HONG KONG (Reuters) - Just a few years ago, lucrative business prospects in China on the back of a booming economy led to a scramble among Western financial firms, from investment banking to asset management, to expand their footprints and source talent from across the world.

But as doubts grow about China's economic recovery and its markets lag global peers, many of the financial firms are taking a hit on their earnings and are reining in their ambitions for what was a key piece of their global growth strategy.

From the beginning of this year, a growing list of Western financial firms, including Fidelity International Ltd (FIL), Morgan Stanley, and Legal & General have either sharply cut China-focused jobs or have shelved expansion plans.

More companies are expected to follow suit soon as a tepid deals pipeline and lacklustre asset generation weigh on expenses and revenues, according to senior executives at foreign financial firms, headhunters, and analysts.

The souring of the China allure for Western financial firms comes at a time when Beijing has been ramping up efforts to lure more foreign capital to revive the domestic economy amid persisting geopolitical tensions.

Fund company FIL, which is cutting 16% of its 120-strong China team, for example, expects its loss in the country to widen to $45 million this year from last year's $41 million, according to an internal document seen by Reuters.

The headcount plan of FIL has been "significantly reduced" for the next four to five years compared to the business plan formulated in 2022, said the document, circulated internally earlier this year.

In response to a Reuters request for comment, FIL said in a statement the firm remained focused on growing its mutual fund business in China and continued to plan "a range of scenarios" in the current market environment.

"Earlier in 2024 we also boosted our registered capital and opened a Beijing branch office, in addition to our Shanghai and Dalian offices," FIL said, without comment specifically on its earnings outlook and headcount reduction plans.

In investment banking, Morgan Stanley and HSBC are the latest to cut dozens of investment banking jobs in the Asia Pacific region, most of them focusing on China deals.

The bulk of the Wall Street banks' China-focused investment bankers are based in Hong Kong.

"We are hearing some more investment banks and securities firms in Hong Kong (are) already looking at staff scale reduction," said Sid Sibal, vice president Greater China and head of Hong Kong, at recruitment firm Hudson.

'PEAK TO TROUGH'

Over the last one year, Goldman Sachs, JPMorgan Chase & Co, Citigroup and Bank of America, among others, have cut China-focused investment banking jobs.

Despite some banks paying out low or zero annual bonuses, voluntary attrition has been low, Sibal said, necessitating staff headcount reduction this year in line with the dour outlook for China-related deals and, therefore, revenues.

Morgan Stanley's net revenue generated from Asia fell 12% to $1.74 billion in the first quarter from a year earlier.

Money raised via IPOs by Chinese companies, including both on onshore and offshore bourses, plunged 80% in the first quarter of this year compared to the year-ago period to $2.9 billion, according to LSEG data.

The total value of merger and acquisition deals with China involvement shrank by 36%, according to LSEG data, pointing to smaller fees bankers earned from clients by advising on such transactions.

And China's onshore fund market saw a muted 6% growth in assets last year after a 1% rise in 2022, slowing from an annual jump of more than 27% in both 2020 and 2021.

Britain's Legal & General shelved a plan in February to obtain an outbound investment business license in China and more than halved its onshore headcount, Reuters reported in March, citing sources.

Global firms making inroads into China's domestic market have experienced a journey "from peak to trough", said Yoon Ng, Global Asset Management Advisory Principal at Broadridge, driven by the tough fundraising and macro outlook in China.

"As the outlook for the Chinese stock market and economy remain sluggish, [foreign] firms will inevitably take steps to streamline their businesses especially since most would have gone through a hiring spree in earlier years."

While foreign investment banks and asset managers are expected to continue with their cost-cutting measures in the near-term, not many are expected to withdraw, betting on the world's second-largest economy bouncing back.

"We're cognizant of the fact that from a policy perspective there's certainly been a policy shift (between U.S.-China) which affects the footprint that we might have from a business perspective," said a U.S. banking source.

"However, our clients are in China and we will continue to operate in China. We are committed to the country given the importance of its economy," said the source, who declined to be named due to the sensitivity of the issue.

(Reporting by Selena Li, Xie Yu in Hong Kong and Megan Davies in New York; Editing by Sumeet Chatterjee and Muralikumar Anantharaman)