Approval for HSBC to launch its groundbreaking joint venture in China – the first to have a foreign-held majority – has been a long time coming.
HSBC first announced the JV, with local partner Shenzhen Qianhai Financial Holdings, in November 2015 — so long ago that its partner has since changed its name, dropping the ‘Shenzhen’, and the announcement appears to have vanished from HSBC’s site. The only remaining trace is Stuart Gulliver’s comment during the 2015 results two Februaries ago that “subject to approvals, the joint venture will be operational during the second half of this year”. When it finally opens at the end of 2017, it will therefore have taken a year longer than expected.
Still, it got there, and just in time for the 20th anniversary of the Handover. And, though the thunder of it all has been very much dissipated by the passage of time, it remains an important step.
The world of Sino-foreign JVs has always come with caveats, so it should be noted that both Goldman Sachs and UBS have had operational control of their experimental early ventures while not having majority ownership. Nevertheless, the HSBC venture marks a first. Not only will HSBC own 51%. Its partner is not an established mainland brokerage or securities company with its own direction and ambitions: it is a passive financial investor that will give HSBC free rein to run the business the way it wants.
What will the bank do with this opportunity?
There is no sugar-coating the fact that 20 years of Sino-foreign JVs have been intensely disappointing. At absolutely none of the international banks who have them does the income, if any, make any meaningful impact on the bottom (or top) lines of their broader China businesses.
In the first half of 2016, the highest net profit of them all was just RMB186.3 million ($27.47 million), for Citi Orient Securities; Goldman Sachs Gao Hua logged a mighty RMB4.6 million, and Credit Suisse Founder a loss. The best full-year figure Euromoney is aware of since 2013 was UBS bringing home RMB296 million in 2015. The combined profits for all the joint ventures in the first half of 2016 were equivalent to less than half of the bank fees from just one deal that year, China Postal Savings Bank’s IPO.
There is no sugar-coating the fact that 20 years of Sino-foreign JVs have been intensely disappointing
Along the way, banks have become irritated and dismissive of the ventures. JPMorgan abandoned its own joint venture last year. Another bank, when contacted about its JV, replied: “If you want to talk about China investment banking, the opportunities, market reforms and our overall China business, then there are lots of people who want to talk to you. If you want to talk about the performance of a particular legal entity that forms a part of our China business, then nobody wants to talk to you.”
Nevertheless, having control of a business like this has clear advantages. HSBC Qianhai Securities will operate from a special zone in Shenzhen from where it will conduct equity research and brokerage of locally listed securities, equity and debt underwriting and sponsoring in local markets, and advice on both domestic and cross-border M&A. These are all clearly potentially enormous businesses, if razor-thin on fees, and one has to start somewhere. Moreover, the Pearl River Delta is key to HSBC’s approach to China, and the presence of the venture will surely help its other businesses in the region. It means HSBC can offer onshore in China what it offers to clients offshore in Hong Kong and elsewhere.
What it doesn’t do, though, is open the floodgates for majority ownership of all the other ventures. This deal was struck under something called Supplement X of the Mainland and Hong Kong Closer Economic Partnership Agreement (CEPA), which only applies to Hong Kong-funded financial institutions that satisfy the requirements for establishing foreign-invested securities companies. Or, in other words, HSBC. (Standard Chartered and Bank of East Asia also presumably qualify, but it’s not clear either one wants to pursue the same model.)
“Clearly HSBC is in a unique position given their HK listing, so can leverage CEPA,” says one banker whose institution has a JV. Other banks are being permitted to go up to 49%, UBS and Morgan Stanley being public examples, but of course there is a world of practical difference between 49% and 51%.
The default response to any move like this is to welcome another tentative step towards full market openness while berating its limitations or unevenness. MSCI’s inclusion of A-shares in key indices, in a very limited fashion, was the most recent example; before that it was the new bond licences for JPMorgan and Citi. Bond Connect, which formally started today (July 3), will be the same.
Are foreign investment banks still enormously restricted in trying to compete with homegrown mainland players? Yes. Has this been a costly restriction, as China’s domestic equity and debt markets have become among the largest in the world? Obviously. But in that context, is HSBC’s 20-months-in-the-waiting approval a step forward? Yes again. Now let’s see what they do with it.