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For decades, American banks have been eager to expand their business in China, the world’s second-largest economy. They’re finally getting their way — just as a spiraling corporate debt crisis threatens to rock the country’s financial system and China’s central government takes a stronger hand with big businesses.
Citigroup was the first foreign bank to be approved to open a Chinese custody business. This essentially allowed Citigroup to act as a bank for Chinese investment fund funds. In August, JPMorgan Chase got permission from the Chinese authorities to take full ownership of its investment banking and trading business in the country — a century after it first opened shop there. In October, Goldman Sachs was granted permission to launch a similar venture.
Beijing sent a clear message to the U.S. that it wanted more foreign investors in China and for Chinese people to buy assets overseas as soon as the approvals were received.
Wall Street banks are eager to help, as they are no longer required to share profits with local partners in order to provide services such as underwriting equity deals or giving advice. They want to broker more transactions, help Chinese companies raise funds and manage money for the country’s rapidly growing moneyed class. The total wealth of China’s 100 richest people increased to $1.48 trillion in 2021 from $1.33 trillion a year earlier, according to Forbes.
“Obviously, what we can do in China is largely dictated by how the Chinese government allows us to operate,” David M. Solomon, the chief executive of Goldman Sachs, said in an interview last month. “We’re encouraged by the fact that after a long period of time they’re allowing us to control our joint venture.”
Still, he added, “the U.S.-China bilateral relationship, the politics around China are going to be complicated.”
China’s Wall Street banks are expanding at a time of property crisis and a financial system that is struggling to cope with years-long debt-fueled corporate boom. China Evergrande, a property developer, is the poster child for these problems, with over $300 billion in unpaid debts.
Although it narrowly averted default on its bonds last month, Evergrande’s perilous situation is causing panic among other developers that could unsettle the wider Chinese economy. The debt woes can create new banking opportunities but they also create uncertainty.
China has relaxed restrictions on foreign ownership of financial service firms due to a trade agreement it signed with the Trump administration. However, the country could also ban these firms, according to Dick Bove, a veteran bank analyst at Odeon Capital Group.
“Give it a year and a settling of their financial problems,” Mr. Bove said. After that, “they won’t need the American banks, and they can kick them out.”
Banks must also be aware of the complicated relationship between China’s economy and the United States. China was America’s largest trading partner for goods last year, with $559.2 billion in goods changing hands between the two nations, according to the Office of the United States Trade Representative. It was the third largest market for U.S. exports.
Despite the trade war that erupted in 2018 when President Donald J. Trump placed tariffs on large swathes of Chinese products, the flow has continued. President Biden hosted a virtual summit with President Xi Jinping, China, on Monday amid friction over trade and cyberthreats.
Financiers have been concerned about geopolitical tensions in Taiwan and fears that military maneuvers could escalate into hostilities that could shake financial markets, as well.
Six senior Wall Street banking executives, who declined to speak publicly about some aspects of their business because of the political sensitivities, said that although they welcomed China’s latest steps toward financial opening, they were keenly aware that the Chinese government could at any moment revoke their right to do business. For any reason, their firms had other bases, such as Tokyo or Singapore, to support them if they needed to move from the mainland.
Bankers cited Beijing’s crackdown on tech companies, including the ride-hailing giant Didi, the internet powerhouse Tencent and the e-commerce giant Alibaba, as examples of other policy changes that could unnerve foreign businesses and investors. Mr. Xi’s “common prosperity” initiative to address the country’s wealth gap, which has put many homegrown tycoons on notice, is also worrisome to foreign companies.
Chinese regulators canceled the Ant Group’s initial public offering last year. Ant Group is an internet finance company owned by Jack Ma, co-founder of Alibaba. The celebrity billionaire has kept his profile low and donated billions of dollars along with other business moguls to charity.
The banks continue to push ahead. They are now fully involved in joint ventures and looking for new business partners. JPMorgan and Goldman plan to expand their China operations. They will be underwriting equity and debt offerings, as well as advising on cross-border transactions and building out trading activities. Goldman also has a tie-up with ICBC Wealth Management, a local player that gives it a shot at managing money for some of ICBC’s 26 million personal customers and 730,000 corporate clients.
Bank of America, which has taken longer than its rivals to establish a presence in China, will apply for permission to open a brokerage. Morgan Stanley is still waiting for Chinese regulators approval to increase its Chinese securities firm’s ownership to 90 percent. The bank is also looking to increase its stake at a joint venture fund-management to 85 percent.
And BlackRock, the asset management behemoth, raised $1 billion in September from Chinese investors for the country’s first foreign-run mutual fund three months after the authorities gave the go-ahead.
Citigroup is focusing on its wealth management business. Even as it sheds some consumer-banking operations on the continent, the bank aims to double staffing in its private bank in Asia and concentrate on serving wealthy clients, including in China, said Ida Liu, Citi’s global head of private banking.
But the lender also monitors Chinese policies “super closely,” and has explained to clients that strained U.S.-Chinese relations may introduce more volatility into their portfolios, Ms. Liu said in an October interview.
U.S. banks are also bullish about the potential to sell financial products to China’s rising middle class as it seeks out investments beyond real estate. The debt-ridden housing market in China is becoming a threat to the economy, as nearly three quarters of China’s household wealth is tied to property.
Wall Street’s enthusiasm for China is echoed by some of its biggest clients, including hedge funds, money managers and other major American investors who have been so far undeterred by the common-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 “anticapitalist.” In media interviews and in a LinkedIn post in July, he said diversified portfolios should include investments in both the United States and China.
According to Kimberley Stafford (global head of product strategy at PIMCO), the giant asset manager, investors are paying attention.
“We’re seeing a lot of institutional investors stay the course in China,” Ms. Stafford said last month. “This is perhaps an indication that allocations to China are sticky, and have staying power, and people are in it for more of the long term.”
Alexandra StevensonContributed reporting
Source: NY Times