Within the early 2000s, Hank Paulson travelled extensively to China looking for entry to the nation’s monetary markets for Goldman Sachs, the place he was chief govt. The funding financial institution’s high brass believed the deal he ultimately minimize would solely be a brief one.
The considering was that an alliance with Fang Fenglei, a mainland funding banker with peerless connections to the Communist social gathering elite, would endure for just a few years, till the Wall Road establishment was permitted to immediately personal its securities and funding banking enterprise in China.
However as a substitute the association lasted for practically twenty years. Throughout that point the financial advantages flowed primarily to Fang, leaving Goldman determined to unwind the deal.
“We rented his identify however we selected somebody who tried to screw us ultimately,” says one former Goldman banker of a person whom Paulson had lauded as “extraordinary” and a “preternatural networker in a rustic of networkers”.
As Goldman stands on the point of buying a futures dealer, the ultimate piece of its China enterprise, the Monetary Occasions has pieced collectively a full account of a misadventure that the group itself has not often commented on and which barely options in its investor communications.
Interviews with greater than a dozen of Fang’s associates and bankers and a whole bunch of pages of paperwork present how Goldman’s associate wove himself into the material of the financial institution’s Chinese language operations and compelled it to pay way over it had anticipated to realize full possession of the enterprise.
In a press release, Goldman mentioned that “after a profitable 19-year partnership with Gao Hua”, referring to Fang’s native entity, it’s now “the main worldwide funding banking and securities franchise in China”.
Fang, who as soon as advised state media that he didn’t care “what others say about me or how they see me”, didn’t immediately reply to the FT’s requests for touch upon his dealings with Goldman or a later inside dispute at Hopu Funding, a non-public fairness fund he co-founded.
However the saga demonstrates the problem, even for giant world firms, of working in China, particularly when the counterparty has such deep connections to the very best ranges of the ruling social gathering.
And it serves as a cautionary story for the plethora of western banks and buyers which have sought to hitch themselves to China’s financial miracle regardless of growing state management of the economic system.
Fang now runs Hopu, which has $15bn beneath administration and the place he has additionally seen off makes an attempt to take away him. These days, he has turn into an everyday on the China convention circuit, buying and selling on a fame earned whereas steering the inventory choices of a lot of China’s state-owned teams across the flip of the century.
“China nonetheless has its attract,” he advised a gathering in Hong Kong at first of the 12 months, as he labored to boost a fourth billion-dollar-plus fund from overseas buyers.
“China’s present state of affairs offers a chance for buyers, a really uncommon alternative.”
Fang got here of age at a turbulent time for China.
The son of presidency officers, he grew up in Beijing however was despatched to a farm in Interior Mongolia through the Cultural Revolution.
After a stint within the military, he labored his approach up in state posts and met Wang Qishan, a well-connected official who turned a mentor. Wang was chair of China Worldwide Capital Company, the nation’s first funding financial institution, and appointed Fang as its deputy chief govt in 1995. Inside two years he was main the $4bn flotation of the corporate now referred to as China Cell.
As an alternative of handing worldwide underwriting duties to Morgan Stanley, which owned a stake in CICC, Fang introduced in Goldman and shortly emerged as a key determine within the US financial institution’s efforts to interrupt into China. With the political cowl of Wang — by now the mayor of Beijing — the 2 sides fashioned a plan.
First, Goldman paid $62mn to “show its dedication to the Chinese language securities markets” by making complete account holders who misplaced cash at a failed brokerage in Hainan, the place Wang had beforehand been Communist social gathering secretary. That freed up a brokerage licence to challenge to Goldman.
The US financial institution then loaned $100mn to Fang and 5 subordinates, certainly one of whom was his secretary, Xu Jie. They arrange three funding firms which, together with Lenovo’s largest shareholder, Legend Holdings, established Beijing Gao Hua Securities.
Gao Hua and Goldman then arrange a three way partnership, Goldman Sachs Gao Hua Securities, or GSGH, with the US financial institution paying $32mn for the utmost 33 per cent allowed to foreigners.
Goldman’s attorneys in Hong Kong and New York stitched collectively a whole bunch of pages of contracts for Fang and his associates to signal. They pledged their Gao Hua shares to Goldman as collateral for the $100mn mortgage and granted it name choices to purchase these shares and different items of the companies as quickly as Chinese language regulators relaxed overseas possession guidelines.
The supposed impact was to make Fang’s group akin to caretakers of the Wall Road financial institution’s shares. In his e-book Coping with China, Paulson described GSGH as “a three way partnership by which Goldman owned the permissible 33 per cent however had full working management”.
