China’s anti-corruption agency takes aim at the financial industry | The Signal with Lizzi Lee

Below is a transcript of the video:

Lizzi Lee: Hello and welcome to this episode of Live with Lizzi Lee, powered by The China Project. Today joining me is Benjamin Qiu. Benjamin Qiu is a partner with the law firm Loeb & Loeb. He handles venture capital financing for Chinese companies and others. Benjamin is also a registered arbitrator with the Shenzhen Court of International Arbitration. Thank you so much for joining me, Benjamin. 

Benjamin Qiu: Thank you. Glad to be here. 

Lizzi: So, Benjamin, you recently penned an article for Nikkei Asian Review on China’s anti-corruption agency, now having its financial sector in sight. So that’s what I want to discuss with you today. As you know, Central Commission for Discipline Inspection, China’s top anti-graft agency, has recently criticized the so-called financial elitism and called for a crackdown on the financial sector. What’s your read on this? Who are the people that a CCDI is targeting? 

Benjamin: Yes, many people have noticed the anti-corruption campaign in China has been ongoing for around ten years. And all sectors, whether it’s power, energy-related, the state-owned enterprises, or car companies, including banking systems, have been under review for several years. And my reading of this is we might be looking at the start of the anti-corruption campaign 2.0 because CCDI is a very powerful anti-corruption arm of the party itself. It’s, strictly speaking, not an arm of the State Council but of the party. And they have access to all kinds of tools to detain, interrogate, and investigate any targets. And in the past, most of the targets tend to be some persons or companies relating to state power, government officials or state-owned companies. 

But now this new article that came out a week ago from CCDI broadly criticizes cronyism, all kinds of questionable gray zone type of corruption practice, such as the political-business revolving door phenomenon, and also down to the personal lifestyle of financial professionals, presumably relating to government officials were state-owned company employees. But it’s not clear. We might be looking at a broader campaign where, you know, businesspeople mingle with government officials, and then, you know, they go to dinner and or go to a yacht in Hong Kong. None of those seems to be going to be tolerated anymore. And it begs the question, why be a financial professional if you cannot live a certain lifestyle? 

Lizzi: Fascinating. In the article, you also talk about the practice of serving as another party’s nominee for corporate holdings. Can you talk a little more about that whole problem? How prevalent is that practice, and why is it potentially problematic? 

Benjamin: It is very prevalent and is nothing new. There’s nothing illegal about it. It’s permitted under PRC law, and oftentimes it’s for completely innocent reasons. For example, a founder may be holding a foreign passport, and a company that has an interest in China by regulations cannot have foreign shareholders. That person asks a co-founder or his or her family members to hold shares on that person’s behalf. It happens all the time. Or oftentimes. There’s some wise or influential person who has helped the company. And then, out of gratitude, the company decides that that person should be allocated a certain number of shares. But because the person has some other full-time job where that person holds a foreign passport, and then the founder or somebody holds the shares on behalf of that person. That happens all the time. But of course, it becomes questionable and potentially related to the corruption issue if that person is current or a recently retired, let’s say, a government official who influences this sector. 

So going back to the CCI mandate. It broadly talks about cronyism having, you know, influence and at the same time speaking out on behalf of certain “interest groups.”. Well, on the one hand, if you are looking at a government official potentially holding shares in a company in a corrupt situation, of course, that’s probably wrong. That should be undone. But oftentimes, companies have legitimate reasons to talk to officials, regulators, and decision-makers. You know what? If the companies or certain activist groups have, you know, comments about environmental regulations, about labor regulations, there will be some chilling effect on those. 

Lizzi: As you briefly alluded to, Beijing seems to be tightening its leash on financial market players. Again, anti-corruption 2.0. And now we’ve heard of the detention of high-profile bankers like Bao Fan. What’s the implication for private companies? How are they feeling now? 

Benjamin: Well, the implications are huge. On the one hand, he’s not the first person in the Chinese business world or the financial professional world that has been detained in a situation that’s completely without transparency or due process. But we recall that right after the Silicon Valley dot-com bust, probably the top American banker… You know, people sometimes on the market try to flatter Bao Fan by saying he’s China’s Frank Quattrone. Frank Quattrone, a Credit Suisse banker in the late nineties, made a lot of deals in Silicon Valley and some of the practices became questionable. And, of course, some people would argue, or his lawyer would argue that after the dot com bust, the regulators wanted to make an example of some people. 

He got into several legal troubles. But, well, that’s where the difference starts. Well, he has lawyers. He went through the process. He had his lawyer have a plea bargain with the federal agency enforcement. And he never served any jail time. And sure enough, since a few years ago, he had a quite successful second start of his financial dealmaking career. So, you know, we were all watching this because if you are an investor who invested in some of the top technology companies in China over the past 5 to 10 years, chances are both on or China Renaissance was involved in the deal. Now you will be very nervous. Well, what would happen to your deal? Would that be ordered to unwind? What happened to the company that you invested in? And most importantly, who would be the next? You know, Bao Fan was involved in several deals in recent years, including Didi and many others; all those founders must be asking the question now. Even before his arrest, a lot of the founders from China are asking each other vocally, what’s the point of getting rich if accountability and transparency are still not there yet? So the people asking those questions would just be louder now. Or they’re just moving their money and their family and their company out of China. 

Lizzi: Right. And speaking of this lack of transparency, a lot of people in our audience are wondering what the regulation changes or the most updated regulations regarding the overseas stock market listing are。。。 There’s been a lot of chatter about rules being changed. Are rules being tightened？ What’s the future of VIE structure? 

Benjamin: Sure. Well, in theory, the future of a value structure is bright, as many people know. Well, first of all, for those unfamiliar, the structure is essentially fairly complex, onshore plus offshore. I’m talking from China’s perspective-onshore plus offshore company structure, which includes a variable interest entity, meaning a company registered and operates in China as part of that overall structure. 

So, you know, by going through that kind of costly and complicated structure, the goal for a company, having that kind of structure, is generally to get around the tight foreign currency control to satisfy Beijing and also the regulations about overseas financial transactions, including IPO, or going public on overseas markets. So the CCRC, the China Securities Regulation Commission securities regulator, published a bundle of rules which will come into effect on March 31st, the end of this month. Essentially, part of that clarifies that the value structure is legitimate. It is no longer considered implied. That is no longer considered a way to get around Beijing’s regulations. And it doesn’t add any additional barriers in the form of approval. You need to register your plan to go public overseas, and then you can do it. Now you need to report it to the Beijing regulators periodically. So in a way, that’s good news. At the same time, after the Zero-covid policy ends, Beijing seems to be making many efforts to reopen the economy. And today’s Chinese companies are still hungry for foreign technology and capital and expertise that comes with that foreign capital. But of course, the question is how many companies will be too nervous to try still to raise funds or go public overseas, considering what happened to, you know, Didi and and and and several other companies you were talking about the prominent cases. Those cases were chilling because people will say, okay, so VIE is considered legitimate. China still is hungry for technology and capital. But so what? Look at Bao Fan. Look at the demographics and the overall sentiment of the founders and entrepreneurs from China. So we will have question marks. We’ll see.