The Lure of Quanxi: East and West

The Economist posted an interesting small piece yesterday about the current investigation of US bank’s hiring of Chinese “princelings” in their China offices.


Of course, as the article points out, no one in China would be surprised to learn that the latest intern to join a team was the son/daughter/niece/nephew/etc. of a government official. As the piece notes:

The probe will cause amazement in China, a country in which the idea of guanxi—loosely translated, relationships—is ingrained. Familial connections are rife across government and commerce. The investigation will also cause consternation at Western firms hoping to do business in the country. Investment banks in Hong Kong privately concede that finding a “princeling” who is valuable for reasons other than their connections is the exception, not the rule. Although America’s Foreign Corrupt Practices Act (FCPA) specifically targets the bribery of government officials, many of China’s largest companies retain strong government ties so may come within its ambit. The SEC’s scrutiny comes after the conviction last August of a Shanghai-based employee of Morgan Stanley for bribing a government official.

Correctly, the Economist also notes that the West has its own version of this phenomenon (and always had), so what is happening in China should also lead the investigators to ask some questions here as well:

Connections also count in the West, of course. Following initial reports of the SEC’s investigation in the New York Times, a flood of stories have noted the jobs held in politically sensitive American firms by the sprogs of American politicians.*

Personally, I doubt any investigation is going to have much of an impact on investment banks and their kind. In the end, since the founding days of Wall Street, family and educational connections have often counted for more than merit, for the obvious reason that someone who is well-connected can often lead to money flows that even the brightest unconnected employee can’t duplicate. Good luck to the investigators, but this is one banking practice that will be with us for a long time to come.

*Sprog: British term for offspring.

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Carlos Alvarenga

Founder and CEO at KatalystNet and Adjunct Professor in the Logistics, Business and Public Policy Department at the University of Maryland’s Robert E. Smith School of Business.

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