* HSBC to use JV to tap China's onshore bond market
* Foreign rivals on restrictive licences have made little
* HSBC will have full control of JV and broader licence
* Risk of rising defaults in slowing Chinese economy
By Lawrence White and Umesh Desai
HONG KONG, Nov 9 HSBC is seeking to
overtake Western rivals in the race for a slice of China's $4
trillion onshore bond market thanks to an investment banking
partnership with a state-owned investor it announced last week.
Europe's biggest bank is late among foreign banks to the
party in China's onshore investment banking market, where rivals
like Credit Suisse, Deutsche Bank and
Goldman Sachs established joint ventures with local
players years ago.
But foreign banks have made limited inroads in China because
of the restrictive licences handed out to the early entrants.
Morgan Stanley Huaxin Securities, the top foreign player in
China's onshore bond market this year, ranked 29th by proceeds
raised, just ahead of UBS, according to Thomson
The move is not without risk in a slowing economy with a
heavily indebted corporate sector, but HSBC, which is exploiting
new rules that favour Hong Kong-funded lenders, will have an
extensive licence and will not be bound by the 49-percent
ownership cap normally imposed on foreigners.
And while rivals partnered with smaller local brokerages,
HSBC's partner is the Chinese government itself.
"The other banks have had a 10-year headstart and not gotten
very far, and I think HSBC could be the tortoise to their hares
and get ahead despite a slower start," said Keith Pogson, Asia
head of financial services at EY.
CEO Stuart Gulliver said last week HSBC aims to establish a
foothold in issuing bonds in China, part of a potentially risky
strategy to expand in the country's export-oriented Pearl River
Delta industrial zone, despite China's slowing economic
HSBC will work with Shenzhen Qianhai Financial Holdings, the
state investment fund arm of a development zone bordering Hong
Kong that has been earmarked by the government for investment.
The venture is subject to regulatory approval, HSBC said.
Existing joint ventures set up by foreign investment banks
in China have mostly foundered, with bankers privately blaming
the lack of majority ownership and a requirement to partner with
weak local firms rather than top-tier players.
A Reuters analysis of data from China's securities regulator
showed that between 2007 and 2014 they made an average loss of
21 million yuan a year.
STARTING FROM SCRATCH
HSBC hopes to avoid that by building from scratch an onshore
venture that it will control and run.
"The benefit of this approach is we can build this venture
to our global standards of governance and technology," said
Gordon French, head of global banking and markets in Asia
Pacific for HSBC.
Ratings agencies have nevertheless expressed concerns that
the breakneck speed of China's corporate bond market while the
economy slows could lead to a boom in defaults that might
China's corporate debt-to-GDP rose to 160 percent, with
total borrowings of $16.1 trillion in 2014, twice that of the
United States, and could rise to $28.5 trillion in 2019,
according to Standard & Poor's.
"Rapid debt growth, opacity of risk and pricing, very high
debt to GDP, and the moral hazard risk of the Chinese market
make it a high risk to credit," the rating agency said in July.
That could make it difficult for HSBC to build a profitable
business while adhering to its costly global compliance
The biggest challenge to HSBC's attempted push will come
from local players, with their huge branch networks and the
advantage of incumbency.
"The domestic houses are well established with strong
balance sheets and financial muscle, which will make it hard for
new players to break into this market and make it a profitable
business on a standalone basis," said Louis Kuijs, analyst at
(Editing by Lisa Jucca and Will Waterman)