HSBC in China
Introduction
After years of negotiations, China finally acceded to the
World Trade Organization (WTO) in December 2001 (see
Exhibit 1). This development was a significant milestone
in China’s integration with the global economy. One of
the most important and far-reaching consequences was the
transformation of China’s financial sector. China’s banking, insurance, and securities industries were long due for
a major overhaul, and the WTO requirements guaranteed
that the liberalization of China’s economy would extend
to the important financial sector. China’s banking sector
had become a casualty of the state. Banks and other financial institutions haphazardly extended loans to state-owned
enterprises (SOEs) based not on sound credit analysis but
favoritism and government-directed policy. As a consequence, crippling debt from bad and underperforming
loans mounted, with no effective market disciplines to
rein it in.
China recognized that opening up the banking sector
could bolster its financial system. Foreign management
would help overhaul the banking sector and put the focus
on returns, instead of promoting a social agenda. This
fiscal agenda would ultimately lead to a stronger and
more stable economy. Yet after years of direction from
the state, Chinese bank managers did not have the necessary skills to transform the banks on their own. Guo Shuqing, shortly after being promoted to chairman of China
Construction Bank, admitted that, “more than 90% of the
bank’s risk managers are unqualified.”1
Immediately upon accession to the WTO, China’s
banking sector began to open to foreign banks. Initially,
foreign banks were allowed to conduct foreign currency
business without any market access restrictions and conduct
local currency business with foreign-invested enterprises
and foreign individuals. In addition, the liberalization of
foreign investment rules made Chinese banks attractive
targets for foreign financial institutions. Sweeping domestic changes have followed. Strong emphasis has been
placed on interest rate liberalization, clearer and more
consistent regulation, and a frenzy of IPOs of state owned
banks has followed. It was in this context that HSBC rapidly expanded its presence in China.
Exhibit 1 China’s WTO Commitments
General Cross-Sector Commitments
3 Reforms to lower trade barriers in every sector of the economy, opening its markets to foreign companies and their
exports from the first day of accession.
3 Provide national treatment and improved market access to goods and services from other WTO members.
* Special rules regarding subsidies and the operation of state-owned enterprises, in light of the state’s large role in
China’s economy.
3 Undertake important changes to its legal framework, designed to add transparency and predictability to business dealings and improve the process of foreign market entry.
3 Agreement to assume the obligations of more than 20 existing multilateral WTO agreements, covering all areas of
trade.
3 Under the acquired rights commitment, agreed that the conditions of ownership, operation, and scope of activities for
a foreign company under any existing agreement would not be made more restrictive than they were on the date of
China’s accession to the WTO.
• Licensing procedures that were streamlined, transparent, and more predictable.
Commitments Specific to the Financial Services Industry
2 Allow foreign banks to conduct foreign currency business without any market access or national treatment limitations.
2 Allow foreign banks to conduct local currency business with foreign-invested enterprises and foreign individuals (subject to geographic restrictions).
3 Banking services (with a five-year transitional plan) by foreign banks:
Within two years after accession, foreign banks would be able to conduct domestic currency business with Chinese
enterprises (subject to geographic restrictions).
Within five years after accession, foreign banks would be able to conduct domestic currency business with Chinese
individuals, and all geographic restrictions will be lifted.
Foreign banks also would be permitted to provide financial leasing services at the same time that Chinese banks are
permitted to do so.
518
In-Depth Integrative Case 1 HSBC inChina 519
HSBC, known for its international scope and careful,
judicious strategy, made a series of key investments
between 2001 and 2005 that arguably gave it the most
extensive position in China of any foreign financial group.
These investments included two separate transactions that
resulted in a 19.9 percent stake in Ping An insurance, and,
in June 2004, a $1.8 billion successful tender for a 19.9
percent stake in Bank of Communications, the fifth largest
bank in China. HSBC had a long history in Asia, and was
uniquely positioned to take advantage of China’s vast
population and mushrooming middle class, high savings
rates (in the range of 40 percent), and huge capital investments (US$50 billion FDI in 2005). HSBC recognized
that the current banking system was not capitalizing on
this vast opportunity, and sought to get in on the ground
floor in this new environment. Perhaps, with further liberalization, however, China would allow future investors
to establish even greater claims to Chinese banks. Citigroup’s successful effort to gain a controlling stake in
Guandgong Development Bank appeared to undermine
earlier investors who had been limited by China’s rule that
allowed foreigners to own no more than 19.9 percent of
domestic financial institutions. Did the huge potential
rewards of being an early mover in China mitigate the
promise of uncertainty and risks of doing business in an
emerging market? After being burned in Argentina, could
HSBC relax its conservative philosophy in its China strategy? If the economy took a turn for the worse, HSBC
could face heavy losses. On the other hand, could HSBC
afford not to be an early mover in a region where it had
a longstanding presence?
Background on_HSBC______________________
History
Thomas Sutherland founded the Hongkong and Shanghai
Banking Corporation (Hongkong Bank) in 1865 to finance
the growing trade between Europe, India, and China.2
Sutherland, a Scot, was working for the Peninsular and
Oriental Steam Navigation Company when he recognized
a considerable demand for local banking facilities in Hong
Kong and on the China coast. Hongkong Bank opened in
Hong Kong in March 1865 and in Shanghai a month
later.
The bank rapidly expanded by opening agencies and
branches across the globe, reaching as far as Europe and
North America, but maintained a distinct focus on China
and the Asia-Pacific region. Hongkong Bank helped pioneer modern banking during this time in a number of
countries, such as Japan, where it opened a branch in
1866 and advised the government on banking and currency, and Thailand, where it opened the country’s first
bank in 1888 and printed the country’s first banknotes. By
the 1880s, the bank issued banknotes and held government funds in Hong Kong, and also helped manage British
government accounts in China, Japan, Penang, and
Singapore. In 1876, the bank handled China’s first public
loan, and thereafter issued most of China’s public loans.
Hongkong Bank had become the foremost financial institution in Asia by the close of the 19th century.3
After the First World War, the Hongkong Bank anticipated an expansion in its Asian markets, and took a leading role in stabilizing the Chinese national currency. The
tumultuous Second World War, for its part, saw most of
the bank’s European staff become prisoners of war to the
advancing Japanese.
