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HSBC Chinese Joint Venture OK'd: What About Other Banks?

HSBC Holdings plc HSBC finally received approval from the China Securities Regulatory Commission to set up majority-owned joint venture (JV) in China. The company had announced its plan to establish a JV in China in Nov 2015, with an aim to improve profits in the fast growing southern Chinese region.

HSBC’s partner in the JV is a local government-backed firm, Qianhai Financial Holdings. The company will hold 51% interest in the JV, HSBC Qianhai Securities Limited. Based in the Qianhai special economic zone in the city of Shenzhen, the JV is expected to be launched by the end of 2017.

HSBC will be investing 918 million yuan ($135 million) for its 51% stake in HSBC Qianhai. The JV will be providing equity and debt underwriting as well as M&A advisory services. Also, it will be conducting equity research and brokerage activities on the local firms.

The JV got regulatory approval under the agreement between Hong Kong and mainland China that permits ‘Hong Kong-funded’ financial firms to establish one such business in several big Chinese cities.

HSBC Chief Executive Stuart Gulliver said, “The establishment of this joint venture is an important step for HSBC to deliver on our strategic commitment to invest in and grow our business and operations in mainland China.”

In 2015, HSBC had announced plans to expand its operations in the southern Pearl River Delta region of China with the hiring of 4,000 workers and significant investments. Nonetheless, the plan got delayed owing to slowdown of the Chinese economy.

But now with the approval of the JV, HSBC will be able to operate more freely than other banks.

Are Other Banks Lagging Behind?

China has been allowing minority-owned financial JVs since 2004. The only exceptions were UBS Group AG UBS and The Goldman Sachs Group, Inc. GS that were allowed operational control over their JVs. However, following the amendments to the rules in 2007, such JVs were not allowed.

Further, banks had mixed luck when it came to profitability. While providing exposure to the vast Chinese market, these JVs have been less profitable as lucrative operations like secondary-market trading in Chinese debt and equities, and managing money for wealthy clients were not allowed. Last year, JPMorgan Chase & Co. JPM exited its JV with First Capital Securities.

Now with HSBC’s approval for establishing majority-owned JV, the doors are expected to open for other global banks as well. Of late, the Chinese regulators have been giving signals about their readiness to allow greater access to global banks into their financial markets. If this happens, banks will be able to expand their share in lucrative Chinese market.

Over the last six months, shares of HSBC have rallied 12.3%, outperforming the Zacks categorized Foreign Banks industry’s gain of 7.1%.

Currently, HSBC carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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