A few years ago, Western financial firms—from asset management to investment banking—were in a mad rush to establish global presences and hire top personnel in China due to the country’s rising economy and attractive economic opportunities.

But many of the financial businesses are suffering from a decline in earnings and are scaling down their aspirations for what was a crucial component of their global expansion plan as concerns about China’s economic recovery and the country’s markets’ relative stagnation increase.

Since the start of the year, an increasing number of Western financial institutions, such as Legal & General, Morgan Stanley, and Fidelity International Ltd. (FIL), have either cancelled plans for development into China or drastically reduced the number of employees dedicated to the country.

Analysts, headhunters, and top executives at foreign financial institutions predict that more businesses will soon follow suit as expenses and revenues are burdened by a sluggish asset generation and lukewarm sales pipeline.

The decline in Western financial corporations’ interest in China coincides with Beijing’s increased efforts to draw in more foreign cash to boost the country’s economy despite ongoing geopolitical problems.

According to an internal document seen by Reuters, fund company FIL, which is laying off 16% of its 120-person China team, anticipates that its loss in the nation will increase to $45 million this year from $41 million last year.

According to the document that was sent internally earlier this year, FIL’s headcount goal has been “significantly reduced” for the next four to five years in comparison to the business strategy created in 2022.

FIL released a statement in response to a Reuters request for comment, stating that the company was still committed to expanding its mutual fund business in China and that it was still planning “a range of scenarios” given the situation of the market.

FIL stated, “Earlier in 2024 we also boosted our registered capital and opened a Beijing branch office, in addition to our Shanghai and Dalian offices,” without providing any details on its plans to reduce headcount or its profitability outlook.

The most recent banks to eliminate dozens of positions in the Asia Pacific region that were primarily focused on China agreements are Morgan Stanley and HSBC.

Hong Kong is home to the majority of Wall Street banks’ investment bankers with a concentration on China.

“We are hearing some more investment banks and securities firms in Hong Kong (are) already looking at staff scale reduction,” said Sid Sibal, vice president Greater China and head of Hong Kong, at recruitment firm Hudson.

A number of banks, including Bank of America, JPMorgan Chase & Co., Citigroup, and Goldman Sachs, have eliminated positions in investment banking with a concentration on China in the past year.

According to Sibal, voluntary attrition has been minimal despite some banks offering little or no annual incentives. As a result, staff headcount has had to be reduced this year in keeping with the gloomy forecast for deals involving China and, consequently, revenues.

Compared to a year earlier, Morgan Stanley’s net revenue from Asia decreased by 12% to $1.74 billion in the first quarter.

According to LSEG data, the amount of money generated by Chinese companies through initial public offerings (IPOs), covering both onshore and offshore bourses, fell 80% to $2.9 billion in the first quarter of this year compared to the same period last year.

According to LSEG data, the overall value of merger and acquisition agreements involving China decreased by 36%, suggesting that bankers received lower fees from clients for their advice on these kinds of transactions.

In addition, assets in China’s onshore fund market increased by a meek 6% last year following a 1% increase in 2022, decelerating from an annual increase of almost 27% in 2020 and 2021.

In February, Britain’s Legal & General reportedly cut more than half of its onshore staff and abandoned plans to apply for a Chinese outbound investment business licence, according to Reuters, which cited sources in March.

Due to the challenging fundraising environment and uncertain macroeconomic climate in China, foreign companies seeking to enter the Chinese domestic market have gone through a “peak to trough” phase, according to Yoon Ng, Global Asset Management Advisory Principal at Broadridge.

“As the outlook for the Chinese stock market and economy remain sluggish, [foreign] firms will inevitably take steps to streamline their businesses especially since most would have gone through a hiring spree in earlier years.”

In the short run, international investment banks and asset managers are expected to keep lowering costs, but few are anticipated to pull out as they bet on the recovery of the second-largest economy in the world.

“We’re cognizant of the fact that from a policy perspective there’s certainly been a policy shift (between U.S.-China) which affects the footprint that we might have from a business perspective,” said a U.S. banking source.

“But we will still conduct business in China since our clientele are there. Given the significance of the nation’s economy, we are dedicated to it,” the source—who wished to remain anonymous since the matter is delicate—said.

(Adapted from TheDailyStar.com)

Categories: Economy & Finance, Entrepreneurship, Geopolitics, Strategy