More investment banking jobs could eventually move from Hong Kong to China, if global banks such as J.P. Morgan gain greater control over their mainland joint-venture operations, experts warn.
J.P. Morgan is working with Chinese regulators to develop a new ownership structure that it hopes will one day give it full control of its China business, CEO Jamie Dimon told Bloomberg.
The Chinese government said in November, without proposing a timetable, that it will gradually relax a rule that currently restricts foreign ownership of securities and fund management joint ventures to 49%.
“Full ownership could lead to more JPM bankers being located onshore in China – as opposed to covering China from Hong Kong – given the bank would have the ability to manage the JV, including its personnel, as a controlling shareholder,” says former UBS banker Benjamin Quinlan, now CEO of Hong Kong finance consultancy Quinlan & Associates.
J.P Morgan exited a minority-owned Chinese investment banking JV last year.
“Assuming JPM is granted a better license in the future with a full suite of services and products, I think some bankers in HK will move to Shanghai, Beijing and Shenzhen,” adds Jason Tan, a partner at search firm Carlson Harriet in Shanghai. “They will be closer to the regulators as well as the clients.”
Other banks with Chinese JVs – such as Goldman Sachs, Morgan Stanley and UBS – are expected to increase their ownership stakes when permitted. And this could prompt them all to relocate people who had previously been ‘fly-in-fly-out’ bankers, covering the mainland from Hong Kong.
“It will be important for foreign banks to have stronger onshore coverage in China, given that their JVs are currently dwarfed by the major Chinese investment banks in terms of headcount by a factor of five,” says Quinlan.
US and European firms have struggled to challenge the dominance of local players in Chinese investment banking over the past 10 years. The banks argue that holding minority stakes in their JVs limits their influence over business decisions.
“Basing more bankers onshore would increase JV banks’ ability to provide dedicated, on-the-ground coverage for Chinese clients, allowing them to better compete with the Chinese banks,” says Quinlan.
Local banks took the top six spots for China investment banking fees in the first quarter of this year, according to Dealogic.
“Having more control over the JVs will let foreign banks better capture opportunities between their onshore and offshore business – cross-border M&A or H-share listings of mainland companies, for example,” says Quinlan.
“It should also make them more willing to expand the scope of their licenses – for example into secondary brokerage and wealth/asset management – which would help create new jobs,” he adds. “However, JVs must get their cost structures in order before they pile on headcount, given that many are operating at unsustainable cost/income ratios.”
If and when China fulfils its commitment to rolling back foreign ownership laws, don’t expect an immediate exodus to the mainland. “’It should be a gradual increment, and it will mostly be mainland Chinese bankers in Hong Kong returning home,” says Tan from Carlson Harriet.
“A few senior expats will move to China to take head of department jobs. But most local Hong Kong and Western bankers will keep flying back and forth to cover Chinese clients – not permanently relocate to China – because of family, education and lifestyle reasons,” says Tan.
Some Hong Kong-based bankers will also have concerns about China’s higher tax rates, adds Quinlan. “Compensation could potential be lower, especially for juniors, but pay differentials between Hong Kong and the mainland are already rapidly narrowing.”
Image credit: Rasmus-Raahauge, Getty