The Hong Kong and Shanghai Banking Corporation likes to call its China business a homecoming. But HSBC, which advertises itself as 'the world's local bank', is none too familiar to mainland bank depositors. While Hong Kong still accounts for 25 per cent of its global operating profits, Credit Suisse First Boston analyst Michael Lever says 'its China business is not even a gnat on an elephant's bum'. The world's second largest banking group intends to change that; it is celebrating its 140th anniversary this year with more acquisitions and new expansion plans for the middle kingdom. Last month, HSBC paid US$1.04 billion to increase its stake in Ping An Insurance from 10 per cent to 19.9 per cent and last Thursday, Bank of Communications (Bocom) - 19.9 per cent owned by HSBC - became the first mainland bank to list in Hong Kong. Offices in Chengdu and Chongqing will soon open under HSBC's own name, adding to the 10 branches and four sub-branches already established across the country, the largest footprint of any foreign bank. 'We have been opening in China as soon as we have been allowed to do so,' says Mike Smith, chief executive of HSBC Asia. Under World Trade Organisation accession terms, mainland banking regulators will completely lift restrictions on foreign banks by the end of next year. But Mr Smith is quick to say he thinks they will not pose a significant challenge to the giant Chinese lenders. He points out that the largest, Industrial and Commercial Bank of China, has more branches than HSBC has staff in Hong Kong. 'There has been steady deregulation in China and I expect that to continue,' he says. 'Will everything change as a result of lifting these restrictions? Of course not. It will remain a fairly difficult place to do business.' Undaunted by the challenges, the world's largest banks are jockeying for position as December 2006 approaches. Bank of America bought a 9 per cent share in China Construction Bank (CCB) for US$3 billion this month and in the process snatched the record from HSBC for the largest investment in a Chinese bank. But HSBC remains the most committed to China with a total of US$5 billion invested. 'I think HSBC's strategy is very different from Bank of America's,' says David Marshall, head of financial institutions in Asia for Fitch ratings agency. 'I don't think Bank of America has any intention of acquiring majority control of CCB because it's so huge, whereas I assume that if the opportunity arose for HSBC to acquire Bocom outright they would take it.' Mr Smith confirms that assumption. He describes the two main elements in the bank's China strategy as organic buildup through its own branch network and strategic alliances such as those with Ping An and Bocom. He says HSBC would definitely be interested in acquiring larger stakes if regulators were to lift the limit on foreign ownership, but 'any acquisitions we would make in the future would be governed very much by our strategic partners. We, on our own, would not envisage making any investments in another Chinese bank'. The point is moot anyway, because of what Mr Smith calls an 'unwritten understanding' - essentially a government ban on foreign institutions buying shares in more than two domestic commercial banks. Analysts have speculated HSBC was caught out by the government ruling and left holding shares in the relatively small Bank of Shanghai when it would have preferred a larger acquisition. 'That was something that has been talked about for some time and doesn't cause us huge concern,' says Mr Smith. But when he lists the bank's China partners he adds Bank of Shanghai as an afterthought. When you're running a massive corporation that's expanding as rapidly as HSBC, some smaller acquisitions must slip your mind now and then. In addition, partly through its subsidiary Hang Seng Bank, HSBC owns shares in Ping An Bank, Industrial Bank, a broker and an asset management joint venture. 'These are medium- and long-term investments where we will gradually expand our relationships with our partners and create a fairly significant presence in China,' says Mr Smith. The bank is certainly taking a long-term view on the country. Mr Lever says it will be five to 10 years before it begins to meet the cost of capital invested. HSBC says the return on its organic business is satisfactory but strategic investments will take longer to realise their potential. With more than 110 million customers in 80 countries, it can afford to wait. Over the past five years the group has doubled its assets to a little more than US$1 trillion. A string of mostly well-managed high-profile acquisitions since the late 1980s has brought it success and status as the only truly global bank besides US-based Citigroup, the biggest banking group in the world and its main competitor. When current HSBC group chairman Sir John Bond joined the bank in 1961, it had a market capitalisation of US$154 million. Today its market cap has grown a thousandfold. 'The most important thing the board and executive directors can do is plan the revenue streams of tomorrow and we've always had an informal rule that up to 10 per cent of the group's book capital should be invested in development businesses which represent tomorrow's revenue streams,' says Sir John, describing the rationale behind the bank's China strategy. The bank acquired Republic New York in 1999 for US$9.7 billion, CCF of France in 2000 for US$12.5 billion, and the biggest and most unorthodox of all, Household International in 2003 for US$15 billion. Household is not a bank but a US credit organisation targeting euphemistically-named 'sub-prime' borrowers who would be refused credit by traditional banks such as HSBC. The bank is looking to roll the concept out across Asia, although Mr Smith says he believes it's far too early to consider setting up in China, considering consumer credit is in its infancy there. HSBC and its strategic partners are concentrating on introducing the concept through credit cards. The bank sees no logic in going head-to-head with the large Chinese banks so the focus of HSBC's own brand is high-end corporate and commercial business, particularly trade financing. The card business is managed through Bocom and is expanding rapidly as mainland consumers catch on to credit. 'I think the credit card business will develop very, very fast but the problems will be with infrastructure,' says Mr Smith. 'I don't think you'll have a centralised credit bureau for many years, so it will be up to individual banks to create their own credit policy and credit checking, and indeed collection agencies.' Mr Smith says foreign-domestic partnerships and the central government's policy of partially listing the country's largest state-owned commercial banks are the catalysts that will eventually produce world-beating Chinese banks. 'Banks are a reflection of the economy in which they operate, and the way the Chinese economy is going it would be natural to assume that some of the Chinese banks will become some of the largest banks in the world,' he says. When asked about the massive legacy of non-performing loans and the danger that a pronounced economic slowdown could cause a whole new batch of loans to turn sour, Mr Smith says that HSBC itself would not be affected in such a scenario. He has certainly endured worse, having headed HSBC's Argentinian operation from the late 1990s through to the 2001 economic collapse. Initially during that stint, he was optimistic. 'The time is right for us and Argentina's future is extremely attractive in the medium- and long-term,' he was quoted as saying early on. 'Of all the Latin American economies, Argentina has a proven period of stability.' It was not to be, and at one point during the country's descent into chaos he was shot in the leg. So what did he take away from the experience? 'Besides scars? The specific lessons I learnt in Argentina I hope I never have to use again,' he says. 'Let's hope the economies out here are not going to go the same way that particular one did.'