HSBC group chief executive, Stuart Gulliver, singled out the Pearl River Delta as a key area of focus in his investor update in June, setting out the aim to generate $1bn of pre-tax profit from the region. The new venture, based in Qianhai, Shenzhen, is one of the first signs of this plan in action.
“This joint venture is further evidence of HSBC’s determination to be part of China’s economic development, grow our business in the Pearl River Delta and throughout the country and support the innovative approach to reform and liberalisation that policymakers are undertaking,” Gulliver said in a statement on November 2.
While the JV is still subject to regulatory approval, a source close to HSBC said the potential is huge as the bank could possibly engage in a full spectrum of securities and investment banking business in China.
Having a full licence is essential as most international JVs at the moment are only allowed to underwrite primary offerings.
“Apart from having origination and execution capabilities, you also need to be able to distribute and trade,” the source said. “It remains to be seen whether we’ll be able to get there, but it’s certainly a nice place to start.”
He added that the firm is keeping its expectations in check as the JV is only at an agreement stage and there is no telling when the licences would be granted, which would dictate the timing of the JV’s launch.
In addition, the main focus during the initial stages of the JV would be to create an onshore debt business, after which other units would be added. Focusing on debt would best allow HSBC to take advantage of China’s transformation from a bank financing economy to a capital markets financing market.
“It’s the bond market where most companies fund themselves and that’s also exactly one of the core strengths in Asia, so it is the most natural way for us to create a footprint in China,” he said. “It’s too early to say how many years it would take us to get this right, but at least we’ve made the first step now."
HSBC is not the first foreign bank to link up with a Chinese partner. Citi, Credit Suisse, Deutsche Bank, JP Morgan and Morgan Stanley, among others, have all established a similar presence in China in the past.
However, there are some differences to HSBC’s model. For a start it is not tying up with a Chinese brokerage firm. Instead, its partner Shenzhen Qianhai Financial Holdings, is a state-owned entity that has a government mandate to promote and develop the Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone – a special economic zone in Guangdong.
Majority ownership
HSBC’s venture is also one of the few where an international bank holds a majority stake.
It owns 51% of the new venture, joining just Goldman Sachs and UBS as the two other international banks to have majority control over their China JVs. But the conditions in which they gained control are quite different.
Goldman gained the licences of defunct Hainan Securities in 2004, which allowed it to establish its own brokerage with Gao Hua Securities. UBS, on the other hand, bailed out Beijing Securities in 2006 and renamed it UBS Securities.
“Those two JVs are effectively bailouts of an existing company and are done in different ways,” said the source. “The ownership structure is fairly complicated, which was why China hasn’t allowed it to be replicated ever since. The HSBC JV, on the other hand, has a very clean structure. A 51% stake, straight and simple.”
HSBC, though, is only able to do this thanks to an amendment to Supplement X of the Mainland and Hong Kong Closer Economic Partnership Agreement (CEPA).
CEPA was signed in 2013 and the agreement allows Hong Kong or Macau-funded institutions to set up one JV in each of Guangdong, Shanghai and Shenzhen with a maximum shareholding of 51%. But at that stage, the criteria for which firms count as Hong Kong institutions were not clear.
The amendment, made in August this year, has dispelled the ambiguity. The China Securities Regulatory Commission (CSRC) said that a Hong Kong investor must be a licensed financial institution or financial holding company registered and headquartered in Hong Kong.
Also, the investor or its controlling entity must be listed in Hong Kong, while at least 50% of pre-tax profits must also be derived from the city. HSBC qualifies as its unit HSBC Ltd is headquartered and funded in Hong Kong.