Goldman Sachs' China problem, US announces support for Taiwan’s UN participation, & China vows to help the Taliban rebuild Afghanistan -- China Boss News 11.01.21
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Goldman Sachs’ China problem
Wall Street firm Goldman Sachs announced that it finally received the “green light” to proceed under full ownership of its China operations last month:
October 17th Press Statement (GS):
The firm has received approval from the China Securities Regulatory Commission (CSRC) to take full ownership of Goldman Sachs Gao Hua Securities Company Limited (GSGH), whereby we will acquire the remaining equity interest in GSGH we do not currently own. This marks the start of a new chapter for our China business following a successful 17-year joint venture.
Unfortunately, analysts say, what may have been cause to celebrate only a few years ago might present new challenges for the bank today.
That’s because Goldman is digging itself deeper into the nexus between China's vested interests which are protected by the ruling elite and treated as matters of national security and the nation’s money.
Managing an IPO this ain’t. Going forward, Goldman will be doing business in China’s opaque system under President Xi’s creeping totalitarianism without the benefit of a local partner’s protection or a scapegoat. Moreover, according to FT, “the bank has entered into a relationship with a much bigger Chinese financial institution, ICBC . . . just as Beijing introduces rules that have caused a rupture between the country’s biggest companies and foreign investors.”
That complexity when added to another Goldman is facing - the lack of in-house China experience in its new management staff - is adding risk to the bank’s Mainland business, rather than insulating against it.
FT:
Navigating this new world falls to Todd Leland, who was parachuted in to run the Asia-Pacific business in late 2018, having spent almost all of his 30-year career at Goldman in the US and Europe.
A straight-talking Midwesterner, who speaks no Mandarin, the 61-year-old has spent most of his time in Hong Kong since taking the job. A plan to live part of the time in Shanghai was put on hold when the pandemic hit.
Until recently, Leland’s main task was cleaning up after the 1MDB scandal, where Goldman admitted paying bribes to officials to win work raising funds for the Malaysian sovereign wealth fund and then failing to raise red flags when vast sums of that cash were diverted to personal bank accounts. The large penalties connected to the scandal — including a $3.9bn settlement — have damaged the bank’s reputation well beyond Malaysia and sapped the morale of some Goldman staff.
“The Asia business had a big shock in the last five years and David Solomon needed someone to steady the ship,” said an ex-Goldman investment banker in Hong Kong. “After 1MDB, it became a weird place. My main driver for leaving was looking at the profit and loss and realising we were starting each year with [a big deficit from legal costs].”
It was Leland who agreed to the deal to end the firm’s 20-year relationship with Fang Fenglei of Gao Hua Securities. A former Goldman banker in Hong Kong told FT after the 1MDB scandal, Leland was inspired to push harder to end joint control over China’s operations. We’re unlikely to ever know for sure, of course, but my bet is that Fang went rogue in ways that elevated Goldman’s fraud, anti-bribery violation, and reputational risk.
Situations like that invariably present themselves to foreign companies chained to local wolves in China business. But how to part ways without creating new and powerful enemies would be the other half of Goldman’s risk equation, and I wonder how Leland can run a show dictated by Beijing ringmasters while entertaining English-speaking colleagues over dimsum in Hong Kong.
But that’s not the end of it. Beijing’s new crackdown on the commercial processing and storage of data has upped the ante on China business for all foreign firms, including investment banks, like Goldman’s. Kendra Schaefer, head of tech policy research at Beijing-based consultancy Trivium China, told Reuters:
Overseas IPO audits, cross border transfers and open access to certain types of data stand in the way of Beijing's goal to not only take over supervision of the county's vast data assets but to commoditise them.
And Reuters analysts have said:
The [government’s] plans require a huge bureaucratic effort to categorise, standardise and value data, policy documents show, setting foundations for it to be traded domestically while preventing overseas access to the most sensitive information.
According to the Financial Times, Goldman has already run up against the new initiative that will capstone China’s Great Data Fortress.
FT:
During discussions about Goldman’s application for 100 per cent ownership last year, regulators attempted to prevent the business from sending memos to offices outside the country, according to a person close to the matter.
“We said we can’t conduct business that way,” said a person close to the matter. “That’s representative of how the concerns have risen. We weren’t getting these questions three years ago.”
Add to that Leland’s outside hires -
FT:
The recruitment spree means as much as a third of its China investment banking team are now new people, according to people familiar with the matter. “This is totally un-Goldman, a massive culture shock,” said a second former Goldman banker.
And one can imagine that when charting progress CEO David Soloman is probably reaching for an Alka-Selzer as his choice of bubbly - unless one imagines him foolish.
Finally, something that the Financial Times did not add to its otherwise stellar analysis which I think is crucial to understand is this. In China - legal ownership does not mean control or legal protection.
Worse, it could mean the exact opposite. That’s why, both, private Chinese tycoons and officials with staying power often muddy their ownership records so that their most valuable assets are not targeted by commercial enemies or the state. At the very least, the cleverest among them do not draw attention to themselves by announcing them. That Goldman as a public American firm subject to U.S. commercial and securities law would be denied a similar haziness for its China operations by legal necessity is, yet, another risk that also makes it less, not more, competitive in the Middle Kingdom.
In sum, while it appears that Goldman may have outgrown or felt threatened by its old partnership, ironically, it will still be beholden to and controlled by its new venture with the more powerful - and, likely, more ruthless - state-owned Industrial and Commercial Bank of China (ICBC). As a result, Goldman managers and investors can - and should - expect more of the same: The firm will have to offer up any fintech or investment instruments from its own innovation, as well as gains that might be had AFTER investing its own clients’ money to develop China’s wealth products market - and, if sh*t hits the fan, or President Xi has decided it’s time to kick Common Prosperity, national rejuvenation or xenophobia into high gear, then Goldman’s name - the only one inscribed on the office door - could come up in ways that even an old friend, like Wang Qishan, China’s current Vice President, can’t censor. H-o-o-r-a-y…?
For the rest of Financial Times’ report Goldman Sachs was poised to triumph in China. What happened?, click here. For Reuters’ update Analysis: Beyond security crackdown, Beijing charts state-controlled data market, click here.
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US announces support for Taiwan’s participation in UN system
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