HSBC finally wins China JV approval as markets open up

The British bank’s long wait has put it behind other global competitors and given domestic Chinese banks time to consolidate their position at home and extend their reach overseas.
HSBC has finally won approval from the China Securities Regulatory Commission for its Chinese joint venture, enabling it close the gap on the select few other global banks with an onshore presence as financial sector interest in China picks up anew. 
The green light for HSBC Qianhai Securities came on Friday during a visit by China President Xi Jinping to Hong Kong on the 20th anniversary of the former British colony’s handover. 
As an adjunct to the celebrations Bond Connect, a trading link for global investors into mainland China’s bond markets, is also likely to be launched on Monday, market sources say. 
“The road to liberalisation is becoming apparent and many of the foreign banks are taking another look at China for this reason,” said Ben Quinlan, the chief executive of financial services strategy consultancy Quinlan and Associates.
US and European bank interest in China waned in the wake of the global financial crisis because existing Chinese JVs were just not making money, reduced to being mere long-term options on the possible future loosening of Chinese capital controls. Hong Kong businesses were also less willing to make transfer payments to subsidise JVs due to increased regulatory scrutiny.
But Chinese JVs are starting to turn around and cost-income ratios are improving, giving global banks fresh reason to up the ante as a new wave of business opportunities have come to the fore in China.
Much of the new excitement comes from the opening of onshore equity and bond markets to direct foreign investment. There is also the tantalising prospect of A-shares being added to MSCI’s widely tracked emerging markets index and renminbi bonds being included in major global bond indices. This should lead to significant buying by foreign fund managers.
Hong Kong is now connected by Stock Connect pipelines to the Shanghai and Shenzhen exchanges, allowing direct foreign access to Chinese A-shares, the second-biggest equity market in the world and a headspring of Chinese initial public offerings, as well as granting mainland investors access to Hong Kong-listed stocks. There is also talk of a Shanghai-London Stock Connect, probably starting next year.
Behind the game
HSBC has been waiting for its Chinese JV to be approved since November 2015 and HSBC Qianhai Securities won't begin operating by the end of the year.
Trouble finding the right partner and then waiting for approval has put the British bank far behind other foreign banks such as UBS and Goldman Sachs when it comes to setting up an onshore platform for investors.
More ominously, perhaps, Chinese rivals are now making a play for global investors by expanding overseas. On Friday, Bank of China said it had launched a debt capital markets centre in Singapore – the first of its kind by a Chinese bank – to provide bond origination and distribution services for clients in the Asia-Pacific region.
For HSBC, nonetheless, it is a case of better late than never.
Its new JV dovetails with its strategy to build a business at scale across the Pearl River Delta. The region, through which the 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.
“The establishment of this joint venture is an important step for HSBC to deliver on our strategic commitment to invest in and grow our business and operations in mainland China,” Stuart Gulliver, HSBC's group chief executive, said in a statement.
HSBC Qianhai Securities will be based in the new free-trade zone built on reclaimed land near Shenzhen. This brings HSBC closer to privately run technology companies in the area, such as Tencent, the world's fourth-largest internet company by revenue. 
HSBC Qianhai Securities will engage in equity research and brokerage of locally listed securities; equity and debt underwriting and sponsoring; and advising on domestic and cross-border corporate mergers and acquisitions.
A person familiar with HSBC’s plans said it intended to adopt a different approach to other foreign banks in China, such as Morgan Stanley, since the London -headquartered bank is not an equities or corporate advisory-led house. Instead, HSBC will focus on bond issuance and leveraging off its lending relationships with Hong Kong-based conglomerates.
Less friction
HSBC’s deal is different from other Chinese JV security firms in a few key ways. Its JV partner Qianhai Financial Holdings is not a rival securities firm, but a local government-owned entity.
“That will give them a lot more control around managing cost, headcount and overall operational efficiency of the entity,” Quinlan said.
Importantly it will help ease cooperation between the onshore entity and offshore bankers, a problem that has dogged foreign banks in the past.
Some foreign banks have fallen out with their partners as their interests have diverged, particularly those without operational control over the partnership.
Last year JP Morgan upped sticks, selling the one-third stake it owned in an underwriting and financial advisory JV to its Chinese partner, which had a different risk tolerances and priorities. 
Another high-profile example is Morgan Stanley, which 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 prepare the ground for others. Still, it didn't last.
Higher stakes?
Ownership restrictions in China are a perennial gripe for international investment banks.
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 completed the purchase of a 4.99% stake in UBS Securities in 2015 from the World Bank's International Finance Corporation, lifting its holding in the JV to 25% from 20%.
In 2012 Chinese regulators upwardly adjusted the percentage equity foreign investors can hold in Chinese securities houses to 49% from 33%. More leniency may be in the offing.
“We are preparing measures to further open up the securities and futures market to foreign institutions, including gradually uplifting shareholding limits by foreign investors in joint venture securities and futures companies,” Fang Xinghai, a vice chairman of the China Securities Regulatory Commission, said at a press conference on February 28,
HSBC qualifies as a Hong Kong financial institution eligible for extra privileges under the Mainland-Hong Kong Closer Economic Partnership Arrangements (Cepa), Supplement X – the main perks being eligibility for a full investment banking and brokerage licence and an ownership ceiling of 51%, compared with 49% for other Sino-foreign joint ventures.
HSBC owns 51% of HSBC Qianhai Securities.

This article has been corrected to remove a reference to the scope of the JV which stated that it is limited to the free-trade zone. In fact the JV is based in Qianhai but will serve clients nationally.
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