One of Wall Street’s biggest banks stopped briefing the head of its subsidiary in mainland China on sensitive company strategy, so the government can’t eavesdrop or demand details later.
At nearby outposts for other US and European banks, executives are spending tens of millions of dollars to locally house financial data and set up on-site internal controls. Some units are even looking at reshaping balance sheets to stand separate from parent companies.
Those are just some of the many behind-the-scenes machinations taking place inside the Chinese arms of global financial firms as they try to navigate heightened tensions between the world’s two largest economies, as well as new rules in the name of national security. JPMorgan Chase & Co., Morgan Stanley and HSBC Holdings Plc are among a long list of banking behemoths that have deep ties and long histories in China.
The upshot: Units of US and European banks are carrying out a “ringfencing” of their operations in China on a scale rarely seen in modern international finance. Banking subsidiaries that global giants once saw as key to their expansion in future decades are operating more independently and, in some cases, less competitively.
The measures, and their impact, are so delicate that more than a dozen executives and others briefed on the situation spoke only on the condition that they and their firms aren’t identified.
Altogether, it’s disrupting the dream that Wall Street powerhouses were pursuing just a few years ago. In 2020, China ended an era of frustration for global investment banks by loosening rules to let them take full control of the joint ventures they had set up with local partners on the mainland. Bank leaders had hoped to integrate those businesses into their powerhouse franchises to compete harder for deals and trading in the country’s growing economy.
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Now, with China’s economic growth slowing and its policy evolving, such efforts are becoming more challenging, and local outposts are being left as underdogs against the country’s domestic giants.
“You’re going to see more ringfencing, and you’re going to see smaller footprints,” said John O’Connor, former chairman of JPMorgan Alternative Asset Management who served on the firm’s risk committee and now runs J.H. Whitney Data Services, which specializes in risk management. “At some point, is the reward really worth the risk?”
Solomon’s Caution
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Banks’ most imminent concern is complying with China’s strict new rules limiting the ability of companies to transfer data from the mainland across borders. That’s forcing many lenders and asset managers to create onshore data centers, adding costs and management barriers.
The process of separating information in China from elsewhere and localizing technology is complicated enough that Citigroup Inc. — a late entrant — has had to delay setting up its wholly owned securities business in China, Bloomberg reported in December. Other firms, such as Goldman Sachs Group Inc. and UBS Group AG, have been working on the issue for years.
But executives said the headaches of managing data are just part of the trouble. They worry more broadly about the possibility that US-China tensions over trade or Taiwan could someday worsen quickly — potentially endangering their ability to operate subsidiaries their firms spent decades building.
Such was the case for Citigroup in 2022 after Russia invaded Ukraine, prompting a slew of international sanctions that made cross-border banking there all but impossible. The New York-based lender initially sought to sell its Russia unit, but in the end opted to stomach the cost of unwinding it.
The risks of a conflict between the US and China now outweigh all other geopolitical concerns, Goldman Chief Executive Officer David Solomon told a conference in November, noting that recent uncertainty had spurred his firm to pare risk in the Asian country.
“We’re going to be a little more cautious,” he said. “These are not easily resolvable issues.”
Chinese President Xi Jinping used his 2024 new year address to reiterate the Communist Party’s position that the country will “surely be reunified” — an allusion to Taiwan, the self-ruled island Beijing considers its own and has vowed to claim, by force if necessary.
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Slashing Exposure
The impact of China’s slowing growth and US bankers’ concerns are increasingly visible in banks’ quarterly reports, which spell out their exposures to different countries. Though Goldman doesn’t report such figures for China, its rivals have, collectively, revealed a mass retreat.
China’s restrictions on exporting data can impede relatively routine activities across financial sectors from banks to accounting firms.
One major European bank operating in China scrapped some of its plans to sell asset-backed securities, according to a person familiar with the matter, who asked not to be identified discussing internal discussions. Rules blocked the firm from providing details of the underlying auto loans to overseas investors who wanted more information for due diligence.
Business travel also becomes cumbersome. When US partners at Deloitte and KPMG visit China, they’re kept out of the main office area and granted only restricted access to computers, people with knowledge of the matter said. The same goes when partners from China visit America.
Even Hong Kong, the key Asian trading hub for the world’s largest financial firms, has come under increasing scrutiny. Deloitte recently put the city on a list that requires special permission for some partners to travel to because of perceived security concerns, the same as Russia and mainland China.
Spokespeople for the accounting firms and banks declined to comment.
Some industry executives are privately hopeful that China’s leaders might clarify the rules or create ways for international firms to comply more easily.
One concept for enabling transactions would create a “green channel,” in which data-transfer applications would be accelerated. After all, global banks are better positioned to facilitate certain deals. Hong Kong launched a pilot program late last year to help streamline data transfers within the Greater Bay Area.
“It’s not just a security question, it’s an economic-stability question,” said Aynne Kokas, an associate professor of media studies at the University of Virginia who wrote a book about Chinese data.
It might seem like Chinese companies would gain an edge if international players can’t move data across borders, she said. But many domestic companies aren’t as ready to operate globally as well as they do at home.
At the very least, banks are hoping for more clarity on the data rules so they don’t accidentally run afoul of what officials consider acceptable.
“The worst thing that businesses could do is just ignore it,” said Carolyn Bigg, global co-chair of data protection and privacy at law firm DLA Piper. “The Chinese authorities will bring probably quite high-profile enforcement action against businesses that have done nothing,” she said. The aim would be to “make an example that it’s a really critical compliance obligation.”
Moving data is also key to compliance. Global banks have poured billions of dollars into sophisticated systems to flag money laundering or other illicit activities. But that’s harder to do if data can’t flow internationally. Rules can impede transfers of client details, internal company financials and even employee profiles. Yet it can be expensive to manage such systems locally.
Companies try to consolidate overhead costs — such as internal controls, human resources and other functions — firmwide, according to Peter Alexander, managing director of Shanghai-based consultancy Z-Ben Advisors.
But China units have seen their expenses spike by around 30% once they have to account for them locally, he said, citing “a number of conversations” with global firms that he didn’t identify.
Asset managers face similar headaches. Some global quantitative hedge funds have pushed back against draft rules from the Asset Management Association of China that, once effective, would require them to set up risk controls and other internal systems in China and store transaction records, strategy source codes and algorithms locally for at least 20 years.
Firms have argued that the measures would fuel costs and undermine data security.
Losing an Advantage
The problems for investment banks run deeper — down to their balance sheets.
Currently, when global banks sell derivatives or loan money to clients trading China’s stocks, they often rely on their vast scale offshore to set up a hedge — for example by finding a client elsewhere looking to take a trade in the opposite direction.
After closing out the existing positions, future China trades could be capitalized and offset locally, people with knowledge of the practices said. That will probably mean that the subsidiaries have less room to maneuver and take risks.
Ultimately, bank leaders are hoping such challenges won’t last forever and that they will eventually be able to participate more in the country’s vast economy.
“I’m not afraid of China,” JPMorgan CEO Jamie Dimon told a summit in November. “I think it’s good for an American bank to be there to help multinationals around the world and China with their own development if it makes sense.”
Still, he acknowledged that tensions could thwart that.
“If the American government makes me leave China, I’m leaving China,” he said. “It doesn’t matter what I think or don’t think.”
