Pacific Money

SEC Probe Spotlights China Hiring Practices

News that JPMorgan Chase is being investigated for hiring Chinese princelings could have repercussions.

With news of Chinese regulators investigating and subsequently fining numerous companies (both domestic and foreign) in the pharmaceutical sector still fresh, the country’s corporate practices have once again come under the spotlight. This time, the regulators are not Chinese but American, and the target of the investigation are the Hong Kong operations of JPMorgan Chase & Co.

The timing of the Securities and Exchange Commission (SEC) investigation (with regard to the aforementioned Chinese actions) is almost certainly a coincidence, but its repercussions could be much more significant than a few rapped knuckles on Wall Street, or even fines for the U.S. financial institutions in question. The investigation into JPMorgan is focused on the practice of hiring family members – in this case the children – of Chinese leaders, specifically the son of IPO candidate China Everbright Group’s chairman Tang Shuangning.  

For those familiar with the financial industry in China or Hong Kong, there really is no revelation here. The hiring of well connected people is extremely common, and indeed considered necessary, and not just in the financial industry. China’s political situation, so-called “guanxi” networks (the “cultural” excuse for a semi-formalized system of patronage and corruption), and systems of business conspire to make the hiring of leaders’ family members even more important than in other countries. The trouble in China, of course, is that rampant corruption, a lack of free media, deliberately opaque standards of financial reporting and the resulting lack of clarity about leaders’ families’ assets make such behaviour extremely suspicious, and thus extremely sensitive for China’s leaders.

Hence, whether or not the SEC investigation does end up disciplining JPMorgan Chase or any other financial institution for wrongdoing in this case (and “wrongdoing” suggests more than just HR departments favouring certain surnames over others) is not really the point. Far more worrying for the many Chinese elite families whose “princeling” children benefit from such privileges is that the SEC investigation, as well as potential follow-up investigations by Hong Kong regulators or others elsewhere, might draw attention to the system, name names, or spread wider.

China’s leaders are extremely sensitive about their families’ business activities and the activities of their children. This has been shown time and time again, whether in the cover up of a Ferrari crash in Beijing, the continuing blocks put on the Bloomberg and New York Times websites following reports about massive wealth accumulation by top leaders’ families, or in the consistent failure to make officials declare their assets. The imminent trial of Bo Xilai and the revelations about his family’s vast wealth accumulation during his downfall are being presented more as an exception to the rule than the norm.  Whilst the murder that tripped him up and his political downfall are no doubt unusual, the accumulation of wealth is considered to be less so.

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It is far from certain that the SEC investigation will spread beyond the hiring at JPMorgan Chase, or that public revelations will occur, but it is certain that other financial institutions and certain families across China are watching very carefully.  “Whatabout-isms” pointing to similar practices elsewhere hardly excuse the practice in Hong Kong or China, particularly given the unique situation there.