In his book Money Machine, Shan Weijian describes the ups and downs of working within China’s regulatory system in the 2000s. I found it insightful to observe several recurring behavioral traits.
Unless otherwise specified, “the bank” refers to Shenzhen Development Bank, which Newbridge acquired a controlling stake in 2004 and sold to PAIG in 2011.
1. Principles of social engineering
I had the impression that officials adhered to strong, often top-down, social engineering principles and used them to guide even the finer details of transactions.
For example, when Baosteel (a highly profitable state-owned steel company) expressed interest in acquiring the bank, regulators shut it down because, in principle, an industrial raw-materials company was not allowed to own a bank. While such structures exist elsewhere (for example, Mitsubishi owns MUFG in Japan), current regulations in the US and EU prohibit this to prevent banks from becoming “internal treasuries” for industrial firms.
2. Intense leverage and even threats
When the government pursued the share reform in 2005, what began as voluntary participation quickly became coercive. Out of concern that the release of legal-person shares would flood the market and depress prices, a common arrangement required participating companies to grant additional “free shares” (about 30% of the traded amounts) to public shareholders.
Newbridge chose not to participate, worrying that this arrangement would significantly dilute its roughly 20% stake. In response, stock exchanges—under pressure to advance the reform—effectively blocked the bank from releasing its quarterly financial statements, forcing it to violate disclosure requirements for listed companies.
Note: China’s 2005 share reform aimed to make historically non-tradable legal-person shares tradable on stock exchanges.
3. Multiple, often competing, regulations
To obtain approval for the deal with PAIG, both parties had to navigate multiple layers of government—from municipal to provincial authorities, and ultimately Beijing—while also dealing with sector regulators such as the China Securities Regulatory Commission and the China Banking Regulatory Commission.
At best, these regulatory requirements were overlapping; at worst, they were contradictory. For instance, when the bank sought to issue new shares to raise capital, banking regulators supported the move because it strengthened the bank’s capital base and reduced risk. Securities regulators, however, opposed it, arguing that an increased supply of shares would depress the stock price.
4. Publicity, “face,” or pride.
Anticipated public perception is a critical factor in decision-making, because unfavorable perceptions could be detrimental to one’s “face,” or career. When Newbridge filed an arbitration in Paris against the Shenzhen government for breaching the binding transaction agreement, it cracked the government’s once-firm stance on not proceeding with the case. There were signals suggesting that Shenzhen was willing to resume talks in exchange for a withdrawal of the arbitration.
I’d like to note that this does not mean a simple “talk-or-sue” strategy works when dealing with Chinese regulators. In fact, the most important factor may have been that certain top-level officials were still interested in seeing the case go through. Leveraging that momentum, together with the pressure created by the publicity surrounding the arbitration, contributed to the thawing of the negotiation impasse.
First draft: Jan 11, 2025
Second draft: Jan 14, 2025