Paul Donovan, chief economist at UBS Global Wealth Management, mentioned “Chinese pigs” in his comments about swine flu and its effects on the market during a podcast last week. “Chinese consumer prices rose,” he said. “This was mainly due to sick pigs. Does this matter? It matters if you are a Chinese pig.”
Chinese social media users went into a tizzy, condemning the comments as offensive. Since then, various Chinese state-owned firms have sought to punish UBS.
Almost immediately, Haitong International Securities, cut ties between its Hong Kong unit and UBS. On Monday, state-owned CRCC made it clear that it would no longer use UBS for its proposed dollar bond, having initially mandated the Swiss bank to the syndicate team. The Chinese Securities Association of Hong Kong is demanding the bank fire Donovan, despite apologies from both.
Needless to say, the response to Donovan’s comments — which were meant to be humorous — has been overblown by a country that’s feeling vulnerable on the global stage. China is dealing with battles on multiple borders, with the US trade war saga taking its toll, and the massive protests in Hong Kong challenging Beijing’s authority over the city. Had Donovan made his comments at any other time, there would probably have been a much more muted response. But having such a sensitive backdrop made the complaints all the louder, and the repercussions, as CRCC's action shows, look set to rumble on.
It is likely that some bankers reacted with glee to the news, knowing that reduced mandates for UBS mean more business to go around for everyone else. But their celebrations may prove to be short-lived. The incident offers a serious warning to banks that deal with China, not least because the reaction to Donovan's comments was so unpredictable.
Donovan's comments will not bring down the Chinese swine market. Indeed, the actual content of what he said is probably the least remarkable part of this whole episode. But the response to those few words shows how quickly things can turn for foreign banks operating in the country.
That can easily result in self-censorship by banks if they put too much weight on the possibility that any misstep will cause them to lose out on Chinese clients and deals. For a market that is already quite opaque, the last thing investors need is muddled and guarded comments from banks trying not to offend the Chinese regulators.
UBS, which declined to comment about the situation, has done everything it possibly could, short of firing its economist, which would be unjustifiable. It has put Donovan on leave, deleted the offending podcast script from its website and offered an apology. The loss of the CRCC deal will likely be a minor one for the bank, which ranks eighth among bookrunners for Asia Pacific (ex-Japan) G3 debt capital markets year-to-date, according to Dealogic.
The furore around the pig comments will die down soon enough, and the market will move on. It also seems unlikely that many more companies will dump UBS from their deals. But the hostility is a reminder that, when dealing with China, things can turn sour at the drop of a hat. Banks should be prepared to deal with that.