(Bloomberg) – Japan’s second-largest brokerage, Daiwa Securities Group Inc., is reassessing its timeline for profitability in China as economic and regulatory challenges weigh heavily on the mainland’s financial industry. Chief Executive Officer Akihiko Ogino’s tempered optimism reflects the broader struggles faced by global investment banks in navigating China’s increasingly complex market environment.
Profitability in China Remains Elusive for Daiwa Securities
CEO Akihiko Ogino revealed in a recent interview that turning a profit in China by 2025 appears unlikely. The firm initially hoped to achieve profitability through its joint venture in China, Daiwa Securities (China) Co., by the end of next year. However, market stagnation and regulatory hurdles have slowed progress.
Key Highlights:
- Market Performance: The Chinese market’s underperformance over the past year has defied expectations, with revenues of securities firms declining by 9% in the first half of 2024 to 203.3 billion yuan ($27.9 billion).
- Losses Narrowed: Daiwa’s China operations reduced their losses by 22% in 2023 to 48.6 million yuan, marking the third consecutive year of deficits since securing their license in 2021.
Ogino emphasized that while the Chinese economy faces stagnation, the market’s sheer size presents potential opportunities for long-term success.
Challenges in China’s Financial Industry
China’s financial sector has been grappling with significant headwinds, including:
- Deal Slump: Investment banking revenues have declined as regulatory scrutiny and sluggish economic conditions dampen deal-making activity.
- Workforce Reductions: Global banks such as BNP Paribas and Morgan Stanley have responded with layoffs amid declining profitability.
- Real Estate Crisis: The struggling property sector has added to the economic slowdown, drawing comparisons to Japan’s economic bubble burst in the early 1990s.
These challenges have forced firms like Daiwa to recalibrate their strategies and focus on strengthening collaborations with investment funds to secure more business opportunities.
Daiwa’s Strategy for Recovery in China
Despite the setbacks, Ogino remains cautiously optimistic about Daiwa’s prospects in China. The firm plans to leverage its partnerships with investment funds and explore new avenues to drive growth.
Future Goals:
- Achieving profitability by 2026 through enhanced collaboration and strategic initiatives.
- Expanding business operations while maintaining a steady headcount of approximately 110 employees in its Beijing-based joint venture.
Ogino acknowledged the difficulties but stressed the importance of perseverance in such a significant market, believing that a clear path to success is achievable with the right approach.
Contrasting Economic Trends in Japan
While Daiwa grapples with challenges in China, Japan’s economy presents a more optimistic outlook. Corporate profits are on the rise, and mild inflation signals a steady economic recovery.
Bank of Japan (BOJ) Policy Outlook:
- The BOJ is expected to raise its policy interest rate from the current 0.25% to 0.5% in January, followed by another hike to 0.75% by the end of 2025.
- BOJ Governor Kazuo Ueda has indicated the possibility of delaying the next rate hike, which has contributed to a weakened yen in recent weeks.
Ogino believes Japan’s economic conditions are favorable for tighter monetary policy, in stark contrast to the stagnation seen in China.
Global Implications of Daiwa’s Struggles in China
Daiwa’s challenges in China highlight broader issues faced by global investment banks in the region. Regulatory hurdles, market volatility, and geopolitical tensions have dampened enthusiasm for expansion in the Chinese market.
Key Takeaways for Investors and Stakeholders:
- Diversified Strategies: Investment banks need to adopt diversified approaches to navigate the complexities of the Chinese market effectively.
- Long-Term Perspective: Despite short-term challenges, the potential for growth in China remains significant for firms willing to commit to long-term strategies.
- Global Impact: Developments in China’s financial sector will continue to influence global markets, particularly in industries such as real estate and commodities.
Looking Ahead: Opportunities and Risks
As Daiwa Securities recalibrates its China strategy, the firm must balance the risks associated with market stagnation against the opportunities presented by the country’s vast economic potential.
Ogino’s leadership and strategic initiatives will be pivotal in determining whether Daiwa can turn its fortunes around in China and strengthen its position as a global financial powerhouse.
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