Morgan Stanley has reduced its workforce by approximately 9% in its asset management division in China. This decision comes amidst challenges posed by the country's declining stock market, which has impacted the outlook for its $3.8 trillion fund sector. 

In December, Morgan Stanley Investment Management China initiated staff reductions, affecting approximately 15 employees, according to Reuters. This marks the initial instance of staff reduction at Morgan Stanley's China fund unit since acquiring its local partner's 36% stake in the unprofitable business for approximately $54 million in 2023. 

The unit was rebranded as a wholly owned subsidiary in June. The downsizing highlights the difficulties encountered by global financial institutions, such as JPMorgan and BlackRock, in the world's second-largest economy. 

A prolonged economic downturn has adversely affected markets in the region. Last month, China's blue-chip CSI300 index plummeted to its lowest level in five years, following an 11% decline in 2023. 

The market downturn was fuelled by an unprecedented debt crisis in the property sector and a notable absence of substantial government stimulus. This downturn has dampened local investors' appetite, leading to significant redemptions from actively managed equity funds. 

The recent job cuts at Morgan Stanley's China fund unit contribute to a bleak outlook for other China-focused roles in the financial sector, including investment banking. China's onshore fund market experienced modest growth of 6% in assets last year, a slowdown from the 1% rise in 2022 and a significant deceleration from the impressive annual surges of over 27% in both 2020 and 2021. 

Shenzhen-based Morgan Stanley IM China witnessed a decline in assets under management every quarter since reaching a peak in June 2021. Assets in its funds plummeted by 53% from the peak to 19.8 billion yuan ($2.75 billion) by the end of 2023, as disclosed by the company, reported Reuters.  

According to earnings results from its former joint venture partner Huaxin Securities, the unit reported an operating loss of 48.5 million yuan in 2022 and 23.2 million yuan in the first half of 2023. In response to these challenges, Morgan Stanley IM China appointed Alex Zhou as Chief Investment Officer, marking the first time the U.S. firm has filled this role. 

Zhou, previously Head of Equity at AIA, brings valuable experience to steer the business. The decision to reduce headcount and hire Zhou reflects Morgan Stanley IM China's efforts to recalibrate the business following its full ownership acquisition. 

The strategic shift towards defensive measures is driven by weaker fundraising prospects and is among the reasons cited for the cuts. Although China's stock market sentiment has improved since March due to measures implemented by Beijing to restore confidence, including curbs on short-selling and crackdowns on trading misbehaviours, challenges persist. 

Morgan Stanley expressed optimism in a recent research note, suggesting that the significant global fund outflows observed in previous quarters have largely concluded. Peter Alexander, founder and managing director of China consultancy Z-Ben Advisors, noted that foreign firms may be implementing overhauls or cuts in their China units due to corporate directives to reduce expenses. He suggested that such actions may stem from broader cost-cutting pressures rather than specific market conditions.