How HSBC Holdings PLC (ADR) (NYSE:HSBC)’s Entry in China Skirts Hurdles

HSBC Holdings PLC (ADR) (NYSE:HSBC) is moving to tap into China’s onshore bond market several years behind rivals. However, the bank is hoping to have a much smoother ride in the market than its competitors, partly because its entry strategy eliminates multiple hurdles. In China, HSBC is partnering with a government-backed investor, which is expected to earn it a more extensive license to operate in China’s investment banking market.

HSBC Holdings PLC (ADR) (NYSE:HSBC) is the latest major Western investment banker pursuing the nearly $4 trillion onshore bond market in China. However, the company’s move into China is coming late, almost 10 years behind its major competitors. Nevertheless, going late into China could be a blessing than a setback for HSBC, because the bank is able to exploit a new policy so that it removes some restrictions from its license.

Partnering with the government

While the likes of Credit Suisse, Goldman Sachs Group Inc (NYSE:GS) and Morgan Stanley (NYSE:MS) were forced to collaborate with weak local firms to operate in China, HSBC will escape that restriction. Therefore, instead of building its business on potentially risky partnerships that can limit its market penetration, HSBC Holdings PLC (ADR) (NYSE:HSBC) will be working with the Chinese government itself.

Shenzhen Qianhai Financial Holdings, the Chinese firm that HSBC is partnering with, is backed by the Chinese government and is also set to get more government investments. The strategy of collaborating with Shenzhen Qianhai should clear many hurdles in HSBC’s entry and operation China.

Flexible ownership structure

According to HSBC Holdings PLC (ADR) (NYSE:HSBC) officials, the other benefit the bank stands to enjoy in its late entry into China is that it will sidestep the restrictive ownership structure imposed on its foreign counterparts in the market. Earlier foreign investors in China’s investment banking market were bound by a 49% ownership cap, which greatly limited their growth in the market. In the case of HSBC, the company will be able to build its business from scratch, thus allowing it greater control of its business in the market despite being a joint venture.

Economic slowdown

Perhaps the problem in China that could also impact HSBC Holdings PLC (ADR) (NYSE:HSBC) is the economic cold that is spreading in the country. Slowing economic growth could trigger defaults and expose investment bankers to more risks.

Sources: reuters