Wall Street finally has access to China. But for how long ?

For decades, American banks have wanted to expand their activities in China, the world’s second-largest economy. They are finally getting what they want – 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 business.

In July, Citigroup became the first foreign bank to obtain approval for open a childcare business in China, primarily acting as a bank for Chinese investment funds. In August, JPMorgan Chase obtained permission from Chinese authorities to take full ownership of its investment banking and trading activities in the country, a century after opening its store there. Goldman Sachs was given the green light for a similar venture in October.

When the approvals arrived, Beijing’s message was clear: It wanted US lenders to attract more foreign investors to China and help the Chinese buy assets abroad.

Delighted that they no longer have to share the profits with local partners for services like underwriting equity deals or providing business advice, Wall Street banks are rushing to help. They want to negotiate more deals, help Chinese companies raise funds, and manage money for the country’s rapidly growing affluent class. The total wealth of The 100 richest people in China rose 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, managing director of Goldman Sachs, said in an interview last month. “We are encouraged by the fact that after a long period of time they allow us to control our joint venture. “

Yet, he added, “bilateral US-China relations, politics around China are going to be complicated.”

Wall Street banks are gaining ground in China as a real estate crisis looms and its financial system begins to falter under the weight of a corporate boom fueled by debt for years. Real estate developer China Evergrande, with some $ 300 billion in unpaid debt, has become the star child of these problems.

Despite narrowly avoiding default on its bonds last month, Evergrande’s perilous situation is causing panic among other developers that could disrupt the Chinese economy as a whole. And while debt problems 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 ban those companies, said Dick Bove, senior banking analyst at Odeon Capital Group.

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

Banks must also take into account the strained relationship between the United States and China, even though their economies are deeply intertwined. China was America biggest business partner for goods last year, with $ 559.2 billion in goods traded between the two countries, according to the US Trade Representative’s office. It was the third largest market for exported US goods.

The flow of goods and services has continued despite an ongoing trade war that escalated in 2018 after President Donald J. Trump imposed tariffs on a wide range of Chinese products. President Biden is due to hold a virtual summit with Chinese President Xi Jinping on Monday amid friction over trade, cyber threats and Taiwan, among other issues.

Geopolitical tensions involving Taiwan and fears that military maneuvers could escalate into hostilities that would shake financial markets have also weighed on the minds of financiers.

Six senior Wall Street banking executives, who have declined to speak publicly about aspects of their business due to political sensitivities, said that while they welcome China’s latest moves toward financial openness, they are keenly aware that the Chinese government could revoke their right to do business at any time. They noted that their companies had other bases in Asia, like Singapore or Tokyo, in case they needed to move away from the mainland.

Bankers cited Beijing’s crackdown on tech companies, including ridesharing giant Didi, internet powerhouse Tencent, and e-commerce giant Alibaba, as examples of other policy changes that could disrupt foreign businesses and investors. . Xi’s “common prosperity” initiative to close the country’s wealth gap, which has alerted many local tycoons, also worries foreign companies.

Last year, Chinese regulators canceled the initial public offering of Ant Group, an internet finance company controlled by Jack Ma, the co-founder of Alibaba. The famous billionaire kept a low profile and pledged billions of dollars to charity along with other business moguls.

Yet the banks are moving forward. They take full ownership of joint ventures or find new business partners. JPMorgan and Goldman aim to expand their operations at all levels in China, from underwriting equity and debt offerings to advising on cross-border transactions and developing trading activities. Goldman has also forged ties with ICBC Wealth Management, a local player that allows it to manage money for some of ICBC’s 26 million individual and 730,000 corporate clients.

Bank of America, which took longer than its competitors to gain a foothold in China, is considering seeking approval from set up a brokerage firm. Morgan Stanley is waiting for Chinese regulators to approve an increase in ownership of its Chinese securities firm to 90%. The bank is also looking to increase its stake in a fund management joint venture to 85%.

And BlackRock, the asset management giant, raised $ 1 billion in September with Chinese investors for the country’s first foreign-managed mutual fund, three months after the green light from the authorities.

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

But the lender is also monitoring Chinese policies “very closely” and explained to clients that the strained relationship between the United States and China could introduce more volatility into their portfolios, Liu said in an interview in October.

U.S. banks are also bullish on the potential to sell financial products to China’s rising middle class as they seek investments beyond real estate. Nearly three-quarters of Chinese household wealth is linked to real estate, and the debt-ridden housing market is increasingly seen as a threat to the economy.

Wall Street’s enthusiasm for China resonates with some of its biggest clients, including hedge funds, fund managers and other large U.S. investors who have so far not been deterred by the program. of common prosperity and the Evergrande saga.

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

Investors appear to be paying attention, said Kimberley Stafford, Global Head of Product Strategy at PIMCO, the asset management giant.

“We are seeing a lot of institutional investors staying the course in China,” Stafford said last month. “Perhaps this is an indication that the allocations to China are rigid and sustainable, and that people participate in them for the longer term.”

Alexandra Stevenson contributed reports.

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