Thursday, November 30, 2023

Opinion: China’s rainmakers exit stage left as Beijing cleans its financial house

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China’s financial sector used to be a happy hunting ground for well-connected brokers, with these “rainmakers” able to combine the language of Wall Street with enviable access to Beijing’s corridors of power.

The emergence of this elite group began in the 1990s when Beijing began the partial privatisation of state-owned enterprises (SOEs) and state banks by ceding control of minority stakes to foreign investors.

China needed capable agents who could reach investors, while investors in turn needed these people to navigate China’s complicated and opaque political and regulatory landscape.

As such, these rainmakers are the children of China’s great market opening and its path towards integration within the global economy. However, they have also become associated with the country’s financial exuberance due to their role in accelerating foreign investment and China’s economic development.

Without them, it might have been much harder and slower for China’s state banks and SOEs to get the much-needed capital to fuel their expansion.

As a bridge between China and the capitalist world, this group of elite brokers have constantly faced doubt and suspicion. Chinese nationalists have accused them of helping foreigners snatch national assets, while compliance departments at their New York and London-headquartered employers have often found their methods questionable.

Investors worry as China’s Communist Party cements control over finance

As a result, these rainmakers have become much more low profile and discreet in the past decade. And few foreign institutions today would contemplate a recruitment scheme with the name “sons and daughters” aimed at currying favour and getting deals done via family ties to Beijing’s elite officials and power brokers.

China’s latest financial work conference is set to further squeeze the wiggle room for these middlemen. Tighter risk controls and regulation along with strong Communist Party leadership are the key messages from the meeting, with the country’s financial cadres told to stay loyal and clean. The ability to rub shoulders with Western capitalists is no longer an essential quality.

The geopolitical and economic backdrop has changed for China’s deal makers. An agent is typically successful when they can win the trust of both the sell and buy side, but the trend going forward is that they will likely get trust from neither.

In a telling development, Sequoia Capital – one of the most successful boutiques in terms of channelling US funds to China start-ups – earlier this year decided to split off its China operations into an independent entity.

However, the spin-off has not stopped more questions from US lawmakers about Sequoia’s previous deal-making activities. And as China investment risk rises globally, this has an inverse effect on demand for the agents who have historically brokered such deals.

China Renaissance founder Bao Fan still ‘cooperating’ in Beijing’s probe

Many former high-flying individuals associated with China’s financial boom have suffered a fall from grace. Beijing’s November announcement of a corruption probe into Zhang Hongli – also known as Lee Zhang – a former Deutsche Bank executive and vice-president of ICBC, is just the latest reminder of the risks for rainmakers who dance between power and money.

Zhang worked for Goldman Sachs and Deutsche Bank before being hired as a vice-president at ICBC, China’s biggest lender, in 2010 via a special recruitment plan from the Party’s personnel department. For a brief moment in history, it seemed as though people like Zhang would have a big role to play in China’s development as super agents.

Those hopes have now been dashed. While authorities have yet to provide any details about alleged wrongdoings by Zhang, the investigation cannot be connected to anything else other than his lengthy career in investment banking.

The silence, or even disappearance, of rainmakers in China will likely help to prevent corruption, but the loss of their services may also see a reduction in dynamism and financial connectivity.

Hong Kong was once a stage for these brokers to prove their worth. But as the climate changes and deal pipelines dry up, the city will feel the impact of their passing on its standing as an international financial centre.

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