In the early 2000s, Hank Paulson travelled extensively to China seeking access to the country’s financial markets for Goldman Sachs, where he was chief executive. The investment bank’s top brass believed the deal he eventually cut would only be a temporary one.
The thinking was that an alliance with Fang Fenglei, a mainland investment banker with peerless connections to the Communist party elite, would endure for only a few years, until the Wall Street institution was permitted to directly own its securities and investment banking business in China.
But instead the arrangement lasted for nearly two decades. During that time the economic benefits flowed mainly to Fang, leaving Goldman desperate to unwind the deal.
“We rented his name but we chose someone who tried to screw us in the end,” says one former Goldman banker of a man whom Paulson had lauded as “extraordinary” and a “preternatural networker in a country of networkers”.
As Goldman stands on the brink of acquiring a futures broker, the final piece of its China business, the Financial Times has pieced together a full account of a misadventure that the group itself has rarely commented on and which barely features in its investor communications.
Interviews with more than a dozen of Fang’s associates and bankers and hundreds of pages of documents show how Goldman’s partner wove himself into the fabric of the bank’s Chinese operations and forced it to pay far more than it had expected to gain full ownership of the business.
In a statement, Goldman said that “after a successful 19-year partnership with Gao Hua”, referring to Fang’s local entity, it is now “the leading international investment banking and securities franchise in China”.
Fang, who once told state media that he did not care “what others say about me or how they see me”, did not directly respond to the FT’s requests for comment on his dealings with Goldman or a later internal dispute at Hopu Investment, a private equity fund he co-founded.
But the saga demonstrates the difficulty, even for large global corporations, of operating in China, especially when the counterparty has such deep connections to the highest levels of the ruling party.
And it serves as a cautionary tale for the plethora of western banks and investors that have sought to hitch themselves to China’s economic miracle despite increasing state control of the economy.
Fang now runs Hopu, which has $15bn under management and where he has also seen off attempts to remove him. Lately, he has become a regular on the China conference circuit, trading on a reputation earned while steering the stock offerings of many of China’s state-owned groups around the turn of the century.
“China still has its allure,” he told a gathering in Hong Kong at the start of the year, as he worked to raise a fourth billion-dollar-plus fund from foreign investors.
“China’s current situation provides an opportunity for investors, a very rare opportunity.”
Fang came of age at a turbulent time for China.
The son of government officials, he grew up in Beijing but was sent to a farm in Inner Mongolia during the Cultural Revolution.
After a stint in the army, he worked his way up in state posts and met Wang Qishan, a well-connected official who became a mentor. Wang was chair of China International Capital Corporation, the country’s first investment bank, and appointed Fang as its deputy chief executive in 1995. Within two years he was leading the $4bn flotation of the company now known as China Mobile.
Instead of handing international underwriting duties to Morgan Stanley, which owned a stake in CICC, Fang brought in Goldman and soon emerged as a key figure in the US bank’s efforts to break into China. With the political cover of Wang — by now the mayor of Beijing — the two sides formed a plan.
First, Goldman paid $62mn to “demonstrate its commitment to the Chinese securities markets” by making whole account holders who lost money at a failed brokerage in Hainan, where Wang had previously been Communist party secretary. That freed up a brokerage licence to issue to Goldman.
The US bank then loaned $100mn to Fang and five subordinates, one of whom was his secretary, Xu Jie. They set up three investment companies which, along with Lenovo’s largest shareholder, Legend Holdings, established Beijing Gao Hua Securities.
Gao Hua and Goldman then set up a joint venture, Goldman Sachs Gao Hua Securities, or GSGH, with the US bank paying $32mn for the maximum 33 per cent allowed to foreigners.
Goldman’s lawyers in Hong Kong and New York stitched together hundreds of pages of contracts for Fang and his associates to sign. They pledged their Gao Hua shares to Goldman as collateral for the $100mn loan and granted it call options to buy those shares and other pieces of the businesses as soon as Chinese regulators relaxed foreign ownership rules.
The intended effect was to make Fang’s group akin to caretakers of the Wall Street bank’s shares. In his book Dealing with China, Paulson described GSGH as “a joint venture in which Goldman owned the permissible 33 per cent but had full operating control”.
