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Tuesday, 21 October 2014

Help wanted

Chinese “fixers” speak to Wall Street weakness

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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Context News

JPMorgan Chase paid $1.8 million over two years to a small consulting firm run by the daughter of former Chinese Premier Wen Jiabao, The New York Times reported on Nov. 14. The relationship is part of a wider U.S. probe into the Wall Street bank’s hiring practices in the region.

Citing documents, public filings and interviews, the newspaper said JPMorgan had a $75,000 a month contract with the consulting firm run by Lily Chang, which appeared to have only one other employee. The paper said Chang is the alias of Wen Ruchun, the only daughter of Wen Jiabao, who had oversight of financial institutions as China’s premier.

Separately, JPMorgan has withdrawn from a role advising China Everbright Bank on an initial public offering in Hong Kong, according to people familiar with the situation. JPMorgan had hired the son of the current chairman of Everbright, the New York Times reported in August. The Chinese company said on Aug. 19 that its choice of underwriters was “open and transparent”.

JPMorgan declined to comment on the New York Times articles, or its role in the Everbright IPO. The bank said it is co-operating with the U.S. authorities in a regulatory filing on Nov. 1.

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