November 30, 2016 1:00 pm JST
China up close

JPMorgan scandal could make Xi-Trump relations more awkward

Ripples from bank's bribery case lap at Chinese president's power base

KATSUJI NAKAZAWA, Nikkei senior staff writer

President Xi Jinping, center, relies on support from China's "princelings," some of whom wield influence over economic ties with the U.S. (Photo by Akira Kodaka)

TOKYO -- Bribery allegations against one of the biggest U.S. financial institutions are reverberating in Chinese political circles, and could further complicate the countries' relationship just as Donald Trump enters the Oval Office. 

On Nov. 17, as Chinese President Xi Jinping began a tour of Latin America, U.S. regulators said JPMorgan had hired nearly 100 offspring, relatives and friends of executives at state-run Chinese companies. This, the authorities allege, helped the bank bring in more than $100 million worth of operating revenue.

A Justice Department official said the program, dubbed "Sons and Daughters," amounted to "bribery by another name."

JPMorgan subsequently agreed to pay a $264 million settlement, factoring in allegations of similar practices in other Asian countries. The bank thus avoided prosecution under the U.S. Foreign Corrupt Practices Act.

But while the case may be resolved, the ripple effects are just beginning to spread. And those ripples are brushing up against Xi's power base.

Too close for comfort

The descendants of revolutionary-era Chinese Communist Party leaders and top bureaucrats are called the "second red generation," the "princelings" or the "second generation of government officials." Thanks in no small part to their parents and relatives, many of these people land prime positions at major companies under the party's control. They also use their family connections to help foreign companies do business in China.

Xi is a princeling himself -- his father, Xi Zhongxun, served as vice premier. His government is backed by descendants of party leaders and influential bureaucrats. While Xi has swept aside his political rivals with his anti-corruption campaign, few princelings or kin of high-level officials have been arrested. For the most part, "ladder climbers" are the ones who have been thrown in jail.

As a political late bloomer, the president leans heavily on his support base, meaning he is unlikely to break the princeling bond. He draws a clear line between allies and foes and systematically cracks down on the latter.

U.S. authorities draw no such line. While they zeroed in on JPMorgan's Sons and Daughters program, which ran for seven years through 2013, they have also been scrutinizing cases since Xi took the Communist Party helm in 2012. In the process of looking at favored referrals, the U.S. Securities and Exchange Commission turned its gaze on Wang Qishan, who leads Xi's anti-corruption crusade as secretary of the Central Commission for Discipline Inspection.

Wang is a princeling by marriage -- his wife is a daughter of a former party leader. According to The Wall Street Journal and other media, the SEC demanded that JPMorgan hand over reference materials and records of communication with high-ranking Chinese officials -- including Wang.

As vice premier in charge of financial affairs from 2008 to 2013, Wang was deeply involved in negotiations with U.S. financial companies.

Meanwhile, the son of current Chinese Commerce Minister Gao Hucheng -- who leads China in trade negotiations with the U.S. -- is one of those employed by JPMorgan, internal bank emails reportedly showed.

In 2013, furthermore, JPMorgan awarded a lucrative consulting contract to the daughter of then-Premier Wen Jiabao, allegedly in the hope of doing business with state enterprises under her father's control, The New York Times reported. 

After Bo Xilai, the ex-party chief in Chongqing, and Zhou Yongkang, a former senior party leader, were swept up in the anti-graft campaign, a well-known leftist intellectual in Beijing told reporters that the government ought to arrest Wen as well. While lining up behind Xi, a group of leftist scholars denounced Wen as nothing more than a showman and called for an investigation of his family.

In any case, it seems a good bet that corruption within the party goes well beyond disgraced leaders like Zhou, Ling Jihua -- a close aid to former President Hu Jintao -- and others caught in Xi's dragnet. And the nepotistic hiring at JPMorgan is likely the tip of the iceberg. Other financial institutions are believed to have taken a similar approach in China. 

Entwined economies

But even as some corruption is brought to light, other cases remain in the dark. Part of the problem may be the Byzantine nature of U.S.-China economic relations. There are more than 100 frameworks for cooperation between the countries, largely in the economic realm. 

High-profile deals like Anbang Insurance Group's purchase of New York's Waldorf Astoria hotel illustrate how much the countries -- and their elites-- have become intertwined. Anbang's management includes the grandson-in-law of former paramount leader Deng Xiaoping and the son of former Vice Premier and Foreign Minister Chen Yi. U.S. presidents used to stay at the Waldorf when they visit the Big Apple.

Anbang also took part in bidding for Starwood Hotels and Resorts Worldwide, one of the world's largest hotel operators.

One Chinese bureaucrat stressed there are countless behind-the-scenes connections. So despite Trump's anti-China rhetoric on the campaign trail, the bureaucrat was confident the bilateral links will barely be affected by his presidency.

This raises key questions about the Trump administration's China policy.

Will the president-elect's real estate background prompt him to focus on taking advantage of China's wealth? Or, after railing against vested interests and crony capitalism in stump speeches, will he take a tough, law-and-order approach? 

Set for a showdown?

Tensions are already running high. Aside from the JPMorgan case, the U.S. has come out against granting China market economy status under the World Trade Organization rules. This is largely due to China's excessive production of steel products -- and its market-distorting exports of those products at low prices.

The U.S. announcement provoked strong protests from China, which maintains it has a right to gain the status in December -- the 15th anniversary of its accession to the WTO. 

Evidently, however, China is not a true market economy if it enables businesses to reap profits by effectively bribing elite families.

The mere existence of Xi's anti-corruption campaign is an acknowledgment that power and status have long been bargaining chips -- be it among generals in the People's Liberation Army or members of the National People's Congress. By apparently running afoul of the U.S. Foreign Corrupt Practices Act, American financial institutions happened to expose more of the corruption in China.

At this point, it is anyone's guess how Trump will deal with China. He has pledged to brand Beijing a currency manipulator -- a label Xi's government will want to avoid at all costs.

For Xi, who has prided himself on maintaining mutually reliant economic relations with the U.S. despite security friction, the president-elect must be a worrying X factor.

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