The passing of US finance’s princeling era

It used to be common practice for US banks to hire Chinese ‘princelings’ to help win lucrative deals, but an SEC probe into JPMorgan's hiring policies in Asia may induce a cultural change.

In the early 1990s, Donald Tang was sent to Hong Kong to open an office for Bear Stearns, the US securities firm. It was a heady time: China had just discovered the capitalist practice of publicly listing shares and the Shenzhen and Shanghai stock markets were in their infancy. Competition to sell shares in Chinese companies was fierce.

Tang wanted his share of the business. He had grown up in mainland China, studied in the US, and upon graduation landed on Wall Street, which was succumbing to China fever. Unlike many other mainland Chinese who were joining big investment houses, however, Tang lacked a pedigree.

That was not a problem at Bear Stearns, which took pride in its scrappy, outsider image. Jimmy Cayne, Bear’s chief executive, thought Tang had the hungry, determined quality of people who thrived at Bear.

Tang may have lacked a pedigree, but he knew how to find someone who did. He had heard there was a Chinese woman at Kidder Peabody’s New York office who was the daughter-in-law of former premier Zhao Ziyang and the daughter of a senior Communist party official in Guangdong. Tang knew he wanted Margaret Ren to be a part of his group. When she joined Bear’s office in Hong Kong, she became the first “princeling”.

Tang wanted people who were hungry too. Ren was paid about $150,000 a year at Kidder. But when she took up her assignment to bring in lucrative listing mandates for Bear in Hong Kong, she was paid partly on commission. “She knew how to work the system, she made the system work,” says one US banker who has lived in Hong Kong and Beijing for more than 30 years. “She was the pioneer.”

Zhao was then under house arrest, as he had been since the crackdown in the wake of the Tiananmen Square massacre. But Tang understood that made Ren more attractive in Chinese eyes. “To see her was a way to express sympathy and respect for her father-in-law,” he says.

After Ren cut the path in the mid-1990s, the list of princelings – elite Chinese with useful family connections – retained by US investment houses grew. All of the big American banks have employed them, including Bank of America Merrill Lynch, Citigroup, Goldman Sachs, Morgan Stanley and JPMorgan .

Former president Jiang Zemin and premiers Wen Jiabao and Zhu Rongji have children or grandchildren who have worked for foreign investment banks or their mainland joint ventures. The former premier’s daughter, Lily Wen Ruchun, has worked for Credit Suisse and Lehman Brothers. Zhu Rongji’s son, Levin Zhu Yunlai, is head of China International Capital Corp, a former Morgan Stanley joint venture. (Morgan Stanley sold its stake in CICC to TPG and KKR in 2010.)

But the era of the multibillion-dollar mandates to take the Chinese state-owned companies public has come to an end. The princeling era is closing too.

The party, which is holding a strategic meeting next week, is keen to dispel perceptions that a privileged elite has benefited disproportionately from 30 years of reform. Under Xi Jinping, the president, China’s propaganda apparatus has trumpeted a crackdown on official corruption.

The passing of the princeling era may also be accelerated by the Securities and Exchange Commission’s investigation into JPMorgan’s hiring of two well-connected mainlanders. The SEC is looking into whether they were hired to get lucrative mandates from the Chinese Ministry of Railways and Everbright Bank, a second-tier mainland lender.

The inquiry has turned up internal documents linking new hires to mandates JPMorgan was trying to win, raising questions about whether the recruits were signed up on merit or purely for their pedigree – potentially in violation of the US Foreign Corrupt Practices Act.

JPMorgan has said it is co-operating fully with the SEC. Moreover, none of the progeny of Jiang, Wen or Zhu, nor their employers, have been accused of any wrongdoing, and many people doubt the SEC’s investigation into JPMorgan’s hiring of princelings will lead anywhere.

Possibly complicating any inquiry into such practices is the fact that many of the princelings can boast impressive qualifications, such as an Ivy League education.

“Most of the people with a mainland background who are employed by these banks are very well connected – that’s clearly an element in why these people are hired,” says one person familiar with the inquiry. “But they normally have been quite well educated at top US universities. They are highly experienced, highly qualified people in their own right. It’s very, very difficult to say there’s a corrupt reason for employing them given their calibre and then very difficult to prove that the bank has won business purely because of the employment of that person.”

But in some quarters there was something unseemly about the appearance of quid pro quo. HSBC had considered hiring princelings but decided not to. “It was never part of our culture,” says a board member for the bank in Asia. “But the fact we didn’t engage in such practices definitely put HSBC at a disadvantage.”

Others paint the banks as the victims of pressure that stems from the Chinese, who have the leverage as the banks compete for favours. “It is a negative phenomenon,” says another veteran China banker, noting that local regulators will punish those who refuse to perform favours, such as footing the tuition for relatives at American universities.

