JPMorgan in China: Why 'Business as Usual' Is a Growing Problem

The SEC's investigation of the financial company for bribery underscores how entrenched favoritism is in hiring -- and why this is an issue that shouldn't be ignored.

There is a wonderful word in Chinese that, soon after arrival in the country, every expatriate learns: guanxi. The most common English translation for guanxi is "relationship", but this only captures part of its meaning. In China, guanxi refers to the total strength of a person's interpersonal connections -- and his ability to leverage these connections in order to get ahead. This, in a country of 1.3 billion, is an essential asset. Having "good guanxi" can mean the difference in getting a job, getting into the right school, or ensuring that a new business venture avoids unnecessary government attention. Intractable problems can be resolved, quickly and without undue stress, by "pulling" guanxi.

So this brings us to the case of JPMorgan, now under investigation by the SEC for allegedly hiring the children of high-ranking Chinese officials in exchange for lucrative business deals. Hiring the sons and daughters of important Chinese officials is hardly unusual -- and not illegal -- for a company with Chinese business interests, but the SEC is weighing whether these hires led directly to bank business -- and thus violated the Foreign Corrupt Practices Act.

JPMorgan's alleged transgressions have met with a collective shrug in the United States, where Americans of privilege are long used to pulling guanxi in order to obtain plum jobs. Writing in the New York Times, Andrew Ross Sorkin defends this practice as practically harmless, even saying that the children of elite are better candidates for these jobs because -- lo and behold! -- they have better contacts and thus are more useful than mere commoners. Or, as the Chinese would say, they simply have more guanxi, a commodity of real value.

Sorkin's probably right that from Wall Street's point of view, hiring the well-connected -- people who are usually intelligent and competent, anyway -- makes sense. But what does it say about society as a whole?  As The Atlantic Wire's Dashiell Bennett and others have pointed out, just because a Chelsea Clinton has the wit and education to succeed in finance doesn't mean that other members of her Stanford graduating class -- or those with less prestigious educational pedigrees -- do not. And over time, only hiring the well-connected seals off the entire industry to outsiders, making a mockery of the Horatio Alger-ism that supposedly underpins American prosperity.

In China, the guanxi problem is even more pronounced. Although bribery is technically illegal in the country, China lacks a regulatory body with the scope, mandate, and independence of the SEC, or any other institution overseeing the relationship between business and politics; which, in China, are so entwined that it would make a K Street lobbyist blush. This is not by accident; one way of explaining Chinese prosperity over the past three decades is that, by and large, business has bought into the political system, while politicians have bought into business.

But the consequences of this guanxi-led business have become apparent in China. First, income inequality has grown over the years to an extent that, by some measurements, China is a more unequal society than the United States. In addition to the effect inequality has had on the economy, a gulf between the well-born and everyone else has emerged in Chinese society. When a 19-year old Chinese student living in Italy was killed in July, many of her compatriots were unsympathetic; after all, in order for her to have gone abroad in the first place, she must have come from money. This was hardly a unique example: throughout the country, there's a pervasive belief that the rich get to play by their own rules. And while there are institutions in China that are supposed to mitigate inequality -- for example the gaokao, China's univeral college entrance examination, gives students from any background a chance to attend elite universities -- class divisions in China have grown worse over the years. Good guanxi has never been so important.

It isn't JPMorgan's responsibility to push for social mobility in China (or the United States), and in any case the company has denied wrongdoing. But whether or not the SEC investigation uncovers any criminality, the story at least highlights an issue that, in China, shouldn't just be ignored.