A First Look Inside HSBC’s China JV

Euromoney, November 2017 (first published September 28)

After years of discussion and an agonizing wait for regulatory approval, HSBC’s securities joint venture in China – the first to have majority foreign control – is approaching launch. Senior figures explain the process and what the JV will look like.

It has been a long time coming – and that’s putting it mildly – but HSBC’s mainland investment banking joint venture is finally approaching the start line. It’s still not quite done – there are China Securities Regulatory Commission inspections to be held, specific licences to be awarded, individual tests to be passed – but we can finally say with certainty that HSBC Qianhai Securities Limited will soon be open for business.

In his office in HSBC’s Hong Kong headquarters, Gordon French, head of global banking and markets for Asia Pacific, reflects on a process that has, one way or another, lasted rather a long time. Setting up the venture “goes back 12 years,” he says, “and maybe even slightly longer than that.

“There were times along the way, including in recent years, when we did get close to setting up joint ventures but decided it wasn’t going to be the right structure, the right framework, the right partner or the right design, and pulled back.”

For a long time, all that was on the table was the less-than-ideal joint venture structure that has been employed by many foreign investment banks over the years: a minority stake in a JV alongside an established domestic partner. There were quirky exceptions – both Goldman Sachs and UBS, among the first in, got either more licences than the others or a greater degree of management influence, in sometimes elaborate structures – but basically the only available option was to be the smaller partner in somebody else’s show.

None of the JVs, from Citi Orient to Deutsche’s Zhong De Securities, could really be said to have been a knockout success: all of them making a contribution but dwarfed in securities business by the big home-grown brokerages. Their contribution to overall China investment banking profitability at those houses has, by and large, been negligible.

JPMorgan got fed up and sold out of its JV earlier this year.

Then, in 2013, the Mainland and Hong Kong Closer Economic Partnership (CEPA) came into being and, in particular, Supplement X, among whose sundry clauses was this: “Hong Kong-funded foreign-invested securities companies will be allowed to set up one full-licensed joint venture securities company each in Shanghai, Guangdong Province and Shenzhen… the maximum percentage of aggregate shareholding of the Hong Kong-funded institutions is 51%.”

It doesn’t look much, on paper, but for HSBC this was an enormously important shift. It meant two things: that, provided HSBC put it in the right place, it appeared to be permitted to launch a joint venture within which HSBC, not the local partner, would have control; and, better still, that among all the international peer group, only HSBC (and Standard Chartered, which has different priorities) appeared to fit the bill.

“When CEPA came into being, Stuart Gulliver and other senior people spotted the opportunity to aim higher,” says Irene Ho, CEO and general manager of the new venture, speaking in her first interview on the subject.

When word of CEPA X’s likely concession started circulating in 2012, HSBC’s senior staff formed a task force to study it and set out to find a partner, starting dialogue with the Qianhai authorities, in a district of Shenzhen, in 2012.

Finding the right partner required a quite specific set of attributes. It needed to be a partner in one of the cities where these new JVs would be permitted, one with a decent track record but young enough to allow the JV to be basically a greenfield set-up, and , crucially, a willingness to let the foreign partner be in charge.

Qianhai Financial Holdings back then – and still today, to an extent – was little known outside of China or even Shenzhen. So why them?

“Best partner, best situation,” says French. “Qianhai is in the Pearl River Delta, so the location is ideal. The connectivity with Hong Kong is also attractive, but this JV will have national licences and will allow us to do business for global clients. It would have been very hard for any other partner in any other location, because this is the only partner to have given us all those things and ticked all those boxes.”

And a willingness to cede majority control of the venture?

“CEPA X gives us that optionality,” says French. “But yes, the willingness of our partner to do it for the first time in a partnership with HSBC was crucial.”

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