HONG KONG BANKS are poised for a 'defining moment' in their history today as China dismantles its last regulatory barrier to full competition from foreign lenders and allows them unrestricted access to its huge retail banking market.
'China's commitment to open its banking market completely [on December 11] is a defining moment for foreign banks - a major breakthrough,' says Vincent Cheng Hoi-chuen, the local chairman of HSBC, Hong Kong's biggest lender and the foreign banking group with the largest presence in China. 'We are prepared for that.'
Since the fortunes of Hong Kong's finance sector in general, and HSBC's share price in particular, will continue to exert a major influence on the benchmark Hang Seng Index (HSI) - even after sweeping reforms introduced this year to the way the index is compiled - aftershocks from the 'defining moment' may well ripple across the wider share market.
HSBC's weighting in the HSI is set to fall from 30 per cent on June 27 to just 15 per cent by September next year, as the index shifts from a full market capitalisation formula to a free float-adjusted market capitalisation weighted formula. And based on the present constituents in the index, the finance sector weighting will fall from 38 per cent to 25 per cent. But that remains the single-largest sector weighting in the index, and yet to be taken into account is the almost certain inclusion in the future of ICBC and Bank of China.
With 13 full branches already operating in China (19 of the branches of its 62 per cent controlled subsidiary Hang Seng are included), HSBC has the biggest presence on the mainland of all foreign banks, and in response to the opening of the retail market to foreign competition will embark on a major expansion of its distribution network, Mr Cheng says.
Its rivals will doubtless respond in kind, but whether the increased investments will translate into immediate gains in pre-tax profit contributions from China and a revaluation of share prices, which could lift general market sentiment, remains to be seen.