China's Investment Banking Faces Pressure Amid Government Scrutiny

The Chinese investment banking sector is feeling increasing government pressure, as state officials have detained at least three top bankers in the last six weeks.

What Happened: One of the high-profile cases involved an overseas arrest of Haitong Securities‘ HAITY senior executive, who was repatriated to China.

Haitong and other state-backed brokerages have imposed travel restrictions on its staff, requiring them to hand over passports and seek approval for both business and personal travel, according to Bloomberg.

This heightened scrutiny is part of broader efforts to tighten control over the financial sector. Regulators are focusing on initial public offerings (IPOs) and other capital-raising activities. Haitong Securities and other firms have mandated that employees obtain permission before resigning.

"These crackdowns and restrictions will hurt the morale of financial workers, but the authorities aim to reshape the financial industry by redistributing profits," said Shen Meng, director at boutique investment bank Chanson & Co.

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Why It Matters: State scrutiny is not the only issue Haitong faces. The firm reported a 75% drop in profits for the first half of 2024, attributed largely to a downturn in the sector. The firm also recently announced a merger with Guotai Junan Securities, which could reshape China's financial landscape by creating the country’s largest brokerage.

However, the deal's timing is far from ideal. The IPO market is experiencing its worst slump in a decade, with new listings down 88% from their 2022 peak. A tightening regulatory environment risks further IPO cancelations, adding further strain to investment bankers.

Employees at Haitong fear potential layoffs, particularly in light of the fate of China Renaissance Holdings, another investment bank rocked by the mysterious disappearance of its founder, Bao Fan. Bao’s vanishing in 2023 led to widespread speculation about corruption probes, and his firm has since experienced significant staff reductions.

China's financial sector employs around 8,700 investment bankers. However, it’s becoming increasingly difficult for foreign investors to navigate. Last year, billionaire investor Mark Mobius revealed that he has been unable to withdraw funds from the country.

“I can’t get an explanation of why they’re doing this … They’re putting all kinds of barriers. They don’t say: No, you can’t get your money out. But they say: give us all the records from 20 years of how you made this money … This is crazy,” he said for Reuters.

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