Drink a beer with your 'enemy'

Last week, I went for a beer at Hong Kong FCC with James, a friend from London. He had two of his other friends there. I exchanged business cards with the two. One of the two was shocked and said, "Joe, do you remember that I sued you 18 years ago? " Yes. I did. After the beer, I sent this 2015 article to the senior counsel at Richards Butler.

A cautionary tale from the muddy waters of Chinese business

FINANCIAL TIMES, 21 May 2015, by Joe Zhang,

Fifteen years ago, as the head of China research at UBS, I was threatened by two Chinese companies listed on the Hong Kong Stock Exchange. One of the two, Greencool Technology, sued me and my employer for libel. The other, Euro-Asia Agricultural Holdings, was equally threatening. I had written negative research on both companies, and their stock prices had tanked as a result.

Within two years, both companies, which boasted market values of billions of dollars at their peak, had gone bust. And then the chairmen of the day — Gu Chujun of Greencool and Yang Bin of Euro-Asia — were put behind bars in China.

Was justice served? No — at least, not completely. Both chairmen were punished for their criminal offences. But in neither case was their fraud in the capital markets mentioned, let alone punished. The large numbers of investment bankers, auditors, directors, corporate executives involved have escaped proper scrutiny. Worst of all, neither the relevant government departments nor the public have learnt a lesson.

To me, sleepless nights were not the only damage I suffered from the case. I have endured censure from many of the hundreds of retail and even institutional investors. They blamed me for their financial losses: had I not raised questions about these troubled companies, they might have unloaded the stocks in good time and in doing so booked tidy profits — or so they argued. Many questioned my motives; some even asked whether my employer held short positions in the shares, meaning it would benefit from plunging prices.

In those days, despite the high-profile court cases and widespread media coverage of my role, no government agency ever asked me about my doubts regarding the two companies. They never inquired about the investigative field trips — to check out whether, say, certain factories were indeed producing the widgets they said they were producing — that sparked my concern. I was largely left to fend for myself. Having become known as a “black mouth” — someone who calls public attention to corporate wrongdoing — I received strange, sometimes hostile, stares of recognition on the streets of Hong Kong and big Chinese cities.

My employer, UBS, was one of my few sources of support. It not only funded my legal bills but also allowed me to continue in my job. My colleagues in the equity sales, wealth management and investment banking departments also faced negative comments from customers, including rich individuals, fund houses and corporate clients.

Today, I am the chairman of a company that is publicly quoted in Hong Kong, and I sit on the boards of others. Laws and rules for public companies and their directors are clear, if tedious. But in my view there is still far too much tolerance in the government and among the Chinese public at large about illegal and improper behaviour in the capital markets.

Everyone seems to agree that stealing money is both a crime and ethically wrong; yet when it comes to stealing money from crowds (the market), or from a large number of strangers (again, the market), our moral judgment is somehow less clear if we are not the direct victims. Even when we are the victims, the sense of grievance fades very quickly. Illegal and improper behaviour is sometimes even admired as financial engineering or deft use of ingenious skills.

When large numbers of people throw rubbish in the street and we tolerate it, we should not be surprised to find that our streets are as dirty as they are. When polluters go unpunished, we must be prepared to live in a toxic environment — and we do. Likewise when the regulators clamp down on stock market manipulation, many in the public seem at best uninterested — with predictable consequences. When the anti-corruption drive began to unfold in China two years ago, parts of the business world seemed concerned mainly about a negative effect on the health of the economy. They invoked the old saying: “If the water is too clean, you will not catch any fish”; or, to put it another way, the creatures will survive only in “muddy waters”. The inference is: “Do not be too hard on crooks or corrupt officials. Do not be too strict on friends. No one is perfect.”

Corporate governance has greatly improved in this part of the world in the past 15 years. But in my judgment there is still much more the regulators can do. Some kinds of wrongdoing in the capital markets are almost public knowledge. The only thing the government needs is more resources, more talent and more determination. A market overseen by tough regulators benefits all.

The writer is chairman of China Smartpay Group Holdings Limited and author of ‘Inside China’s Shadow Banking’