OXFORD, ENGLAND - JULY 12: Paul Donovan, Global Economist Managing Director at UBS Bank discusses how efficient businesses gain a competitive advantage at the ReSource 2012 conference on July 12, 2012 in Oxford, England. ReSource 2012 is a 2 day ground-breaking forum on resource scarcity and volatility, dedicated to engaging the financial and business community on the issues of food, water, energy supply and global growth. (Photo by Matthew Lloyd/Getty Images for ReSource 2012) (Photographer: Matthew Lloyd/Getty Images Europe)

UBS Group AG has managed to alienate an important client that it’s hoping to milk for millions in fees.

State-owned China Railway Construction Corp. has decided against hiring UBS as a joint global coordinator on a dollar-bond sale, Cathy Chan of Bloomberg News reported Monday. Haitong International Securities Group Ltd. has already cut business ties with the Swiss bank, while the Securities Association of China recommended members shun research by global chief economist Paul Donovan over language used in a research report last week.

At issue were Donovan’s comments on the rise of inflation in China:

“Does this matter? It matters if you are a Chinese pig. It matters if you like eating pork in China. It does not really matter to the rest of the world.”

Two debates ensued. The first is whether Donovan’s words are offensive and racist. Even linguists are chiming in. The second is whether U.S. President Donald Trump’s administration is right after all: Is doing business in China more perilous for foreign firms? Will Beijing continue to protect domestic players despite its vows to open up?

As a native Chinese speaker, I don’t find Donovan’s comments racist, and certainly didn’t draw a connection with the pejorative term for Chinese laborers who built U.S. railroads in the 19th century. Rather, I find his choice of words unfortunate, and perhaps insensitive, given UBS is keen on luring wealthy Chinese clients.

Bear in mind that 2019 is the Year of the Pig, which is supposed to be bountiful and abundant. Yet the nation, where pork remains the main source of animal protein, is suffering from a swine fever epidemic. To make matters worse, this year is shaping up to be another painful one for the economy: Growth is losing steam, despite Beijing’s trillion-yuan stimulus package, and the stock market is now in correction zone. Donovan’s comments were inauspicious, at a time when Chinese investors are already in a foul mood. I’d be willing to bet that we Chinese would better absorb his dry humor if the nation’s economic engine was running at full steam. 

You could say that China’s response has been a bit heavy-handed. But tough luck. It’s called the cost of doing business in emerging markets, and China is by no means an exception. Foreign banks have gotten into just as much trouble for lesser offenses. Two examples in the recent past come to mind.

Andy Xie, an MIT-trained star economist, left Morgan Stanley in 2007 after an email he wrote citing “money laundering” as one reason for Singapore’s economic success. Never mind that it was an internal message. Donovan’s published report, meanwhile, presumably went through the requisite compliance hoops. Xie had disparaged Singapore, an Asian Tiger. 

Or consider what happened to JPMorgan Chase & Co. in Indonesia. In 2017, the government severed business ties with the bank, eliminating its role as a primary dealer in sovereign-bond auctions. That came after its research division downgraded the nation’s stocks to underweight, citing a “spike in volatility” following Trump’s surprise election win. The response also punished investment bankers for equity research, despite the well-established split between the businesses. That penalty certainly hurt: Indonesia is a mover and shaker in the bond world, with close to 40% of its sovereign issues taken up by foreigners.

For UBS, even bigger asset-management fees are at stake. Unlike in the U.S., where passive funds now dominate, China is the last big market on earth where investors still have faith in active managers. That explains why global banks are falling over themselves to bulk up there.

When I wrote about this in April, I warned that domestic brokers wouldn’t leave the field to the foreign “barbarians.” A cynic could ask about the conflict of interest apparent in Pig-Gate. After all, core members of the Chinese Securities Association of Hong Kong, which demands Donovan’s dismissal, and the Securities Association of China, which aims to block out UBS, compete with the Swiss bank for China money. In that light, the outcome with Haitong isn’t all that surprising.   

At the end of the day, beggars can’t be choosers. With its investment-banking business falling behind that of U.S. mega banks and Swiss rival Credit Suisse AG, UBS needs its wealth-management business. In that case, it had better start doing more to please a moody client.

To contact the author of this story: Shuli Ren at sren38@bloomberg.net

To contact the editor responsible for this story: Rachel Rosenthal at rrosenthal21@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron’s, following a career as an investment banker, and is a CFA charterholder.

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