Despite an extremely challenging operating environment, Wall Street investment banks continue to be bullish on their China business.
JPMorgan Chase was recently demoted as the lead underwriter for the Hong Kong IPO of a Chinese software giant after the bank published research that was unflattering to the company and the Chinese Communist Party (CCP) regime.
The bank was poised to be the coveted “lead-left” banker on Kingsoft Cloud Holdings’ Hong Kong listing, according to a Bloomberg report citing people familiar with the proceedings. JPMorgan is still one of the underwriters, but has lost its role as the lead underwriter, now occupied by UBS and China International Capital Corp.
Apparently one of the bank’s equity research analysts cut its earnings estimates on Kingsoft recently. In addition, JPMorgan research analysts recently cut their ratings on dozens of Chinese companies in March, including stating that the Chinese internet industry had become “uninvestable.”
Clearly, the bank’s unflattering research could have something to do with its demotion as one of Kingsoft’s advisors. Never mind that a bank’s investment banking team, which advises clients on capital raising and IPOs, must maintain strict separation from its research analysts, who advise clients on where to invest, and the two departments cannot influence each other’s work. This, ironically, is called a “Chinese wall” in industry parlance.
The CCP couldn’t be bothered with such trivial compliance matters, of course. And JPMorgan pays the price.
In the grand scheme of things, the Kingsoft deal is immaterial. But the anecdote underscores a tricky tightrope Wall Street investment banks are walking in China. But despite this complicated operating backdrop, the Chinese regime’s punishing “zero-COVID” policy, a stagnant economy, and heightened China-U.S. political animosity, Western investment banks continue to double down on their expansion plans in the world’s number two economy.
JPMorgan has been revamping its China business recently, after becoming the first foreign bank to receive CCP approval for full ownership of its domestic Chinese business. Recently it announced that its top investment bank executive in China, Houston Huang, is leaving his post as of April 15. Huang is being replaced by Lu Fang, a former official who spent more than a decade at China Securities Regulatory Commission, the country’s securities industry regulator.
This changing of the guard is seen as a move to appease the Beijing authorities and solidify the bank’s position domestically. Last year, JPMorgan CEO Jamie Dimon came under fire in China after joking that his bank would eventually outlast the CCP.
Wall Street investment banks are doubling down on China even in the face of logistical challenges such as China’s strict COVID-19 lockdowns, such as the recent weeks-long shutdown of Shanghai, China’s financial center.
China also needs to court such investments to maintain its U.S. dollar supply. As of Sept. 30, 2021, China had almost $1.3 trillion in dollar-denominated debt outstanding, according to the State Administration of Foreign Exchange. Such borrowings’ debt service must be paid in U.S. dollars.
What’s in it for the banks? A slice of China’s $58 trillion financial services sector, and the fees associated with arranging debt and equity raises, investment management, and mergers and acquisitions advisory. Western banks are counting on their name brands and vast experience to take market share quickly.
In practice, it’s unclear how Western banks can realize their China potential. U.S. investment banks were barred from participating in the massive $4.4 billion stock listing of Chinese energy giant CNOOC in April, due to U.S. sanctions. The worsening U.S.-China political landscape means that being locked out of Chinese deals could be the norm, not the exception.
But for now, the expansion continues. Shanghai, specifically, is where the banks are looking to increase their presence since the CCP has opened up the nation’s securities sector. Goldman Sachs and JPMorgan recently shifted some staff from Hong Kong to Shanghai. Other banks, including Credit Suisse and UBS, are also increasing their investment banking workforce in Shanghai.
This is despite Shanghai employing one of the strictest lockdowns in China, confining residents to their homes for weeks on end. To ease the burden on its staff, Goldman charted vehicles to deliver food to its staff in Shanghai. There are anecdotes of staff at other banks living in and sleeping on the trading floor to avoid being confined to their homes.
Despite paying lip service, few global senior banking executives are keen to visit their China branch. “Other than JPMorgan Chase chief executive Jamie Dimon’s brief trip to Hong Kong in November, no international banking boss has set foot in China for almost three years,” a Financial Times column recently observed.
No matter, investment banks are hoping that in the long run it will all be worth it. Right?
