Wall Street giants have begun realizing that their plans to generate significant profits from China are tougher than expected. China is the second-largest equity market globally, and is one of the broadest and deepest growth markets outside the United States.
After the removal of ownership restrictions in 2018, China’s financial market has been open to foreign firms. Several global banks, including some of the Wall Street giants, including The Goldman Sachs Group, Inc. GS, Morgan Stanley MS and JPMorgan JPM, tried to capitalize on the lucrative prospect.
However, China’s business climate has deteriorated significantly and because of the increasing restrictions in the region, the private sector has been negatively impacted. Deal-making has also been curbed, hampering investment banking business growth. Thus, like others, GS and MS are scaling back their expansion plans in the country.
Over the past decade, the biggest revenue driver for Wall Street firms has been taking China firms public in New York. However, after the tightening of listing rules to keep companies at home and the United States’ crack down on China firms over accounting, initial public offerings have been put on hold. This revenue source has almost dried up for U.S. giants.
Given the drastic change in China’s business environment, Goldman Sachs, which was ahead of targets in 2021, has revised its projections on its five-year plan.
Likewise, Morgan Stanley is planning not to build an onshore brokerage in the region. Notably, it is planning to make a smaller bet of $150 million on derivatives and futures businesses. MS is planning another round of job cuts, which will likely affect 7% of its Asia-Pacific investment bankers.
With this move, MS will join JPM in cutting jobs in the country.
The present job cuts in China are the biggest in many years and are relatively deeper than the rest of the world. Post Covid, China’s economy has been struggling to get back on its feet.
Since September 2022, at least 100 China-focused jobs have been lost. Goldman Sachs has removed more than one-tenth of its workforce in China after almost doubling its headcount to above 600.
For banks like JPMorgan, Goldman Sachs, Morgan Stanley and others, this comes as a harsh reality check. China’s markets have long been considered the generator of huge fees, including everything from mergers to stock sales and trading.
The above-mentioned banks have spent billions of dollars in recent years trying to increase their stakes or acquire controlling interest in their securities and asset management joint ventures in China in the hope of future growth.
While China remains a massive opportunity, these firms will have to rethink their growth plans in the region because of a more fractured geopolitical landscape.
Because of the huge sums of money already spent, the Wall Street giants may not pull back completely. But, it will be more difficult for them to maintain good standing with both sides.
These firms may see some contraction in profitability, which is already under pressure because of the expectations of a recession.
Currently, MS carries a Zacks Rank #4 (Sell). Goldman Sachs has a Zacks Rank #3 (Hold) and JPM carries a Zacks Rank #2 (Buy).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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