24 October 2016
BoCom is the perfect vehicle for HSBC's ambitions in the mainland. Photo: HKEJ
BoCom is the perfect vehicle for HSBC's ambitions in the mainland. Photo: HKEJ

Will reform turn BoCom into another Hang Seng Bank?

Bank of Communications (BoCom) recently became the first bank in mainland China to gain approval for mixed ownership and mixed operations.

Niu Ximing, its chairman, revealed at the shareholders’ meeting that strategic shareholder HSBC Holdings plc (00005.HK) could be allowed to raise its stake in the bank to above the normal 20 percent limit and appoint a vice chairman to the board.

Market observers can’t help wondering if BoCom will become a strategic local unit of HSBC in the mainland, like Hang Seng Bank in Hong Kong.

Let’s review how hard HSBC has been trying to build up its banking assets in China for the last two decades.

After China joined the World Trade Organization in 2001, HSBC bought stakes in mainland financial institutions such as Bank of Shanghai, Industrial Bank Co. Ltd., and Ping An Insurance (Group) Co. of China Ltd. (02318.HK).

The most notable purchase was made in 2004, when HSBC bought a 19.9 percent stake in BoCom for 14.46 billion yuan (US$1.75 billion), which approached the mainland’s 20 percent limit for a single foreign investor in a Chinese bank.

At that time, HSBC was ambitious, regarding itself as the “strategic shareholder” and major partner of these mainland financial institutions in which it invested, and was eager to expand its banking and financial business in the mainland.

However, the authorities have never lowered their guard against foreign investors.

The 20 percent limit has been in force for more than a decade.

Foreign investors have never been allowed to participate in the management of mainland financial institutions.

HSBC and other foreign investors — such as Goldman Sachs Group, Inc., Morgan Stanley and Bank of America Merrill Lynch — all suffered from the same fate.

Though they were dubbed “strategic shareholders”, they were unable to act any differently from ordinary investors.

Hence, they have been reducing their stakes or exiting their investments.

HSBC has reduced much of its stake in Ping An Insurance and in Industrial Bank.

However, it has been the second-largest shareholder of BoCom, with a 19 percent stake for more than a decade.

Finally this extraordinary, long-standing relationship seems to be bearing fruit.

Going by Niu’s remarks, HSBC will be able to replace the Ministry of Finance (which has a 26.5 percent stake) as BoCom’s biggest shareholder by adding a 7 percent stake.

Nevertheless, even if HSBC becomes the largest shareholder, with a vice chairman’s seat, BoCom will continue to be heavily under the control of the government, which will be able to exert its influence through other major state-owned shareholders such as the National Social Security Fund, Capital Airports Holding Co. and Shanghai Haiyan Investment Management Co. Ltd.

It is not a coincidence that Niu is offering an attractive deal at this moment.

HSBC set out 10 strategic actions in its investor update in early June, indicating that it will pivot further to Asia, especially China.

Rather than building up its businesses in the mainland bit by bit, leveraging on its BoCom stake will be a much more efficient option to fast-track its development there.

More importantly, BoCom is in need of a transformation.

Among the Big Five banks in China, its market value is the lowest, at only 600 billion yuan.

In terms of aggressiveness and flexibility, BoCom is not keeping up with Minsheng Banking Corp. (01988.HK) and China Merchants Bank Co. Ltd. (03968.HK).

In short, BoCom needs a new positioning to stand out from the other mainland banks.

If HSBC becomes a genuine strategic shareholder of BoCom, it will be able to gain from providing asset management services to its international clients that takes advantage of the renminbi internationalization process and China’s opening up of its capital accounts.

The mainland financial market is finally opening up to foreign investors after almost two decades.

Though HSBC is still regarded as a foreign investor, it was in fact founded as the Hong Kong and Shanghai Bank 150 years ago in Hong Kong.

It would not be surprising if HSBC could become the first foreign bank to successfully penetrate the mainland.

This article appeared in the Hong Kong Economic Journal on July 3.

Translation by Darlie Yiu

[Chinese version中文版]

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