November 2, 2015 / 1:06 PM / 3 years ago

HSBC targets Chinese bond market with securities joint venture

HONG KONG (Reuters) - Europe’s biggest lender HSBC (HSBA.L) is setting up a majority-owned securities joint venture in China, taking advantage of Chinese rules that favor Hong Kong-established banks over foreign peers in the world’s second biggest economy.

A traffic light shines red near the HSBC bank logo, pictured at the bank buidling in Paris, June 15, 2015. REUTERS/Christian Hartmann

HSBC’s aim is to establish a foothold in issuing bonds in China, which the bank sees as an area of strong future growth.

HSBC said on Monday it would own up to 51 percent of the proposed joint venture with China’s unlisted Shenzhen Qianhai Financial Holdings Co Ltd.

“It opens up quite a significant opportunity, mostly in the area of bonds,” HSBC Chief Executive Stuart Gulliver told reporters on a conference call. “It allows us to do debt capital markets in China in RMB (renminbi) for corporates.”

HSBC has already said it plans to shift assets into China’s Pearl River Delta region in the southern province of Guangdong, a move seen by analysts as potentially risky given the country’s slowing economic growth.

“As China moves forward people will have to save for their own retirement, healthcare, education of their kids, etc. That means long-term liabilities and they’ll need long-term assets,” Gulliver said.

He declined to forecast potential profits for the business nor how much the bank has invested, but he said “it is not insignificant.”

“It will take us three to four years for it to become profitable and start to make a return, but it’s a significant component of both our global banking and markets proposition in China and also commercial banking,” Gulliver said. He was speaking after reporting a 32 percent rise in quarterly profits.

HSBC should have an edge over foreign rivals due to its ownership of a Hong Kong-based banking subsidiary, The Hongkong and Shanghai Banking Corporation Limited.

Ownership for other foreign banks of their China securities joint ventures is capped at 49 percent. Industry watchers say those ventures suffer from restrictive licences that confine them to underwriting stock offerings rather than share trading.

Since 2007, foreign investment banks operating through joint ventures with local partners in China have struggled to make much headway. A Reuters analysis last year of data from China’s securities regulator showed they averaged a collective loss of 21 million yuan ($3.31 million) a year.

HSBC said the proposed joint venture could engage in the full range of investment banking and securities businesses in China. The proposed venture is subject to regulatory review.

($1 = 6.3371 Chinese yuan renminbi)

Additional reporting by Steve Slater in London; Editing by Kenneth Maxwell and Mark Potter

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