Foreign capital continues to shrink its operations in Hong Kong, while there is a wave of pay cuts in Chinese investment banks. China International Capital Corporation (CICC) is cutting the base salary of its CLSA employees, marking the first time a Chinese investment bank has reduced base salaries outside the domestic market.
In the midst of a booming stock market in the United States, Japan, and Taiwan, with increasing numbers of IPO listings, business in both mainland China and Hong Kong continues to be weak. In the past, due to its status as a financial center, financial industry professionals in Hong Kong had an income advantage over those in mainland China. However, as Hong Kong gradually “mainlandizes,” this advantage diminishes, with the latest AI concepts being isolated from both China and Hong Kong.
Hong Kong has lost the advantages it once enjoyed in the supply chain, and even Chinese concept stocks are abandoning Hong Kong in favor of listing in the United States, with fundraising amounts tripling compared to the same period last year.
According to reports by Reuters in June this year, CICC is cutting the base salary of approximately 110 CLSA bankers in Hong Kong, by as much as 30%, due to declining trading volumes and the need to narrow the salary gap with domestic employees. This marks the first time a Chinese investment bank has cut base salaries outside the domestic market.
Since CICC acquired CLSA in 2013, renaming it CICC CLSA, there has always been a wage disparity between its Hong Kong and mainland employees. Reports have indicated that Hong Kong employees have been strongly criticized internally for low performance despite high salaries. In June last year, CICC had already reduced the base salaries of its domestic investment banking employees by up to 15%. In an industry downturn, not only CICC but also China International Capital Corporation (CICC) has cut the base salaries of Chinese employees by 25%, affecting 2,000 employees, with news of layoffs following. Additionally, UBS, Bank of America, and Citigroup have laid off staff in Hong Kong, leaving CLSA employees with no bargaining power.
The main sources of revenue for investment banking are brokerage commissions, underwriting income from IPOs, and wealth management income, among others. Generally, when stock market indices in a region rise, it can drive investment activities, and active stock trading is a great help to IPO activities. The S&P 500 index has hit new highs this year, with the Taiwan Stock Exchange breaking through 22,000 points to reach a historic high, and the Nikkei reaching 41,000 points in March. However, the Hang Seng Index has remained around 18,100 points, with a sluggish stock market leading to weak performance in investment banking business, resulting in pay cuts and layoffs.
According to CICC’s first-quarter performance report, operating income decreased by 10.38% year-on-year, and earnings per share fell by 11.11%. Although the report did not break down the performance of CICC CLSA separately, overall “investment banking business,” including new listings, fell by 57% to 803 million yuan year-on-year. Among its peers, CICC has seen its revenues drop by 37.61% year-on-year to 3.87 billion yuan in the first quarter, with investment banking business declining by 25%.
Due to the impact of the real estate bubble and the withdrawal of foreign capital, there has been a general trend of pay cuts and senior executives leaving in the domestic banking industry in China, with Hong Kong unable to escape unscathed. According to data from the Hong Kong Stock Exchange, as of the end of May, only 21 new listings have taken place in Hong Kong, lower than the 28 listings in 2023. It is worth noting that Hong Kong had just started to gradually lift the “dynamic zero-clearance” at the beginning of 2023 and had not fully returned to normal, thus, there were more new listings in the stock market compared to this year. A similar drastic drop in the number of A-share listings was seen in mainland China. According to data from the Shanghai and Shenzhen stock exchanges, there were only 32 new listings in the first five months of this year, a significant decrease from the 129 listings during the same period in 2023.
A report by Deloitte, one of the Big Four accounting firms, indicated that new listings activity in Hong Kong has been slow to start in the first quarter of 2024, with no appearance of any super large or large new listings in the depressed market environment. In contrast, new listing activities in the A-share market in mainland China slowed down in the first quarter of 2024, while Chinese companies continued to list in the United States. According to Yingli Capital, as of May 31, 2024, a total of 24 Chinese concept stocks have listed in the United States, exceeding the 20 listings during the same period last year, with fundraising reaching $2.41 billion (approximately HK$18.8 billion), triple the amount raised in the same period last year.
Despite the weak new listings in China and Hong Kong, the number of new listings on US, Japanese, and Taiwanese stock markets has all increased. The number of new listings on the Taiwan Stock Exchange has doubled to 16 from the same period last year, while the US and Japanese stock markets have seen growth of about 25% and 23%, respectively.
The latest trend in artificial intelligence (AI) has seen Jensen Huang, CEO of Nvidia (NVDA), giving a speech at National Taiwan University, listing 107 Taiwanese supply chain companies across various fields such as industrial computers, robotics, machine vision, and others. His visit to Taiwan has directly boosted Nvidia, Taiwan Semiconductor Manufacturing Company (TSMC), and other Taiwanese stocks. During Apple’s rapid stock price growth in the past, there was a series of “Apple concept stocks” in the Hong Kong Stock Exchange, which are companies listed in providing components for Apple, including AAC Technologies (2018.HK) and Sunny Optical Technology (2382.HK).
After the enactment of the national security law, the US technology sanctions have included Hong Kong as part of China, which has led to Hong Kong missing out on the wave of AI technology and has prevented Hong Kong stocks from experiencing the same boost from AI concepts as seen in US, Japanese, and Taiwanese stocks. The US-China Economic and Security Review Commission, authorized by the US Congress, pointed out in its 2023 annual report that it was unclear how Hong Kong could be considered separate from mainland China. Christian Whiton, a scholar at the Nixon Center, recently wrote on the National Interest website suggesting that the US government should recognize that Hong Kong is no longer clean or different from other regions of China, particularly in the financial aspect.