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Louis Beckerling

Hong Kong's biggest lender, HSBC, is poised to become the first privately owned foreign bank to take an equity stake in a mainland bank.

Hongkong and Shanghai Banking Corp last night confirmed it was 'in discussions which may lead to a possible minority investment in the Bank of Shanghai'.

Though the size of the proposed stake was not disclosed, it is reliably understood to be under 10 per cent.

The proposed investment will be subject to the parties reaching agreement on terms and conditions and also regulatory approval, said bank spokesman Gareth Hewett in Hong Kong.

If the deal goes ahead, HSBC - the Hong Kong-based unit of London headquartered HSBC -  will beat off all contenders to become the first foreign bank to benefit from relaxed investment rules negotiated under China's accession to the World Trade Organisation.

However, ahead in the queue is the World Bank's International Finance Corp (IFC), which was invited by the mainland to provide technical assistance to the fledgling Bank of Shanghai when it was created in 1995 from the restructuring of China's former credit unions.

IFC took a 5 per cent equity stake in Bank of Shanghai, for which it paid US$22 million, and secured a seat on the board.

Established by the World Bank to promote sustainable private sector investment in developing countries, IFC undertook a long-term technical assistance programme with Bank of Shanghai.

'This assistance has covered all major management and operational aspects of the bank,' it said.

At the end of June, the bank had total assets of 105.2 billion yuan (about HK$98.5 billion), and was expected to boost this to 200 billion yuan by 2005. It has 196 branches throughout Shanghai, 4,500 staff, and serves a broad range of personal and corporate customers.

The bank has been an aggressive player on the mainland market and earlier this year the People's Daily  reported it had reached an agreement with Thakral Bank of Iran on offering a US$16.14 million export credit to Teheran for buying Chinese underground railway facilities.

This made it the first commercial bank in China to grant export credit, reported the paper.

It has also been identified as a front runner in the race by the better-capitalised city commercial banks to list and raise fresh capital in order to help them compete with foreign counterparts in the wake of China's entry into the WTO.

A People's Bank of China official was quoted by the Shanghai Daily  earlier this year as saying the central bank had its eye on such listings.

The paper also reported that the Bank of Shanghai had vowed to become the first of the city's commercial banks to secure a listing.

Under agreements negotiated with China to secure its accession to the WTO, foreign banks may begin providing full banking services to corporate customers in two years' time and in five years will enjoy unrestricted access to both corporate and private customers.

At present, HSBC operates nine branches on the mainland, as well as a sub-branch and two representative offices. It employs about 1,000 employees and has moved its China management office from Hong Kong to Pudong in Shanghai.

Under the restricted operations allowed to date by mainland authorities, it has expanded its business to provide yuan banking services, including deposits, loans, and settlement services to customers and secured lines of credit with local state-owned banks to fund these services.

However, the share of the banking business by foreign operators is low. The 177 foreign banks on the mainland operate 155 branches with a combined asset base of about US$34 billion, which represents just 1.5 per cent of financial assets in China.

At just US$5.8 billion, the share of deposits held by foreign banks is at present 0.4 per cent.

Purely organic growth from this low base was likely to be a slow and laborious process, bank executives have said, leaving open the prospect of growth through acquisition once this is allowed by mainland authorities.



HSBC set to win China race