Key Highlights :
1. Wall Street has been salivating over imagined riches in China for a long time.
2. After years of foot-dragging and half measures, China progressively opened up its financial markets in the past decade.
3. First, foreign investors were allowed to buy stocks listed in Shanghai and Shenzhen through a trading link with Hong Kong.
4. Then, in the wake of the 2018 and 2019 China-U.S. trade war, foreign firms were permitted to run their own wholly owned investment shops in the country, tapping into China’s burgeoning demand for asset management.
5. Ernst & Young last year estimated the industry’s assets under management in China amounted to about $16 trillion.
6. Firms such as BlackRock and Fidelity have raised money for yuan-denominated mutual funds.
7. Investment banks such as Goldman Sachs Group can also now assume full ownership of their existing securities operations in China.
8. They were previously required to set up joint ventures with local partners.
9. But things haven’t exactly been smooth. First, the big opening for foreign investment firms has coincided with an uninspiring Chinese stock market.
10. After a strong start this year, the rally in Chinese stocks fizzled out quickly.
11. The CSI 300 Index, which tracks major stocks listed in Shanghai and Shenzhen, is up only 2.4% this year—underperforming most other major markets.
12. Offshore investors, including those based in Hong Kong, currently own around $364 billion of stocks in Shanghai and Shenzhen. That is still less than 3% of the total market, according to Wind.
13. Apart from the poor market performance, foreign institutional investors continue to face regulatory problems.
14. Strict data rules in China, for example, make it hard for their Chinese subsidiaries to share much essential information with headquarters back home—including, in some cases, basics like how their funds are actually doing and who their clients are.
15. Meanwhile, foreign investment banks—which helped introduce many Chinese companies to global investors in the past—are also falling behind their local rivals in the initial public offering league tables.
16. That is especially true now that many Chinese companies are choosing to list in Shanghai and Shenzhen, instead of Hong Kong.
17. Since 2020, the volume of initial public offerings on mainland Chinese exchanges has surpassed that of Hong Kong every year, according to Dealogic.
18. Foreign investment bankers , like their asset-management kin, also face a very different regulatory regime and worsening geopolitics between China and the West.
19. And, unfortunately, those two problems are often intimately linked: Western regulators are continually calling for more transparency regarding listed Chinese firms’ finances and business practices, while Beijing is increasingly obsessed with data and technological security.
Wall Street has been eagerly anticipating the wealth that could be found in China for years. But after a decade of gradual opening up of financial markets, the results have been far less than expected. Despite allowing foreign investors to buy stocks in Shanghai and Shenzhen through a trading link with Hong Kong, as well as permitting foreign firms to run their own wholly owned investment shops in the country, the Chinese stock market has failed to meet investor expectations.
The CSI 300 Index, which tracks major stocks listed in Shanghai and Shenzhen, is up only 2.4% this year—underperforming most other major markets. Offshore investors, including those based in Hong Kong, currently own around $364 billion of stocks in Shanghai and Shenzhen, but that is still less than 3% of the total market. Foreign institutional investors continue to face regulatory problems, such as strict data rules in China that make it hard for their Chinese subsidiaries to share essential information with headquarters back home.
Foreign investment banks have also been falling behind their local rivals in the initial public offering league tables. Since 2020, the volume of initial public offerings on mainland Chinese exchanges has surpassed that of Hong Kong every year, according to Dealogic. No foreign banks are among the top 10 in underwriting IPOs in mainland China this year and last year. Many U.S. banks have also dropped out of their IPO mandates in Hong Kong due to the lack of enthusiasm for Chinese stocks.
The geopolitical tensions between China and the West have also played a role in the disappointing results. Western regulators are continually calling for more transparency regarding listed Chinese firms’ finances and business practices, while Beijing is increasingly obsessed with data and technological security. Furthermore, China's closed-off nature for most of the past three years has not helped.
China was once seen as a gold mine waiting to be excavated by Wall Street, but it has failed to live up to the expectations. Despite years of effort, foreign investors have not been able to reap the rewards they anticipated. The reality is that it is much harder than expected to find success in the Chinese markets.
