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.
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.