More than three years after China’s grand financial opening, it’s becoming clear to Wall Street giants that their dreams of windfall profits from the $60 trillion market are more elusive than ever.

Goldman Sachs Group Inc. and Morgan Stanley are among banks scaling back ambitious expansion plans and profit goals as a deteriorating geopolitical climate and the increasingly authoritarian direction of President Xi Jinping rock the private sector and throttle dealmaking. More drastic jobs cuts are being eyed at the biggest banks, according to senior executives who asked not to be identified discussing private matters.

Goldman Sachs, which was ahead of targets in 2021 after revenue surged, has revised projections on its five-year plan after the country’s business environment drastically changed. Morgan Stanley is opting not to build an onshore brokerage for now, making a smaller bet of about $150 million on derivatives and futures businesses. The firm is planning another round of job cuts affecting 7% of its Asia-Pacific investment bankers as soon as this week, people familiar said, joining JPMorgan Chase & Co. and rivals in reducing China-dedicated headcount earlier this year.

The moves mark an about face for many of the Wall Street giants, which as recently as 18 months ago were sticking to plans to take on China’s massive banks on their home turf and were more concerned about finding enough local talent to drive the expansion. For many firms, there’s now a realization that they need a fundamental rethink on the world’s No. 2 economy because the business climate has weakened significantly and the best opportunities for making outsized profits in the country are over, according to the senior executives.

``This changing calculus makes the cost of doing business in China higher and the rewards much lower,’’ said finance professor Mark Williams at Boston University. ``These global banks are vulnerable to political actions that could inflict material financial harm to their franchises and to shareholders.’’

While many banks are eliminating jobs globally, the cuts in China are the biggest in years and in many cases are relatively deeper than the rest of the world, the people said. China’s economy is struggling to get back on its feet after years of Covid restrictions and crackdowns on everything from financial technology to private education and real estate. In all, at least 100 China-focused jobs were lost since September. Goldman alone let go of more than a 10th of its workforce on the mainland after doubling headcount to over 600 to build up its business, the people said.Representatives at Goldman Sachs, JPMorgan and Morgan Stanley declined to comment.

More Pessimism

China has enacted the most sweeping changes in decades for its financial services, allowing foreign firms full ownership of insurers, banks, brokers and asset managers as President Xi seeks to cushion the economy from the steepest slowdown since the early 1990s amid a trade dispute with the US. Yet the country’s state-owned players are well-entrenched across all these segments after learning from their joint venture partners for years, making it hard for global firms to compete.

“The Chinese banks totally dominate the market,” said Dick Bove, a long-time bank analyst and chief financial strategist at Odeon Capital Group in New York, adding the domestic firms now have “little need for American expertise.”

The stakes are high for the international banks in a market long viewed as the final frontier for big fees on everything from mergers to stocks sales and trading. JPMorgan, Citigroup Inc., Bank of America Corp. and Morgan Stanley had combined China exposure of $48 billion in 2022, though that’s down 16% from the previous year. The banks have spent more than $4 billion in recent years upping or acquiring controlling stakes in their securities and asset management joint ventures, banking on future growth, according to Bloomberg calculations.

The backdrop of a more fractured geopolitical landscape means Wall Street firms have to strike an increasingly delicate balance. Publicly, everyone’s saying the same thing: China is still a massive opportunity and they have no plans to pull out, especially since so much money has already been spent. Privately, Wall Street executives are saying it’s difficult to maintain good standing with both sides as tensions repeatedly flare. That could get tougher as the US election cycle approaches — China policy is poised to be a major topic on both sides of the political aisle, all but guaranteeing more drama.

As a result, bank executives are increasing scrutiny of credit and market risks, peppering senior managers in Asia with questions on their liquidity and the potential for clients to be ensnared by US sanctions, the people said. The further away bankers sit from China, the more pessimistic they are, they added.