Fang was made chair of each Gao Hua and GSGH and made a Goldman associate. The opposite 5 shareholders additionally took up employees positions.
Paulson dispatched Goldman associate Peter MacDonald to Beijing in 2004 to turn into Gao Hua’s first chief working officer. “Chinese language regulators and bankers needed to see how we might arrange a brokerage from scratch,” recollects MacDonald. “Goldman offered us with all of their methods and tech and mental heft, however our enterprise playing cards mentioned Gao Hua.”
“As soon as Gao Hua was licensed [by China’s securities regulators], Goldman was primarily in a position to [joint venture] with itself,” he provides. The 2 entities shared an workplace and, as they have been majority owned by Chinese language nationals who took the requisite board seats, have been in a position to get hold of a full suite of economic providers licences for Goldman.
The US financial institution gained de facto operational management of each. Gao Hua and GSGH employees logged into Goldman-built IT networks. They have been employed by Goldman’s HR division, labored with Goldman colleagues outdoors China as equals, and rose via the ranks like Goldman staff. However they have been by no means formally employed by Goldman. The US financial institution was constructing a China enterprise that it solely partly owned.
Gao Hua mentioned Goldman introduced know-how and knowhow to each firms however that the Chinese language events “have been unbiased and acted autonomously”.
“There was no query of Goldman utilizing them as proxies,” it added.
In 2007, Fang withdrew from day-to-day involvement in Goldman’s China enterprise and established Hopu, one of many nation’s first non-public fairness funds run by locals. Goldman invested $300mn in its first fund.
However he remained a major shareholder and chair of each entities. When policymakers in Beijing raised the restrict on overseas possession of securities companies to 49 per cent in 2012, Goldman executives organized for a small workforce to fulfill him within the Chinese language capital.
Many within the monetary providers business thought an extra rest was imminent, and Goldman’s emissaries believed solely a few weeks of talks on a plan for taking full management can be wanted.
The 2004 contract created a posh name choice method for the value Goldman hoped to pay to purchase the companies, which Goldman anticipated can be equal to a web annual return within the single-digit tens of millions of {dollars} to Fang and his companions, in accordance with paperwork seen by the FT and folks accustomed to the matter.
However associated Chinese language contract legislation was untested and Chinese language regulators would additionally must approve of any deal. That made Fang’s buy-in a should have, not least as a result of within the meantime his ally Wang had risen to turn into President Xi Jinping’s anti-corruption tsar whereas one other buddy, Zhou Xiaochuan, sat atop the central financial institution.
Fang needed $250mn. “This was a once-in-a-lifetime alternative to get wealthy,” says one particular person near Fang. “If you happen to don’t pay him — effectively, he isn’t going to vanish,” provides one other particular person near the talks.
Goldman’s bankers balked. “There was a complete construction the place we thought we might take management, however the construction was irrelevant,” says one former Goldman banker, briefed on the negotiations on the time.
The financial institution explored bringing in new companions or beginning over, however there was no approach round Fang. They set their sights on end-2014, when the unique $100mn mortgage was due for reimbursement, believing this might improve their leverage. However no deal was reached.
Gao Hua, on behalf of Fang, denied that any negotiations passed off throughout this time interval.
When Goldman tried to increase the $100mn mortgage, China’s State Administration of Overseas Change (Protected), which regulates overseas inflows, advised the financial institution it might not be accepted, in accordance with an individual accustomed to the matter. Fang approached China Retailers Financial institution, which offered Rmb606mn ($98.4mn) in loans secured by their Gao Hua shares. They repaid Goldman.
“The safety again of the deal simply disappeared,” the previous Goldman banker says. “We obtained to an deadlock. It wasn’t very fairly.”
Gao Hua mentioned the borrower “exercised its proper to hunt a brand new mortgage from a 3rd social gathering, which Goldman supported”. Protected didn’t reply to a faxed request for remark.
The manoeuvring made the advanced pricing method irrelevant, leaving the 2 sides in industrial negotiations. “We went spherical and spherical in circles,” the banker recollects.
Fang was in no hurry. Public filings present he and different Gao Hua executives and administrators — together with Goldman executives who have been on Gao Hua’s payroll — collected a median of Rmb30mn in annual pay and bonuses.
As soon as the Goldman mortgage was repaid, Fang was additionally totally answerable for Gao Hua’s funds. From 2014, he started distributing the income it had earned from Goldman’s China enterprise as dividends. By the top of 2022, Gao Hua had paid Rmb1.5bn to the businesses managed by Fang, his workforce and Legend. None went to Goldman, because it had no fairness in Gao Hua. Individuals near Fang’s 5 associates say these people didn’t obtain any cash both.