The Postwar Years
In the postwar years, Hongkong Bank turned to dramatic
expansion through acquisitions and alliances in order to
diversify. The acquisitions began with the British Bank of
the Middle East (Persia and the Gulf states) and the Mercantile Bank (India and Malaya) in 1959, and were followed by acquiring a majority interest in Hong Kong’s
Hang Seng Bank in 1965. The 51 percent controlling
interest in Hang Seng Bank was acquired during a local
banking crisis for $12.4 million. As of 2002, HSBC’s interest in the bank was 62 percent and was over $13 billion.
Hang Seng, which retained its name and management, has
been a consistently strong performer. The bank made further acquisitions in the United Kingdom and Europe (from
1973), North America (from 1980), Latin America (from
1997), as well as other Asian markets.
Under Chairman Michael Sandberg, Hongkong Bank
entered the North American market with a $314 million,
51 percent acquisition of Marine Midland, a regional bank
in upstate New York. In 1987, the bank purchased the
remaining 49 percent, doubling Hongkong Bank’s investment and providing the bank a significant U.S. presence.
As a condition of the acquisition, however, Marine Midland retained its senior management.
Move to London and Acquisitions
In 1991, Hongkong Bank reorganized as HSBC Holdings
and moved its headquarters in 1993 to London from Hong
Kong. Sandberg’s successor, William Purves, led HSBC’s
purchase of the U.K.’s Midland Bank in 1992. This acquisition fortified HSBC’s European presence and doubled
its assets. The move also enhanced HSBC’s global presence and advanced the bank’s reputation as a global financial services company.
Other major acquisitions of the 1990s included Republic Bank and Safra Holdings in the United States, which
doubled HSBC’s private banking business investments
moves in Brazil and Argentina in 1997, and acquisition of
Mexico’s Bital in 2002. In 2000, HSBC acquired CCF in
France. By 2006, HSBC had assets exceeding $1,860 billion, customers numbering close to 100 million, and operations in six continents. In recent years, HSBC has made
520 Part 4 Organizational Behavior and Human Resource Management
a major commitment to emerging markets, especially
China and Mexico, but also Brazil, India, and smaller
developing economies.
Expansion, Acquisition,
and Succession———————————————–
The World’s Local Bank
HSBC, holding company set up a group policy in 1991 that
established 11 quasi-independent banks, each a separate
subsidiary with its own balance sheet.4
The head office provided essential functions, such as strategic planning, human
resource management, and legal, administrative, and financial planning and control. This setup promoted prompter
decision making at a local level and greater accountability.5
HSBC portrays itself as “the world’s local bank,” recognizing the importance of globalization, flexibility, and local
responsiveness.
As of 1998, HSBC established distinct customer groups
or lines of business that would overlay existing geographic
designations. This encouraged maximizing the benefits of
its universal scope, such as sharing best practices of product
development, management, and marketing. The geographic
perspective was melded closely with a customer group perspective, demanding both global and local thinking.
Traditionally, HSBC’s culture has embraced caution,
thrift, discipline, and risk avoidance. The bank looked at
long-term survival and considered markets in 50-year
views. Thrift manifested through the company, and even
the chairman flew economy class on flights less than three
hours.6
In 2005, incoming Chairman Stephen Green recognized the company’s rule “to follow the letter and spirit
of regulations” and signaled his intention to protect the
bank’s reputation as it extends into consumer finance.7
Bond’s Rein and Move to “HSBC”
Sir John Bond joined Hongkong Bank in 1961, spent most
of his early career in Asia and the United States, and is
credited with turning around Marine Midland Bank in the
late 1980s. Bond became CEO of HSBC in 1993, and
chairman in 1998, bringing with him a hands-on entrepreneurial style and exceptionally ambitious goals.8
He pursued acquisitions beyond HSBC’s traditional core, in pursuit of such attractive financial segments as wealth
management, investment banking, online retail financing,
and consumer finance. Bond considered shareholder value
and economic profit in deciding when acquisition premiums were in order, which was in contrast to his predecessor’s “three times book value” rule.9
By 2001, Bond had
authorized investments of over $21 billion on acquisitions
and new ventures.10
In 1998, Bond adopted the HSBC brand, and preserved
“The Hongkong & Shanghai Banking Corp.” name only
for its bank based in Hong Kong. HSBC branded its
subsidiary banks across the world with the parent bank’s
acronym and greatly expanded marketing efforts in 2000.
In March 2002, HSBC’s marketing message became “the
world’s local bank,” which would help the brand become
one of the world’s top 50 most recognizable brands by
2003.11
Household Acquisition
In 2003, HSBC’s acquisition of Household International
became the basis of HSBC’s Consumer Finance customer
group. Household utilized a unique system to forecast the
likelihood that customers would repay debt, which used
a 13-year database of consumer behavior. Household was
controversial and yet presented great opportunity. HSBC
desired to leverage this new skill in developing countries,
yet was unable to find all demographic and credit data
that Household normally relies on in the United States.
HSBC particularly looked to extend the Household model
into China and Mexico.
Transitions
In May 2006, Sir John Bond presided over his final board
meeting, with CEO Stephen Green poised to replace the
retiring chairman. Green had been with HSBC for nearly
a quarter century, after also spending several years as a
consultant at McKinsey. Green’s style is known to be
more cerebral and low key than his predecessor.12 Stephen
Green was succeeded as group chief executive by Michael
Geoghegan, 52, who joined HSBC in 1973 and was formerly chief executive of HSBC Bank plc, the group’s
principal subsidiary in the U.K. Geoghegan has a reputation as an aggressive banker who is not afraid to make
tough strategic decisions. Shortly after his appointment,
Geoghegan traveled around the world visiting more than
a dozen countries and meeting with thousands of HSBC
employees. Overall, the appointments were met with
guarded optimism in the investment community, though
not without detractors. One shareholder said: “The question is whether HSBC should have an independent nonexecutive who might make a future chairman and therefore widen the choice in the future.”13
Managing for Growth_______________________
HSBC’s strategic plan, “Managing for Growth,” was
launched in the fall of 2003. This strategy builds on
HSBC’s global, international scope and seeks to grow by
focusing on the key customer groups of personal financial services; consumer finance; commercial banking;
corporate, investment banking, and markets; and private
banking.14 “Managing for Growth” is intended to be “evolutionary, not revolutionary,” and aims to vault HSBC to
the world’s leading financial services company. HSBC
seeks to grow earnings over the long term, using its peers
as a benchmark. It also plans to invest in delivery platforms,
In-Depth Integrative Case 1 HSBC in China 521
technology, its people, and brand name to prop up the
future value of HSBC’s stock market rating and total
shareholder return. HSBC retains its core values of communication, long-term focus, ethical relationships, teamwork, prudence, creativity, high standards, ambition,
customer-focused marketing, and corporate social responsibility, all with an international outlook.15
Strategic Pillars
As part of the growth strategy, HSBC identified eight strategic pillars:
Brand: continue to establish HSBC and its hexagon symbol
as one of the top global brands for customer experience and
corporate social responsibility.
