A perfectly innocent comment about “Chinese pigs” has now cost UBS millions of dollars in lost revenue and one chief economist, even as the cowardly Swiss bank refuses to back its employee knowing perfectly well he has done nothing wrong.

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The most bizarre and outright ridiculous conflict to have emerged in recent months, that between a grammatically challenged China and UBS’s chief economist, Paul Donovan, who in a note last week commented on “Chinese pig” inflation which a few overly sensitive Chinese commentators (with a 780 GMAT score) immediately interpreted as a personal attack against Chinese civilization (it wasn’t) continues to escalate, and even though UBS put Donovan on a leave of absence, on Monday one of China’s biggest state-owned infrastructure companies excluded UBS from a bond deal due to the ongoing frenzy over the chief economist’s use of the phrase “Chinese pig.”

The decision, first reported by Bloomberg, by China Railway Construction, marked the first known case of a corporate issuer distancing itself from UBS over last week’s comment by economist Paul Donovan. As reported here on Friday, his sarcastic comment – which was not at all meant to slight Chinese citizens – on the swine flu epidemic led to a public uproar in China even as some on Wall Street said the reaction was overblown.

CRCC decided against hiring UBS as a joint global coordinator on a dollar-bond sale, a spokesman for the Beijing-based company said on Monday. The decision was prompted by the pig comment, people familiar with the matter said. CRCC gave the mandate to banks including Citigroup, HSBC Holdings and ICBC International.

And, as Bloomberg notes, “while lost fees from the deal will have a negligible impact on UBS’s bottom line, the signaling effect from a major state-owned company is potentially more worrisome for the Swiss bank as it tries to prevent the drama from damaging its investment-banking and wealth-management businesses.”

The stakes are high for UBS, which has had a presence in China longer than many of its peers and was the first foreign business to win approval for a majority shareholding in a local securities venture under relaxed ownership rules. Most wealth managers still serve China’s rich from offshore centers such as Hong Kong and Singapore, but the nation’s massive pool of onshore money, estimated at around $20 trillion, is a huge prize for the industry.

Meanwhile, the FT writes overnight that “UBS must resist social media bullying over ‘Chinese pig’ comment”:

… cultural sensitivity is important for any multinational. But it is an absurdity to translate an innocent English phrase in a certain way and then take offence at it. Mr Donovan’s original remark was merely a factual explanation of what has caused inflation — swine flu — followed by a droll aside that inflation more generally was not a problem and therefore that only pigs, because of the risk of flu, need worry. The explanation rather kills the witticism.

Mr Donovan can feel rightly sore about his enforced leave of absence, though if UBS continues to kowtow, and accedes to demands to convert suspension into sacking, it will be another level of injustice.

UBS is naturally keen to protect its business in China. In response to similar instances in the past, western banks have acted decisively — or brutally, depending on your point of view. In 2006 Morgan Stanley parted company with respected economist Andy Xie, after he made critical comments about Singapore which were leaked to the authorities.

UBS cannot go down the same path. Mr Donovan is highly rated, has had a 26-year career at the bank and has done nothing wrong. His employer must stand by him and resist a misguided bullying campaign stoked by social media and mistranslation.

For once we agree with the FT.

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