Wall Street’s China Dreams Slip Away
U.S. banks, asset managers struggle to expand their businesses while tensions escalate
By Jack Pitcher and Rebecca Feng
EMIL LENDOF/THE WALL STREET JOURNALBlackRock became the first global asset manager to operate a wholly owned mutual fund business in China in 2021, roughly a year after Chief Executive Larry Fink called the country “one of the biggest opportunities.”
Two years later, the world’s largest asset manager is struggling to compete in the market.
BlackRock ranks 145th among nearly 200 Chinese mutual fund houses in terms of domestic assets under management, according to Wind, a financial data provider.
Fidelity International and Neuberger Berman’s wholly owned China subsidiaries rank even lower.
BlackRock’s underwhelming start is emblematic of other Wall Street titans whose dreams of riches from China appear to be slipping away.
Deal flow for many American investment banks in China has slowed to a trickle with local companies increasingly turning to their Chinese peers.
Meanwhile, a slowing Chinese economy and growing difficulty in securing data have damped foreign investors’ appetite for Chinese assets.
President Biden’s new executive order that will prohibit Americans from investing in some Chinese companies is the latest in a string of setbacks.
The outlook appeared brighter for U.S. institutions just a few years ago.
In 2020, China scrapped restrictions on U.S. asset managers selling mutual funds to individual Chinese investors and lifted the limits on foreign ownership in domestic securities firms.
The following year, Goldman Sachs took full control of its onshore securities venture.
In 2022, Morgan Stanley boosted stake in its China securities venture to 94%.
Despite the official loosening of ownership caps, analysts say China appears uninterested in allowing a wholly owned American firm to gain momentum.
“Western business models that were operating freely in China just a couple years ago are being challenged every month,” said Stephen Roach, former chairman of Morgan Stanley Asia and a senior fellow at Yale Law School’s Paul Tsai China Center.
“The environment is much, much tougher today than it was.”
“I think plans for massive expansion are being put on hold at a minimum,” Roach said.
As Wall Street firms contend with a prolonged slump in investment banking revenue at home, their efforts in China are floundering, too.
Last year, Goldman, Morgan Stanley and JPMorgan all reported revenue declines at their Chinese domestic ventures’ investment banking business, according to their Chinese businesses’ annual reports.
Meanwhile, their Chinese peers, Citic Securities and China International Capital Corp. recorded 6% and 0.3% revenue increases, respectively.
Goldman’s China securities venture, which only generated 4% of its income from investment banking business in 2022, has led or co-led seven initial public offerings in China’s domestic market in the past decade, including one last year.
Citic Securities led 57 IPOs in 2022 alone, Wind data show. JPMorgan’s China securities unit led two deals last year; Morgan Stanley had none.
In May, top JPMorgan executives, including CEO Jamie Dimon, flew to Shanghai for the bank’s Global China Summit.
In a sideline interview with Bloomberg, Mark Leung, the bank’s China chief, said it had received a full suite of licenses to operate in the country, but “it will be a longer journey than we would wish to gradually build up scale and reputation to do business.”
That said, the firm remains committed to growing in China, he added.
Cross-border businesses are also taking a hit as international investors’ enthusiasm for China wanes.
Foreign investors bought a net $12 billion of Chinese domestic stocks via a popular trading link last year, the lowest sum since 2016, according to Wind data.
Meanwhile, they pulled about $84 billion from China’s bond market in 2022 and $20 billion in 2023 as of the end of July.
Foreign demand for Chinese stocks and bonds recovered somewhat this year, but the days of heavy buying appear to be over, at least for now.
For asset managers, China presented a vast untapped market of savers to whom they could sell mutual funds.
But international institutions have found it difficult to compete with larger local rivals that sell a bigger variety of mutual funds, including products that focus on specific sectors and investment themes that have performed better than the broader market.
BlackRock raised 6.68 billion yuan, equivalent to about $917 million, in September 2021 for its inaugural mutual fund in China after receiving orders from more than 110,000 individuals.
The New Horizon Mixed Securities Fund invests in dozens of midcap and large-cap stocks listed in mainland China.
The fund’s assets had shrunk 47% as of June 30, hit by investor redemptions and returns of negative 30% since its launch.
It has fared worse than its benchmark, which is heavily weighted toward China’s CSI 300 index of the largest stocks listed on the Shanghai and Shenzhen stock exchanges and returned negative 16% over the same period.
A representative for BlackRock declined to comment.
Vanguard, another giant U.S. asset manager, took a different path after making plans to expand in China.
The company in 2021 suspended its preparations to launch a mutual fund business there, The Wall Street Journal reported at the time, after realizing that building a significant presence in China would be difficult and costly.
It still operates a robo advisory service joint venture with financial-technology company Ant Group.
Many Wall Street analysts offered rosy forecasts for Chinese markets at the start of 2023, expecting the reopening of the world’s second-largest economy from Covid restrictions to spark a boom in consumer spending.
Instead, there has been a burst of dire economic data, prompting China’s central bank to unexpectedly cut key interest rates.
Officials also said they would stop reporting the country’s youth unemployment rate, following months of spiraling increases.
Wall Street is now dealing with “geopolitical risk that makes these investments not worth the time and trouble, particularly if you’re not making a lot of money,” said Andrew Collier, managing director of Orient Capital Research in Hong Kong.
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