Personal Financial Services: drive growth in key markets
and through appropriate channels; emerging markets are
essential markets with a burgeoning demand.
Consumer Finance: offer both a wider product range and
penetrate new markets, such as the emerging country markets.
Commercial Banking: leverage HSBC’s international reach
through effective relationship management and improved
product offerings.
Corporate, Investment Banking, and Markets: accelerate
growth by enhancing capital markets and advisory capabilities.
Private Banking: a focus on serving the highest value personal clients.
People: draw in, develop and motivate HSBC’s people.
TSR: fulfill HSBC’s TSR target by achieving strong competitive performances in earnings per share growth and efficiency.16
Challenges in Investment Banking
Within the CIBM group, HSBC had always excelled at the
“C” (global corporate banking) and “M” (markets—sales
and trading of bonds, foreign exchange, derivatives, and
other instruments) but had lagged in its execution of the
“IB”(investment banking). Therefore, as part of the managing
for growth initiative, HSBC launched an ambitious plan to
strengthen IB. Executing the plan proved to be challenging
within the HSBC culture. According to a Wall Street Journal report, the budget for the first two years—mostly for
hiring new talent and improving technology—was around
$800 million. The then chairman, Sir John Bond, needed
top IB talent to lead the change. He hired John Studzinki,
a very experienced banker who had worked for Morgan
Stanley. Studzinski was paired with Stuart Gulliver, an experienced veteran of HSBC’s international manager program.
Because Gulliver had worked for HSBC for 26 years, he
was accustomed to HSBC’s very strict cost-control policies.
Studzinki started building a team from scratch by hiring
people from competitor’s banks, such as Credit Suisse,
Lazard Frères, and Goldman Sachs.17 According to the Wall
Street Journal account, spending was drastically increasing
and Gulliver was disturbed by this change in HSBC’s traditional prudence. For example, although unusual for the
banking industry, some bankers were promised fixed bonuses
(they are usually paid based on the company’s financial performance).18
Although expenses were increasing, profits were down.
In the first half of 2005, costs for the CIBM unit were up
24 percent to $3.32 billion, whereas pretax profit decreased
by 18 percent.19 HSBC was outranked by other banks in
terms of mergers and acquisitions for 2006. The bank
ranked number 13 (see Exhibit 2). The IB strategy
appeared to stall. In November 2005, Sir John announced
his retirement for the next May, and in May 2006,
Studzinki announced he would leave in September 2006.
Focus on Emerging Markets_________________________
In 2000, HSBC had half of its assets in developing countries.20 Most earnings, however, stemmed from mature
markets, such as Hong Kong and Britain. All but 5 percent
of group profits came from five economies, while India
and Latin America each only added 1 percent to group
profit.21
Exhibit 2 HSBC Mergers and Acquisitions Ranking
Adviser
2006 Rank
(first nine months)
Value of deals
in USS Number of deals
Goldman Sachs 1 731 b 237
Citigroup 2 659.7 225
J.P. Morgan 3 652.9 313
Morgan Stanley 4 574.2 263
Merrill Lynch 5 543.3 197
Credit Suisse 6 497.1 211
UBS 7 477.0 271
Lehman Brothers 8 430.5 138
Deutsche Bank 9 388.7 161
BNP Paribas 10 292.3 82
HSBC 13 211.2 58
Source: Carrick Mollenkamp, “HSBC Stumbles in Bid to Become Global Deal Maker,” The
Wall Street Journal, October 5, 2006, p. A1.
522 Part 4 Organizational Behavior and Human Resource Management
The Draw of Emerging Markets
Recognition of the impact of emerging markets is an
essential thread running throughout the elements of the
“Managing for Growth” strategy. Since 2000, many of
HSBC’s emerging markets’ profits have increased dramatically (see Exhibit 3). Across the board, HSBC’s pretax profits in emerging markets have increased from $905
million in 2000 to $3,439 million in 2005. China, which
lost $26 million in 2000, made $334 million in 2005, an
increase of 944 percent from 2004 alone. Mexico has
also had great success, increasing from $9 million profit
in 2000 to $923 million in 2005. In 2006, this trend continued, as total profit before tax during the first half of
2006 increased by 18 percent over the first half of 2005
(see Exhibit 3). The biggest winners were India (99 percent increase), the Middle East (95 percent increase), and
China (74 percent increase), while Indonesia (-51 percent) and Argentina (-50 percent) fell by the greatest
percentage.
Incoming Chairman Stephen Green underlined
HSBC’s focus on the potential of emerging markets:
“There is a general rule of thumb that says the emerging
markets grow faster than mature markets as economies
and the financial services sector grows faster than the
real economy in emerging markets because you are starting from very low penetration of financial services in
general.”22
Specifically in consumer finance, Green recognized the
importance of importing HSBC’s model into markets
starved for credit cards and loans, saying, “Any analysis
of the demographics of emerging markets tells you that
consumer finance is going to be an important part, and a
rapidly growing part, of the financial-services spectrum
for a long time to come.”23
Success in Mexico
HSBC has had phenomenal success in Mexico, which led
emerging markets with $515 million in pretax profits during the first half of 2006, an increase of 20 percent over
the same period in 2005. Indeed, Mexico’s market is
expanding at a very rapid clip. In 2002, HSBC purchased
the undercapitalized Mexican bank Grupo Financiero
Bital SA. Four years later, HSBC opened Bital’s new
headquarters in an impressive tower in Mexico City’s
Paseo de la Reforma. HSBC’s tagline in Mexico City proclaims: “13,500 tons of commitment to Mexico.”24 The
slogan works well with the proudly nationalistic Mexican
population.
