Chinese “fixers” speak to Wall Street weakness

November 20, 2013

By John Foley 

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Wall Street banks used to argue privately that hiring consultants in China was the only way to get ahead. Now their worth is under the spotlight, after the New York Times reported that JPMorgan Chase paid $1.8 million to a two-person consultancy run by the daughter of Wen Jiabao, then China’s premier. The real mystery is why banks that have been in China for so long still need the extra help.

It’s true that personal connections have extra importance in China. An underwriter that hires the ex-director of a state-owned company as a consultant may get dinner with the chairman, while rivals get lukewarm tea with the finance director. Former insiders can educate bankers on how decisions at Chinese companies get made, which may be very different from what appearances suggest.

The worry is that hiring consultants – especially those with powerful relatives – might be a way to channel illicit cash to the powerful. But graft controls should make that difficult to cover up once the whistle has been blown. Prosecutors can demand to see fee payments, email traffic and even photographic evidence of meetings. Auto-maker Daimler and oil giant Total were both whacked by the U.S. Securities and Exchanges Commission for using fake consulting contracts.

The nebulous nature of deal fixers’ services adds complexity. Unlike a computer consultant, say, advisors whose job is to open doors may struggle to provide concrete evidence of their labours. That effectively puts the burden of proof on the hirer. Powerful connections may even become more trouble than they are worth: JPMorgan withdrew from the initial public offering of China Everbright Bank, amid a report it had hired the chairman’s son.

The big question is why foreign investment banks need outsiders to help them understand how China works, or make high-level connections. JPMorgan, which has declined to comment on the Everbright IPO or the New York Times stories, trumpets a 90-year history in China – yet was one of the last big banks to snag an underwriting license on the mainland. If the continued dependence on fixers shows anything, it’s how weak foreign banks’ position in China really is.

 

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