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AgendaJuly 1 2013

HSBC bets big on China

HSBC China has expanded rapidly since being established in 2007. Its chief executive and deputy chairman, Helen Wong, says it wants to retain its position as the largest foreign lender in China, and boost its ties with Bank of Communications, in which HSBC has a large stake. She insists, too, that the outlook for the country's economy is rosy. 
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HSBC bets big on China

Having been established in Hong Kong and Shanghai in 1865, HSBC is no stranger to China. But despite this almost 150-year presence, it is only in the past 12 years or so that it has been able to exploit the banking opportunities offered by the vast country.

Before 2001, when China joined the World Trade Organisation, the activities of foreign banks on the mainland were heavily restricted. For the next six years, foreign lenders were able to do a limited amount of work with local companies and multinationals invested in the country. A major breakthrough came in 2007, when for the first time Chinese regulators allowed foreign lenders to be locally incorporated, giving them the green light to offer full banking services.

HSBC was one of the first banks to take up the opportunity and apply for a licence. Since then, its China subsidiary has expanded quickly. The biggest foreign bank in the country, it had $47bn of assets at the end of 2012 and now has 145 branches, which offer a wide range of corporate, retail and private banking products.

The bank’s ability to out-pace its foreign rivals so far has doubtless been helped by its historical ties to China, which have given HSBC a strong brand locally and made its job convincing potential clients about its long-term commitment to the country far easier. “We have more attachment to China than many other banks because we were born in China,” says Helen Wong, chief executive and deputy chairman of HSBC China. “We have very deep roots here. That gives us something that other banks perhaps don’t have.”

China’s importance to HSBC is clear from the fact the bank has no intention of slowing its growth there, let alone relinquishing its position as the country's largest foreign lender. “Our strategy is quite simple,” says Ms Wong. “We want to be big in China. We want to build our network and our balance sheet, and add more people. There’s no other way. I keep telling the team that we have to be the biggest and best foreign bank in China.”

Billion-dollar goal

HSBC China is yet to make up a big proportion of its parent bank’s overall profits. Last year it contributed $792m to HSBC’s total pre-tax earnings of $21bn. But Ms Wong is determined to see that figure rise. “I can’t really answer when we are going to earn $1bn,” she says. “It really depends on the market, but I certainly want to reach [that number].”

The bulk of the HSBC group’s earnings from mainland China come not from its organic business, but a 19% stake in Bank of Communications (BoCom), China’s fifth biggest lender (it also owns 8% of Bank of Shanghai, the 16th largest Chinese bank). The holding in BoCom, which had $838bn of assets and made $12bn of pre-tax profits last year, according to The Banker Database, is particularly lucrative. Based on the Hong Kong and Shanghai-listed lender’s share price in early June, it was worth about $11bn.

After HSBC sold its stake in Chinese insurer Ping An for $9.4bn last year, as part of chief executive Stuart Gulliver’s cost-cutting plans, some analysts questioned its desire to keep BoCom. Yet Ms Wong refutes any notion that HSBC is considering a sale by saying that it would rather look at increasing its holding of 19%, provided it had the permission of China’s regulators. “If the country said it were to permit us to consider it, then we would consider it,” she says. “China is a priority market. So, if we have a chance to grow faster than is possible by organic means, I’m sure the group will look at it.”

Deepening BoCom ties

HSBC wants to deepen its ties with BoCom regardless of whether it buys more of the bank. Ms Wong says the relationship is mutually beneficial, helping each lender gain from growing investment in to and out of China. HSBC, with its relatively small network on the mainland, can direct its multinational clients wanting to invest there to BoCom, which has almost 3000 branches. Conversely, BoCom, with its limited presence abroad, can defer to HSBC to service Chinese companies making overseas investments.

“We can always work with BoCom on certain things, especially when it comes to international connectivity,” says Ms Wong. “BoCom doesn’t have that many outlets around the world. And if we have customers coming into China, where our network is still limited, of course we can refer them to BoCom.”

The still small international reach of China’s banks is something that HSBC is keen to exploit, especially given that overseas direct investment from the country is rising quickly and by some estimates could reach $150bn in 2015, double the level of 2012. “That’s where foreign banks, and especially a bank such as HSBC, have an advantage over local banks,” says Ms Wong. “If you have a Chinese corporate that wants to go overseas, we’re probably in the place they want to go.”

Ms Wong says that as China’s economy and international trade grow, so will the use of the renminbi, which is leading HSBC to expand its renminbi services quickly. In 2011, about 10% of Chinese international trade was settled in the currency. That figure is likely to rise fast and is widely projected to hit 30% within two years, aided by measures such as the People’s Bank of China having recently signed bilateral currency swap agreements with several central banks.

Ms Wong has no doubt the renminbi’s internationalisation and the liberalisation of China’s capital account will continue. “It’s a given,” she says. “Once people begin to understand and use the currency, there’s no way you can turn back on that.

“The new government talks a lot about opening up. It’s never been clearer as to what they want to do. Now, they are so much more open. In the past, no one talked much in detail about convertibility. Today, the State Council has said there is a roadmap for it.”

No hard landing

HSBC is also positioning itself to take advantage of the renminbi’s emergence as an investment currency. Over the past year, it has been the top bookrunner by volume for dim sum bonds (offshore renminbi deals issued in Hong Kong), a market expected to grow substantially in the medium term as more non-Chinese companies seek renminbi funding. It has a leading position, too, helping international portfolio investors get access to China’s onshore securities through the so-called qualified foreign institutional investor (QFII) schemes, which were introduced in 2004 and through which tens of billions of dollars worth of shares and bonds have been bought.

“China’s capital markets have eased entry for foreign investors more quickly in the past year and a half, building a momentum we see continuing this year,” says Ms Wong. “This trend is seen in the relaxed investment rules, larger QFII quotas and opening of the China interbank bond market to foreign insurers.”

China’s economic growth has slowed in this year, leading some economists to doubt that its rapid expansion of the past few decades can be sustained. But Ms Wong disagrees that the country’s outlook is much bleaker today than was the case two years ago. She cites predictions that China, already the largest exporter in the world, will see its share of global trade roughly double to almost 20% by 2020. And she believes that the Chinese authorities have the means to stimulate the economy in the short term should they need to, and that long-term growth will be underpinned by increasing urbanisation, which should result in further investment in infrastructure and a boost in consumer spending.

Such a scenario would be very promising for any bank in HSBC’s position. “The point is that China is continuing to grow,” says Ms Wong. “Where else in the world are you offered a growth rate of 7.5% to 8.5%? And because the country is opening up, there are a lot of opportunities for a bank such as HSBC.

“I’m very positive. Yes, the economic situation is not as favourable as before. There are external headwinds all around the world. But you just have to be smart as to what you do and don’t take silly risks. If a certain industry in China is affected by external markets, shy away from it and focus on things that are safer.

“For a country this big, you will always get the business opportunities you want. You just have to manage them properly.”

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Read more about:  Agenda , Banking strategies , Asia-Pacific , China