Today, foreign banks control more than 80 percent
of Mexico’s banking assets. Turning over the assets
was the easiest way for policy makers to escape the
“Tequila Crisis” of 1994-95, which wiped out half of
Mexico’s assets. HSBC and other foreign banks that bet
on Mexico have won big, as profits in Mexico have
skyrocketed. HSBC has taken a long-term view of
Mexico, which has a relatively stable economy and a
very young population (about 45 percent under age 19),
in addition to great opportunities arising from NAFTA.
HSBC’s plan includes offering credit cards to a customer base that uses primarily debit cards. “That’s part
of a wide-ranging retail-banking strategy for Mexico,
where we are also growing our deposit products [and]
remittance products for the very considerable flow of
retail remittances,” according to Chairman Stephen
Green.25
Setback in Argentina
Not all emerging markets have been as successful for
HSBC as Mexico. A hefty investment in Argentina, for
Pretax Profits 2005 vs. 2006
Exhibit 3 HSBC Emerging Markets
Pretax Profits 2005 vs. 2004, 2002
Country
2000
(US$
mil)
2004
(US$
mil)
2005
(USS
mil)
% Change
2004-
2005 Country
2006
(USS mil)
% Change
(2006 over
2005)
Argentina 112 154 244 58 Argentina 157 -36
Brazil 208 281 406 44 Brazil 526 .30
China -26 32 334 944 China 708 112
India 87 178 212 19 India 393 85
Indonesia 70 76 113 49 Indonesia 71 -37
Malaysia 116 214 236 10 Malaysia 274 16
Mexico 9 774 923 19 Mexico 1009 9
Saudi Arabia 30 122 236 93 Saudi Arabia 181 41
South Korea 65 89 94 6 South Korea 48 -13
Taiwan 45 107 68 -36 Taiwan (23) NA
Turkey 59 142 265 87 Turkey 217- -18
UAE 130 192 308 60 Middle East 730 25
Total 905 2,361 3,439 +46 Other 166 -15
Total profit 18,943 20,966 + 10.7 Total 4,533 19
before tax Total profit 22,086 5
(all countries) before tax
(all countries)
In-Depth Integrative Case 1 HSBC in China 523
example, spiraled out of control. In 1997, HSBC completed its acquisition of Grupo Roberts, becoming one of
the major players in the country and expanding its Latin
American presence. Four years later, however, Argentina
went from seemingly one of Latin America’s strongest
economies to a stunning failure.
Much of the damage stemmed from a governmentmandated conversion of U.S.-dollar-denominated assets
into pesos. Argentina removed an 11-year-old mechanism
pegging the peso one to one to the dollar, which led to
the peso’s sharp devaluation, and resulted in massive
losses for many banks. In the 2001 meltdown of Argentina’s
economy, HSBC lost $1.152 billion, with bad debt charges
on HSBC’s Argentina exposure of $737 million, even
though the country only accounted for 0.5 percent of
HSBC’s assets.26 Faced with huge losses, HSBC was
forced to cut 2001 profit estimates 10 percent and considered exiting the country. Despite its long-term approach,
the fluid, unstable economy was daunting, and demonstrates the volatile nature of emerging markets. More
recently, HSBC’s position in Argentina has recovered
somewhat (see Exhibit 3).
Liberalization of China’s
Banking Sector____________________________________
China’s Banking Sector Pre-WTO
Before the WTO accession negotiations, China’s banking
industry operated as a cog in China’s centrally planned
economy. The state commercial banks performed a social
function, during China’s post-Mao drive to industrialize,
instead of operating for economic return. Consequently,
the banks adhered to directed lending practices from the
government and in turn created some of China’s most
successful enterprises, but also supported thousands of
other, inefficient, and unprofitable state-owned enterprises.
This practice left state commercial banks with massive
amounts of debt that were largely unrecoverable and
hordes of nonperforming loans.
In addition to widespread losses, instability ensued in
the banking system overall. To make matters worse, corruption and mismanagement ran rampant throughout the
sector, sapping away consumer and investor confidence.
WTO Accession
Following 15 years of negotiation and two decades of
economic reform in China, December 11, 2001, marked
China’s accession to the World Trade Organization. The
main objective of the WTO agreement was to open China’s
market up to foreign competition. The deadline for complete implementation was December 11, 2006.
China made a number of implementations immediately. To begin with, foreign banks were allowed to conduct foreign currency business without any market access
restrictions. Also, foreign banks were allowed to conduct
local currency business with foreign-invested enterprises
and foreign individuals (with geographic restrictions).
Within two years of accession, China agreed to allow foreign banks to conduct domestic currency business with
Chinese enterprises (geographic restrictions). Within five
years, foreign banks could conduct domestic currency
business with Chinese individuals (no geographic restrictions); and foreign banks were able to provide financial
leasing services at the same time as Chinese banks. Under
the WTO investment provisions, China agreed to allow
foreign ownership of Chinese banks (up to 25 percent),
with no single foreign investor permitted to own more
than 20 percent.
“Bank reform has become the most crucial task for the
government in pushing forward economic reforms,” said
Yi Xianrong, an economist at the Chinese Academy of
Social Sciences in Beijing.27 Indeed, bank reform is critical to stabilizing and advancing the Chinese economy.
Domestic Reform
China has undertaken a number of domestic reforms in
order to overhaul the banking industry. China has engaged
in interest rate liberalization by removing certain interest
rate and price controls. Instead of being pegged to the
U.S. dollar, as it once was, China’s currency exchange
rate is now pegged to within 0.3 percent of a basket of
currencies, dominated by a group including the U.S. dollar, euro, Japanese yen, South Korean won, British pound,
Thai baht, and Russian ruble. The yuan was revalued by
2.1 percent against the dollar in July 2005, but analysts
estimate that it remains 10-30 percent undervalued.
Regulation has long been a concern in the Chinese banking industry. China has made major progress by creating
regulatory agencies. In 2003, China created a central regulator, the China Banking Regulatory Commission (CBRC),
out of the central bank. The regulator’s 20,000 staff members endeavor to shift the banks’ focus from senseless loans
and grow mind-sets to a goal of preserving capital and generating returns. Lenders not meeting a capital ratio of 8
percent of risk-weighted assets (as decreed by Basel I, a
global standard) by 2007 may face sanctions, which could
include the removal of senior management. Still, the CBRC
faces an uphill battle. Han Mingzhi, as head of the CBRC’s
international department, admitted in 2004 that “we lack
people who understand commercial banking and microeconomics. It is a headache for the CBRC.”28
Concurrently, China is striving to make regulatory and
reporting requirements more clear, because they have
often proved confusing barriers to foreign investment.
