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One after another, bankers at China International Capital Corp. — China’s premier investment bank –  are pledging loyalty to the Communist Party, underscoring a new reality for Wall Street-style capitalists in the era of Xi Jinping.

Today on The Big Take Asia, host David Gura speaks with Bloomberg’s Cathy Chan about the tug-of-war between communism and capitalism at the “Morgan Stanley of China,” and how politics are redefining Chinese finance.

Here is a lightly edited transcript of the conversation:

David Gura: The oldest investment bank in China is a shadow of its former self. The Beijing-based China International Capital Corp. – or CICC — used to compete for business and talent with some of the biggest firms on Wall Street. The bank was designed to raise the profile of China and its state-run companies, and to attract more foreign investment. It was a symbol of the communist country’s embrace of capitalism, under former Chinese President Jiang Zemin. But Cathy Chan, who covers Asia’s investment banks for Bloomberg, says CICC’s priorities have changed under new leadership. And so have its ambitions. 

Cathy Chan: I think that internal culture has shifted from being aggressive and driven, to largely complacent. 

Gura: Cathy says, the firm, which once embraced the West, is now turning inward, deepening its ties to the Chinese Communist Party: 

Chan: It was revealed that 30 percent of the staff become Communist Party members. Having 30 percent is a pretty high number. Quite an astonishing figure. 

Gura: One of Cathy’s sources told her about a recent meeting of CICC senior staff. He said they unfurled a Chinese flag, and a banner with slogans by President Xi Jinping, the current leader of the Chinese Communist Party. And something else stood out to Cathy’s source. 

Chan: He was astonished to see a lot of people wearing the CCP badges. Basically, it features a red background with a golden yellow hammer and sickle display on the left. It symbolizes the party’s roots and socialist ideals. 

Gura: It’s not something you would’ve seen during the bank’s heyday, when there were fewer party members among the CICC’s ranks, and they wouldn’t have advertised it. And what’s happening at CICC could raise eyebrows among global investors, who are already anxious about China’s opaqueness and find the business environment difficult to navigate. 

Chan: It basically tells you a liberal, westernized company or entity in China will not grow well because they will not be very much welcomed. What China wants is a company or entity that only serves the interests of the party.

Gura: This is The Big Take Asia, from Bloomberg News. I’m David Gura. Every week, we take you inside some of the world's biggest and most powerful economies, and the markets, tycoons and businesses that drive this ever-shifting region. On today’s episode, the transformation of China’s oldest investment bank and what that means for the future of finance in China.

Gura: The story of the China International Capital Corp. begins almost 30 years ago. 

Chan: CICC was created in 1995. It was a joint venture between Morgan Stanley, and China Construction Bank and backed by several other investors in Hong Kong and China.

Gura: It was a new arrangement, and at that time, Morgan Stanley’s president called it a “landmark in China's move toward becoming a full participant in, and a beneficiary of, the international capital markets.” The goal, Bloomberg’s Cathy Chan says, was to create a firm that would help Chinese companies raise money from overseas investors. 

Chan: The idea is really to help all these state-owned companies in China with structure, reform, and to introduce foreign investors to invest into these companies.

Gura: Of course, to do that successfully, CICC needed to hire top talent, and the bank was on the lookout for a specific type: 

Chan: They actually didn't want to attract bankers from Goldman and Morgan Stanley. They only want bankers who have really good knowledge base in China, about China. So they were more focusing on the Chinese who study abroad or have westernized minds. 

Gura: Cathy says these people have a nickname.

Chan: People who studied abroad and came back, they are called “sea turtles.” Basically, having the westernized knowledge and skills to run the firm with pretty westernized thinking.

Gura: CICC was basically a startup, without the name recognition of its more-established peers. But as the company grew, it modeled itself after the big Western banks that came before it, in New York and London. 

Chan: In the early days, because of the backers, you have Morgan Stanley and also GIC, behind, definitely, it was a pretty liberalized, westernized way of managing things.

Gura: That seemed to work; CICC was competitive. It became a trusted adviser to Chinese companies, and introduced them to investors who saw opportunity in China.

Chan: And so CICC has been making really good profit because of these valuable advice given to the Chinese companies. And they are very competitive among the global banks in China because they are the only one who knows the East and the West. And, competitive in the sense that they are paying the bankers really well sometimes, better than the people, the bankers get at Morgan Stanley, Goldman is getting.

Gura: But after 15 years, Morgan Stanley decided to pull out of the joint venture. It partnered with another local firm – China Fortune Securities Co. – that Morgan Stanley hoped would give it more influence over management and securities. 

Gura: What happened when Morgan Stanley pulled out of this arrangement? 

Chan: Hasn't changed much except to become more very CICC, a profit-driven company, very aggressive, even more independent from Morgan Stanley, meaning they can pursue their own goals, pursue their own clients, strategies. I mean, they're very, very China focused. And they don't have the restrictions that face Morgan Stanley or Goldman Sachs. So after Morgan Stanley left, CICC became even more prosperous.

Gura: But then, something changed. A few years ago, China’s president started to signal a shift in the country’s economic priorities. And he summed it up in a political slogan: “common prosperity.” 

Chan: Common prosperity drive is introduced by President Xi Jinping in 2021. The aim of that is to create an environment with relatively equal distribution of wealth. 

