HSBC inks 'final' large deal
By Jiang Jingjing (China Business Weekly)
Updated: 2004-08-10 14:35

China's banking sector last Friday received the single largest overseas equity investment in its history, which industry observers widely consider a prelude to the sector's further opening to global capital.

Hongkong and Shanghai Banking Corp Ltd (HSBC), a wholly owned subsidiary of HSBC Holdings Plc, paid US$1.75 billion to acquire a 19.9-per-cent stake in the Bank of Communications, China's fifth-biggest lender.

HSBC made the announcement in Beijing late Friday afternoon.

Sir John Bond, chairman of HSBC Holdings, said the investment provides the group with new opportunities for developing business in China.

The UK-based bank will offer technical assistance to its partner, and the parties will develop their credit card business in China, Bond said.

The deal is the bank's "final large investment" in China, and HSBC will concentrate all its energy on the initiative, he said.

Jiang Chaoliang, chairman of the domestic bank said the deal is a "mutually beneficial relationship" between two strong banks.

Bank of Communications is China's largest joint-stock commercial bank, with the lowest non-performing loan ratio of 3.43 per cent, while the average ratio in the sector is 13.32 per cent in China, according to latest statistics.

HSBC, the world's third-largest bank by market value, was founded in Hong Kong and Shanghai in 1865. It owns stakes in the Bank of Shanghai and Ping An Insurance Co.

Experts said the huge potential in China's market prompted HSBC to make such a huge investment in the Chinese mainland.

"HSBC anticipates booming business in real estate mortgages and car loans, which have lower risks compared with other types of loans," said Chen Ping, professor with Peking University's China Centre for Economic Research.

China's rapidly growing economy, 1.3-billion-plus residents and US$1.35 trillion in savings in banks are the reasons for HSBC's confidence in the market, Chen said.

In May, HSBC announced it had received approval to open its 10th branch in the Chinese mainland.

"The Chinese market is quite big. There should be enough room for HSBC to set up branches in the main cities and, at the same time, by buying into the Bank of Communications," Chen said.

"The distribution network could be very substantial."

The deal is a hefty boost in the commitment to China by the UK lender, said He Liping, economist and professor with the College of Economics affiliated with Beijing Normal University.

HSBC last week announced a record interim result, with its first-half profit rising 55 per cent, to US$6.35 billion, in its global businesses.

Bank of Communications is anticipating receiving HSBC's assistance as it prepares to list.

"The Bank of Communications needs HSBC's abundant funds and advanced management to improve its various accounting indices in order to list," said a China Banking Regulatory Commission (CBRC) official, on condition of anonymity.

Over the long run, the domestic bank believes HSBC's experience will help it improve its management structure and efficiency, he added.

Bank of Communications is preparing to raise about US$2 billion in an initial public offering, insiders said.

Although Jiang declined to reveal the exact timetable for the listing, he said the bank is doing everything possible to go public before China Construction Bank and the Bank of China.

That, he said, would help the Chinese bank attract more capital.

Reuters, however, has reported Bank of Communications will list in Hong Kong early next year.

Bank of Communications, established in 1908, operates more than 2,700 branches in 86 cities across China.

Other foreign banks eyeing China's market include Standard Chartered, which reportedly wants to buy a stake in a Chinese lender by year's end.

The world's largest banking group, US-based Citigroup Inc, is reportedly negotiating with China Construction Bank and China Minsheng Banking Corp Ltd. Citigroup is believed to be helping the banks with their listing plans.

China will permit foreign banks to open branches more quickly, as it prepares to open its financial industry to full foreign competition by the end of 2006, in accordance with its commitments to the World Trade Organization, officials of the banking watchdog said last week.

CBRC has deleted a provision -- in rules to take effect on September 1 -- that required foreign banks to wait one year between branch openings, Xinhua News Agency has reported.

The rules will also reduce capital requirements -- to 300 million yuan (US$36.14 million) from 400 million yuan (US$48.19 million) -- imposed on foreign banks applying to conduct yuan-denominated business for Chinese firms.

China must not rely solely on foreign capital, rather it should take domestic private capital into consideration, Chen said.

"The large amount of domestic private capital should be involved," he said.

China does not have a truly privately funded domestic bank, even though there are many shareholding banks that are somewhat related to the State's capital, Chen said.

"Existing banks mainly provide loans to State-owned or large-scale enterprises, leaving the vast number of small and medium-sized companies in difficulty. The banking sector should contribute to the development of China's private economy," Chen said.

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