Since 1998, China has intensified accounting, prudential,
and regulatory standards. Prior to 1998, the banks booked
interest income for up to three years even if it was not
being paid. Now, the banks can do so for only 90 days,
which is the international norm. Still, it has been all too
524 Part 4 Organizational Behavior and Human Resource Management
common for Chinese banks to ignore regulations and not
monitor loans. As a result of poor accounting, the banks
themselves are sometimes unsure of their bad loans. Lai
Xiaomin, head of the CBRC’s Beijing office, admits that
“when our banks disclose information, they don’t always do
so in a totally honest manner.”29 Indeed, the lack of reliable
accounting can hamper investment. As one Hong Kong
investor put it, “When you take a state-owned enterprise that
has had weak internal controls, it can be enormously laborintensive to come up with financials we can work with.”30
In 2006, regulators overhauled the system in which
almost one-third of a company’s shares were “nontradable.”
Fixing this problem has helped energize the market and
welcome in individual investors.31
Recent Regulatory Moves
New regulations also hope to address China’s history of
dishonesty and embezzlement. With the tight connection
of Chinese banks with local governments, corruption has
choked the Chinese banking system. Some common practices have historically encouraged corruption, such as
allowing the same person to make and approve a loan.
Former bank Chairman Zhang Enzhao himself was arrested
in June 2005 for allegedly taking bribes. At the China
Construction Bank alone, there were more than 100 cases
of theft and embezzlement between 2002 and 2004.32
These old habits have to be rooted out.
China is working hard to transition its traditional
banks into “universal” banks. Most of China’s 128 commercial banks have introduced better governance, shareholding, and incentive structures, while also adding independent directors to their boards.33 Foreign management
and knowledge are intended to flush the Chinese banking
system with managerial talent. To help encourage foreign
banks, China is relaxing some foreign bank restrictions.
The Chinese government has also taken steps to eliminate
bad loans, by bailing out banks.
IPO Explosion
China has aggressively pursued IPOs of state-owned
banks, a policy which has been met with a strong response
from investors eager to tap into the populous country and
seize first-mover advantages (see Exhibit 4). HSBC’s purchase of a 19.9 percent stake in Bank of Communications
(BoCOM) in June 2004 was the pioneering, substantial
foreign bank investment in China. HSBC previously made
large investments in Fujian Asian Bank (50 percent) and
Bank of Shanghai (8 percent). In 2005, foreign banks
invested $18 billion in several of China’s largest banks.
The October 2005 listing of China Construction Bank
Exhibit 4 Foreign Bank Investments in China
PRC Bank Foreign Partner % Stake Price Date
Bank of Shanghai HSBC 8.00 $62.6 m 12/2001
IFC 7.00 $25.0 m
Shanghai Commercial Bank (HK) 3.00 $15.7 m
Shanghai Pudong Dev Bank Citigroup 4.62 $72.0 m 12/2003
Fujian Asian Bank HSBC 50 Less than $20 m1 12/2003
Bank of Communications HSBC 19.90 $1.75 b 6/2004
Xian CCB Scotia Bank 12.4 $3.2 m 10/2004
Jinan City CCB Commonwealth Bank of Australia 11.0 $17 m2 11/2004
Shenzhen Dev. Bank Newbridge Capital 17.9 $1.23 b 12/2004
Minsheng Bank Temasek 4.9 1/2005
Hangzhou CCB Commonwealth Bank of Australia 19.90 $78.0 m 4/2005
China Construction Bank Bank of America 9.00 $3.0 b 6/2005
Temasek 5.1 $1.5 m3
Bank of China Royal Bank of Scotland 5.00 $3.1 b 8/2005
UBS 1.6 $500 m4 9/2005
Temasek 10.00 $3.1 b5 9/2005
Industrial Commercial BOC Goldman, Allianz, AmEx 8/2005
Nanjing CCB BNP Paribas 19.20 $27.0 m 10/2005
Hua Xia Bank Deutsche Bank 9.9 $329 m6 10/2005
Sal. Oppenheim Jr. 4.1 10/2005
Bank of Beijing ING 19.90 $214 m 3/2005
’HSBC Press Article, accessed October 3, 2006, www.hsbc.com.cn/cn/aboutus/press/content/03dec29a.htm.
2Guonan Ma, “Sharing China’s Bank Restructuring,” China and World Economy 14, no. 3 (2006), p. 8.
3David Lague and Donald Greenlees, “China’s Troubled Banks Lure Investors,” International Herald Tribune, www.iht.com/
articles/2005/09/21/business/bank.php, accessed on October 4, 2006.
4
“UBS to Invest $500 million in Bank of China,” CBS News, www.cbsnews.com/stories/2005/09/27/ap/business/main
D8CSHPLOO.shtml, assessed October 4, 2006.
5Luo Jun and Xiao Yu, “Temasek to Buy 10% of China Bank,” International Herald Tribune, www.iht.com/articles/2005/09/01/
bloomberg/sxboc.php, accessed on October 4, 2006.
6
“Deutsche Bank Seals Chinese Deal,” BBC News, news.bbc.co.uk/2/hi/business/4348560.stm, accessed October 4, 2006.
In-Depth Integrative Case 1 HSBC in China 525
(CCB), China largest at the time, raised $8 billion from
foreign investors for 12 percent of its shares. CCB further
obtained an additional $4 billion ahead of its float by
selling stakes of 9 percent to Bank of America and 5.1
percent to Temasek, Singapore’s investment agency. In the
following months, the Royal Bank of Scotland put $3.1
billion into Bank of China, Temasek another $3.1 billion
and Switzerland’s UBS $500 million.
In May 2006, Bank of China, the country’s second-largest
lender, raised $11.2 billion in a Hong Kong stock sale,
which was the fifth-largest initial public offering in history.
In July 2006, the Chinese government announced approval
for an even larger IPO of the country’s largest bank, Industrial & Commercial Bank of China, to raise $18 billion or
more in one of the largest stock offerings ever.34 The central
bank expects foreigners to bring much needed improvements to the state banks’ risk-management and internal control systems, including credit-risk assessment and more
transparent reporting. With capital allocated more efficiently,
a more stable financial system will follow, and the economy
will become more open to foreign competition.
