Wall St has billions to lose in China from mounting tension

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NEW YORK • Street giants such as Goldman Sachs and JPMorgan Chase have tens of of dollars at stake in , as political risks derailing the nation’s opening of its US$45 trillion (S$63.8 trillion) financial market.

Five big US banks had a combined US$70.8 billion of exposure to China last year, with JPMorgan alone ploughing US$19.2 billion into lending, trading and investing. That is a 10 per cent increase from 2018.

While their assets in the country are comparatively small, they have big expansion plans there that may come undone if financial services firms are dragged into the tit-for-tat between the two countries. Not only would that cloud their growth plans, it would also threaten the income they have generated over the years from advising Chinese companies such as Alibaba Group Holding.

Profits in China’s brokerage industry could hit US$47 billion by 2026, Goldman estimates, with foreign firms gunning for a considerable chunk. There are US$8 billion in estimated commercial banking profits and a projected US$30 trillion in overall assets to go after, also being pursued by fund giants such as BlackRock and Vanguard Group.

“If you’re an American financial institution and you have an approved plan to expand into China, you’re going to continue that plan to the extent the US government allows you to because you see great future profits,” said Mr James Stent, a former banker who spent more than 10 years on the boards of two Chinese lenders. “A US-China cold war is not good for your plans to build business in China.”

After years of trade war turmoil, US policy makers are now starting to take aim at the financial industry amid growing scepticism over US firms ploughing money into a country perceived as a big geopolitical foe. Policy makers and lawmakers are looking at restricting US pension fund investments in Chinese firms and limiting the ability of Chinese companies to raise capital in the US.

Here is an overview of the biggest US banks’ presence in China and their plans.

GOLDMAN

Goldman, which has spent years lobbying for control of its onshore business, won approval this year. Chief executive officer David Solomon has pledged to infuse its China business with hundreds of millions of dollars in new capital as it plans to embark on a hiring spree to double its workforce to 600 and ramp up a variety of businesses.

It put its “cross-border outstandings” to China at US$13.2 billion at the end of last year. But its two onshore operations had capital of just 1.8 billion yuan (S$356.3 million), making a profit of almost 300 million yuan. A bank spokesman declined to comment.

MORGAN STANLEY

IMPACT OF A COLD WAR

If you’re an American financial institution and you have an approved plan to expand into China, you’re going to continue that plan to the extent the US government allows you to because you see great future profits. A US-China cold war is not good for your plans to build business in China.

MR JAMES STENT, a former banker who spent more than 10 years on the boards of two Chinese lenders.

Hosting an annual summit in Beijing last year, Morgan Stanley CEO James Gorman said in a Bloomberg TV interview the bank is in China “for the long run”. He highlighted its presence there for 25 years and its handling of hundreds of billions of dollars in equity and merger deals for Chinese businesses.

Morgan Stanley won a nod to take majority control of its securities venture this year, and last year had a net exposure of US$4.1 billion to Chinese clients. Its local securities unit, however, has revenue of just 132 million yuan, posting a loss of 109 million yuan last year.

The bank has been overhauling senior management of the venture, installing its staff in key roles. It plans to apply for additional licences to broaden its products and invest in new businesses, build market-making capability and expand its asset management partnership and ultimately take control.A bank spokesman declined to comment.

JPMORGAN

The biggest US bank has been doing business in China since 1921. CEO Jamie Dimon has said his firm is committed to bringing its “full force” to the country. This year, it applied for full control of an asset management firm and a securities venture, and is expanding its office space in downtown Shanghai.

JPMorgan’s China total exposure last year was US$19.2 billion, including US$11.3 billion in lending and deposits and US$6.5 billion in trading and investing. Its China banking unit had 47 billion yuan in assets last year and made a profit of 276 million yuan, while its newly started securities firm had capital of 800 million yuan. A JPMorgan spokesman declined to comment.

CITIGROUP

Citigroup, which has been doing business in China since 1902, had total exposure to the country of US$18.7 billion at the end of last year. Its local banking arm had total assets of 178 billion yuan, making a profit of 2.1 billion yuan.

Citigroup, which is setting up a new securities venture in China, is the only US lender that has a consumer banking business in the country with footprint in 12 cities.It said last month it has doubled its overall revenue from China to more than US$1 billion over the past decade.

China represents 1.1 per cent of Citi’s total global exposure and includes local top tier corporate loans and loans to US and other global companies with operations in China, a bank spokesman said.

BANK OF AMERICA

Bank of America, the only major bank to decide against pursuing a securities joint venture, is continuing to expand into China. It is looking to provide a fuller range of fixed income services in the country.

Its largest emerging market country exposure last year was China, with net of US$15.6 billion.A spokesman for the bank declined to comment.

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