Bank On Regulatory Risk

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HSBC has hit an unexpected regulatory snag in China, according to the FT. HSBC invested US$1.75 billion to buy 19.9 percent (the maximum allowed for an individual foreign investor) in the Bank of Communications (BoCom)three years ago. This was done as part of a long-term strategy and the deal included an agreement that the stake could be lifted to 40 percent in the event that restrictions on foreign investment were lifted.

While the theory was good, and the focus was on adapting to new regulations…it seems to have been assumed that the most likely change would be greater openness and more investment. Sadly for HSBC, while there has indeed been regulatory change, it has come in an unexpected form:

    “Liu Mingkang, the chairman of the China Banking Regulatory Commission, told the Financial Times in Hong Kong that BoCom had been reclassified as a “large state-owned bank” instead of a “joint-stock bank”.

    The government regards the members of this class of bank – which also 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 ensuring government control over the economy and therefore the nation.

    Officials have all but said they would never allow these banks to be controlled by foreign interests.”

It is also reported that (Hong Kong-listed) BoCom, which has some RMB1,00 billion (US$130 billion) in assets, may soon make a secondary offering on the Shanghai stock market, with the possibility that HSBC’s stake could be diluted.

As HSBC are operating in a key strategic industry (and with a company in which the government has about 41 percent) they are obviously at high risk of policy and regulatory change – and the reclassification of BoCom into a key enterprise is a good example of how these things can impact business plans.

I have written about protectionism and foreign investment issues recently, and as the FT points out, there is some concern about the motivations behind the BoCom move:

    ““The government has decided to grab another institution to ensure it retains control of at least half the banking market,” says Charlene Chu, Fitch banking analyst….The big five currently control 52 per cent of the Chinese banking ¬market but their share is shrinking. The newly created China Postal Bank could also be placed in this regulatory category, securing a larger buffer against the gradual erosion of government influence in the industry.”

The message is that, where strategic national interests (not to mention social and financial stability) and key state enterprises are involved, the government will not take risks over management control. Even with blue-chip friends like HSBC. They will however continue to welcome the capital, technology, expertise and other gems on offer.

This story is a timely reminder of the need for comprehensive risk analysis in business planning, and the fact that the government’s impact on business cannot be ignored.

See news sources:

HSBC’s China expansion hits roadblock
By Jamil Anderlini in Hong Kong and Peter Thal Larsen in London
Published: April 11 2007 22:06 | Last updated: April 11 2007 22:06
FT (Subscription)

Reclassification ends HSBC’s hopes for BoCom (Subscription)
By Jamil Anderlini and Sundeep Tucker
Published: April 12 2007 01:09 | Last updated: April 12 2007 01:09

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