Two Steps Forward
Pulling back from some of its commitments, China
indirectly delayed the implementation of its WTO commitments. On February 1, 2002, the People’s Bank of
China (PBOC) issued regulations and implementation
rules governing foreign-funded banks. While these
measures met the commitments of the WTO agreement,
the PBOC was taking a very conservative approach in
opening up the banking sector. For example, foreignfunded banks could open only one branch every 12
months.
In the wake of these early obstacles, there have been
positive changes. Capital requirements were reduced,
additional cities were opened up to foreign banking, and
the “one branch every 12 months” restriction was lifted.
Central bank officials have indicated willingness to eventually elevate the foreign ownership limit above the current 25 percent, but experts doubt it will ever go beyond
50 percent.35
A 2006 study by McKinsey found that underperforming loans with merely negligible returns are also very
damaging to the Chinese economy. McKinsey estimates
that reforming China’s financial system could boost GDP
by $321 billion annually.36
China’s banking sector plays an excessive role in the
overall financial system. The share of bank deposits in
the financial system ranges from less than 20 percent
in developed economies to around half in emerging
markets. China, however, has a share of bank deposits
at a sky-high 75 percent of the capital in the economy,
which practically doubles any other Asian nation (see
Exhibit 5).37
Capital is still mostly allocated to state-owned enterprises, even though private companies have been China’s
growth engine. Private companies produce 52 percent of
GDP in China, but only account for 27 percent of outstanding loans.38 By sinking money into state-owned enterprises, China’s banks are dragging the economy. China’s
banks had difficulty lending to private companies in the
past, because of challenges related to gathering and processing the necessary information on them. As a response,
Exhibit 5 Financial Depth in Major Market
Financial Depth, 2004
Financial Assets as a Percent of GDP
450 —
Source: McKinsey.
526 Part 4 Organizational Behavior and Human Resource Management
China launched its first national credit bureau in early
2006. China’s banks have been satisfying a social role,
but now must allocate capital efficiently in order to generate
positive economic return.
Investments in Ping
An and BoCOIVI____________________________
With its longstanding presence in China, HSBC was
among the most well-positioned financial institutions to
take advantage of China’s market opening.
Ping An Investments
In October of 2002, HSBC announced that it had taken a
10 percent stake in Ping An Insurance, China’s second
largest insurer for $600 million. U.S. investment banks
Goldman Sachs and Morgan Stanley already had a combined 14 percent stake in Ping An. Chairman Sir John
Bond indicated that HSBC was particularly attracted to
the long-term prospects in the insurance and asset management sectors.
In May 2005, HSBC indicated it was investing an additional HK$8.1 billion ($1.04 billion) for an additional 9.91
percent stake in Ping An, doubling its holding in the numbertwo life insurer. HSBC paid HK$ 13.20 a share for the stakes
held by investment banks Goldman Sachs and Morgan
Stanley, lifting HSBC’s holding to 19.9 percent, the maximum stake allowed by a single foreign investor.
“This is good news for Ping An,” said Kenneth Lee,
an analyst at Daiwa Institute of Research. “HSBC is buying at a premium and is replacing Goldman Sachs and
Morgan Stanley, which are venture capital investors. HSBC
is a long-term investor and will help Ping An to develop
its insurance platform,” he said.
The company’s market share of more than 15 percent
of the Chinese market puts it behind domestic competitor
China Life Insurance Co., which underwrites about half of
all Chinese life insurance premiums. In 2005, HSBC Chairman John Bond commented, “We are optimistic about the
long-term prospects of the insurance industry in mainland
China and believe Ping An is well-positioned to benefit
from the sector’s development.”39
In addition to holding a stake in Ping An Insurance,
HSBC has applied for its own life insurance license in
China. Foreign firms only account for 5 percent of the
life insurance market in China, while three domestic
firms (China Life Insurance, Ping An Insurance, and
China Pacific Insurance) hold 76 percent of the market
share. The bank hopes to start operations in 2008, and
says it will maintain its relationship with Ping An.40
The BoCOM Deal____________ ______________________
HSBC invested $1.8 billion for a 19.9 percent stake in
BoCOM in June 2004. HSBC’s chairman at the time, Sir
John Bond, commented on the company’s long-term perspective, “[I]t is inevitable that China will become a
superpower. And indeed, desirable. And we are positioning our business for the decades ahead accordingly.”41
HSBC wanted a piece of the alluring Chinese market,
which Goldman Sachs predicts will overtake the United
States as the number-one economy in the world by 2040,
and wanted to deepen its international scope in line with
the “Managing for Growth” strategy.
Speaking one month after HSBC’s big move, thenCEO and future Chairman Stephen Green expounded
upon China, “[T]he potential in China’s domestic market
is the largest in history.” China is the “world’s manufacturer,” and as the population continues to urbanize and
industrialize, it increasingly has more disposable income,
the workers become greater consumers, and the middle
class expands.42 China has one of the world’s highest savings rates, at around 4Q percent, and already has around
one-third of the $1.2 trillion of central bank foreign
exchange reserves sitting in Asia. Further, access to capital is not a problem, as FDI floods the country. The challenge facing China is to recycle and invest its pool of
savings efficiently.
HSBC recognized the huge potential in the market for
banking services, as well as credit cards. As part of its
emerging market strategy, HSBC wanted to feed the
demand for credit cards in these markets. Green commented: “[O]ur joint venture with Bank of Communications for credit cards is one which we think has a lot of
exciting prospects. Bank of Communications has over 30
million debit cards in issue. Over time, a proportion of
those is going to convert to credit cards. And we are issuing co-branded credit cards with the Bank of Communications.”43 HSBC saw an opportunity to shepherd millions
of new people into the banking system.
HSBC’s Green acquiesced that emerging markets do
carry risk. This risk was starkly evident during the HSBC
debacle in Argentina during the country’s economic crisis.
