StockBeat: UBS Feels China's Wrath After Swine Fever Comments

By Geoffrey Smith

Investing.com -- UBS is feeling the heat of Chinese wrath Friday, its stock down 2% by 6:30 AM ET (1030 GMT), amid fears that it may lose precious business as the result of a flippant remark by one of its economists about the swine flu epidemic that has ravaged China's pork industry this year.

That puts it at the bottom of a Swiss market that is down 0.5% overall, although Switzerland is faring better than most European bourses on a day when a gloomy outlook by U.S. chipmaker Broadcom (NASDAQ:AVGO) revived fears of a global economic downturn. Germany's Dax is down 0.9% while the U.K. FTSE is down 0.7%. The benchmark Stoxx Europe 600 is down 0.7% at 377.58.

Paul Donovan, chief economist at UBS's Global Wealth Management unit, was accused of racism after a podcast in which he discussed the impact of an epidemic that led to pork prices rising 18% last month, a big enough rise to drive overall Chinese inflation to a 15-month high of 2.7%.

In an attempt to put that into the broader economic context, Donovan asked rhetorically in the UBS Morning Audio Comment whether that mattered, answering his own question:

“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.”

His point was that the outbreak was likely to have little longer-lasting impact that could affect the price of Chinese or global assets. However, he was quickly accused of racism, not least by an economist at one of UBS's competitors in Hong Kong.

Hao Hong, head of research at Bank of Communications International, the state-run Chinese bank’s Hong Kong unit, accused Donovan in a Twitter post of "distasteful and racist language" according to the Financial Times. The Global Times, an English-language mouthpiece for the Communist Party, took up the theme, detailing a storm of outrage on Chinese social media.

Despite apologies from UBS and from Donovan personally, the Hong Kong Securities Association said it "urges UBS to terminate the employment of the staff involved, and report the result to the Chinese public.”

It also demanded “the management of UBS make an open and formal apology, and to ensure that such incidents will not occur again.”

The incident puts UBS in an awkward position. Since slashing its once-freewheeling investment bank, it has come to rely more and more on the fees it generates from Donovan's division, which manages the wealth of the world's ultra-rich. The biggest single growth market for that division is, of course, China (not least since its U.S. business has been crimped for years by the after-effects of a brush with U.S. authorities over abetting tax evasion). Asia accounted for nearly 80% of the division's $22 billion in net new assets under management in the first quarter of the year

But if UBS fires Donovan, it risks getting a reputation for becoming the sort of bank that bows to political pressure. That will damage its reputation in the rest of the world, even if putting a price on that damage is hard.

The incident underlines the risks of business models - especially models that revolve around the exchange of ideas such as giving investment advice - that depend on China, where public discourse is tightly controlled. The country's image abroad has suffered this week from coverage of demonstrations in Hong Kong, which showed police firing rubber bullets and pepper spray at protesters objecting to a new law that allows citizens to be extradited to the Chinese mainland for trial.

Small wonder that HSBC (LON:HSBA) and Standard Chartered (LON:STAN), which also have above-average exposure to the region, have also underperformed in the last couple of days.

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