Comments on international investment banks recruiting Chinese

Written by Victor Fan || April 18 2014

As US SEC’s investigation on large investment banks recruiting Chinese governmental officials’ and SOE senior managers’ children is going further than any such probe before, the dark side of foreign companies operating in Chinese markets is gradually being exposed to the public. However, that probably doesn’t come as a surprise for the Chinese public which has known and suffered from the ‘unwritten rules’ for a long time. 

Firstly, let’s talk about the motivations for investment banks to recruit people with connections. Clearly, the traditional investment banking business in China relies on relationships with firms, governments and many local high-net worth individuals. By recruiting staff with special ‘Guanxi’ or connections, it is easier for investment banks to win deals. Sometimes, there are even multiple layers of ‘Guanxi’ from different investment banks. The one with the strongest connection may win the bid eventually. Here, we have to admit that personal relationships are not only important in China, but almost has the same importance in the rest of the world. The difference is that Western countries have stronger supervision on this kind of unfair competition.

Objectively, Chinese elites’ children usually have received better education from the West compared to children born in the poor families. Although they may not have outstanding academic performance, both foreign and local firms are still willing to recruit them for their top notch educational background and a more global outlook. As the Chinese financial industry is advancing towards a higher standard of business, investment banks are willing to recruit staff with knowledge of the global best practices in the industry and to apply the same business models in China.

However, the Chinese local environment is actually really the main sources of the problem, not the foreign investment banks. As firms in China have so many scandals, we have to wonder whether the problem really comes from the underlying socioeconomic system. It seems that in many industries in China, especially the monopolistic industries or the ones with higher profits, government corruption could not be easily prevented. Currently, the Chinese government is undergoing a revolution of ‘Cleaning up the corrupted government officials’, which is also a reason why the investment banks’ scandals had been unveiled. We don’t know how long the ‘Cleanup’ will last and how effective it will be, but the good news is that the public eventually will be more aware of the problems and it may not be as easy as in the past for these elites to commit crimes.  

From the national level, the SEC’s investigation is somewhat aiming at Chinese government. By threatening to expose more details of the investment bank case, the US government actually gains ground in the diplomatic war towards Chinese government. In order to stop further investigation the Chinese government may have to compromise, for example by increasing the holding volume of US treasury bills or by making concessions in the economic and trade disputes. While it may be speculative to deduce further on the political side, still we have to point out the possibility of political blackmail because there are so many ‘naked elites’ in China whose families are living in the West. In some sense the families can be thought of as political assets for Western countries.

So what will happen in the future? Optimistic proponents of the current Chinese government claimed that the future could be brighter after the Cleanup process. The economic reform, accompanied with slight political changes, may have positive effects on creating a more transparent system for restricting bribery and corruption. But as corruption is thought to be a global challenge for thousands of years, different countries are exploring different roads to fight against it and currently no government can say that it is absolutely independent and clean.  After all, there are flaws in human nature that never lose their grip on us -- as Gordon Gekko once said, ‘Greed is good’.