Wall Street finally gets access to China. But for how long? – Community News
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Wall Street finally gets access to China. But for how long?

For decades, US banks have been eager to expand their operations in China, the world’s second largest economy. They’re finally getting their way — just as a spiraling corporate debt crisis threatens to disrupt the country’s financial system and China’s central government takes a stronger hand at big business.

In July, Citigroup became the first foreign bank to receive approval to open a custodian company in China, essentially as a bank for Chinese investment funds. In August, JPMorgan Chase received approval from Chinese authorities to take full ownership of its investment banking and trading operations in the country — a century after it first opened shop there. Goldman Sachs was given the green light for a similar venture in October.

When the approvals came in, Beijing’s message was clear: it wanted US lenders to bring more foreign investors to China and help Chinese people buy assets abroad.

Relieved that they no longer have to split profits with local partners for services like closing stock deals or providing advice to companies, Wall Street banks are rushing to commit. They want to bring about more transactions, help Chinese companies raise money and manage money for the country’s burgeoning money class. According to Forbes, the total wealth of China’s 100 richest people has risen to $1.48 trillion in 2021, from $1.33 trillion a year earlier.

“Obviously, what we can do in China is largely determined by how the Chinese government allows us to operate,” Goldman Sachs CEO David M. Solomon said in an interview last month. “We are encouraged by the fact that after a long time they are giving us permission to audit our joint venture.”

Still, he added, “the US-China bilateral relationship and China’s politics will become complicated.”

Wall Street banks are gaining ground in China just as a real estate crisis is brewing and the financial system is beginning to collapse under the weight of a years-long debt-fueled corporate boom. Property developer China Evergrande, with some $300 billion in unpaid debts, has become the poster child for those problems.

While it narrowly prevented default on its bonds last month, Evergrande’s predicament is causing panic among other developers that could disrupt China’s economy in general. And while the debt burden could create new banking opportunities, they also create unpredictability.

China is easing restrictions on foreign ownership of financial services companies as it agreed to do so as part of a trade deal with the Trump administration. But the country might as well block those companies, said Dick Bove, an experienced banking analyst at Odeon Capital Group.

“Give it a year and a solution to their financial problems,” Mr. Bove said. After that, “they won’t need the US banks anymore and they can kick them out.”

Banks also need to consider the strained relationship between the United States and China, even though their economies are closely intertwined. China was America’s largest trading partner for goods last year, with $559.2 billion in goods switching hands between the two countries, according to the Office of the United States Trade Representative. It was the third largest market for exported U.S. goods.

The flow of goods and services has continued despite an ongoing trade war that intensified in 2018 after President Donald J. Trump imposed tariffs on many Chinese products. President Biden will hold a virtual summit with China’s President Xi Jinping on Monday, amid frictions over trade, cyber threats and Taiwan, among others.

Geopolitical tensions with Taiwan and concerns that military maneuvers could lead to hostilities that would shock financial markets have also weighed on the minds of financiers.

Six senior Wall Street bank executives, who declined to speak publicly about some aspects of their business due to political sensitivities, said that while they welcomed China’s final steps towards financial opening, they were well aware that the Chinese government could withdraw their contract at any time. right to do business. They noted that their companies had other bases in Asia, such as Singapore or Tokyo, in case they had to move away from the mainland.

Bankers cited Beijing’s crackdown on tech companies, including ride-hailing giant Didi, internet giant Tencent and e-commerce giant Alibaba, as examples of other policy changes that could deter foreign companies and investors. Xi’s “common prosperity” initiative to address the country’s wealth gap, which has brought many homegrown tycoons to the forefront, is also worrying foreign companies.

Last year, Chinese regulators scrapped the IPO of Ant Group, an internet finance company controlled by Alibaba co-founder Jack Ma. The famed billionaire has kept a low profile and, along with other business magnates, has pledged billions of dollars to charitable causes.

Yet the banks are calculating ahead. They take full ownership of joint ventures or find new business partners. JPMorgan and Goldman are looking to expand their business in China across the board, from underwriting equity and debt offerings to advising on cross-border deals and building trading activities. Goldman is also affiliated with ICBC Wealth Management, a local player that gives it an opportunity to manage money for some of ICBC’s 26 million personal clients and 730,000 corporate clients.

Bank of America, which has been slower than rivals to build a footprint in China, plans to apply for permission to set up a brokerage. Morgan Stanley is waiting for Chinese regulators to approve an increase in ownership of its Chinese securities company to 90 percent. The bank also plans to increase its stake in a fund management joint venture to 85 percent.

And BlackRock, the asset manager, raised $1 billion from Chinese investors for the country’s first foreign mutual fund in September, three months after authorities gave the go-ahead.

Citigroup is focused on building its wealth management business. While ceasing some consumer banking operations in the continent, the bank aims to double the workforce at its private bank in Asia and focus on serving high net worth clients, including in China, said Ida Liu, Citi’s global head of private banking. .

But the lender follows Chinese policy “super closely” and has explained to customers that tense US-China relations could cause more volatility in their portfolios, Ms Liu said in an October interview.

US banks are also bullish on the potential to sell financial products to China’s emerging middle class, who are looking for investments beyond real estate. Nearly three quarters of household wealth in China is tied to real estate, and the debt-ridden housing market is increasingly seen as a threat to the economy.

Wall Street’s enthusiasm for China is reflected in some of its biggest clients, including hedge funds, money managers and other major US investors who have thus far been undeterred by the communal prosperity agenda and the Evergrande saga.

Ray Dalio, the founder of Bridgewater, the world’s largest hedge fund, has urged investors not to read the Chinese government’s actions as necessarily “anti-capitalist.” In media interviews and in a LinkedIn post in July, he said diversified portfolios should include investments in both the United States and China.

Investors seem to be heeding it, said Kimberley Stafford, global head of product strategy at PIMCO, the giant asset manager.

“We see many institutional investors staying on track in China,” said Ms. Stafford last month. “This is perhaps an indication that the allocations to China are sticky and have staying power, and that people are in it for a greater part of the long term.”

Alexandra Stevenson reporting contributed.