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 Europe's biggest bank is late among foreign banks to the party in
China's onshore investment banking market, where rivals like Credit
Suisse, Deutsche Bank and Goldman Sachs established joint ventures
with local players years ago.
But foreign banks have made limited inroads in China because of the
restrictive licenses handed out to the early entrants. Morgan
Stanley Huaxin Securities, the top foreign player in China's onshore
bond market this year, ranked 29th by proceeds raised, just ahead of
UBS, according to Thomson Reuters data.
The move is not without risk in a slowing economy with a heavily
indebted corporate sector, but HSBC, which is exploiting new rules
that favor Hong Kong-funded lenders, will have an extensive license
and will not be bound by the 49-percent ownership cap normally
imposed on foreigners.
And while rivals partnered with smaller local brokerages, HSBC's
partner is the Chinese government itself.
"The other banks have had a 10-year headstart and not gotten very
far, and I think HSBC could be the tortoise to their hares and get
ahead despite a slower start," said Keith Pogson, Asia head of
financial services at EY.
CEO Stuart Gulliver said last week HSBC aims to establish a foothold
in issuing bonds in China, part of a potentially risky strategy to
expand in the country's export-oriented Pearl River Delta industrial
zone, despite China's slowing economic growth.
HSBC will work with Shenzhen Qianhai Financial Holdings, the state
investment fund arm of a development zone bordering Hong Kong that
has been earmarked by the government for investment.
The venture is subject to regulatory approval, HSBC said.
Existing joint ventures set up by foreign investment banks in China
have mostly foundered, with bankers privately blaming the lack of
majority ownership and a requirement to partner with weak local
firms rather than top-tier players.
A Reuters analysis of data from China's securities regulator showed
that between 2007 and 2014 they made an average loss of 21 million
yuan a year.
STARTING FROM SCRATCH
HSBC hopes to avoid that by building from scratch an onshore venture
that it will control and run.
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"The benefit of this approach is we can build this venture to our
global standards of governance and technology," said Gordon French,
head of global banking and markets in Asia Pacific for HSBC.
Ratings agencies have nevertheless expressed concerns that the
breakneck speed of China's corporate bond market while the economy
slows could lead to a boom in defaults that might destabilize
markets.
China's corporate debt-to-GDP rose to 160 percent, with total
borrowings of $16.1 trillion in 2014, twice that of the United
States, and could rise to $28.5 trillion in 2019, according to
Standard & Poor's.
"Rapid debt growth, opacity of risk and pricing, very high debt to
GDP, and the moral hazard risk of the Chinese market make it a high
risk to credit," the rating agency said in July.
That could make it difficult for HSBC to build a profitable business
while adhering to its costly global compliance standards.
The biggest challenge to HSBC's attempted push will come from local
players, with their huge branch networks and the advantage of
incumbency.
"The domestic houses are well established with strong balance sheets
and financial muscle, which will make it hard for new players to
break into this market and make it a profitable business on a
standalone basis,” said Louis Kuijs, analyst at Oxford Economics.
(Editing by Lisa Jucca and Will Waterman)
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