Just how far does the empire of the Chinese 'princelings' go?

A footnote in yesterday’s results reveals HSBC is the latest Western bank to be investigated by US regulators about the practice of hiring the well-connected sons and daughters of Communist Party officials

HSBC’s headquarters in Hong Kong. The bank will say only that it is co-operating with the SEC inquiry into hiring in China (Reuters)

Earlier this year the Communist Party of China started censoring a seemingly innocuous phrase that was cropping up with increasing regularity on Chinese social media.

Zhao, a surname as common in China as Smith is in Britain, was slowly conquering China’s top social networks including WeChat and Weibo – sparking the crackdown by censors.

But Zhao was not a pop star or a Shangywood film celebrity. It was a cleverly disguised code word used by tech-savvy Chinese youth to criticise the so-called princelings of China’s Communist elite, amid growing unease about so-called crony capitalism in the world’s biggest economy.

The cloak-and-dagger tactics of Chinese web users underscores the sensitivity around princelings, a derogatory term for the sons, daughters and relatives of powerful Chinese officials who run state-owned enterprises.

Well-educated, bi-lingual and extremely wealthy, the princelings, or second-generation reds as they are sometimes known, are drawing fire from China’s rising middle class.

The sensitivity surrounding this new political class was heightened yesterday when Europe’s biggest bank, HSBC, revealed that it had been dragged into a long-running probe by the US Securities and Exchange Commission (SEC) looking at the relationship between princelings and Western investment banks.

HSBC is just the latest lender to be drawn into the investigation, which is examining the practice of banks employing the well-connected sons and daughters of senior Chinese officials, which cynics argue generates lucrative business contracts for the banks involved.

HSBC admitted that US regulators had knocked on its door asking for information about hiring candidates “referred by or related to government officials or employees of state-owned enterprises”, without giving further specifics.

“HSBC has received various requests for information and is co-operating with the SEC’s investigation,” it said in a short statement buried on page 454 of its mammoth 500-page annual report.

When asked the bank declined to give further details about the information requested, or how many staff it had employed with links to the Chinese state.

China Everbright boss Tang Shuangning’s son was hired by JP Morgan (Reuters)

The admission has surprised and spooked some concerned about the bank’s growing roster of regulatory headaches, but HSBC is not alone in facing the scrutiny of regulators over is relationship to princelings.

The SEC has reportedly asked scores of banks to hand over documents related to their recruitment of young professionals with links to Chinese state officials.

Among those who have publicly disclosed such requests about hiring practices in Asia are JP Morgan, Goldman Sachs and Deutsche Bank.

Citigroup, Morgan Stanley and Credit Suisse are also reportedly under investigation, although they have not publicly commented.

None of the banks involved has been accused of any wrongdoing.

The princeling saga was thrown into sharp focus after it emerged that JP Morgan had operated a recruitment programme with the explicit aim of employing well-connected young princelings as interns and associates, and to win M&A and capital market mandates in China.

Under the scheme, known internally as Sons and Daughters, it reportedly kept a spreadsheet listing the recruits and what deal the posting had generated.

Three quarters of the Chinese companies that the bank helped float had some link to employees on the Sons and Daughters programme, which is understood to have hired about 222 candidates.

The most eye-catching example turned up by investigators at the New York Times was Tang Xiaoning, the son of the China Everbright Group chairman Tang Shuangning.

The bank worked on the flotation of a subsidiary of China Everbright called Everbright Bank, after the younger Mr Tang was recruited. JP Morgan was later forced to pull out of the deal due to the controversy. JP Morgan China’s then-chairman, Charles Li, currently head of the Hong Kong Stock Exchange, has since become embroiled in the affair after emails surfaced suggesting he encouraged the bank to recruit family members of senior Communist Party officials.

“It is impossible for me to recall specific aspects of the JP Morgan internship programme and particular referral hiring decisions,” he said last year.

Kamel Mellahi, a China specialist at Warwick Business School, said many companies had derived significant value from the princelings’ political connections. “Political connections are more valuable when there is an institutional void,” he said. “Their connections help firms navigate the institutional maze of obtaining permits, loans and other valuable resources.”

The pressure to access Chinese M&A activity intensified after the financial crisis, when the downturn took the wind out of the sails of deal making in developed markets.

Goldman Sachs has long been the dominant deal maker in the region, followed by Morgan Stanley, but HSBC has crept up the rankings.

It is currently the third biggest M&A adviser in region based on the value of deals, according to Dealogic, although this does not imply a link with its recruitment practices in the region.

Most of its work involves joint advisory roles on Hong Kong-based companies but it has also won roles on a number of deals involving Chinese state-owned enterprises.

Last year, for example, it advised China General Nuclear Power on its $3.9bn (£2.7bn) takeover of Edra Global Energy and it is currently advising ChemChina on its bid for the agribusiness firm Syngenta.

It also advised China Overseas Land & Investment and China National Cereals, Oils and Foodstuffs Corp (CNCOF) on deals.

At the heart of the SEC probe is the US Foreign Corrupt Practices Act, which prohibits US firms from giving overseas firms anything of value to get an unfair advantage over rivals.

Whether the sons and daughters of Chinese state officials won their banking roles through nepotism – a practice which can be levelled to a greater or lesser extent at most firms in the City – or talent is hard to judge.

But with rising anger on Chinese social networks about the country’s elites it is at the forefront of the political agenda on both sides of the Pacific.