Complex Made Simple

China, world’s richest nation, now beacon to world’s largest banks

China is not just the richest nation in the world. It just loosened its foreign ownership policies creating a gold rush of sorts, mainly US banks scrambling for a piece of an enormous pie

China's wealth skyrocketed to $120 trn from a mere $7 trn in 2000 Citigroup, JPMorgan Chase, and Goldman Sachs are among those eyeing huge potential profits in China Wall Street banks are gaining ground in China just as a property crisis there is brewing

China is not just the richest nation in the world. It just loosened its foreign ownership policies creating a gold rush of sorts, mainly US banks scrambling for a piece of an enormous pie.

Richest nation

China has surpassed the US as the richest nation in the world, according to new global financial data from McKinsey & Co., initially reported by Bloomberg.

The report said net worth worldwide rose to $514 trillion in 2020, from $156 trn in 2000, according to a McKinsey &Co. study. China accounted for almost one-third of the increase. Its wealth skyrocketed to $120 trn from a mere $7 trn in 2000, the year before it joined the World Trade Organization.

68% of global net worth is stored in real estate. The balance is held in such things as infrastructure, machinery and equipment.

McKinsey & Co. analyzed the balance sheets of ten different countries that, combined, comprise 60% of the world’s total income.

“We are now wealthier than we have ever been,” said Jan Mischke, a McKinsey partner, in the Bloomberg report.  

The US nearly doubled its net worth over the same period, to $90 trn. China and the US are the largest economies in the world, but the lion’s share of the world’s wealth is held by the richest 10% of households.

And they’re only getting richer, according to the report. 

The sharp rise in net worth in the last two decades has surged beyond the increase in the global gross domestic product (GDP), thanks in large part to ballooning property prices, which the report says is the result of declining interest rates. It also concluded that asset prices had risen to nearly 50% higher than their long-run average, compared to income.  

“Net worth via price increases above and beyond inflation is questionable in so many ways,” said Mischke, in the Bloomberg report. “It comes with all kinds of side effects.”

Rising real estate prices can push most people out of the real estate market, bringing the world closer to a substantial financial crisis like the 2008 housing bubble.

The report adds that the best solution for these world-historical bumps would be for the world’s wealth to reach more productive investments capable of meaningfully expanding global GDP.  

Financial stampede into China

Citigroup, JPMorgan Chase, and Goldman Sachs are among those eyeing huge potential profits in China.

For decades, American banks have been eager to expand their business in China.

In July, Citigroup became the first foreign bank to win approval to open a custody business in China, essentially acting as a bank for Chinese investment funds. In August, JPMorgan Chase got permission from the Chinese authorities to take full ownership of its investment banking and trading business in the country, a century after it first opened shop there. Goldman Sachs received the green light for a similar venture in October.

As the approvals came in, the message from Beijing was clear: It wanted US lenders to bring more foreign investors into China and help Chinese people buy assets overseas.

Thrilled that they no longer have to split profits with local Chinese partners for services like underwriting equity deals or providing advice to companies, Wall Street banks are rushing to oblige.

They want to broker more transactions, help Chinese companies raise funds, and manage money for the country’s rapidly growing moneyed class. The total wealth of China’s 100 richest people increased to $1.48 trn in 2021 from $1.33 trn a year earlier, according to Forbes.

“Obviously, what we can do in China is largely dictated by how the Chinese government allows us to operate,” David M. Solomon, the chief executive of Goldman Sachs, said in an interview last month. “We’re encouraged by the fact that after a long period of time they’re allowing us to control our joint venture.”

Wall Street banks are gaining ground in China just as a property crisis there is brewing, and as its financial system is beginning to reel under the weight of a years-long debt-fueled corporate boom. The property developer China Evergrande, with some $300 billion of unpaid debts, has become the poster child for those troubles.

Although it narrowly averted default on its bonds recently, Evergrande’s perilous situation is causing panic among other developers that could unsettle the wider Chinese economy. And while the debt woes could create new banking opportunities, they also create unpredictability.

China is easing restrictions on foreign ownership of financial services firms but could easily be politically motivated to reverse course at any time.

China was America’s largest trading partner for goods last year, with close to $560 bn in goods changing hands between the two nations, according to the Office of the United States Trade Representative.  

JPMorgan and Goldman are aiming to expand their operations across the board in China, from underwriting equity and debt offerings to advising on cross-border deals and building out trading activities. Goldman also has a tie-up with ICBC Wealth Management, a local player that gives it a shot at managing money for some of ICBC’s 26 million personal customers and 730,000 corporate clients.

Bank of America plans to apply for permission to set up a brokerage. Morgan Stanley is waiting for Chinese regulators to approve an increase in ownership of its Chinese securities firm to 90%. The bank is also seeking to raise its stake in a fund-management joint venture to 85%.

And BlackRock, the asset management behemoth, raised $1 billion in September from Chinese investors for the country’s first foreign-run mutual fund three months after the authorities gave the go-ahead.

IUS banks are also bullish about the potential to sell financial products to China’s rising middle class as it seeks out investments beyond real estate.