HONG KONG (BLOOMBERG) - One after another, the big names in global finance were summoned by Chinese officialdom.
On the agenda: pay - specifically, telling Credit Suisse Group, Goldman Sachs Group and UBS Group to report details on how they compensate their top bankers.
Don't reward your top people too lavishly, Chinese regulators warned the banks this year in meetings in Shanghai and Beijing, or you might run afoul of the Communist Party, according to people familiar with the matter.
The say-on-pay meetings, reported here for the first time, are just one of the many potholes that global banks have hit lately on their long, rocky road into China. After years of losses or skimpy returns, some of them are reassessing their prospects. Short term, the outlook isn't good.
Hopes that banks' business in China finally might be paying off have been dented and dented again. China's Covid-19 lockdowns, its volatile markets and moves by its leader, Xi Jinping, to reshape the business scene - and reassert the state's control - have reverberated through banks in New York, London and Zurich.
Publicly, executives say they're as committed as ever to China. Filippo Gori, the Asia-Pacific chief for JPMorgan Chase & Co, captured the prevailing line in a recent interview with Bloomberg Television, saying his bank was focusing on the next 25 years in China, not the next quarter.
But privately, a growing number of executives in the region are expressing doubts about their banks' immediate futures here.
Interviews with eight senior bankers at firms including Goldman, Morgan Stanley and UBS - all of whom spoke on the condition that they not be named to avoid angering their superiors, clients or Chinese authorities - point to a litany of problems.
Questions about pay are but one worry (among other things, regulators have pressed banks to reduce cash compensation and extend deferred bonuses to 3 years or more, people familiar with the meetings say). Other concerns involve licences, recruiting, data security and more.
Overriding everything is Xi's campaign to combat what the Communist Party considers undesirable economic and social elements. Xi wants to rein hyper-rich entrepreneurs, narrow the country's stubborn wealth gap and promote "common prosperity".
In a sign of the new times, several major banks, among them Credit Suisse, JPMorgan and UBS, recently shuffled senior executives in China. After hiring about 200 people here last year, Credit Suisse now is delaying plans to form a local bank and could let go of dozens, according to people familiar with the matter. Other banks could make similar moves.
"Wall Street banks really need to ask themselves now, why do I want to be in China?" said Veronique Lafon-Vinais, an associate professor at Hong Kong University of Science & Technology. "Are they truly profitable, what is the true return on capital for their China business?"
It's a remarkable turn of fortune. Only three years ago, many of these same banks were celebrating as China began to throw open the market to foreign competition. Global banks were allowed to take control of the joint ventures they'd struck up with Chinese partners in order to gain an initial toehold on the mainland.
Morgan Stanley, which formed a securities venture in 2011, eked out a small profit on its China business in 2021. So did JPMorgan, which reestablished itself around 2019. Profit jumped at Credit Suisse, in China since 2008, and UBS, established in 2006, albeit from tiny bases.
All in all, the top six global banks made roughly US$42 million in China last year - a pittance next to their earnings elsewhere, but welcome news after so many lean years. Those figures don't include profits made from dealmaking with Chinese clients outside the country.
The party didn't last long. China's zero Covid approach to the pandemic locked down Shanghai for months. Financial markets reeled. The economy stumbled. Deals dried up. Global banks most profitable China business - selling new stock in Chinese companies on offshore markets - has plunged 94 per cent this year from the same period last year now that Xi has tightened rules on foreign listings. Offshore bond sales are down 39 per cent. Inside China, foreign banks have made little headway against the country's domestic banking giants.
Tensions between Beijing and Washington have only added to the strains. Speaking on the condition he not be named, a top banking executive in the region said that Chinese regulators have signalled that Xi's uneasy relations with the west - tensions with the US are as high as they've been since the countries normalised diplomatic relations more than four decades ago - have, along with Covid, held up licences and other necessary paperwork.
The CSRC was the agency that summoned executives to discuss bankers' pay. People familiar with the meetings characterised the discussions as a highly unusual, if not unprecedented, regulatory intrusion into foreign banks' personnel decisions. It's a sign that they are being put on the same footing as local brokers, who were told in the past two years to cut pay and expenses.
Executives in attendance, which included Credit Suisse's local chairman Janice Hu and Goldman's China co-head Sean Fan, were told by top regulators to keep compensation, especially for senior managers, in line with the "common prosperity" agenda.
The CSRC didn't respond to a request for a comment.
On pay, a first-year managing director at a Chinese broker can get about 4 million yuan (S$829,247) in compensation. The bulge bracket Wall Street firms offer 10-20 per cent more than that, while second-tier foreign banks are struggling to match it, according to Eric Zhu, head of financial services recruitment at Morgan McKinley.
With pressure on pay, that gap could now narrow and make it harder to attract talent. The more senior bankers at local firms, which still dominate deal making, can take home well above 10 million yuan, something that foreign firms have a hard time matching, according to local headhunters.
A question for banks is how to lure and retain top talent while trying to follow Xi's prescriptions. Among other things, regulators told the bank executives to avoid excessive income gaps. The were forbidden to pay salaries that might be deemed unfairly high, one of the people said.
Executives also must contend with compliance staff who report directly to regulators rather than the banks - and can't be fired without regulators' approval. Some bankers are worried that local authorities also might refuse to honour tax incentives offered as part of a programme to senior foreign managers as the slow economy and a property slump erodes government coffers, people familiar said.
The increasing challenges have coincided with some top executives leaving their China jobs. UBS's China head David Chin, based out of Hong Kong, stepped aside in April partly because of travel curbs and the need to focus on regional business. He was succeeded by Eugene Qian, who's based in Shanghai. The CEO of JPMorgan Securities (China) Co, Houston Huang, also quit and was replaced by Lu Fang, a former official at China's securities regulator. The head of Credit Suisse's securities venture, Tim Tu, stepped aside in April to take on a bigger Asia-Pacific role.
Given that China is home to the world's second-largest economy, global banks aren't about to pull up stakes. For example, UBS in March increased its stake in its securities venture to 67 per cent and its revenue in the mainland has almost doubled to US$1 billion in 2021 from 2019.
But some might redeploy resources if the business landscape doesn't improve.
Even London-based HSBC, which traces its history back to British imperial trade and plans to keep adding people in China, hasn't been immune. HSBC remains a "China bull", according to its chief financial officer, Ewen Stevenson. Still, profit from its mainland business fell 10 per cent in the first quarter, reflecting the bank's exposure to the nation's shaky real estate market.