Is HSBC Holdings plc Making The Right Decision By Betting On China?

HSBC (LSE: HSBA) is going back to its roots. The bank, which was first established in 1865 to finance trade between Europe and Asia from Hong Kong, is looking to expand its Asian operations, after scrapping international expansion plans. 

In many respects, this change makes a lot of sense for HSBC. During the first-half of this year, 69% of group pre-tax profit came from HSBC’s Asian arm. The group’s Asian operations reported a cost efficiency ratio of 39% for the same period. However, only 36% of HSBC’s assets are located in Asia. 

Most profitable region

Asia is, without a doubt, HSBC’s most productive region and the bank is looking to capitalise on this. 

Management is looking to increase the bank’s workforce in the Pearl River Delta area of southern China, which includes the mega city Shenzen and Hong Kong, by 30% during the next few years. At the same time, the group is planning to cut 50,000 jobs from its global headcount. HSBC has targeted a ten-fold increase in pre-tax profit from the Pearl River Delta region by 2020. 

But while HSBC is increasing its Chinese presence, many of the bank’s peers are fleeing the region. 

Change of heart 

Before the financial crisis, global banks fought tooth and nail to buy into China’s financial industry. Deutsche Bank, Goldman Sachs Group Inc. and Bank of America Corp. all snapped up shares in Chinese lenders, often off-market and at premium prices. However, since 2012 global banks have sold off $14bn of shares in Chinese lenders. Deutsche Bank may currently be planning the sale of its $3.5bn Huaxia Bank Co. stake. 

According to financial news service Bloomberg, Western banks are leaving China as the country’s economic situation deteriorates. The number of bad loans in the financial system is rising, and some of China’s biggest lenders reported zero profit growth for the second quarter.

The right decision 

So is HSBC making the right decision by swimming against the tide? Well, unlike other international lenders HSBC’s roots are in Asia, and the group already has strong ties with China. For example, the bank recently became the first foreign commercial bank to issue bonds in China, a landmark deal signalling authorities’ soft stance towards the bank. 

As the Financial Times points out, greater access to local funding could aid HSBC’s plan to build up its Chinese business. Indeed, international banks that have tried to expand in China have been faced with restrictions on lending and the transfer of funds between their Chinese arms and offshore parents. An in-country source of funding would significantly improve HSBC’s growth potential within the region. 

Still, only time will tell if HSBC is making the right decision by increasing its presence within China. That said, the company is in a better position than most to benefit from the region’s growth and has the potential to succeed where others have failed.