(Bloomberg) -- China’s financial opening that kicked off three years ago was supposed to be the biggest banking play of a lifetime. It’s now at risk of foundering as a slump in deals and growing political tension force global banks to recalibrate their plans to conquer the $56 trillion financial market.

In public, executives say they’re in for the long-haul, but behind the scenes banks such as Goldman Sachs Group Inc. and UBS Group AG have jettisoned China-focused investment bankers. Some global banks expect to cut more next year and are prepared for major staff exits as bonuses vanish.

Doubts are growing over whether China will ever become the deal and fee machine once envisaged. Some 10% to 20% of high-level bankers are likely be paid no bonus this year and more than half are in for a record drop, said a Wall Street banker responsible for remuneration, asking not to be named discussing internal matters. Goldman and other banks are counting on the diminished payouts to keep costs down as they wait for a deal revival. 

The landscape has shifted dramatically as Covid Zero has stunted growth and President Xi Jinping cracked down on the private sector and offshore listings. The Chinese leader, who last month secured a precedent-breaking third term, is emphasizing national security and “common prosperity” over the market economy and wealth creation that have flourished in prior decades. After Xi installed allies in all key posts at the twice-a-decade party congress last month, markets responded with a $6 trillion stock blowup.

“It’s clear China can switch direction and crack down quickly as has been shown in many industries in recent years,” said Christopher Marquis, Sinyi professor of Chinese management at Cambridge Judge Business School and author of ‘Mao and Markets.’ “Particularly banking is tied to general national security, which has really been shown in recent years to be the dominant logic of Xi, above and beyond economic growth.”

Banks are also looking to narrow the pay gap among bankers rather than cutting jobs as deals may bounce back in the second half of next year, one of the people said. Others predict 10% to 15% of the staff, likely those ranked at the bottom, will quit because of the near-zero bonus pool, people familiar with the matter said. Morgan Stanley is targeting to cut about 10% of its 500 person Asia-Pacific ex-Japan investment banking workforce in an upcoming retrenchment. 

Spokespeople at Goldman, UBS and Morgan Stanley declined to comment for this article. 

Goldman has led the way, already firing investment bankers in September, the majority of whom were focused on Greater China. 

On the buy-side, Warburg Pincus has trimmed its China dealmaking team and Carlyle Group has cut in half the investment it planned for China in its new $8.5 billion Asia fund, holding back amid Covid Zero concerns and flagging corporate earnings. Hedge fund giant Tiger Global Management is slashing its investments in China after heavy losses last month.

It’s a sharp turnaround to just a few years ago, when Goldman, JPMorgan Chase & Co. and others were allowed to take control of joint ventures they had operated in China with little success over the past decade. Banks quickly drew up plans to double or even triple their workforce in the country, in the hunt for billions of dollars in potential profits. 

Banks are also cutting jobs elsewhere as deals slow around the world amid rising interest rates. 

Credit Suisse Group AG, facing deep problems globally, has lost nearly half the senior managers at its China securities ventures in recent months. The Swiss bank was warned by Chinese regulators that it faced delays in getting its needed licenses until it fills the positions.

Banks were also stung by a series of high-profile departures this year, including the senior China heads at the securities units of UBS, JPMorgan Chase & Co. and Credit Suisse.

While uncertainties are growing, the pull of China, its wealth and expanding middle class remains palpable. Signs China is easing its Covid controls have sent markets into overdrive, helping Hong Kong’s main index to rally 18% this month.

Beijing is now moving more aggressively to backstop its struggling property sector, which may boost sentiment. Authorities on Friday issued a notice to financial institutions laying out plans to ensure the “stable and healthy development” of the property sector. The notice included 16 measures that range from addressing the liquidity crisis faced by developers to loosening down-payment requirements for homebuyers.

A who’s who of global finance, including Goldman Chief Executive Officer David Solomon and his counterpart at Morgan Stanley, James Gorman, jetted into Hong Kong this month to attend a summit arranged by the city’s Beijing-installed leaders. UBS Chairman Colm Kelleher said during a panel discussion that he was “very pro-China.” Nonetheless, the Swiss bank recently cut about half a dozen China-focused bankers in debt capital markets, investment banking and real estate.

Even those that are cutting back, argue that China can’t be ignored. “I think it’s very hard to bet against China when it comes to investing generally, particularly for people with a long view,” William Conway, co-chairman of Carlyle Group, said at the summit in Hong Kong. 

Iris Pang, ING Groep NV’s chief China economist, said the country still offers plenty of upside once it gets past its Covid restrictions. “The current state of the economy is temporary,” she said. “The long-term economic structure has gained growth in terms of GDP per capita. Wealth has increased. Potential investments are waiting for a rebound.”  

Goldman this year relocated E.G. Morse to Shanghai to co-lead the China business. The bank now as close to 600 employees in China, almost two years ahead of its schedule to double its mainland headcount, after including a newly formed fund management venture.

Chinese policy makers are also bullish and pledge to keep opening up the economy. Speaking at the Hong Kong summit, Fang Xinghai, a vice chairman of the China Securities Regulatory Commission, said some global banks have already exceeded their plans in China and warned to not bet against the country since its opening can only become “bigger and bigger.”  

Part of Xi’s crackdown has included limiting the ability of domestic companies to sell shares overseas, triggering an 88% slump in those deals. Domestic deals and cross border mergers have also cratered. China is on track for its first year of foreign portfolio outflows in more than two decades, possibly amounting to over $100 billion this year, according to calculations by Morgan Stanley. That would compare to an inflow of $200 billion in 2020 to 2021. 

Goldman has done four deals in mainland China this year and UBS five, topping Morgan Stanley’s two. They face significant competition from local brokerages such as Citic Securities. UBS is the best global bank in terms of rankings for China stock deals, placing 11th. 

In a shift from its typical strategy of only doing the biggest deals, the New York-based bank has been arranging smallish China deals this year, as has Morgan Stanley. 

Almost 70% of Chinese overseas stock sales arranged by the two this year were below $100 million in size, with only three deals out of the combined 23 worth more than $300 million and just one topping $1 billion, data compiled by Bloomberg shows. Back in 2020, the duo arranged 127 deals, with 20% of them worth more than $1 billion. 

In a town hall in Hong Kong last week, Goldman’s Solomon acknowledged that the US-China tension was a complex issue when answering a question from the floor. 

Following the staff cuts in September, Goldman told its bankers internally that no more redundancies were planned for the China business year, but wouldn’t make any such promises for 2023.

“China’s days of 8% growth are behind it and given the ideological turn in the recent years that only seems to be accelerating -- if I was an investor in China I would be trying to get my money out as soon as possible,” said Marquis.  

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