The 27-year bet Goldman Sachs has been running on China’s financial sector isn’t just paying off. It’s suddenly becoming a remarkably crowded trade.
True to its “long-term greedy” mantra, the iconic Wall Street giant has had an office in Asia’s biggest economy since 1994. Since then, Goldman has eked out a modest living in the shadow of the giant state banks.
Now, “slow and steady” is suddenly accelerating as Beijing grants initial approval for Goldman to grab a controlling stake in a wealth management tie-up with state-owned Industrial & Commercial Bank of China.
Goldman isn’t alone.
A who’s-who of Wall Street royalty is rushing China’s way even as geopolitical currents pull Washington and Beijing apart. Last week, JP Morgan applied to take full control of its mainland securities venture. It also is supersizing hiring in China, by at least 17% this year.
The same with BlackRock Inc., which just got green-lit for a 50.1% wealth-management stake in China Construction Bank. And Vanguard has shifted its Asia headquarters from Tokyo to Shanghai.
And it is not just the Americans.
HSBC is closing its US retail banking business and accelerating its pivot to China. French asset manager Amundi is upping its presence via relationships with Bank of China. Schroders gained approval for a majority-owned partnership. Credit Suisse has detailed ambitious mainland hiring plans.
Citigroup is applying to open a new wholly-owned domestic securities business in China. The list of household names that now own majority stakes in local ventures include Morgan Stanley, Nomura Holdings and UBS. Daiwa Securities is setting one up. Standard Chartered is working on expanding its mainland footprint, too.
Even though Donald Trump is gone, fallout from his trade war means US, European and Japanese financiers have rarely had more to lose as geopolitical tensions fester. Then there is the issue of whether the Chinese Communist Party will loosen controls further, thereby letting these players flourish in the local market.
Yet their actions prove that some of the world’s top bankers are willing to swallow these risks.
Show me the yuan
Consider this history’s biggest follow-the-money trade.
Analysts at Goldman reckon Chinese households will see investable assets surge to 450 trillion yuan, or $70 trillion, by 2030. That’s three and a half times bigger than the US gross domestic product (GDP).
It’s more than 14 times greater than Japan’s annual output – upwards of 60% of which, Goldman says, “is expected to be invested in non-deposit types such as securities, public funds and wealth-management products.”
As Tuan Lam, who heads the Asia-Pacific business at Goldman Sachs Asset Management, puts it, “China’s wealth management industry has grown on the back of increased household wealth and continued financial market reform.”
Goldman brass in New York responded with an unprecedented China-region hiring spree between January and April. It’s getting 320 new staffers in place, 70 of whom will handle investment banking. It hopes to add another 100 employees this year. JP Morgan, too, is now on a China hiring tear.
At the center of the reforms grabbing Wall Street’s attention was a 2019-2020 “Big Bang” opening of China’s financial system.
Along with efforts to deleverage, China widened the pathways for foreign punters to access stock and bond markets. Those include seeing mainland shares added to the MSCI index and government bonds added to the FTSE Russell. And harnessing the fact that China, by some measures, now has more billionaires than the US.
Guo Shuqing, head of the China Banking and Insurance Regulatory Commission, insists Beijing will continue easing barriers to foreign investment. He stresses that the rate at which national savings rises is “often closely tied to its financial power.”
One lesson China may have learned from 2020 is that its “dual circulation” strategy is working. This has Xi’s government harnessing foreign demand and capital flows to supplement a domestic economy serving as a massive growth driver. That helped China recover from Covid-19 faster than the developed world.
In late 2020, HSBC Qianhai Securities surveyed more than 900 major global companies and institutional investors. It found that two-thirds of them planned to up China investments by an average 25% this year. Also in late 2020, Goldman reckoned that profits in China’s brokerage sector would jump to $47 billion by 2026 – up from just $10 billion in 2018.
Those trends coincide with Beijing’s increasing willingness to allow foreign banks, asset managers and payment-clearing networks to take greater control of their mainland operations. Beijing regulators have also made it easier for punters overseas to access futures and options exchanges. They are scrapping quotas on foreign inflows and raising China’s initial public offerings game, devising a US-style registration protocol.
If ever there were a sign of how Donald Trump made China great again it’s Wall Street’s accelerating sprint into Xi Jinping’s economy. The former US president did his worst to obliterate Asia’s top economy with tariffs, banning companies and threats of new sanctions over the coronavirus pandemic.
Now, not only is China leading the globe’s post-Covid-19 recovery but Wall Street is scurrying China’s way with an urgency that must have Trump supporters’ heads exploding. For all Trump’s bluster about “decoupling,” Wall Street has never been closer to Chinese growth.
Yet, there are two big risks. One is the party’s control reflex. The other is the wave of China-phobia surging across the West.
CCP needs to lighten up
This is a perilous moment for China. Though China has been moving toward greater liberalization, the biggest – and riskiest – reforms are yet to come.
The yuan, for example, is still not completely convertible. Vagueness surrounding capital controls and challenges in repatriation funds could boomerang on President Xi’s financial reform team. So might a dearth of transparency in rule-making and legal rights.
As MSCI chairman Henry Fernandez notes, the more money that rushes China’s way, the more Xi’s inner circle is realizing that “in order to have that leadership in the world, economically, politically and financially, they need to embrace openness and become one of the largest countries in the world in all these markets.”
These goals aren’t mutually exclusive, but self-reinforcing.
