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Beijing's antigraft crackdown forces foreign firms to rethink business practices in China

Recent scandals have highlighted multinationals' hiring of princelings, putting pressure on Beijing to crack down on murky corporate practices

PUBLISHED : Thursday, 28 November, 2013, 11:31am
UPDATED : Monday, 02 December, 2013, 10:31am

Creating guanxi – relationships or connections – used to be a reliable way for multinational firms to break into the China market.

Several big names, including two of the world’s largest financial institutions – JPMorgan and Zurich Insurance – and GlaxoSmithKline, one of the largest drugmakers on the planet, have been caught in the media spotlight this year and a subsequent public outcry about their business methods in the country.

Some of the alleged breaches of business ethics were old news to many but suddenly became a hot topic in the past few months following government investigations and complaints from the public.

There had been many signs Beijing had begun to take corruption more seriously than ever since Xi Jinping succeeded Hu Jintao as China’s president in March.

Xi has repeatedly pledged to fight corruption, which is often linked to senior executives at powerful state-owned enterprises or senior government officials’ relatives, often known as princelings.

“The times are different now. You’ve got new leaders in China who have new ideas about how to manage the country and improve their own image as leaders,” said a Shanghai-based political risk consultant who declined to be named, as he was not authorised to speak to the media.

“You don’t even know who are the friends or enemies of those new leaders.

But foreign companies are increasingly having to re-examine the way they do business in the world’s second-largest economy.

“You can still play the game of guanxi, but if you don’t play it well, it is more likely to backfire on you and your company’s business in China.”

The US government is investigating hiring by Wall Street bank JPMorgan in China in recent years, including that of the son of Tang Shuangning, a former senior Chinese banking regulator who is now chairman of state-owned Everbright Bank.

JPMorgan was originally one of the investment banks hired by Everbright to handle its planned listing in Hong Kong but relinquished its role as a sponsor last week amid the ongoing US investigation.

You can still play the game of guanxi, but if you don’t play it well, it is more likely to backfire on you and your company’s business in China
A Shanghai-based political risk consultant

“Don’t think hiring officials’ children is necessarily bad, because they’re people just like other candidates, but companies should make sure they have the necessary credentials and their hiring doesn’t pose an obvious conflict of interest,” said a Hong Kong-based lawyer who declined to be named, owing to the sensitivity of the matter.

The latest imbroglio has dented the corporate image of JPMorgan, which has already been hurt by a series of regulatory probes in the US following the 2008 global financial crisis.

China is not in as great a need of foreign investment as previously and is being more selective on the type of foreign investment that it is attracting
Susan Finder, Practical Law China

Another hire by JPMorgan in China that is now the subject of interest is the daughter of a former senior railway ministry official, who was later arrested for corruption in unrelated cases. JPMorgan has denied allegations that it tried to use the family connection to win deals from the railway ministry.

Susan Finder, a legal analyst with Practical Law China, said: “The pressure to reduce corruption in China is driven by internal factors. The leadership sees corruption as making ordinary people disillusioned with leadership by the Communist Party and therefore not conducive to social stability.”

Finder, a former lawyer with Freshfields in Hong Kong, said, “On the foreign investment front, China is not in as great a need of foreign investment as previously and is being more selective on the type of foreign investment that it is attracting.”

Last week, Zurich Insurance raised about US$943 million by offloading its entire remaining stake in Hong Kong-listed New China Life, the country’s third-largest life insurer.

Zurich Insurance’s exit from New China Life came as a surprise to market participants. It followed media reports last month that Li Xiaolin, daughter of former premier Li Peng, had brokered a deal for Zurich Insurance to buy a stake in New China Life in 1995, before foreign firms could invest in the sector.

Britain's Daily Telegraph said in its report that Zurich Insurance paid US$16.9 million into an offshore account as a “good faith fee”. Both Li and Zurich Insurance denied the allegations.

... China is looking to make an example of some high-profile companies like GSK, but China does not want to hurt MNCs in any meaningful way
Professor Daniel C.K. Chow, Ohio State University

“Most large foreign companies already have sophisticated compliance policies and procedures. They need to be monitored, reviewed and updated on a regular basis,” said Andy Dale, a partner at law firm Orrick in Hong Kong.

“However, one size does not fit all, and companies of different sizes and industries will need to find the proportionate solution for them.

“A key component is the consistent appropriate tone from the top filtering through the management hierarchy to all employees. This then needs to be followed up by regular boots-on-the-ground visits, with regular engagement with employees.”

Unlike the JPMorgan and Zurich Insurance cases, which were first uncovered by a foreign government or in the Western media, earlier this year, the Chinese government found salespeople for Britain’s GlaxoSmithKline bribed large numbers of mainland doctors, which eventually led to a nationwide probe.

Such probes initiated by Beijing have made foreign investors nervous, and some are waiting to see how far the government takes its campaign against undesirable business practices before they commit to new investment in China.

“I believe that China is looking to make an example of some high-profile companies like GSK, but China does not want to hurt [multinational corporations] in any meaningful way,” said Professor Daniel C.K. Chow of Ohio State University’s Moritz School of Law.

“There might be an investigation, and some individual officials at MNCs might get prison sentences, but China is not interested in shutting down or disrupting the business of MNCs in any serious way or in deterring them from further investment in China.”

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