American investment bank Morgan Stanley is under investigation by the Republican-led US House China committee for its role in underwriting a massive $3.7 billion Hong Kong initial public offering for Chinese company Zijin Gold International Co.
US Lawmakers Demand Answers
Representative John Moolenaar, who heads the House Select Committee on the Chinese Communist Party, has formally requested detailed information from Morgan Stanley about their due diligence processes. In a letter dated November 13 addressed to CEO Ted Pick, Moolenaar asked for documents and communications related to the September IPO transaction.
The controversy centers around whether Morgan Stanley conducted sufficient background checks on Zijin Gold's parent company, Zijin Mining Group, which remains on a US government blacklist. The parent firm faces allegations of violating restrictions concerning forced labor practices in China's Xinjiang region.
IPO Structure Raises Red Flags
Moolenaar specifically questioned whether the deal was intentionally structured to consolidate Zijin Mining's overseas gold assets under a separate entity while allowing the blacklisted parent company to maintain controlling ownership. This arrangement potentially allowed the company to access international capital markets despite its controversial status.
"Morgan Stanley's participation raises serious potential concerns about the adequacy of its due diligence practices in connection with a company that is included on a U.S. government entity list, is associated with human rights abuses, and maintains deep ties to the Chinese Communist Party," Moolenaar wrote in his strongly-worded letter.
Broader Scrutiny of Wall Street Banks
This investigation forms part of a larger review being conducted by the House Select Committee on China examining Wall Street banks' involvement in IPOs of Chinese companies with known connections to China's military or histories of labor violations. Moolenaar emphasized that "Morgan Stanley's underwriting of Zijin Gold's IPO showcases the very type of commercial activity the US government seeks to prevent."
The September IPO, which Morgan Stanley co-led with Citic Securities Co., represented the world's largest such offering since May and Hong Kong's second-largest listing this year. Only Contemporary Amperex Technology Co. Ltd.'s $5.3 billion deal surpassed it in size.
Despite the controversy, the market response was overwhelmingly positive. Zijin Gold's Hong Kong shares surged 68% on their first trading day and have remarkably doubled in value since their market debut.
This isn't the first time the committee has targeted major financial institutions. In July, the same committee subpoenaed JPMorgan Chase & Co. and Bank of America Corp. regarding their involvement in CATL's Hong Kong listing, indicating a pattern of increased scrutiny on American banks' dealings with Chinese companies facing US government restrictions.
A Morgan Stanley representative has not yet responded to media requests for comment on the developing situation.