China’s epic turnaround could conceivably flop, and heavily
invested banks could pay dearly. The banking system in
China was and is very fragile. Would China’s banks be able
to break away from state-directed lending and its lasting
effects? The banks further rely on the continued acceleration
of the economy, and many rely on volatile real estate loans.44
HSBC recognized other challenges for China, including the
need to strengthen regulations, build social security, stem
corruption, and fortify the financial system.45
Green contends that “emerging markets growth will continue at quite a rapid clip for the foreseeable future. I think
that China will continue on a strong growth path.”46 HSBC,
in investing in BoCOM, was wagering beyond continued
growth and counting on the financial system finally being
fixed. HSBC trusts that the banking cleanup would continue
with cleaner, more competent corporate governance,
decreased corruption, and more transparent practices.47
Margaret Leung, general manager and global co-head
commercial banking for the HSBC Group commented,
In-Depth Integrative Case 1 HSBC in China 527
“[W]e believe we have a unique advantage [in China]. A
lot of analysts… have been saying that if any foreign bank
is going to succeed in China, that would be HSBC.”48
BoCom’s net profit soared from Rmbl.604bn (US$200m)
in 2004 to Rmb9.249bn in 2005, and a BoCOM-HSBC
credit card has successfully been issued to over 650,000
people.49 However, with the passing of the WTO deadline,
BoCOM now faces greater competition from foreign
banks, which are now better able to compete under the
new Regulation on Administration of Foreign-Funded
Banks (adopted in late 2006). Under these new regulations, foreign banks are allowed to issue local currency
loans and are no longer limited in the size and scope of
their business.
Recent Developments and Future
Competitive Conditions_____________________________
Current Strategies in China
Foreign banks that operate in China have different strategies. Some of them have purchased smaller stakes of Chinese
financial institutions, while some prefer to buy a bigger
stake of a small bank. Nevertheless, they all want to be
in China. The best strategy, in theory, has turned out to
be with a local partner. Bob Edgar, senior managing director at Australia and New Zealand Banking Group Ltd.,
said that “it would be very difficult to go into a market
like that and undertake the cost of establishing a branch
network, getting a customer base of hundreds of thousands if not millions of customers. That already exists, so
why would we want to set it up again?”50
Many foreign banks however experience difficulties
when working with a local partner. The credit standards
are not as strict as they should be, and there is still high
corruption at different levels. In addition, the partners gain
influence in the foreign bank. This is the reason why
HSBC has decided to invest “outside the Big Four” so it
would have bigger control in operations. Peter Wong,
executive director of HSBC’s Hong Kong and Mainland
China operations, has commented: “[T]he state-owned
banks would be too big.” So only the future will tell what
is the best strategy.51
Recent Developments
One significant development in the bank sector in China
was the IPO of Industrial and Commercial Bank of China
IPO. As expected, it was the world’s biggest IPO. ICBS
raised $19.1 billion, exceeding investors’ predictions, valuing the bank at more than $108 billion. The previous IPO
record was $18.4 billion and was held by NTT DoCoMo
Inc., a Japanese mobile company.52 The bank has announced
that the money will be used to fund its expansion.
The competition in China’s banking industry is continuing to grow. Recently, Morgan Stanley announced its
expansion into China, given the company’s desire to tap
into the growing Chinese market and become competitive
there. The company chief executive commented, “[T]his
platform will allow us to provide a wider array of new
product capabilities that are currently offered only by commercial banks with a presence within China.”53
Another important development was the deal in which
a consortium led by Citigroup took control over the
Guangdong Development Bank (GDB). The agreement
was reached on November 16, 2006, after a year of negotiations. Citigroup and its investors’ partners have agreed
to pay about $3.1 billon for 85.6 percent of Guangdong
Development Bank.54 The deal is significant since this is
the first time that a foreign investor has been able to gain
control in a Chinese bank. It is expected that Citigroup
alone would purchase only 20 percent of Guangdong
Development Bank; however, its partners would split the
remaining 65.6 percent. The China Life Insurance Co. and
State Grid Corporation each own 20 percent, followed by
Citic Trust & Investment Co. with 12.9 percent and
Yangpu Puhua Investment and Development Co. with
8 percent. Interestingly, IBM also has a stake at GDB,
owning 4.74 percent of Guangdong Development Bank.
Another issue that makes the deal special is the fact
that in January 2007, China opened its financial sector to
foreign investors, which was one of its last WTO membership commitments. Under the new rules, foreign batiks
in China finally have the opportunity to offer services in
the local currency—yuan—which was previously prohibited.55 In a statement issued after the deal was announced,
William R. Rhodes, the chairman and chief executive of
Citibank, said, “The continued emergence of China’s
economy represents a tremendous opportunity for Citigroup.”56
Although Citigroup has gained more market opportunities since the deal was approved, analysts say that there
are certain risks involved. It is publicly known that the
Guangdong Development Bank has been struggling financially, and there is speculation about the amount of bad
loans that have not been put on the books. Bad loans have
been an issue for the Chinese banks. However, it seems that
the experience in banking and asset management that Citigroup possesses, in addition to the IT support offered by
IBM, would make this investment beneficial to Guangdong
Development Bank and could turn the bank around.57 In
June 2007, the Guangdong Development Bank issued an
outline of its five-year plan. The bank aims to reach the
average levels of its Chinese bank peers for all major operational indicators in the next two to three years and become
a leader among midsized Chinese banks within three to five
58
years.
Other recent developments include the Ping An and
China Life Insurance initial public offerings in China.
Ping An raised 38.9 billion yuan ($5 billion) with its February 2007 IPO and plans to use those funds to finance
528 Part 4 Organizational Behavior and Human Resource Management
operations. In January 2007, its main competitor, China
Life Insurance Co., was also listed on the Shanghai Stock
Exchange, making an IPO of $3.6 billion.
In July 2006, it was announced that Bank of Communications President Zhang Jianguo had submitted his resignation, and would replace Chang Zhenming as president
of the China Construction Bank. It was not clear whether
HSBC was consulted in this move.
On September 11, 2006, HSBC opened a new subbranch in Beijing. With the opening of its fourth branch
in Beijing, HSBC became the foreign bank with the
most branches in Beijing. Richard Yorke, chief executive
officer China at the Hongkong and Shanghai Banking
Corporation Limited, commented: “[We] are delighted to
be able to further expand our service network in Beijing.
