Turns Out The SEC Does Not Feel The Same About Guanxi

Published on Author fishman

Recently, American investment banks have fallen under scrutiny for their hiring practices in China. Specifically, the hiring related to applicants with close familiar ties to Chinese governmental officials with particular political influence. The SEC’s industry-wide investigation revolves around US bribery laws, which prohibit the exchange of favors for beneficial treatment.Guanxi

Prior reports from a former Morgan Stanley investment banker confirm that the firm intentionally flagged resumes of influential Chinese official’s children applying for entry-level positions. Since there are significant regulatory hurdles to conducting business in China coupled with the CCP’s exposure to the country’s overall business, building connections with state-owned enterprises is critical. The supposed unfair treatment of children of political figures and heads of SOEs, if true, would undoubtedly facilitate investment banks gaining access to underwriting business as well as other contracts. Given the aforementioned information, it should be noted that the applicants related to officials came from top-tier schools, portrayed as a common practice across the industry. Thus, any conviction would have to be able to prove that these candidates were not, in fact, qualified.

This is not the first time there have been violations of the Foreign Corrupt Practices Act in China. In 2010, there were six companies that had to pay $236 million to resolve a similar investigation. Based on the Hessler reading and its elucidation of Guanxi, it seems that for the foreseeable future this trend will continue in China. As long as a system of favors characterizes a large portion of business and firms continue to look for ways to maximize profit, businesses within the country are likely to operate within the bounds of Guanxi as best they can. The continued market reforms are probably mitigating the need for Guanxi, since the CCP has less control over the economy, which could be a good sign of China’s progress.

Works Cited

U.S. expands China hiring probe to Morgan Stanley

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One Response to Turns Out The SEC Does Not Feel The Same About Guanxi

  1. There seems to be a new article on this topic almost every day in one of the big newspapers. I’m glad the Chinese government is taking it seriously. However, I think the disconnect between Western and Chinese culture is very apparent here. Although Guanxi may have never been condoned in such a setting in China, it is certainly a common part of the business world in China. However, regulations of the banks are stricter than ever since 2008, making it hard for there to be leniency when it comes to cultural barriers.