According to the Chinese calendar, 2019 is denoted as the year of the pig. For Swiss investment bank UBS, the year of the pig has not been particularly kind to the firm in China.
Earlier this month, Paul Donovan, an economist at UBS, broadcast a research note on consumer price inflation. In the note, he described the impact of swine flu on consumer price inflation in China and went on to comment that the incidence of swine flu “matters if you are a Chinese pig, and it matters if you are consuming pork in China.”
The reaction to Donovan’s comments were swift and furious. Social media in China captured the phrase “Chinese pig” suggesting the author committed an act of racial insensitivity and naked racism.
In the days following, both Paul Donovan and UBS felt the wrath of China’s blogosphere, and the bank was dropped from transactions already in progress.
Over the course of many years, UBS has carefully built its platform in China and has recently gained approval to take majority control over its securities joint-venture there, UBS Securities. With this incident, it seems all of that is now in peril.
On its face, it would be very difficult to say the economist’s words or statement were in any way, shape or form racist. Nevertheless, this incident demonstrates the pitfalls of doing business in China and the possibility that words taken out of context can be “lost in translation.”
In order to implement damage control, UBS has benched Donovan and has made numerous public apologies to assuage the authorities in China and the Chinese people that it rectify its mistakes.
Caught in the vise of heightened sensitivities partly associated with the ongoing trade war with the United States, there is a growing sense of nationalism and national pride within Chinese society. As the trade war continues unabated, evidence is mounting that the economic picture within China is becoming increasingly clouded.
Growing sentiment within the United States of China’s unfair trade practices has only elevated defensiveness within China, resulting in backlash against UBS.
How will this play out for UBS? Will UBS be forever shut out of China’s market? In my opinion, no. This incident and the longer-term impact on UBS will soon fade. The reason being is that China is going to need all of the help it can get as trade frictions continue unresolved.
All of the vital signs of China’s economy are starting to point in a downward direction as the trade wars and tariffs start to bite. Chinese consumers are tightening their belts as seen in lower automotive sales and factories laying off workers as orders begin to dry up.
Foreign companies, including Apple, are starting to pull their factories out of China and rearrange supply chains to places such as Vietnam. As trade flows and foreign direct investment go into reverse, stresses within China’s economy will become increasingly difficult to manage.
China’s debt-to-GDP ratio stands at over 250 percent. For many observers, this is the ticking time-bomb that overhangs the Chinese economy. Much of this debt resides in both private-sector and public-sector entities with a significant portion held in numerous underperforming state-owned companies.
The portion of non-performing loans in loan portfolios is escalating, and this situation is bound to get worse as trade flows contract due to the ongoing trade wars.
To address rising risks on the horizon, China has imposed currency controls, advanced numerous liquidity injections into the banking system, restricted outbound investment and acquisitions and restrained lending into speculative sectors, such as real estate.
In 2018, China’s State Council approved measures for debt-laden Chinese companies to convert outstanding debt to equity as a measure to shore-up deteriorating bank balance sheets.
Given this backdrop and the growing clouds on the financial horizon, China will need access to global capital markets and the services that UBS can provide. China’s leaders would be well advised to heed the words of Sun Tzu in the Art of War: “Insult and injury is temporary, death is permanent.”
Arthur Dong is a professor at Georgetown University’s McDonough School of Business. He specializes in legal and business engagements between China and the United States.