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Hongkong Bank seals landmark mainland investment

Purchase agreement gives it the largest foreign-held stake in a Chinese lender

The Hongkong and Shanghai Banking Corp yesterday completed the largest investment in a Chinese lender by a foreign bank.

The agreement, signed in Beijing's Great Hall of the People, with top mainland government officials looking on, will see Hongkong Bank pay 14.46 billion yuan for 19.9 per cent of the mainland's Bank of Communications (Bocom).

Under the deal, a joint venture will also be set up to tap the mainland's underdeveloped credit card market.

Hongkong Bank, founded 139 years ago in Hong Kong and Shanghai, will also help the mainland's fifth-largest bank to improve risk management and corporate governance.

Pending regulatory approval, Hongkong Bank will buy 7.77 billion Bocom shares, to become its second-largest shareholder behind the Ministry of Finance, according to a statement from the Shanghai-based bank.

The investment will give Hongkong Bank the largest foreign stake in an established mainland bank and is just shy of the 20 per cent cap on any single international investor's holdings in a mainland bank.

'This agreement between Bocom and HSBC establishes a benchmark for strategic co-operation between domestic and foreign financial institutions in China,' said Sir John Bond, chairman of Hongkong Bank's UK-based parent HSBC Holdings, at yesterday's signing ceremony.

'This is the final investment we will make in the name of HSBC in China,' he added at a press conference that followed.

The latest agreement represents HSBC's biggest single investment in the mainland banking sector. It is already the foreign bank with the largest presence on the mainland. Aside from operating nine branches, two sub-branches and two representative offices in major mainland cities, the world's third-largest bank by market value bought an 8 per cent stake in Bank of Shanghai for 517.92 million yuan in 2001. Late last year, it spent another US$20 million to acquire half of former Sino-foreign joint venture Fujian Asia Bank.

As foreign banks face regulatory and budgetary constraints on the rapid expansion of branch networks, HSBC is hoping to benefit from Bocom's network of more than 2,700 branches and outlets in 137 of the mainland's wealthiest cities.

For a start, Bocom and Hongkong Bank will team up in a joint venture to issue credit cards bearing the brand names of both banks. A source said Hongkong Bank would initially seek a 49 per cent stake in the joint venture.

Bocom vice-president Qiao Wei said the two banks would also co-operate on the development of other products.

Hongkong Bank chairman David Eldon said it was seeking two seats on Bocom's 19-member board.

HSBC would also help Bocom improve its internal audit and risk management systems as well as corporate governance, Mr Eldon said.

As part of the restructuring to prepare the bank for a Hong Kong initial public offering in the next year, the Ministry of Finance injected another 5 billion yuan into the bank, Central Huijin Investment, the government company established to hold state capital in mainland banks, put in 3 billion yuan, the National Council for Social Security Fund 10 billion yuan and Bocom's existing shareholders 1.13 billion yuan.

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