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Joint misadventure

3 November 2015 By Peter Thal Larsen

One sure way to upset investment bank bosses is to ask about their securities joint ventures in China. After spending a decade trying to establish a foothold in the People’s Republic, most Western groups have little to show but mounting losses and minimal market share. So it may seem surprising that HSBC is belatedly setting up shop through a joint venture with Shenzhen Qianhai Financial Holdings, a state-owned investor. But its approach has some advantages that could make up for the slow start.

For one, HSBC will be the first major foreign lender with a majority shareholding in its joint venture. It has managed to do so by exploiting an agreement designed to encourage financial integration between Hong Kong and mainland China. That’s a big advantage: other investment banks have been forced to settle for minority stakes. Only UBS and Goldman Sachs have effective day-to-day control of their onshore operations.

HSBC may also benefit by starting from scratch, allowing it to impose its own systems and culture. Other securities joint ventures have suffered from clashes over compliance and bonuses.

Holding back has had some unexpected benefits, too. Many established brokerage houses are now also facing intense scrutiny from regulators over their role in China’s stock market boom and bust. Besides, HSBC’s absence has spared it a financial drain: an analysis by Reuters last year found that existing joint ventures had collectively lost an average of 21 million yuan ($3 million) since 2007.

As a big issuer of bonds in Asia, HSBC needs a foothold in China’s rapidly changing fixed income markets. But the bank knows from experience that much can go wrong: a credit card joint venture with Bank of Communications, launched with much fanfare in 2009, has been a flop. Regulators can prove reluctant to issue new licenses, and political partners which help to open doors today can fall out of favour. In a country where bond market defaults are rare, further financial reform remains uncertain. Even so, HSBC has lost little by lagging behind its rivals. The bar for success over the next decade could hardly be lower.


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