The JP Morgan Asia-Pacific headquarters in Hong Kong Photo: CFP
Following the recent disclosure of a confidential US government document, international investment banks may be more cautious when hiring politically connected people in China.
The document, cited by the New York Times on August 16, revealed that the US Securities and Exchange Commission (SEC) has launched an investigation into JP Morgan Chase & Co, suspecting the financial services firm of having hired children of powerful Chinese officials in order to get more business through their relatives in China.
According to US law, hiring politically connected executives is allowed, but if the purpose of the hiring is to win businesses from relatives, it can be classified as bribery.
JP Morgan is now being investigated by the commission's anti-bribery unit, said the New York Times.
The company has been required to submit information and documents relating to some of the company's former employees in China and its business connections with certain clients, according to the New York Times report.
The bank revealed the matter in its quarterly filing with the SEC on August 7. "We are fully cooperating with regulators," the bank's Hong Kong-based spokesperson Marie Cheung was quoted by Reuters as saying on August 18.
This investigation has blown a chill wind through the sector, with other banks rushing to review their own records, the Guardian newspaper reported on August 18, citing lawyers in Hong Kong.
The SEC refused to comment when contacted by the Global Times Tuesday via e-mail. But it's not the first SEC probe into this kind of matter, and it won't be the last. Useful connections
China has become the world's second-largest economy, and with the country's State-owned enterprises seeking listings in overseas stock markets, more and more international investment banks are scrambling to get China-based business.
With the relationships established by their politically powerful parents or grandparents, the later generations are in a position to help their foreign employers become IPO underwriters for China's State-owned enterprises, a Beijing-based industrial insider told the Global Times Wednesday on condition of anonymity.
According to the New York Times report, Tang Xiaoning - son of Tang Shuangning, the chairman of State-owned financial firm China Everbright Group - joined JP Morgan in 2010.
Since he joined, JP Morgan has secured several important deals with the group, including being an H-share lead underwriter in 2011 for the group's subsidiary, China Everbright Bank, said the report.
The report also said the firm had hired Zhang Xixi, the daughter of Zhang Shuguang, a former railway official who is currently being investigated over bribery charges. Since then, the report claimed, JP Morgan's Hong Kong office got the chance to advise China Railway Group - a State-owned firm that has a close business relationship with the railway ministry - about its listing plans.
Tang Xiaoning left JP Morgan in December 2012, media reports said, and Everbright Bank's IPO is still pending. Zhang Xixi also no longer works for JP Morgan, according to the Guardian.
The insider told the Global Times that international investment banks have a long history of hiring politically connected Chinese bankers.
The Guardian report also noted that Wall Street firms have sought to employ children of powerful Chinese officials in order to boost their chances of involvement with the multibillion dollar IPOs of the country's large State-controlled companies.
One well-known Chinese investment banker is Ren Keying, daughter-in-law of former Chinese premier Zhao Ziyang. She has worked at several banks and played a key role in business decisions.
Citigroup Inc hired Ren Keying in 2001 and soon after got four eye-catching deals in China, including underwriting China Life Insurance Co's $3.5 billion IPO in 2003.
However, in 2004 she was suspended by Citigroup, after the SEC opened a probe into allegations that she had submitted false information to Citigroup and its regulator while she was handling China Life Insurance's IPO.
Ren later left Citigroup, since when the bank's business in China has been less successful. According to data from Bloomberg, in 2004 the bank fell from fourth place to eighth in terms of underwriting volumes in the Chinese mainland and Hong Kong.
Currently, Ren works for Bank of America Merrill Lynch and is responsible for the US bank's China business.Are bribes involved?
"A politically connected executive in China like Ren Keying could bring foreign investment bank profits of some $1 billion within three to five years during the golden period 10 years ago. Now the profit is not that high due to competition, but it's still attractive," remarked the insider.
In order to build such connections to help their businesses in China, banks offer special bonuses or even bribes, he said.
This is something that has concerned the SEC for a long time and the commission has opened a number of probes into the matter. But few probes have led to successful legal proceedings so far.
It is hard to collect evidence that definitively links banks' hiring of Chinese contacts with their ability to win business, said the insider. "Therefore, we may hear thunder from the investigation of JP Morgan, but without any rain falling, just like the investigation of Ren Keying."
In 2006, the probe into Ren was closed and the SEC cleared her of any wrongdoing.
Similar practices are seen in other countries' financial industries. Investment banks prefer to hire people who have some connections with local political officials to manage their branches around the world.
"International investment banks may have more experience than local rivals. But JP Morgan holds few competitive advantages over its rivals like Goldman Sachs, Citigroup and Bank of America Merrill Lynch. Therefore, the political background of their branch senior executives largely determines whether they can secure high-profile and lucrative assignments," said the insider.
He predicted that in the future the hiring of politically connected executives to win business will be seen all around the world, especially in the Chinese market where relationships to political and business leaders are vital for business success.
In China, investment banks have to employ executives whose parents, relatives or friends have political connections, if they want to succeed in the country's fiercely competitive investment banking industry, he noted.
By 2001, there were 56 branches of international investment banks in China and the number has kept increasing since then, media reports said.