News / Asia

US Investigation Spotlights China's Princelings

US Investigation Spotlights China's Princelingsi
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September 19, 2013 8:19 PM
The U.S. Securities and Exchange Commission (SEC) is investigating JP Morgan’s Hong Kong office for hiring the children of high-level Chinese officials. Observers say the hiring of these so-called “princelings” is to open business opportunities in mainland China. But could the practice, which dates back almost two decades, also be considered bribery? Yinan Wang and Yi Chen look at the practice in a report voiced by Colin Lovett.
The U.S. Securities and Exchange Commission (SEC) is investigating JP Morgan’s Hong Kong office for hiring the children of high-level Chinese officials.  Observers say the hiring of these so-called “princelings” is to open business opportunities in mainland China.  But could the practice, which dates back almost two decades, also be considered bribery? 

The SEC has investigated at least seven cases of bribery of Chinese officials, involving major American firms, since 2010.

This SEC investigation is reportedly centered on two children of top Chinese officials who were hired by JP Morgan’s Hong Kong office.  The New York Times reports that in 2007, the bank hired Zhang Xixi, the daughter of Zhang Shuguang , a senior official at the China Railway Group who is now on trial in Beijing for allegedly accepting millions in bribes.

Then in 2010, it hired Tang Xiaoning, the son of China Everbright Group Chairman Tang Shuangning.  Both companies are state-run enterprises. After they were hired, became JP Morgan clients.

Gordon Chang, author of The Coming Collapse of China, says that these hirings have come to be known as "Elephant Hunting."

“What’s going on here is that there are elephants out there. They’re very important state officials. They have children and those children have gone to very good business schools around the world and if you want to hunt these elephants, if you want these big [contracts], you’re gonna go into the jungle, and that’s exactly what’s been going on here," said Chang.

Chang says this practice is universal in China, where people rely on guanxi, which literally means “connections” or “relationships,” and carries a sense of mutual obligation between the two parties.

Analysts say it is more common to see money, travel, and entertainment used to bribe officials rather than jobs for their children.

But some of the hiring cases involve massive salaries. UBS hired the son of Li Ruihuan, a former member of the elite standing committee of China’s Politburo, for a reported compensation package of $10 million.
 
A 1977 U.S. anti-corruption law prohibits U.S. companies from providing things of value to a foreign official to secure or retain business. While financial institutions are eager to hire princelings, they often don’t stay for long.

“If the children of China’s leaders stay in the U.S., one thing is that the U.S. is a mature market so there is no opportunity to break out," said Ming Xia, a political science professor at City University of New York. "Another aspect is if they hold a position in the U.S. for a long time, on the whole it is a middle-level management job, which doesn’t bring sudden huge profits."

Even though the decades-old practice of hiring princelings has been on the decline recently, the SEC decision to investigate is bringing new attention to the issue.

Ming Xia believes the investigation may reflect U.S. worries about China’s crony capitalist model.

“To some level the U.S. is aware, especially at the strategic level, that China’s model of capitalism can pose a huge threat to the global investment, business, and capital flows environments, capable of causing some kind of corrosion to the U.S. and Western way of life," he said.

The SEC investigation is ongoing and there has been no official word on its status.

This report was produced in collaboration with the VOA Mandarin service

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