It is part of our overall network expansion in China
where HSBC has a long-term commitment. Beijing is a
key retail market for HSBC in the Mainland and we shall
provide diversified products to meet our customers’
growing needs for world-class banking services.”59
Yet another recent development for HSBC was its decision to reduce its exposure to the U.S. subprime lending
market in early 2007. HSBC had entered the market when
it purchased Household International Inc., a U.S. subprime lender, in 2003. However, since then the subprime
lending market has begun to fail as a result of the huge
U.S. construction boom and rising interest rates. Delinquencies on subprime mortgages in the United States rose
to a four-year high in the fourth quarter of 2006, contributing to a 5.7 percent drop in HSBC’s total second-half
profits (an 87 percent drop in its North American profits
alone).60 This prompted HSBC’s early 2007 announcement that it would stop buying second-charge loans from
other lenders. In addition, HSBC has decided to change
the management of Household in order to bring the business “under the HSBC model,” as Michael Geoghegan,
chief executive of the HSBC Group, put it.61
In addition to shrinking its U.S. mortage unit, HSBC
continues to invest in fast-growing emerging markets,
including Asia, Latin America, and the Middle East.
Malaysia is one country where HSBC’s expansion is quite
noticeable. As of March 2007, it operated 40 branches
there and was awaiting approval to open eight more.
HSBC also has plans to extend its insurance business to
other countries.62
Future Competitive Conditions
China has the highest foreign direct investment (FDI) in
Asia; however, the high growth in FDI is beginning to
slow. According to the Ministry of Commerce, for the first
eight months of 2006, China drew $37.2 billion in FDI,
or 2.1 percent, less than during the same period in 2005.
In August 2006, FDI was down 8.5 percent compared to
the same month of last year. David Li, an economist from
Tsinghua University, argues that “an opposition to FDI is
a sign of economic maturity.” China’s local companies are
growing and becoming stronger.63
One of the challenges facing foreign firms in China
is that foreign mergers and acquisitions are becoming
less welcome. The Chinese economy’s annual growth
is 10 percent, and therefore, the opportunities for local
firms are growing. As such, there is a concern with the
increasing number of mergers and acquisitions. However, Arthur Kroeber, managing editor of China Economic Quarterly, has said that despite this concern,
“they are still happy to have you come and build a
factory.”64
HSBC is an institution that actively seeks new opportunities; indeed, HSBC was the first foreign bank to invest
in China in 2001. Peter Wong has commented, “[We] are
reacting to the evolution of the China market. The government basically opened the door and said, ‘Why don’t you
[foreign banks] start investing and see what happens.’ So
we invested in the Bank of Shanghai. Then they opened
the door in insurance, so we invested in Ping An insurance. Then it was joint-stock banks, and we invested in
Bank of Communications.”65 Exhibit 6 summarizes
HSBC’s strategic stakes in Chinese financial institutions.
*lnvestment made by Hang Seng Bank of Hong Kong, which is majority controlled by
HSBC.
Source: K. C. Swanson, “Buying into China’s Banks,” Corporate Dealmaker, SeptemberOctober 2006, p. 18.
Exhibit 6 HSBC’s Stakes in Chinese Financial Institutions
Date Target
Amount (millions
of US$) Stake (%)
May 2005 Ping An Insurance Group
Co. (second stake)
$1,040 9.9%
August 2004 Bank of Communications 1,750 19.9
December 2003 Industrial Bank Co. Ltd. 205* 16.0
October 2002 Ping An Insurance Group
Co. (first stake)
600 10.0
December 2001 Bank of Shanghai 63 8.0
In-Depth Integrative Case 1 HSBC in China 529
HSBC’s future development will depend heavily on two
things. First, the competition will play a major role in
HSBC’s strategy. HSBC competitors are aggressively seeking opportunities in China, and HSBC has to constantly
work to maintain and expand its market position. Second,
HSBC’s success will depend on the opportunities that the
company sees in the other emerging markets of the world.
Questions for Review
1. How has HSBC adapted its global strategy to operate in China, both before and after China’s WTO
accession?
2. Discuss HSBC’s strategy for entering and operating
in other emerging markets. Where has it found success, and where has it faced setbacks? Why?
3. What are the pros and cons of HSBC’s “Managing
for Growth” strategy?
4. Discuss Stephen Green’s leadership style. How does
he differ from his predecessor, Sir John Bond? How
might Michael Geoghegan lead HSBC going forward?
5. Do you think HSBC should reevaluate its corporate
strategy in China, now that the WTO deadline has
passed and the new regulations for foreign banks
are in place?
Exercise
HSBC is considering asking the government of China
(China Banking Regulatory Commission—CBRC) to
allow it to increase its state in BoCom above the limit
currently in place (25% total foreign ownership; 20%
for an individual foreign investor). Break into four
groups:
1. HSBC
2. BoCom
3. Citibank
4. CBRC
Groups 1-3 should prepare a 5 minute presentation on
whether the government of China should grant the request
and, if so, what the ownership limit should be (30%? 50%?)
and whether it should be extended to other foreign financial
institutions (e.g., Citibank). Then, Group 4 should discuss
the question and report its decision.
Source: This case was prepared by Jonathan Doh of Villauora University as the basis for class discussion. Research assistance was provided
by Courtney Asher and Elizabeth Stewart. It is not intended to illustrate effective or ineffective managerial capability or administrative
responsibility
Throughout his poem “The Love Song of J. Alfred Prufrock,” T. S. Eliot uses various literary figures in well-known texts as the character J. Alfred Prufrock experiences anxiety and self-doubt. Allusions and direct references to works and authors Dante Alighieri, William Shakespeare, Andrew Marvell, and the Bible are used to compare and contrast Prufrock’s insecurities and inaction. While this poem revolves around Prufrock asking a woman a question, which he never actually gets to, T. S. Eliot structures the poem almost as a quest for Prufrock to express his intentions, and thus, uses appeals to literature to illuminate how one should be active rather than passive. Published in 1915, this poem displays modernist literary techniques, especially as Prufrock’s inner monologue showcases self-consciousness. Further, Eliot’s use of allusions and direct references seem to question society’s progress; however, he also seems to suggest that looking at the past helps to understand individuals and society as a whole. In his essay “Tradition and the Individual Talent,” Eliot states, “No poet, no artist of any art, has his complete meaning alone. His significance, his appreciation is the appreciation of his relation to the dead poets and artists” (37). Therefore, Eliot uses literary allusions within “The Love Song of J. Alfred Prufrock” to showcase Prufrock’s limitations, which suggests an overarching message that humanity needs to be active in this era of advancement, as urbanization has led Prufrock, as well as society, to a sense of worthlessness. Eliot bases the structure of the poem around Dante’s The Divine Comedy in order to set up a journey for Prufrock in his own personal Hell, as well as to show a contrast between inaction and passivity. The first literary reference is within the poem’s epigraph, which is a direct quote from Dante’s Inferno, which states,