Gura: There is this inherent tension between communism and capitalism — they don’t go hand in hand. And practically speaking, finding some kind of compromise between the two was not an easy sell to investment bankers. For those sea turtles, the water at CICC wasn’t as warm as it used to be. 

Chan: Being westernized, meaning you are not serving the country well, meaning your priority is not the country. It's not party building. Your priority is your own wealth, your enriching your personal life. That's not the ethos of the Communist Party. So in a way the CICC bankers, if you are more on the Western side, you are definitely feeling very awkward in the firm.

Gura: Xi’s common prosperity drive had a profound impact on the bank’s performance. But just how did it go from being a premier investment bank to fighting for its future? That’s after the break.

Gura: China’s President Xi Jinping, who’s also the general secretary of the Chinese Communist Party, rolled out his “common prosperity” drive in 2021. It was a directive intended to share a slower-growing economy more equitably. And it had an outsized impact on CICC, China’s oldest investment bank. Amid a slump in deal making, bankers at CICC have been seeing their bonuses slashed for the past three years. Some senior bankers saw their total compensation cut by more than 40 percent last year. And this April, CICC demoted some of its senior bankers and cut their base salaries even further.

Chan: It actually happened quite slowly, 23 is really the year that you've seen a lot of changes because especially after this new chairman came in from a state-owned background, Galaxy Securities, and once this new guy came in, the whole firm really changed, the culture, everything.  People, when they see the clients, if it's SOE clients, state-owned clients, they will just display the five star flags, you know, displaying presidency slogan, how to build a party, build a country, that sort of thing. It happened not until late last year or early this year.

Gura: Can you introduce us to the chairman, the man running this company?

Chan: The chairman is called Chen Liang. And he came on board in November 2023. After he came on board, the whole firm is being kind of run by him, characterized by a lot of slogan readings and, basically, upholding the values of the party. And he did that pretty much in every major meeting, before the actual meeting starts.

Gura: Cathy, we've talked about the talent that this bank could attract, and compensation getting cut by, by 40%. What effect has that had on the ability to attract talent, to retain talent, and also just on morale within this bank? 

Chan: Definitely, they are not able to retain any talent or attract talent, and that's why you see the morale has been bad. A lot of people I've talked to, they are basically “lying flat,” trying to keep their job unless they find a new one so everyone’s pretty much looking for jobs elsewhere.

Gura: We reached out to CICC, but its spokeswoman declined to comment. For those who’ve stayed put, almost everything about the job that could change has changed, Cathy says. 

Chan: Bankers, who are visiting SOEs, state-owned companies, they will have to display this flag, or the slogans to kind of make the client feel like they are on the same side. That is symbolizing unity and alignment with the party. And lower down, operationally, Chairman Chen is basically telling people you have to work hard for the party. We are not here to promote our self interest. So, because of that change, bankers are generally thinking the hope of CICC is gone. And people are no longer working hard on the investment banking floors in CICC in China. Before 6 p.m. it's pretty much empty, as I was told. People no longer work long hours. They were just be there and then left early.

Gura: This is just an ethos of, of being a member of the party. You wouldn't, you wouldn't pull an all nighter. You wouldn't stay late, you wouldn’t keep working.

Chan: I mean, think about if you are no longer working to, for your own interest, why would you bother, kind of working so hard? 

Gura: Cathy, you've described how there are now so many people who work at this bank who are members of the party, display signs of their membership. Is it the expectation now, if you work at this bank, that you do join the party? And if so, what are the potential benefits of doing that to those bankers who work at CICC?

Chan: Being a party member it's getting more important in this context because if you are performing and you are a party member, that means the chance of you getting promoted is higher than if you're not. 

Gura: I'd love for you to situate this in the economic climate we're in right now, the business climate that we're in. This is a bank whose bread and butter is IPOs, is taking companies public, and this has not been a great time for that, nor is it looking like that’s going to improve any time soon. 

Chan: That’s right. Especially for Chinese companies selling stocks overseas, people generally don't believe that there will be a major bounce back, at least this year. Although we are seeing more deals, but we will never be able to go back to the old days. That's the general thinking. 

Gura: The grim mood is reflected in CICC’s stock price, which is almost half what it was two years ago. Profits and revenue have declined, and the bank has been losing market share. You almost have to squint to see the original CICC at this point, and Cathy says the firm’s future looks very different: 

Chan: We have a professor in Hong Kong, basically thinking CICC will disappear. The future of CICC would be, very much the same as the future of other state-owned brokerages in China. They are there to serve the country. The international clients, investors, will not be their major focus clientele. 

Gura: All of this has signaled the end of what was an ambitious experiment back in 1995, when CICC was started. 

Chan: The bank itself would not disappear, but the culture of the bank, the original access to the bank will disappear eventually. That means, for the global banks, I mean, they will see a disappearance of a strong competitor they used to face, when it comes to China deals.

Gura: For global investors who are watching CICC's cultural and ideological transformation, Cathy says there's a lesson here.

Chan: I think China doesn't really want to be seen as converting the foreign firms into a CCP entity. And that probably will scare a lot of investors. Not yet. But if you are based in China, if you have to deal with the local governments and regulators more for business purposes, you probably want to be seen as more China-like rather than very westernized, or very US-like.

(Added the transcript)

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