The witchhunt for China princelings

IFR 1998 24 August to 30 August 2013
6 min read
EMEA

Keith Mullin Commentary image

Keith Mullin, IFR Editor at Large

AMID ALL THE market noise and chatter around tapering and its dramatic – though overdone – impact on emerging markets, I’ve been somewhat mesmerised by the US Department of Justice and the SEC’s frankly bizarre investigation into JP Morgan’s hiring of well-connected staff in China and the collective sweat it’s causing across the investment banking industry.

Authorities are looking into whether JPM – and by extension pretty much every other investment bank out there – has acted in contravention of the US Foreign Corrupt Practices Act, an all-encompassing but at the margins very woolly piece of legislation with all sorts of extraterritorial tentacles, by hiring offspring (aka princelings) and other family members of influential Chinese officials to win business.

The FCPA was originally intended to prevent US individuals or companies paying off foreign government officials to win or retain business. The rule also applies to certain foreign issuers of securities, while non-US companies whose securities are listed in the US are required to meet US accounting provisions as part of the web of US anti-bribery laws.

Now I’m by no means even hinting that banks might be in breach of any corruption laws, but banks and companies have been hiring people with connections and their friends and family for ever as a short-cut to get business. And not just in China.

So why are regulators looking into this now? If regulators are so concerned about the hiring of well-connected interns and other staff, shouldn’t they have been a hell of a lot more concerned when in the 1990s many firms were appointing Chinese with connections into the most senior positions in their China investment banks and paying them US$10m-plus packages to get them access to China’s convoluted back channels and the lucrative mandates that lay there? And which, by the way, they consistently won!

Foreign banks have been hiring well-connected individuals to win China investment banking mandates ever since China started its shift to a market economy. Where the hell was the SEC 10 to 15 years ago when pretty much every bank was playing the game?

Where the hell was the SEC 10 to 15 years ago when pretty much every bank was playing the game?

REMEMBER MARGARET REN? The daughter-in-law of former Chinese premier Zhao Ziyang has been hot property for around 20 years. She was head of China investment banking at Bear Stearns for years, engineering mandate after mandate for the firm. She was poached by Citigroup in 2001 to become vice chairman and head of China investment banking and she transformed the bank’s China ECM business.

She resurfaced for a brief sojourn at Merrill Lynch (at the time co-heading China IB with Wilson Feng, son-in-law of former National People’s Congress chairman Wu Bangguo). She then headed to BNP Paribas and rejoined Bank of America Merrill Lynch last year. How much of her success is down to her political connections versus her skills as an investment banker? Answers on a postcard.

What about Lee Zhang? He was head of global banking Asia-Pacific at Deutsche Bank before heading to ICBC in 2010, and sat on the Standing Committee of the 11th Chinese People’s Political Consultative Conference (if you can sit on a standing committee, that is).

And there’s Henry Cai, a former chairman of Asian investment banking at UBS, who was known as the grandfather of China’s private sector because of his links to corporate oligarchs. When he left, observers said it would signal the end of the bank’s leading position in Chinese ECM.

Did Morgan Stanley get into bed with CICC, China’s first joint venture investment bank, way back because Levin Zhu, son of former premier Zhu Rongji and now CEO, was working there? Put it this way, CICC’s track record in winning a string of prime investment banking business suggests it didn’t suffer. (MS sold its stake in CICC in 2010).

Reuters reported, citing the New York Times, that the JPM investigation is centred on its hiring of Tang Xiaoning, son of China Everbright Group chairman Tang Shuangning and a former banking regulator, and his connection to a string of IB mandates; and on its hiring of Zhang Xixi, the daughter of a former Chinese railway official, where JPM went on to win an advisory mandate for his railway company’s float.

THE TRUTH IS that princelings have been and still are all over the investment banks in China. The latest media game – the perfect depth-of-summer game where real news is hard to come by – is to see how many princelings they can uncover. It’s all a bit puerile but hey, it keeps the news interns (unconnected, I’m sure) happy. The short answer is: there are dozens.

Here’s the thing: China-related non-domestic investment banking fees year-to-date are running at around US$2.14bn and are tracking below those of full-year 2012. Foreign banks to all intents and purposes are irrelevant in the domestic market.

As China investment banks start to hire experienced Chinese IB rainmakers from the foreign banks – and it is happening – and start in earnest their push to squeeze the foreign players to the margins, there’s never been a better time for the foreign banks to work whatever connections they have.

So back to the DOJ/SEC. I know they see it as open season on the banks, but for God’s sake, don’t they have anything better to do than to have a pop at the banks for hiring interns because their dads, uncles or cousins’ best friends may have influence over an investment banking mandate, even where there’s no explicit arrangement? It’s hardly up there with an Al-Qaeda plot to blow up the White House.