HSBC Holdings (LSE: HSBA) is moving into uncharted waters as the bank pursues a joint venture with Chinese partner, Shenzhen Qianhai Financial Holdings.
Although, while the waters are uncharted, some of the HSBC’s peers have been here before, but almost all other east-west tie-ups have ended in tears. Morgan Stanley was one of the last western banks to try and make a name for itself in Asia by tying up with a local partner, but the bank left in a hurry five years ago.
Tough trading partner
For more than two decades, western banks have tried to initiate partnerships with Chinese peers, as they attempt to profit from the region’s economic growth. However, regulations on the movement of capital make operating within the region extremely difficult. Indeed, international banks that have tried to expand in China have been faced with restrictions on lending and the transfer of funds between their Chinese arms and offshore parents. As a result, almost all of the western banks that have tried to crack the Chinese market have failed.
Still, HSBC may have an edge over its western peers when it comes to dealing with China. You see, HSBC is eligible to apply for majority ownership of its Chinese joint venture, something no other western bank has been able to do. The rules recently changed to allow Hong Kong-founded, and funded, entities to play an active role in China’s financial development. As HSBC was founded in Hong Kong, and is one of the region’s largest lenders, Chinese authorities have allowed the lender to adopt a stance that other western banks have been unable to attain.
What’s more, HSBC recently became the first foreign commercial bank to issue bonds in China, a landmark deal signalling authorities’ soft stance towards the bank. And as HSBC is now able to raise capital inside China, there are no concerns about the movement of capital between the bank’s offshore parent and Chinese joint venture.
Overall, compared to other western banks, HSBC has unprecedented access to the Chinese market. Nonetheless, unique access to the market is no use if the bank can’t put its assets to work.
Struggling for growth
As part of HSBC’s long-term plan to increase its Chinese presence, the bank is shifting its risk-weighted assets — a bank’s assets or off-balance-sheet exposures, weighted according to risk — from western markets, such as Europe, the UK and US to China.
During the third quarter, HSBC cut its risk-weighted asset exposure in Western markets by $38bn, with the intention of redeploying these assets in Asia. However, the bank has only been able to deploy $5bn worth of assets so far.
As chief executive Stuart Gulliver explained, the bank had been forced to slow its redeployment of assets because of the slowdown in Asian economic growth. HSBC is looking to cut $290bn of risk-weighted assets in total. Of these, management is looking to redeploy $150bn of assets into the Asian market. At a rate of $5bn a quarter, it will be a while before HSBC can take full advantage of its unprecedented access to the Chinese financial system.
