HSBC, Bank of East Asia get green light for mainland securities joint ventures

Deal makes HSBC the first foreign bank to hold a majority stake in a mainland securities joint venture

PUBLISHED : Friday, 30 June, 2017, 9:30pm
UPDATED : Friday, 30 June, 2017, 11:06pm

HSBC and Bank of East Asia (BEA) have finally both received approval to establish their securities joint ventures in the Qianhai economic zone, the two banks announced on Friday.

Both lenders will partner with Qianhai Financial Holdings, a wholly owned subsidiary of the economic zone.

It has taken over a year and a half for the two banks to get the go-ahead from the China Securities Regulatory Commission (CSRC), who gave their approval at a time when Hong Kong is holding a number of events to commemorate the 20th anniversary of the UK handing control of the city to China.

“We are delighted to receive this approval on the occasion of the 20th anniversary of the establishment of the Hong Kong SAR,” said Peter Wong, chief executive of HSBC in a statement.

“Once operational, this securities company will expand HSBC’s product offerings in China. Both our mainland and foreign clients the future benefit from the further growth and liberalisation of mainland China’s capital markets.”

HSBC announced the creation of its joint venture back in November of 2015, and BEA announced its own the following month.

The two joint ventures are set up under CEPA (the mainland and Hong Kong closer economic partnership arrangement).

In a statement, BEA said that the establishment of EA Qianhai Securities was a “marked achievement of cooperation between Shenzhen and Hong Kong in the Qianhai region, as well as the liberalisation of the financial sector, particularly the securities sector under CEPA 10.”

David Li Kwok-po, BEA’s chairman and chief executive said in the statement that the bank would “act as a positive force in deepening the financial cooperation between Shenzhen and Hong Kong.”

BEA will own 49 per cent of its venture, East Asia Qianhai Securities, but will be the largest shareholder. Qianhai Financial Holdings will own 4.9 per cent, while local corporates Shenzhen Infogem Technologies and Chenguang Holding Group have 26.1 per cent and 20 per cent respectively.

HSBC will own 51 per cent of its joint venture, HSBC Qianhai Securities. The bank said that would make it the first foreign lender to hold a majority stake in a securities joint venture in China.

In the statement, HSBC said the joint venture was expected to begin operating this year.

HSBC’s 51 per cent stake is the maximum that a Hong Kong funded institution can hold in a mainland securities company. Non-Hong Kong financial institutions are not permitted to hold more than 49 per cent.

“This [the majority ownership] is a significant advantage for HSBC,” said Benjamin Quinlan, chief executive of financial services consultancy Quinlan & Associates.

“It may help them avoid the problems with their partners that affected other foreign banks’ securities joint ventures such as Morgan Stanley’s and BNP Paribas’.”

Morgan Stanley sold its stake in China International Capital Corp (CICC) in 2010, while BNP Paribas withdrew from its joint venture with Changjiang Securities in 2007.

Many of the large international investment banks have set up securities joint ventures in mainland China, but they have struggled to gain traction.

“Not having full control is one of the reasons, but there are others, including regulatory hurdles as most of the foreign banks’ joint ventures are only able to operate in the primary market, and also the fact that they have a higher cost base than their local competitors,” said Quinlan.

Last year JP Morgan said that it was in talks with its Chinese partner, First Capital, to sell back its stake in their joint venture, JP Morgan First Capital.

However, other banks have looked to expand, and recently there were reports that both UBS and Morgan Stanley were looking to raise their stakes in their joint ventures to 49 per cent.