Beijing September 12 2024: China is turning up the heat on its army of 8,700 investment bankers.
After being forced to take big pay cuts and adhere to other belt-tightening measures under President Xi Jinping’s years-long common prosperity campaign, the country’s dealmakers are now in the crosshairs of the nation’s top graft buster.
At least three top investment bankers from different securities firms have been detained by Chinese authorities since August, sending a chill through the industry. One of them, who used to oversee dealmaking at Haitong Securities Co., fled the country and was arrested overseas about two weeks ago, before being repatriated back to China in an incident widely publicized on state media.
Haitong and other state-backed brokerages recently asked many of their investment bankers to hand in their passports and seek permission for all business and personal travel plans, according to people familiar with the matter. The requests followed private guidance from Chinese regulators, said the people, who asked not to be identified discussing internal matters.
Some employees were told that regulators are scrutinizing initial public offerings and other capital-raising activities, and that bankers could be called in for questioning at any time, the people said.
The brokerages have tightened approvals for overseas trips and told staffers that they also need to get approval if they wish to resign, the people familiar added. Those approved for business travel have to do so with a co-worker, and activities outside of pre-approved itineraries would be restricted, according to one of the people.
In China, state-owned enterprises have been known to hold the passports of their senior executives and Communist Party officials. It is unusual for companies to extend that requirement to lower-ranking employees and junior staffers like in the case of Haitong and other brokerages. Haitong didn’t immediately respond to a request for comment.
The detentions of investment bankers and regulatory probes are also raising questions about the future of China’s $1.7 trillion brokerage industry and domestic capital-markets activities, which have already slowed sharply while the broader economy sputters. China’s state-owned financial institutions have capped annual pay for senior staffers at 2.9 million yuan ($400,000), while recent pay cuts for onshore bankers at China International Capital Corp. have been as much as 25% of their base salaries.
“All these crackdowns and restrictions will hurt the morale of financial workers,” Shen Meng, a director at Beijing-based boutique investment bank Chanson & Co. But if problems can be rooted out, then the industry could perform better in the future, he added. Shen said the goal of authorities is “to profoundly change the distribution of the profit pie in the entire financial industry.”
Earlier this month, Shanghai-based Haitong agreed to combine with a larger state-backed rival, Guotai Junan Securities Co., in a share-swap deal that would create China’s largest brokerage by assets. The banks said their combination would produce a “first-class investment bank” and help promote “the high-quality development of the industry.” It also comes after President Xi said China should cultivate a few top-ranked investment banks, at a time when Wall Street firms are trying to expand in the country.
The late August arrest of of Jiang Chengjun, who was a deputy general manager at Haitong overseeing investment banking, helped accelerate the deal’s timing, according to a person familiar with the matter. On Aug. 28, Haitong reported a 75% drop in first-half profit to 953 million yuan, in part because of declines in investment banking, trading and institutional client services revenue.
Layoffs are likely to take place at Haitong, with a focus on its investment banking business, said the person familiar. The firm had 1,645 investment banking staff at the end of 2023, or about 12% of its more than 13,600 staffers. Guotai Junan has about 15,000 employees in total.
Financial Probes
Chinese authorities have been trying to clean up the country’s $66 trillion financial sector since at least 2021, when President Xi set his sights on corruption in the industry. Wide-ranging probes have led to the detentions and arrests of numerous financial professionals at Chinese banks, brokerages, asset managers and insurance companies. The most severe punishments for financial crimes have included death sentences or life imprisonment for former top executives of some institutions.
Investment bankers were already rattled by last year’s disappearance of Bao Fan, a star banker who helped broker the mergers of some of China’s Internet titans. Bao has been assisting authorities in an investigation, and his detention has dented the business prospects of China Renaissance Holdings Ltd., the boutique investment bank he founded in 2005. It has lost about a third of its staff since end 2022, and its Hong Kong-listed shares crashed earlier this week after they resumed trading.
Besides Haitong’s former employee Jiang, Chinese authorities also recently detained Wang Zhaoping, former vice general manager of Shenwan Hongyuan Group’s underwriting and sponsor division, the firm said in a Sept. 5 statement. Wang Chen, head of investment banking division at Guoyuan Securities Co., is assisting in an unspecified investigation, local media reported in mid-August.
China had more than 8,700 investment bankers as of early September across 147 brokerages. Many of them are involved in capital-markets activities including IPOs and follow-on share sales. The combined revenue of securities firms in the country amounted to 203.3 billion yuan in the first half, official data showed, down 9% from a year earlier.
Viewed as “gatekeepers” of the capital market, the role of investment bankers has become more important after China shifted away from a regulatory approval-based listing mechanism last year to a registration-based IPO system. Companies going public have to appoint qualified banks, or underwriters, as sponsors of their listings.
New listings have slumped on the back of a sluggish economy this year, and hundreds of companies have scrapped their IPO plans. Chinese companies raised a total of 76.4 billion yuan in onshore listings so far this year, down 88% from a peak in 2022.
China has been taking more bankers to task of late. Its securities regulator and stock exchanges disciplined 91 sponsor representatives through early September, according to official data. That compared with 88 for the whole of 2023 and 86 for the prior year.
Sun Jianbo, president and founder of Beijing-based asset manager China Vision Capital, said the industry consolidation and regulatory crackdown suggest China’s going in the right direction to reshape its investment banks which had largely offered “inadequate” services.
Also last week, Guosen Securities Co. announced it plans to buy almost all of Vanho Securities Co.. Some other Chinese brokerages earlier this year mapped out plans to acquire stakes in peers.
“We don’t need that many investment banks and cutting redundant bankers is the first and necessary step for China to cultivate top-class investment banks,” said Sun. “We’ll inevitably see faster consolidation and potentially more personnel investigations in the future.”
