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JPMorgan effect casts chill over firms' hiring practices in China

Demand for offspring of influential mainlanders takes a fall amid controversy over employment

PUBLISHED : Friday, 07 February, 2014, 9:56am
UPDATED : Saturday, 08 February, 2014, 1:27am

Western financial institutions and Chinese firms have become more cautious about employing potentially influential mainlanders in the wake of publicity over JP Morgan's repeated hiring of well-connected Chinese.

"I know for a fact that my clients are being cautious. This includes Chinese corporates and Western financial institutions," said Basil Hwang, a Hong Kong-based partner at Zhong Lun, a mainland law firm.

"Virtually every global financial institution and multinational, whether Western or Chinese, is careful today of any perception that they are granting favours in return for business.

"Both the US and UK are very sensitive of any company doing favours for anyone. There is increasing sensitivity among Chinese authorities towards corruption."

JP Morgan, the biggest US bank by assets, recently stopped work on the Hong Kong listing of Tianhe Chemicals shortly after Joyce Wei, a daughter of the mainland firm's chairman, left the bank for a job at UBS, the South China Morning Post reported on January 22.

Tianhe was the second initial public offering JP Morgan dropped in quick succession, having withdrawn in November from China Everbright Bank's offering in Hong Kong.

The Wall Street bank at one point hired Tang Xiaoning, the son of China Everbright Group chairman Tang Shuangning.

JP Morgan has been caught up in US regulatory probes into its business practices, including its hiring practices in China.

Nearly all the top eight investment banks - JP Morgan, Goldman Sachs, Citicorp, Morgan Stanley, UBS, Credit Suisse, Deutsche Bank and Bank of America Merrill Lynch - are under investigation by US authorities in regard to whether they have inappropriately hired well-connected Chinese, said Gene Buttrill, a partner with US law firm Jones Day.

Virtually all the major Western banks are dismantling or carefully reviewing such hiring programmes, said Buttrill.

When asked about employing well-connected Chinese, a Citi spokesman replied: "Citi has well-established global procedures on hiring, where we ensure that any candidate for any position is assessed on their relative merits. This includes strict legal and compliance guidelines on hiring."

A banking source who declined to be named said Citi had made a conscientious decision to build a China investment banking team based on people with industry expertise rather than "princelings" - offspring of influential mainlanders.

A UBS spokesman said: "UBS appoints on merit and recruits from a wide range of sources, which include candidates with a track record in finance."

The underlying principle behind the US regulators' investigation of US companies hiring well-connected Chinese is prevention of abuse of power, said Julian Russell, director of Pacific Risk, a Hong Kong risk consultancy.

"Note there is no evidence that power has been abused in the JP Morgan transactions," Russell said. "However, the perception of abuse of power can be as damaging as genuine abuse of power, because of the lack of transparency, which prohibits others from observing how decisions are made.

"There is nothing wrong in employing well-connected people; in fact, this is absolutely necessary to do business anywhere in the world. However, the risk of abuse of power needs to be minimised by providing a sufficient level of transparency."

Keith Williamson, head of global forensic and dispute services in Hong Kong and China at Alvarez & Marsal, an international professional services firm, said to avoid potential problems, companies should ensure job applicants disclose their relationships with government officials as well as current and prospective customers of the hiring firm.

JP Morgan declined to comment. Bank of China, Credit Suisse, Goldman Sachs and Morgan Stanley did not reply to questions from the Post.


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Julian Russell comments in the story: "There is nothing wrong in employing well-connected people; in fact this is absolutely necessary to do business anywhere in the world. However, the risk of abuse of power needs to be minimized by providing a sufficient level of transparency."
He is partially right in the first part of his comment - hiring well-connected people is a common way to get things done in the business world. The entire lobbyist industry in the US is a prime example of this. However, his second comment, regarding transparency, is where the real problem is with such hiring practices. China is in no sense of the phrase an "open system". A bank in the US can hire some kid of a senator hoping to get some goodies from the government. However, the free media can assist in either outing any possible corruption while the system of free elections would me the senator/father may get thrown out of power for wrongdoing. That is simply not the case in China, where not only is it unlikely the party bigwig/father of a kid hired by a foreign bank will ever be thrown out of his position, the system currently is such that the over-one billion Chinese who are not party members have no right to even be in such positions of power in the first place as the party controls the state, with their kids obviously never being on some bank's list for hiring. That is what makes such hiring practices in China by foreign firms so different, and so wrong.
Here corporate hiring offspring of the politically connected is frowned at by US law but hardly can it be controlled by US firms until Xi Jinping’s hawkish move against corruption in China.
Likewise, without CY Leung to keep an eye on corruption and collusion in Hong Kong, business and the civil servants would do business as usual. Beef up the ICAC and make laws and rules to root out collusion that fearlessly operates even in the open.


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