HSBC buys back into China's banking
market By Gary LaMoshi
HONG
KONG - The lender formerly known as Hong Kong and
Shanghai Banking Corporation started out financing trade
between those two cities and rest of the world.
Revolution in the mainland halted the Shanghai portion
of the business, but only temporarily. Last week, the
global banking giant now called HSBC sealed its long
simmering acquisition of 19.9% of the Shanghai-based
Bank of Communications (BoCom) for US$1.75 billion.
The deal, the biggest foreign investment so far
in a mainland bank, puts HSBC ahead of global rivals for
a foothold in China and a piece of mainland household
savings, estimated at more than $1 trillion. Foreign
banks will be allowed to do business in Chinese currency
by the end of 2006 under China's World Trade
Organization (WTO) agreements, but strategic partnership
with an established mainland bank offers the quickest
route into the fastest growing major economy.
"The investment is a vital and important step in
building our business in China," HSBC chairman Sir John
Bond said at last Friday's formal announcement of the
deal at Beijing's Great Hall of the People. BoCom is
China's fifth-largest bank with reported assets of $112
billion at the end of last year. It holds one of 15
national banking licenses and boasts 2,700 branches in
137 cities.
"This investment represents a major
commitment for both parties: HSBC and Bank of
Communications," Bond explained. "For HSBC, this
investment provides the group with a new window for
developing our business in China. In return, we offer
the Bank of Communications the opportunity to draw on
our international expertise and network."
BoCom's chairman Jiang Chaoliang told reporters
at the ceremony that he hopes to draw on that expertise
for "a quick IPO [initial public offering]" in Hong Kong
early next year. That would make BoCom the first
mainland bank with an offshore stock listing. Reaching
the global capital market first will be a badge of honor
for BoCom, with practical benefits. Arriving first
should bring a premium price since BoCom will be the
only Chinese bank investors can buy and a must-have for
all manner of investment funds. It's unclear whether
HSBC will take up a chunk of the new shares to maintain
its nearly 20% stake in BoCom or allow a dilution.
That's one of many questions HSBC shareholders
should ask about the deal. (HSBC didn't respond when
asked.)
Just what is HSBC's China
strategy? First, those stock owners should ask
exactly what is HSBC's strategy in China? In addition to
its new partner BoCom, HSBC holds stakes in the Bank of
Shanghai and Ping An Insurance Company; plus more than
15% of China Industrial Bank through its Hang Seng Bank
subsidiary. Bond said that BoCom would be HSBC's final
mainland partner but declined to reveal the plans for
its other holdings. HSBC itself also has nine mainland
branches and won approval in May to open a 10th in
Suzhou, a growth node about 80 kilometers outside
Shanghai.
Beyond acquisition strategies, what
about business strategies? At the Great Hall ceremony,
HSBC and BoCom mentioned issuing a joint credit card.
That's not much of a foothold for HSBC's $1.75 billion.
The deal values BoCom at just over $8.75
billion, less than 8% of assets. While the pricing looks
good - markets value HSBC and Citigroup in the mid-teens
- it's important to look beyond the top-line number.
BoCom just finished a major restructuring at the end of
June, off loading nearly $5 billion in bad loans.
Reportedly at HSBC's insistence, BoCom also received
injections from various state bodies and other
shareholders of 9 billion yuan ($2.3 billion) as part of
the deal.
Chinese Vice Premier Huang Ju hailed
the partnership as "an important measure to further
financial reform". But can HSBC's "international
expertise" or its minority holding break the bad habits
of Chinese banks and politicians to scratch each other's
backs at the expense of the balance sheet? That's an
issue at both the branch level and the corporate level.
After all, China's Ministry of Finance is a bigger
shareholder and more strategic partner for BoCom than
HSBC. It's hard to imagine the ruling State Council
favoring overseas shareholders when pursuit of profits
clashes with national or party interests. That problem
should keep any investor in Chinese state companies
awake nights.
The politics of the deal become
even more murky when you look at HSBC's position in Hong
Kong, its flagship franchise, even though the company
headquarters are in London. Located at 1 Queens Rd
Central, HSBC's eclectic local nerve center enjoys an
unobstructed view of Victoria Harbor and, on a clear
day, the mainland. That open view is the ultimate symbol
of clout and is rumored to have been guaranteed in
perpetuity by British and Chinese authorities.
HSBC used to be called Hong Kong's unofficial
central bank, and it remains one of three issuers of
local currency, along with Standard Chartered and the
Bank of China. The latter, of course, is the local arm
of the mainland's leading bank. The Bank of China is a
formidable rival for favor from both local Hong Kong
officials and increasingly influential mainland
authorities.
Keep in mind the Chinese concept of
guanxi, which roughly translates into buying
chips that you can cash in later, a favor that creates a
reciprocal obligation for the beneficiary. Note that
last week HSBC also reported profits for the first half
of this year of nearly $9.4 billion, a record number for
a European company. In that context, $1.75 billion
represents pocket change for HSBC (it's the
shareholders' money anyway, not its management's).
Whatever the business merits of the BoCom deal,
leading the way for other global banks to take Chinese
strategic partners, and for Chinese banks to enter
global capital, buys HSBC management big guanxi
and should ensure the flagship an obstructed view of the
harbor and beyond for years to come.
Gary
LaMoshi, a longtime editor of investor rights
advocate eRaider.com, has also contributed to Slate and
Salon.com. He's worked as a broadcast producer and as a
print writer and editor in the United States and Asia.
He moved to Hong Kong in 1995 and now splits his time
between there and Indonesia.
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