In the buttoned-down world of Wall Street research, JPMorgan Chase & Co’s description of Chinese Internet companies was an instant shocker: “uninvestable.”
The evocative label helped erase about US$200 billion from US and Asian markets and prompted one Chinese technology company to downgrade JPMorgan’s underwriting role on an upcoming initial public offering.
It was also never meant to see the light of day, according to people familiar with the matter who asked not to be named discussing internal deliberations. JPMorgan editorial staff in charge of vetting the bank’s research asked for “uninvestable” to be removed from 28 reports penned by technology analyst Alex Yao and his team before they were published on March 14, the people said.
While the word was cut from most of the reports -- in some cases replaced with “unattractive” -- it appeared in the published version of four, including one on JD.Com Inc.: “As risk management becomes the most important consideration among global investors in relation to their China investment strategy, as they price in China’s geopolitical risks, we view China Internet as uninvestable on a six-12-month view with a binary share price outlook.”
After looking into what happened, JPMorgan concluded that an editorial error allowed the word to slip through even though the editors, analysts and supervisors involved had all agreed before publication that it wasn’t the best choice of word, the people said. While Yao’s team was undoubtedly turning more cautious on Chinese Internet companies, its prediction of share-price gains for at least 10 of them by year-end suggested the sector wasn’t entirely “uninvestable.”
Tightrope Act
The previously unreported episode highlights the fierce debate across Wall Street over the attractiveness of Chinese assets at a time when crackdowns on the tech sector and Covid Zero lockdowns are roiling the world’s second-largest economy. It also underscores the tightrope act facing global banks like JPMorgan as they try to ramp up their businesses in China while still giving clients access to candid research on the country’s turbulent financial markets.
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JPMorgan was removed as the most senior underwriter for Kingsoft Cloud Holdings’ planned Hong Kong stock offering after Yao’s team cut the price target on the company’s U.S.-listed shares by half as part of its flurry of downgrades in March, people familiar with the matter said last month. The bank remains a sponsor of the IPO, but is now ranked behind UBS Group AG and China International Capital Corp on the deal.
“We stand by our published research and the analyst’s independent analysis of the sector,” a JPMorgan spokesperson said in an emailed response to questions. “A few subjective terms used interchangeably doesn’t change that.”
JPMorgan’s research unit uses additional screens when dealing with sensitive issues that require caution and that system remains unchanged, one of the people said.
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Research analysts at global banks are supposed to operate independently of the firms’ investment bankers, but it’s a tricky relationship. UBS lost business in China in 2019 after one of its economists sparked online furore over a quip about pork prices. Countries such as Russia and Turkey are also sensitive to wording that might affect markets or disparage the economy.
The stakes are perhaps the highest in China, which is opening up to foreign banks to allow access to its vast financial system and billions of dollars in potential profits.
Few firms understand the promise and perils of the market better than JPMorgan. Chief Executive Officer Jamie Dimon, who has pledged to bring his firm’s “full force” into China, said he regretted a quip that his bank would outlast the country’s ruling Communist Party last year.
