Wall Street's China Problems Multiply With Warning on Banker Pay

The big names in finance were summoned by Chinese officials.

It's on the agenda to tell Credit Suisse Group AG and Goldman Sachs Group Inc. how they pay their top bankers.

According to people familiar with the matter, Chinese regulators warned banks this year not to reward their top people too much, or they could be in trouble with the Communist Party.

The say-on-pay meetings are one of the many problems that global banks have had recently. Some of them are rethinking their future after years of losses. The outlook is not good for a short time.

Hopes that the business of banks in China would pay off have been dashed. China's Covid-19 lockdowns, its volatile markets and moves by its leader, Xi Jinping, to reestablish the state's control have reverberated through banks in New York.

Executives say they are still committed to China. Filippo Gori, the Asia-Pacific chief for JP Morgan Chase, said in a recent interview that his bank was focused on the next 25 years in China, not the next quarter.

A number of executives in the region are questioning the future of their banks.

Interviews with eight senior bankers at firms, all of whom spoke on the condition that they not be named to avoid angering their superiors, clients or Chinese authorities, point to a lot of problems. Among other things, regulators have pressed banks to reduce cash compensation and extend deferred bonuses to three years or more. Data security is one of the concerns.

The Communist Party considers undesirable economic and social elements. The country has a wealth gap and hyper-rich entrepreneurs. Several major banks have recently shuffled senior executives in China. According to people familiar with the matter, Credit Suisse may let go of many of the 200 people it hired here last year. Similar moves could be made by other banks.

The associate professor at Hong Kong University of Science and Technology said that Wall Street banks need to ask themselves why they want to be in China. What is the true return on capital for China businesses?

It's a remarkable turn of events. Three years ago, many of these banks were celebrating as China opened its market to foreign competition. Global banks were allowed to take control of their joint ventures with Chinese partners in order to gain a foothold on the mainland. Morgan Stanley made a small profit on its China business in 2020. Since 2008, profit has gone up at Credit Suisse in China, and at the same time, it has gone up at the other side of the world.

The top six global banks made $42 million in China last year, but it's a pittance compared to their earnings elsewhere. The figures don't include profits from dealmaking with Chinese clients outside the country.

Wall Street's $6 billion bonanza was chilled by China IPOs.

The party lasted less than a minute. China had a zero Covid approach to the Pandemic. The financial markets fell apart. The economy didn't do as well as expected. There were no deals left. The business of selling new stock in Chinese companies on offshore markets has plummeted this year because of tighter rules on foreign listings by the Chinese government. Sales of offshore bonds are down. Foreign banks have had little success against the Chinese banks.

Washington and Beijing have been at odds. Speaking on the condition that he not be named, a top banking executive in the region said that Chinese regulators have signaled that their relations with the west are just as bad as they have been in the past.

According to people familiar with the matter, regulators haven't made an on-site inspection that's required before it can expand.

The Swiss bank is waiting a bit with some of the growth investments, including slowing down its hiring of relationship managers in China. He spoke at a conference last week and said that the roll-out on the mainland was on track.

Almost eight months after taking a 100% ownership in Goldman, people familiar with the matter said the company finally got approval for several licenses. After agreeing to buy it out, the bank is still trying to get final approval to transfer its wealth and trading businesses. The process is within the target time frame.

Morgan Stanley, which has historically been more cautious in its China expansion, sought four licenses in the first half of this year. The China Securities Regulatory Commission criticized the bank for subsidizing its Chinese operations. The bank was ordered to make some changes. Morgan Stanley is in the process of taking control of 85% of the venture.

All of the spokes people at the banks declined to comment.

Foreign banks trying to build businesses from the ground up have had difficulties. The CSRC questioned the qualifications of a compliance officer at the French bank after it applied to set up a securities firm. Over the past three years, the bank was ordered to submit a review of any fines and investigations. Regulators inquired about the bank's cross-border transaction and data flow systems.

A representative didn't want to say anything. A request for comment was not responded to.

Executives were summoned by the CSRC to discuss bankers' pay. People familiar with the meetings described the discussions as unusual and unprecedented. Local brokers were told in the past two years to cut pay and expenses and it is a sign that they are being put on the same footing.

Senior managers were told to keep their compensation in line with the "common prosperity" agenda by top regulators at the event.

The CSRC didn't reply to the request.

The compensation for a first-year managing director at a Chinese broker can be as much as 6 million dollars. According to Eric Zhu, head of financial services recruitment at Morgan McKinley, second-tier foreign banks are struggling to compete with Wall Street firms.

Pressure on pay could make it more difficult to find talent. According to local headhunters, the more senior bankers at local firms can make a lot of money, something that foreign firms can't match.

How to lure and keep top talent is a question for banks. Regulators told the bank executives to be careful with their incomes. One of the people said that salaries that might be deemed unfair were not allowed.

Compliance staff who report directly to regulators are not allowed to be fired without regulators' approval. Some bankers are worried that local authorities might refuse to honor tax incentives offered as part of a program to senior foreign managers due to the slow economy and a property slump.

Some top executives in China have left their jobs. David Chin stepped aside in April because of travel restrictions and the need to focus on regional business. Eugene Qian is based in China. Houston Huang, the CEO of JP Morgan Securities (China) Co., resigned and was replaced by Lu Fang, a former official at China's securities regulators. Tim Tu stepped down in April to take on a bigger role in the Asia-Pacific region.

Global banks aren't about to pull up stakes because China is the world's second largest economy. If the business landscape doesn't improve, some may redeploy resources.

HSBC, which traces its history back to British imperial trade, hasn't been immune. Ewen Stevenson is HSBC's chief financial officer. The bank had a 10% fall in profit from its mainland business in the first quarter.

Dick Bove is an analyst at Odeon Capital Group who has been covering Wall Street for decades.

The help was given by Lisa Du, Jun Luo, andDenise Wee.