It sounds like one of those minor bureaucratic readjustments but in China, the impact is major. A regulatory reclassification by Chinese authorities of 41 per cent state-owned Bank of Communications has dealt a blow to HSBC’s expansion strategy in China, reports the FT.
BoCom, as it is known, is HSBC’s main domestic partner in China and its reclassification into a “large state-owned bank” instead of a “joint-stock bank” brings with it new rules that protect the Chinese lender from a foreign takeover.
HSBC paid $1.75bn three years ago for 19.9 per cent of BoCom – the biggest stake allowed for a foreign investor under Chinese rules. The purchase agreement included a clause allowing it to raise its stake to 40 per cent if and when the government raised foreign investment limits.
The limit capping foreigner shareholdings in some Chinese lenders is still expected to be lifted in the future but such a reform is now unlikely to apply to BoCom.
Liu Mingkang, chairman of the China Banking Regulatory Commission, told the FT that the government regarded the members of the “large state-owned” class of bank – which includes Bank of China, Industrial and Commercial Bank of China, China Construction Bank and Agricultural Bank of China (formerly known as the “big four”) – as integral state assets essential for proper management of the economy.
Officials have all but said they would never allow these banks to be controlled by foreign interests.
“The big five banks account for 52 per cent of the Chinese banking market and any financial risks in these banks have a major impact on the overall stability of the economy,” Mr Liu said.
In another possible setback for HSBC, Beijing is expected within the next two weeks to approve a secondary share offering of up to Rmb30bn ($3.9bn) on the Shanghai stock market by Hong Kong-listed BoCom.
As foreign investors have little access to the Shanghai market, HSBC will need special dispensation and have to pay about Rmb6bn to avoid having its BoCom stake diluted.
A large part of the bank’s original rationale for buying into BoCom, rather than one of the Big Four banks, was the hope that it would eventually gain full management control.
The reclassification will inevitably raise eyebrows among overseas banking executives looking for signs of which way the political wind is blowing in Beijing, the FT says in a separate comment. But the longer term question raised is how long it will take before foreign investors such as RBS and HSBC start making profits from operational joint ventures in areas such as credit cards and wealth management and when, if ever, they will be allowed to take proper managerial control of a Chinese bank.