Just days after the sudden visit to Hong Kong, JP Morgan CEO Jamie Dimon was desperately trying to make up for it, boasting that the American bank might live longer than the Chinese Communist Party.
Wednesday’s public apology not only cast a shadow over last week’s visit, it also highlighted that the bank—and its main Wall Street and European competitors—believes that there is a prize worth pursuing in China.
For Western banks, so far, this award has proven to be elusive. Troubled by operational setbacks that restrict investment and prohibitive regulations, JPMorgan Chase has paid a huge price in China’s investment banking business, but it has received a meager return.
According to data reported to Chinese regulators and seen by the Financial Times, despite investing millions of dollars and hiring dozens of bankers, the company reported that the total loss in the past two years was 40 million U.S. dollars (2.555 Billion yuan).
These banks are keen to use their losses in mainland China as the necessary price to pay for a profitable future. They also pointed out that fees have been charged for providing advisory services for Chinese companies to list in New York and Hong Kong-if they do not have a mainland base, it will be more difficult for banks to obtain these returns.
But because Beijing threatens to end this source of income while opening up the mainland, Wall Street hopes that its bigger bet will be rewarded, and it can eventually make some real money in China.
“We are building for the future,” Filippo Gori, chief executive officer of JPMorgan Chase Asia Pacific, told the Financial Times. “We are not worried that it will take a year or 25 years.”
JPMorgan Chase is not alone in failing to profit from its investment in China. Morgan Stanley’s Continental Investment Bank made a profit of only US$160,000 in China last year, compared with a total loss of US$33 million in the previous two years.
At the same time, the total profit of Goldman Sachs since 2018 is about 30 million U.S. dollars.
In fact, of the seven global banks with investment banking operations in mainland China, only three—Goldman Sachs, UBS, and Deutsche Bank—have been profitable in the past three years. The businesses of JP Morgan Chase, Morgan Stanley, Credit Suisse and HSBC Holdings are all at a loss.
According to data reported to regulators, the total investment banking service income of these seven banks in China in 2020 will be USD 140 million. JPMorgan Chase contributed approximately $600,000 of this.
All lenders are quick to point out that the domestic reporting income of their investment banks does not fully represent their broader Chinese banking business, such as bond underwriting and consulting work through different domestic entities in Hong Kong or elsewhere. None of them disclosed the total income of mainland China.
Regardless of the warning, these figures show that-even after decades of China’s entry-global banks still have a long way to go to capture a significant share of the huge domestic transaction market.
This was not a problem when they pointed out the approximately US$460 million in fees incurred by helping Chinese companies go public in Hong Kong and New York and registering in these jurisdictions in the first half of this year.
“Before this, no one can better explain the success of their business in China than the IPO of a Chinese company in the United States,” said the head of the capital markets area of an Asian bank on Wall Street.
Following the catastrophic listing of ride-hailing app Didi in June, China’s data security issues hit the overseas listings of its largest companies, which forced global banks to find another way to prove their investments in China—usually In geopolitical tensions-it will be worth it.
But we have reason to hope. In the “big bang” of supervision over the past two years, China has opened up its financial markets to foreign competition. In January 2020, as part of a trade agreement with the United States, China allowed global banks to take over the joint ventures they were forced to build, giving them full access to its $31 trillion and still fast-growing capital market.
“The reality is that there is currently no international bank that has a meaningful impact in China… but this is not important,” said an executive at one of the banks. “Given the continued openness and maturity of the market and more onshore capital flows, now the opportunity really appears.”
In response, the bank announced ambitious expansion plans, in some cases aimed at doubling the number of employees and revenue. JP Morgan Chase and Goldman Sachs have obtained regulatory approval to fully control their China investment banks and are rapidly developing their consulting, wealth and asset management businesses.
“Our strategy is to first have all the permissions and control rights, then build a platform, and the revenue will come,” Gori said. “You accept that there will be volatility and headwinds, and follow the customer.”
Wall Street hopes to be able to sell its international scale, scale and technical capabilities to China’s fastest-growing companies, even if the government forces many of them to control their offshore strategy.
For JPMorgan Chase, the priority is still global customers doing cross-border transactions in China. “Compared with domestic competitors, this is where our advantage lies… The domestic aspect is what we are building,” Gori said.
An executive close to Goldman Sachs said that working in the Mainland has become an increasingly important part of its strategy. “The domestic underwriting business is huge. But it is complex and highly regulated. You need to invest a lot of resources to make it work.”
Banks are facing an uphill battle to implement global underwriting quality and independence standards in a far less developed and faster-growing market.
Their ambitions also compete with national banking giants such as CITIC Securities and CICC, which have annual investment banking revenues of more than US$1 billion. Although Chinese companies dominate overseas transactions, the market share of global banks in China’s capital market has been flat.
“Banks in Europe and the United States are used to a centralized decision-making based on the world’s highest regulatory standards,” said a former executive who left a senior position in a global bank in China.
“This is in conflict with China’s current practice. Sometimes you don’t even write down the rules. I don’t think we are developing fast enough to seize the opportunity. In the end, this boils down to the philosophical conflict between the two civilizations.”
The tortuous history of China’s banking partnerships
the year 1995
Morgan Stanley took the lead in the competition to become a global investment bank in China, and reached a landmark transaction with CICC, becoming the first domestic joint venture. But in 2010, Morgan Stanley sold its shares in the joint venture and gave up management control ten years ago. In 2011, it established a partnership with Huaxin Securities.
Goldman Sachs and Gao Hua Securities established a joint venture company. Obtained 100% control in October 2021. The divorce is expected to be completed by the end of 2022.
UBS rescued Beijing Securities and gained early management control of the business. In December 2018, when China allowed foreign banks to hold more shares in its joint ventures, it became the first bank to obtain a majority stake of 51%. It raised its shareholding ratio to 67% this year, but said it would not pursue complete control.
Credit Suisse and Founder Securities established a joint venture company, but did not obtain a majority stake in the business until 2020. In 2021, it appointed Hu Jintao, granddaughter of the Chinese Communist Party leader Hu Yaobang, as the chairman of the business.
Deutsche Bank and Shanxi Securities jointly established Sino-German Securities, but no new plans for this business have since been announced.
JPMorgan Chase and First Capital Securities formed a joint venture that owns approximately one-third of the company’s shares. Six years later, when full control seemed impossible to achieve, it withdrew from the partnership. Two years later, it re-entered the market with a 51% stake in a new domestic partner. It is the first bank to obtain 100% control of its joint venture in August 2021.
Citibank and Orient Securities set up a joint venture company, holding up to 49% of the shares. But it withdrew from the business in 2019 to set up its own brokerage company after removing the ownership regulatory restrictions. It has not yet re-entered the market.
After waiting for regulatory approval for two years-HSBC announced the cooperation in 2015-finally established a partnership with Qianhai Financial Holdings to provide investment banking services and obtain 51% control.