 16, this year, overseas investors, including those from Hong Kong, held around $364 billion worth of stocks in Shanghai and Shenzhen, which is less than 3 percent of the entire market, according to Wind data.

Among the seven Wall Street and European investment banks operating in China, Credit Suisse, Deutsche Bank, Goldman Sachs, and HSBC reported losses in their Chinese subsidiaries in 2022, while Morgan Stanley saw a decline in profits. JPMorgan and UBS were the only banks with profit growth.

Last year, the total revenue of 140 investment banks in China was 395 billion yuan ($56 billion), with the combined revenue of these seven European and American investment banks accounting for only 0.1 percent, Financial Times reported.

In May, Morgan Stanley announced another round of layoffs that will result in a 7 percent reduction in its Asia-Pacific investment banking division, leaving many bankers unemployed. Since September of last year, at least 100 China-focused foreign investment banking positions have been lost. Goldman Sachs alone has laid off over 10 percent of its staff in China, which is more than 60 people.

Lucia Dunn, an economics professor at Ohio State University, told The Epoch Times on June 11: “I think the CCP will cut off more and more businesses until Western companies finally wake up and see the handwriting on the wall.”

Dunn said: “In my own industry—higher education—for many years China enticed Western academics to come there to teach by offering lavish payments. Then when they thought they had gotten all they could appropriate from Western academics, they kicked many of us out. I think the same will happen with other industries. Eventually, many Western companies will voluntarily leave because the conditions the CCP is imposing will mean they can no longer make adequate profits. I think the CCP will squeeze them to the limit.”

In addition to poor market performance, foreign investment banks also face regulatory issues in China. For example, the CCP’s stringent data rules make it difficult for their subsidiaries in China to share crucial information with their headquarters, including the actual operation of their funds and the identities of their clients.

These foreign investment banks have also received demands from CCP regulatory agencies to control executive compensation and defer bonuses to comply with Chinese leader Xi Jinping’s so-called “common prosperity” goal.

Dunn stated that major investments by American and European companies in China are shortsighted.

“I think there is too much uncertainty, and I think the CCP will never deal with them in a way that does not violate Western standards of fairness. The CCP does not provide a legal framework for fair and balanced conduct of business. I think it will only get worse over time as the CCP faces its own internal challenges.”

Wall Street’s Shuttle Diplomacy 

In February 2018, when former President Donald Trump launched a trade war against China, putting the Chinese regime in a difficult position, Chinese Vice Premier Liu He traveled to Washington D.C. seeking a truce and turned to a group of Wall Street tycoons for help.

Liu appealed to the gathering of Wall Street executives at a hotel near the White House, saying, “We need your assistance.” Among these individuals were Larry Fink, CEO of BlackRock; David Solomon, then co-president of Goldman Sachs; and Jamie Dimon, CEO of JPMorgan Chase. At the time, Dimon served as chairman of the Business Roundtable’s China Committee.

Liu made a promise to the gathering. He said the Chinese regime would provide new opportunities for American financial firms to expand in China.

In November of that year, Peter Navarro, former economic advisor to the Trump administration, criticized the behavior of Wall Street tycoons during a speech at the Center for Strategic and International Studies, saying, “Let’s think about this now. Consider the shuttle diplomacy that’s now going on by a self-appointed group of Wall Street bankers and hedge fund managers between the U.S. and China. As part of a Chinese government influences operation, these globalist billionaires are putting a full-court press on the White House in advance of the G-20 in Argentina.”

Shuttle diplomacy refers to a type of diplomacy where a mediator travels back and forth between two or more parties in order to facilitate negotiations and resolve disputes.

Anders Corr, the founder of Corr Analytics and publisher of “Political Risk Magazine,” told The Epoch Times on June 11 that Wall Street tycoons “naturally want to avoid military and economic conflict that would likely hurt his company’s prospects for profit, including in China. By lobbying Washington to de-risk the relationship with China rather than de-couple, which would impose greater costs on the regime in Beijing, Beijing may be willing to provide a sweetheart deal to banks that increase their profits and CEO bonuses that vest over time.”

Wall Street tycoons have helped China on more than one occasion, driven by their own interests.

Wall Street Tycoons Often Assist China

In the late 1990s, when Chinese banks were struggling with a mountain of bad loans, then-Premier Zhu Rongji asked American investment bankers, including Hank Paulson, Chairman of Goldman Sachs and former U.S. Treasury Secretary, to help clean up the mess.

Following the February 2018 meeting, Liu He approached Larry Fink and BlackRock for assistance in restructuring China’s pension system. Liu He claimed that the rapidly aging population could lead to a significant shortfall in China’s pension funds in the coming years. Subsequently, Fink expressed that BlackRock could help the Chinese authorities with this issue.

BlackRock has followed China’s directives, including in 2017 when it proposed amendments to the articles of association of Chinese companies listed in Hong Kong, such as the Industrial and Commercial Bank of China and the oil and gas giant China Petroleum & Chemical Corporation. The proposed changes required these companies’ boards of directors to seek the opinion of the Chinese Communist Party committee on major decisions. BlackRock voted in favor of these amendments, even going so far as to flatteringly state: “The party committee has played a role in governance... making governance clearer and more transparent.” However, critics pointed out that these amendments would reduce the influence of shareholders and consolidate the Communist Party’s role in corporate governance.