Fang was made chair of both Gao Hua and GSGH and made a Goldman partner. The other five shareholders also took up staff positions.
Paulson dispatched Goldman partner Peter MacDonald to Beijing in 2004 to become Gao Hua’s first chief operating officer. “Chinese regulators and bankers wanted to see how we would set up a brokerage from scratch,” recalls MacDonald. “Goldman provided us with all of their systems and tech and intellectual heft, but our business cards said Gao Hua.”
“Once Gao Hua was licensed [by China’s securities regulators], Goldman was essentially able to [joint venture] with itself,” he adds. The two entities shared an office and, as they were majority owned by Chinese nationals who took the requisite board seats, were able to obtain a full suite of financial services licences for Goldman.
The US bank gained de facto operational control of both. Gao Hua and GSGH staff logged into Goldman-built IT networks. They were hired by Goldman’s HR department, worked with Goldman colleagues outside China as equals, and rose through the ranks like Goldman employees. But they were never formally employed by Goldman. The US bank was building a China business that it only partly owned.
Gao Hua said Goldman brought technology and knowhow to both companies but that the Chinese parties “were independent and acted autonomously”.
“There was no question of Goldman using them as proxies,” it added.
In 2007, Fang withdrew from day-to-day involvement in Goldman’s China business and established Hopu, one of the country’s first private equity funds run by locals. Goldman invested $300mn in its first fund.
But he remained a significant shareholder and chair of both entities. When policymakers in Beijing raised the limit on foreign ownership of securities firms to 49 per cent in 2012, Goldman executives arranged for a small team to meet him in the Chinese capital.
Many in the financial services industry thought a further relaxation was imminent, and Goldman’s emissaries believed only a couple of weeks of talks on a plan for taking full control would be needed.
The 2004 contract created a complex call option formula for the price Goldman hoped to pay to buy the businesses, which Goldman expected would be equivalent to a net annual return in the single-digit millions of dollars to Fang and his partners, according to documents seen by the FT and people familiar with the matter.
But related Chinese contract law was untested and Chinese regulators would also need to approve of any deal. That made Fang’s buy-in a must have, not least because in the meantime his ally Wang had risen to become President Xi Jinping’s anti-corruption tsar while another friend, Zhou Xiaochuan, sat atop the central bank.
Fang wanted $250mn. “This was a once-in-a-lifetime opportunity to get rich,” says one person close to Fang. “If you don’t pay him — well, he isn’t going to disappear,” adds another person close to the talks.
Goldman’s bankers balked. “There was a whole structure where we thought we could take control, but the structure was irrelevant,” says one former Goldman banker, briefed on the negotiations at the time.
The bank explored bringing in new partners or starting over, but there was no way around Fang. They set their sights on end-2014, when the original $100mn loan was due for repayment, believing this would increase their leverage. But no deal was reached.
Gao Hua, on behalf of Fang, denied that any negotiations took place during this time period.
When Goldman tried to extend the $100mn loan, China’s State Administration of Foreign Exchange (Safe), which regulates foreign inflows, told the bank it would not be approved, according to a person familiar with the matter. Fang approached China Merchants Bank, which provided Rmb606mn ($98.4mn) in loans secured by their Gao Hua shares. They repaid Goldman.
“The security back of the deal just disappeared,” the former Goldman banker says. “We got to an impasse. It wasn’t very pretty.”
Gao Hua said the borrower “exercised its right to seek a new loan from a third party, which Goldman supported”. Safe did not respond to a faxed request for comment.
The manoeuvring made the complex pricing formula irrelevant, leaving the two sides in commercial negotiations. “We went round and round in circles,” the banker recalls.
Fang was in no hurry. Public filings show he and other Gao Hua executives and directors — including Goldman executives who were on Gao Hua’s payroll — collected an average of Rmb30mn in annual pay and bonuses.
Once the Goldman loan was repaid, Fang was also fully in control of Gao Hua’s finances. From 2014, he began distributing the profits it had earned from Goldman’s China business as dividends. By the end of 2022, Gao Hua had paid Rmb1.5bn to the companies controlled by Fang, his team and Legend. None went to Goldman, as it had no equity in Gao Hua. People close to Fang’s five associates say those individuals did not receive any money either.