After Ren joined Bear, the firm won assignments such as listing of the Shenzhen-Guangzhou railway, or a share of the $US2 billion capital-raising for China Telecom. But there were limits to what she could accomplish at Bear, which lacked the balance sheet and army of bankers of rivals such as Goldman Sachs or Morgan Stanley.

However helpful her connections, there was little doubt she was also tenacious.

Among those rivals who noted Ren’s success were executives at the Salomon Brothers unit of Citigroup. “We kept losing mandates,” says one of the most senior people at the firm at the time. “And she was so effective at Bear.”

The decision was made to hire her in 2001. “Chinese officials push business to their relatives,” says a former Salomon executive who was involved in the decision to hire Ren. “It is a critically important part of hiring in China to hire people with the right connections.”

At Citi, Ren became the ultimate rainmaker. Citi moved up from outside the top 10 to one of the top three underwriters, with a 30 per cent share in equity issuance – an achievement widely attributed to her. She was instrumental in winning the mandate for listings including Minsheng Bank, China Netcom and China Life, a $US3.5 billion equity offer that was the world’s biggest IPO at the time. Thanks to that mandate, Citi topped the 2003 league tables.

From the beginning, though, Ren was controversial inside Citi, which was very different to the small, scrappy Bear. It was far bigger, more political and more bureaucratic. In Robert Morse, then head of Citi’s Asia Institutional Clients Group, she had a champion. But others opposed her. “She produced but she became contentious,” the senior Salomon executive recalls.

Then, in June 2004, Citi put out a terse memo to senior executives saying it had suspended Ren “for the presentation of false information to the company and to regulators”. Ren resigned, although later SEC regulators said they had found no grounds for taking action against her.

At the time, reports suggested the suspension was linked to an SEC investigation into the listing of China Life, although people close to the matter said Ren’s departure was not directly linked to the IPO. Ren and Citi have never commented on the matter. They declined to comment for this article.

Others have suggested that the issue involved not China Life but China Construction Bank, one of China’s top four state-owned banks. CCB planned to list in Hong Kong and included Citigroup in the underwriting group – a coup in which Ms Ren was directly involved, say numerous executives both at the time and later.

What exactly transpired remains unclear. CCB originally included Citigroup in the underwriting group, based largely on its understanding that the American bank would take a 5 per cent stake in the Chinese bank, these people add. “[Citi] wanted to invest in deals,” says the senior Citi executive. “The deal was debated at the highest levels of the bank. But someone got ahead of the game.”

Among those looking to invest in Asia was Chuck Prince, the bank’s then chief executive. But Prince wanted to pay no more than book value for the stake, while Bank of America was willing to pay more, say people close to the company.

So Bank of America won both the stake in CCB and the mandate to list the bank. It went on to make more than $US30 billion on its holding, finally cashing out this summer – an example of the kind of money to be made in the golden era of the princelings.

Tang, who remains an admirer of Ren, says he thinks she was made a scapegoat.

“At investment banks, most people are killed by friendly fire,” says Tang. “At Citi, people were looking for an excuse to let her go. She was consumed by friendly fire.”

After Ren’s departure, Merrill Lynch reached out to Ren – a decision that was said to have been debated bitterly internally. Ren left Merrill in 2009 to join BNP Paribas in Hong Kong but returned to Merrill in October, 2012. Merrill Lynch declined to comment.

At the same time, the era that gave Ren her early success and prominence is closing. “The question is whether with the passing of these kind of mandates, the era of the princelings will also pass,” says Chen Zhiwei, a professor at Yale School of Management.

Today, Ren is far less controversial. She has become a senior statesman of the firm, according to one senior Merrill banker.

“People seek her out for her experience,” the banker adds.

Private equity: Local firms begin to take root

With the end of the golden era of big listing mandates and a regulatory backlash against the big western banks, the princelings are moving on.

Many members of the younger generation now prefer to work for new, local private equity firms. Winston Wen Yunsong, son of former premier Wen Jiabao, was among the earliest, launching the New Horizon investment fund in 2005. Alvin Jiang Zhicheng, former president Jiang Zemin’s grandson, is a Harvard graduate who left Goldman Sachs’ Hong Kong office to work for Boyu Capital Advisory, a Chinese investment firm.

Boyu has had no trouble raising money, including from Li Ka-shing, the Hong Kong tycoon. It has also had no trouble finding deals, even as international competitors complain that pickings are generally slim.

Some see a broader trend in China: that local firms are supplanting western competitors. Private equity firms such as Carlyle and TPG made huge profits from deals in China, such as China Pacific Insurance or Shenzhen Development Bank. But such deals by big western groups may be a thing of the past.

This may not be so surprising. The Chinese have more financial expertise now – and have seen how much money there is in their own market. 

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