(Bloomberg) -- UBS Group AG is taking steps to ensure its head start over competitors in China isn’t jeopardized by controversial comments by a senior economist that already cost the firm at least one bond deal.
In meetings with Chinese regulators this week, senior Asia-based executives said that economist Paul Donovan’s use of the phrase “Chinese pig” in an analysis of swine flu wasn’t meant to be derogatory, people with knowledge of the matter said, adding that the incident was discussed in previously scheduled meetings on licensing. Regulators responded that UBS should take extra care with the language it uses in research, said the people, who asked not to be identified because the information is private.
UBS executives came away from the discussions with the impression that the firm’s China business would avoid a material hit from regulators, the people said.
The meetings suggest a measured response by Chinese authorities after Donovan’s comments sparked a social-media outcry but were interpreted by some observers as innocuous. While China’s State-Owned Assets Supervision and Administration Commission has informally advised government-run companies to temporarily suspend hiring UBS for deals, it has stopped short of issuing a ban, people familiar with the matter said.
UBS has been quick to capitalize on China’s moves to further open its financial markets, last year becoming the first global bank to get permission to take a majority stake in an existing onshore securities joint venture. The firestorm over Donovan’s comments, made in a regular audio note, illustrates the balancing act foreign investment banks face in China at a time of heightened political tensions globally, with domestic rivals willing to seize on any missteps.
China Railway Construction Corp., a state-owned infrastructure company, excluded the bank from a bond sale last week. UBS expects to lose a few more debt mandates for smaller government-run companies, but the roles are junior and the loss of fees negligible, a person familiar with the firm said.
“Does this matter? It matters if you are a Chinese pig,” Donovan said in his audio commentary, which was emailed last week. “It matters if you like eating pork in China. It does not really matter to the rest of the world. China does not export a lot of food. The only global relevance would be if Chinese inflation influenced politics and other policies.”
A spokesman for UBS, which publicly apologized for Donovan’s remarks and put him on leave, declined to comment. SASAC didn’t reply to a faxed request for comment. Last week, an association representing Chinese-owned securities firms in Hong Kong called for UBS to dismiss those involved.
UBS raised its stake in UBS Securities Co., the local joint venture, to 51% in December. Chief Executive Officer Sergio Ermotti has already moved to take advantage of winning control, beefing up the ranks of senior executives at the JV. For UBS, already the world’s largest private bank, the swelling ranks of millionaires in China represents a huge untapped business opportunity.
JPMorgan Chase & Co (NYSE:JPM)., Nomura Holdings Inc. and Morgan Stanley (NYSE:MS) have also bought majority stakes in their Chinese JVs or started taking steps to do so. In about two years, China is expected to let foreign banks purchase full ownership -- a move that may spur them to pour more resources into their local operations.
To contact Bloomberg News staff for this story: Cathy Chan in Hong Kong at kchan14@bloomberg.net;Steven Yang in Beijing at kyang74@bloomberg.net
To contact the editors responsible for this story: Philip Lagerkranser at lagerkranser@bloomberg.net, ;Shiyin Chen at schen37@bloomberg.net, Michael Patterson
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