Gao Hua said all dividends paid prior to 2022 were used to repay the China Merchant Bank loans and that subsequent dividends were reinvested in its business “except for a small portion distributed to all shareholders in proportion to their ownership”.
In statements, the other five shareholders said Fang did not personally receive the dividends and that they “have maintained an equal and harmonious working relationship with Mr Fang for many years”.
In 2019, after Beijing moved to further open up the financial sector, Goldman finally struck a deal with Fang. Rather than buying Gao Hua outright, it agreed to pay it $88.5mn for its majority stake in GSGH, according to documents seen by the FT.
It then made additional payments to buy business units out of Gao Hua and move them to GSGH, according to a person familiar with the matter. Regulatory filings state that the business migration was completed in February 2023.
“Fang was left with Gao Hua and all its licences, but the people and systems moved across,” the person says. Gao Hua reported Rmb1.8bn in paid-in capital, reserves and undistributed profits at end 2023.
Gao Hua said Goldman’s purchase was “conducted on a strictly commercial basis” in line with the original agreement and a “subsequent restructuring agreement”.
It added that the “final price, freely negotiated, reflected almost two decades of hard work” by Goldman and itself.
Fang agreed to sell the last piece of Goldman’s China arm, a financial futures brokerage called Qian Kun Futures, to Goldman in January and Gao Hua later announced it was repositioning into a wealth management platform for well-off individuals.
The price of the Qian Kun deal, which is awaiting regulatory approval, has not been disclosed. But people close to Fang say he would not be selling the unit for less than the Rmb301mn of capital Gao Hua had put into it.
At the same time, Fang was embroiled in controversy at Hopu.
In 2018 he recruited Zhang Hongli, also known as Lee Zhang, who had won friends among China’s elite while running Deutsche Bank’s China arm and as a senior figure at state-owned Industrial and Commercial Bank of China (ICBC).
Fang gave him a large stake in Hopu to bring him onboard, but the two soon fell out, and Fang moved to marginalise Zhang within the firm, according to two people familiar with the matter. He also drew up plans to reorganise Hopu and shift future profits and dividends into a newly created foundation, the people say.
In response, Zhang and Hopu’s chief executive Lau Teck Sien, who controlled its bank accounts, launched a boardroom coup in 2021, telling a staff meeting they were taking over. “Fang was shocked,” says a person who spoke with him soon afterwards.
Days later, three “fierce-looking musclemen” and another man claiming to be Fang’s “special assistant” appeared in Hopu’s 35th-floor Hong Kong office, according to a letter sent by Lau to Fang in November 2021 and seen by the FT. They said they planned to “take over”, according to the letter.
A picture from the office security camera, attached to the letter, shows the special assistant and three large men at Hopu’s front desk. Someone on Hopu’s Hong Kong team reported it to the police, who recorded a “dispute with four men in an office located at 8 Connaught Place, Central”.
In the office WeChat group, also seen by the FT, Lau told staff that for their personal safety they should work from home until further notice. “Everyone be careful! This is abominable!” added Zhang.
In June 2023, Fang quietly settled with Lau, who stepped aside. That left Zhang on his own. “I used to be the vice-president of ICBC, but I’ve been fucked twice, first by Fang and now Teck Sien,” Zhang complained to an associate.
A few months later, he was detained by the Central Commission for Discipline Inspection, the powerful anti-corruption watchdog once led by Wang. On November 14 he appeared in a Hangzhou court and pled guilty to charges of accepting bribes while at ICBC, according to state media.
Hopu said it was a thriving organisation with “a proven track record” and “a strong, experienced management team”. It added that Zhang’s time at the company was brief and that it had “acted decisively to protect the firm”.
Wang retired from official duties after his term as China’s vice-president came to an end in March 2023. Fang, meanwhile, can often be found criss-crossing Asia to speak at conferences and is raising a new Hopu fund along with his latest deputy, son-in-law Gunther Hamm.
In a statement, Goldman said: “We continue to build on this unique position and develop our businesses in China for long-term success.”
This article has been updated since publication to reflect Zhang Hongli’s appearance in court
https://www.ft.com/content/23128945-0378-4557-bf00-c33fe37218fb