"Wall Street banks should have factored in geopolitical risks a long time ago," said Chen Zhiwu, a professor of finance at the University of Hong Kong Business School. “Over the next five years, the best case scenario for them is that China reverses direction and goes back to real open-door policy and market reforms, revitalizing the business environment. This is an extremely unlikely scenario but not impossible.”

The uncertain outlook has prompted Morgan Stanley to pursue China business out of Hong Kong for years and the financial hub will continue to be the main beachhead even as it builds out some onshore bank and asset management units and applies for research and market-making licenses, the people said. China accounted for less than half of the bank’s investment-banking revenue from Asia-Pacific last year, compared with about 60% in previous years, a person familiar said.

The Wall Street firms face headwinds on several fronts. The biggest revenue driver over the past decades — taking Chinese firms public in New York — has all but dried up. Xi has tightened listing rules to keep companies at home while the US has cracked down on Chinese firms over accounting. That’s put initial public offerings on hold and prompted some bellwether stocks such as PetroChina Co. and the two largest airlines to seek delistings in New York.

Overseas Chinese equity deals slumped to just $19 billion in 2022, a far cry from more than $120 billion in 2020 and 2021, when banks including UBS Group AG, Morgan Stanley and Goldman topped the rankings. While deals are starting to pick up again, bankers said many listings can’t be executed because investors are reluctant to pay up while Chinese firms are unwilling to sell low, according to senior staff handling the offerings.

Global banks have also made few inroads into the highly competitive domestic market. Goldman ranked 13th for arranging stock sales in China last year, trailing 12 local banks. The offshore bond market, once a key driver of fees for underwriters like HSBC Holdings Plc and Goldman, has cratered after defaults by many China property firms.

Read more: Global Banks Are Quietly Cutting China Jobs as Big Bang Fizzles

Chinese investment abroad, another source of advisory fees, has also slowed. Chinese companies announced just $44 billion in deals last year, the lowest since 2008 and a fraction of the $233 billion peak in 2016, according to Bloomberg data.

Meanwhile, foreign companies are facing increased scrutiny with authorities — concerned over the flow of sensitive information — raiding consultancies that conduct due diligence for global investors. Beijing has also urged its state-owned enterprises to gradually sever relationships with the Big Four accounting firms over data security concerns. Most recently, investors have been spooked as a number of financial data companies, including Wind Information Co., stopped providing detailed information on Chinese companies to overseas clients.

Not Priority

Given the tensions, China is no longer a top-three investment priority for a majority of US firms, according to an American Chamber of Commerce business climate survey published this year. Investors including Warburg Pincus have trimmed China dealmaking teams while private equity stalwarts such as Carlyle Group Inc. and PAG are finding it hard to raise new funds in the region. Two Canadian pension funds recently paused direct investments in China due to the geopolitical risks.On the asset management side, firms like BlackRock Inc. and Fidelity International are pressing ahead to expand their fledgling onshore operations, though rival Vanguard Group Inc. plans to shutter its remaining business in China, and Van Eck Associates Corp. has pulled back.

The deteriorating environment comes even as officials in Beijing have talked up the need for foreign investment as the economy struggles to regain traction after the lengthy Covid disruptions. Premier Li Qiang — the No. 2 behind Xi — vowed in March to establish a “broad space” for international companies to develop, while a top securities regulator reaffirmed the country’s commitment to opening its capital markets in a meeting with leaders of 10 international firms including Goldman Sachs and Bridgewater Associates.

JPMorgan meanwhile is gearing up to host three conferences in Shanghai this month, including the China New Economy Forum and the Global China Summit, with Chief Executive Officer Jamie Dimon scheduled to attend, according to a person familiar with the matter.

At a March gala dinner in Shanghai, JPMorgan’s Asia CEO Filippo Gori told more than 1,000 staff that “the business may slow down this year, but please ignore the noise and stories, and stay focused on what we are looking to achieve in China over the long term."

For Williams at Boston University, the best case for Wall Street is for China and the US to tone down the rhetoric and allow for a more friendly environment.

``This is not a likely scenario,’’ he said. ``Both sides are sitting tight with banks caught in an untenable vice grip.’’