HSBC said on Monday that it has agreed with Shenzhen Qianhai Financial Holdings to establish a majority-owned joint venture securities company based in Qianhai, Shenzhen, in China’s Guangdong province.
The British bank is far behind other foreign banks such as UBS and Goldman Sachs when it comes to setting up securities joint ventures in China.
However, many foreign banks have struggled to make money in China or have fallen out with their partners when their interests have diverged, particularly those without operational control of the partnership.
Citi has a joint venture with Orient Securities; Morgan Stanley has teamed up with Huaxin Securities; and JP Morgan has partnered with First Capital.
HSBC’s deal is different from other Chinese JV security firms in a few key ways and may well have been worth the wait because the bank has secured, subject to regulatory review and approval, majority control.
UBS and Goldman Sachs are the only other two foreign investment banks to have control over their JVs and their deals came under special circumstances. China's government granted UBS control of bankrupt Beijing Securities in 2006 on the understanding the Swiss bank would pump in money to revive it while Goldman gained control of a JV in 2004 via a byzantine structure spanning two separate entities.
HSBC’s partnership was made possible by an August 21 ruling made by the China Securities Regulatory Commission. It clarified the criteria to be met by Hong Kong and Macao investors in order for them to be able to invest in securities companies under the special regime provided in Supplement X of the Closer Economic Partnership Arrangements between mainland China and Hong Kong and Macao, respectively, as signed in August 2013.
Law firm Linklaters said after the CSRC announcement that “it is now clearer that the Hong Kong subsidiary of a US or European-headquartered financial institution would not be able to invest under Supplement X.” But HSBC qualified as its unit Hongkong and Shanghai Banking Corporation Limited is Hong Kong-headquartered and funded.
As a result, the maximum aggregate shareholding that a Hong Kong-funded institution can have in a JV securities company is 51%. Foreign JVs are capped at 49%.
If approved, such an entity could potentially engage in a full spectrum of securities and investment banking businesses in mainland China, unlike many existing JVs which are limited to underwriting equity and bond issues and cannot trade in China's secondary markets.
Another differentiator is that Shenzhen Qianhai Financial Holdings is not a rival but a local government-owned entity.
Again under Supplement X, CSRC clarified that Chinese partners no longer have to be domestic securities companies. Law firm Linklaters at the time said that this point “may make potential competition between the foreign and domestic partners a less hotly negotiated issue.”
MS and CCB
In one high-profile example of how partners in a Chinese securities JV can sometimes go their separate ways, Morgan Stanley set up CICC in 1995 with China Construction Bank but gave up management control in 2000 and had no real influence on the business.
The US bank was closely involved with its growth into a fully fledged investment bank with operations similar to those of an international firm. And being the first Sino-foreign securities JV in China, their cooperation helped lay the ground for the opening of China’s capital markets to foreign players. But it didn't last.
HSBC's JV breakthrough comes after a correction in China’s stock markets. “This is a good time to be making an investment,” said one senior source at the bank. “Taking our time has not been a bad thing.”
Although foreign firms have found it difficult to compete there — and make money — all agree that access to China’s domestic markets is important for their China franchises. For one, foreign bankers say it is easier to win mandates for offshore Chinese equity issues if they can approach a company offering to work with it both in China and abroad. That has become increasingly important as many large companies seek a dual listing in Hong Kong and Shanghai.
UBS's onshore presence seems to be working particularly well for the franchise. The Swiss bank said in August it had completed the purchase of a 4.99% stake in UBS Securities from the International Finance Corporation, the private sector arm of the World Bank. The transaction, which saw UBS's stake in the JV rise to 25% from 20%.
In 2012 Chinese regulators upwardly adjusted the percentage of equity foreign investors can hold in Chinese securities houses to 49% from 33%.
For HSBC the joint venture is another arrow in its strategy to build a business at scale in the Pearl River Delta.
“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,” Stuart Gulliver, HSBC's group chief executive, said in a statement.
Capturing opportunities in Asia, including building a business at scale in the Pearl River Delta region, is one of the 10 strategic actions that HSBC Group outlined in its investor update in June.
The delta through which Pearl River flows into the South China Sea has a population of 57 million and forms the core of China’s economic powerhouse and most populous province, Guangdong.