Gao Hua mentioned all dividends paid previous to 2022 have been used to repay the China Service provider Financial institution loans and that subsequent dividends have been reinvested in its enterprise “apart from a small portion distributed to all shareholders in proportion to their possession”.
In statements, the opposite 5 shareholders mentioned Fang didn’t personally obtain the dividends and that they “have maintained an equal and harmonious working relationship with Mr Fang for a few years”.
In 2019, after Beijing moved to additional open up the monetary sector, Goldman lastly struck a take care of Fang. Relatively than shopping for Gao Hua outright, it agreed to pay it $88.5mn for its majority stake in GSGH, in accordance with paperwork seen by the FT.
It then made further funds to purchase enterprise models out of Gao Hua and transfer them to GSGH, in accordance with an individual accustomed to the matter. Regulatory filings state that the enterprise migration was accomplished in February 2023.
“Fang was left with Gao Hua and all its licences, however the individuals and methods moved throughout,” the particular person says. Gao Hua reported Rmb1.8bn in paid-in capital, reserves and undistributed income at finish 2023.
Gao Hua mentioned Goldman’s buy was “carried out on a strictly industrial foundation” in keeping with the unique settlement and a “subsequent restructuring settlement”.
It added that the “closing value, freely negotiated, mirrored virtually twenty years of onerous work” by Goldman and itself.
Fang agreed to promote the final piece of Goldman’s China arm, a monetary futures brokerage known as Qian Kun Futures, to Goldman in January and Gao Hua later introduced it was repositioning right into a wealth administration platform for well-off people.
The worth of the Qian Kun deal, which is awaiting regulatory approval, has not been disclosed. However individuals near Fang say he wouldn’t be promoting the unit for lower than the Rmb301mn of capital Gao Hua had put into it.
On the similar time, Fang was embroiled in controversy at Hopu.
In 2018 he recruited Zhang Hongli, also referred to as Lee Zhang, who had gained pals amongst China’s elite whereas working Deutsche Financial institution’s China arm and as a senior determine at state-owned Industrial and Industrial Financial institution of China (ICBC).
Fang gave him a big stake in Hopu to carry him onboard, however the two quickly fell out, and Fang moved to marginalise Zhang throughout the agency, in accordance with two individuals accustomed to the matter. He additionally drew up plans to reorganise Hopu and shift future income and dividends right into a newly created basis, the individuals say.
In response, Zhang and Hopu’s chief govt Lau Teck Sien, who managed its financial institution accounts, launched a boardroom coup in 2021, telling a employees assembly they have been taking up. “Fang was shocked,” says an individual who spoke with him quickly afterwards.
Days later, three “fierce-looking musclemen” and one other man claiming to be Fang’s “particular assistant” appeared in Hopu’s Thirty fifth-floor Hong Kong workplace, in accordance with a letter despatched by Lau to Fang in November 2021 and seen by the FT. They mentioned they deliberate to “take over”, in accordance with the letter.
An image from the workplace safety digital camera, hooked up to the letter, exhibits the particular assistant and three giant males at Hopu’s entrance desk. Somebody on Hopu’s Hong Kong workforce reported it to the police, who recorded a “dispute with 4 males in an workplace situated at 8 Connaught Place, Central”.
Within the workplace WeChat group, additionally seen by the FT, Lau advised employees that for his or her private security they need to work at home till additional discover. “Everybody watch out! That is abominable!” added Zhang.
In June 2023, Fang quietly settled with Lau, who stepped apart. That left Zhang on his personal. “I was the vice-president of ICBC, however I’ve been fucked twice, first by Fang and now Teck Sien,” Zhang complained to an affiliate.
A number of months later, he was detained by the Central Fee for Self-discipline Inspection, the highly effective anti-corruption watchdog as soon as led by Wang. He’s awaiting trial on costs of accepting bribes whereas at ICBC.
Hopu mentioned it was a thriving organisation with “a confirmed monitor file” and “a robust, skilled administration workforce”. It added that Zhang’s time on the firm was transient and that it had “acted decisively to guard the agency”.
Wang retired from official duties after his time period as China’s vice-president got here to an finish in March 2023. Fang, in the meantime, can typically be discovered criss-crossing Asia to talk at conferences and is elevating a brand new Hopu fund alongside together with his newest deputy, son-in-law Gunther Hamm.
In a press release, Goldman mentioned: “We proceed to construct on this distinctive place and develop our companies in China for long-term success.”