The tension between them explains why last year’s drama surrounding Jack Ma’s Ant Group so spooked financiers from New York to Tokyo. The same goes for Xi’s intensifying effort to “China-fy” Hong Kong, rather than recreate on the mainland the city’s success at building one of the freest economies.
Is the Chinese Communist Party willing to relinquish control fast enough to sate Wall Street’s hunger for hefty returns?
At the root of this balancing act: Draw on overseas expertise to devise a kind of savings-industrial complex to head off a demographic collision with a fast-aging population without ceding too much control.
Equally unpredictable is what Peter Alexander at consultancy Z-Ben Advisors calls a “fallacy of control” as Western banking CEOs flood into China. In a sense, Alexander argues, Wall Street is betting that over time Beijing will make it easier to get spoils out of China to pump up profits back home.
But what if progress on this front is slower?
Nels Frye, managing director at Shanghai-based consultancy Pawnstar wonders if Wall Street is entering a Faustian bargain: having to relinquish much of its independence and control of data and intellectual property, while “scrounging only for scraps” of the domestic finance business in China.
The answer to questions about how much control Xi plans to wield may lie in the default drama surrounding state-owned China Huarong Asset Management Co.
How Beijing resolves its debt troubles – with a laissez-faire market solution or big state bailouts – could be quite instructive. The same goes for how the Ant drama plays out in the months ahead.
Meanwhile, geopolitics remains its own wildcard.
US President Joe Biden has yet to scrap the many speedbumps Trump tried to erect in China’s way. Moreover, he has been more vocal than his predecessor about Beijing’s policies in Hong Kong, its behavior toward Taiwan and its Uighur labor camps in the Xinjiang region.
All indications point to continued confrontation, which could be a big risk to increasingly exposed Western investment banks.
Jake Sullivan, Biden’s national security adviser, recently called Goldman Sachs out by name. “Our priority is not to get access for Goldman Sachs in China,” Sullivan said at the White House in March. “Our priority is to make sure that we are dealing with China’s trade abuses that are harming American jobs and American workers in the United States.”
Wall Street isn’t waiting in suspense. In the short run, says economist Eswar Prasad at Cornell University, China is “yet again shaping up to be the global economy’s bulwark against economic collapse.” In his view, China is winning soft power points by playing an even bigger role in supporting global growth than it did after the 2008-2009 global crisis.
But the real draw for Western finance firms is the next phase of China’s financial development.
China has long been a nation of savers, with wealth often predominantly in cash and real estate. At the same time, mainland capital markets from bond issues to IPOs and asset management offerings are still quite young. That’s an attractive landscape for Western banks.
Though China’s state-owned banking giants offered wealth management-like products for years, the industry has stumbled more than it’s thrived. The taint of scandals – like a China Minsheng Bank branch in 2017 hawking fake wealth products – still has investors wondering about the role of shadow finance.
In this sense, the arrival of Western bankers is as well timed for China’s development as it is for their profits.
This follow-the-money narrative mirrors trade flows. Financial trends, after all, follow trade. It’s no coincidence that the flow in banking assets in Europe is from London to Frankfurt, highlighting Germany’s status as a leading trading power.
No one had to tell Citigroup, Goldman, JP Morgan, Morgan Stanley, Standard Chartered, UBS and others to up their presence in the German financial capital hub. Economic inertia did.
Chinese metropolises from Shanghai to Shenzhen are experiencing similar energy in the East. In this case, “long-term greedy” makes sense – so long as Xi’s government ensures financial reforms keep pace with the office moves.
The steady internationalization of the yuan is one such dynamic. Since its inclusion in the International Monetary Fund’s “special drawing rights” basket, the yuan’s odds of topping the US dollar have only increased.
The fact that the People’s Bank of China is beating all of the most developed economies in the digital currency race matters, too. Done right, the “e-CNY” grants Beijing a unique opportunity: to rewrite the rules for money.
As internationalization and digitization progress, says economist Takahide Kiuchi at the Nomura Research Institute, “the competitive landscape of the dollar and the yuan would drastically change.”
Xi’s success in filling the Trumpian void is sure to pay its own dividends. In 2017, Trump famously pulled out of the Trans-Pacific Partnership. That left an opening for Xi to will the 15-nation Regional Comprehensive Economic Partnership, or RCEP, into existence.
It puts China at the very center of history’s biggest trade deal and global supply chains at arguably the ideal moment – with the US looking on from the sidelines.
At home, Xi’s “Made in China 2025” campaign is setting China up to lead the globe in tech innovation and production. His Greater Bay Area project, meantime, is tying Hong Kong and Macau ever-more tightly to powerhouse cities Guangzhou, Zhuhai, Foshan, Huizhou, Dongguan, Zhongshan, Jiangmen and Zhaoqing.
If executed well the result will be a world-beating economic zone that generates waves of world-changing IPOs.
The risk is that China puts the cart before the proverbial horse – putting access exchanges in Shanghai and Shenzhen ahead of the domestic reforms needed to ready China Inc for global prime time.
The good news, says Diana Choyleva at Enodo Economics, is that “Beijing has done ‘whatever it takes’ to stabilize the economy and keep growth humming ahead of the 100th anniversary of the CCP’s founding in July, but the focus has now shifted to curbing leverage and implementing supply-side changes.”
Curbing leverage will help China repair the underlying cracks in its financial center and avoid bubble troubles. Supply-side reforms to market infrastructure, regulations, taxation and increased transparency would do more than validate Wall Street’s greed.
They would keep investment banks coming China’s way – and staying – for the long term.