Chinese seek pounds 2bn bank stake

The Chinese authorities may force HSBC Holdings to cut its pounds 10bn investment in Hang Seng Bank, its Hong Kong retail banking subsidiary.

A forced reduction of its 61 per cent stake to 49 per cent would leave HSBC with a pounds 2bn war chest to fund acquisitions.

Banking sources in the colony suggest that the recent trend for government- backed Chinese investors to take key stakes in dominant corporations will be repeated in the banking sector, where HSBC has a tight grip on the retail market through HongkongBank, the colony's largest bank, and its stake in Hang Seng.

An HSBC spokesman said there were no talks in progress about reducing its stake in Hang Seng, but speculation that Chinese investors are poised to take a stake have pushed Hang Seng's share price close to its all-time high.

Although both HSBC and Hang Seng have insisted that a sale is not on the agenda, banking sources point out that it is the Chinese authorities that will ultimately determine the issue. They also point out that any move to force HSBC to reduce its stake in Hang Seng would be delayed until after tomorrow's handover of the colony by the British to China.

The Chinese authorities have been keen not to destabilise financial markets ahead of the handover. HongkongBank has traditionally played the role of lender of last resort in the colony, and the Chinese have not wanted to jeopardise that position.

HSBC would resist a forced disposal, but the Chinese have demonstrated they are adept at negotiating stake acquisitions that provide attractive commercial benefits for sellers. Hang Seng, for instance, could be offered the opportunity to accelerate its investment in mainland China, which began 18 months ago.

Last July, Chinese investors took a strategic stake in Cathay Pacific, the colony's dominant airline and last month took a similar holding in Hong Kong Telecommunications, the dominant telecoms company.

So far the stakes have been restricted to minority holdings, but this has not diminished their importance. Analysts see these stakes as part of the Chinese government's move to deregulating key strategic industries on the mainland.

The prospect of increased investment from the Chinese authorities has prompted a wave of speculative buying in the Hong Kong stock market. Ironically, the soaring share price may deter the Chinese, who have shown themselves to be canny investors, from making an early move on Hang Seng Bank. They are prepared, however, to make acquisitions below the market price.

The biggest problem for HSBC in reducing its stake in Hang Seng would be finding an investment that offers such attractive growth potential.

Hang Seng Bank started operations as a simple money- changing operation over 60 years ago and has grown to have branches in every Hong Kong subway station. HSBC paid less than pounds 200m for an investment that is today worth pounds 10 bn.

If HSBC had to reduce its stake to below 50 per cent, the pounds 2bn raised would represent surplus capital, given the strength of its balance sheet.

There has been recent speculation that HSBC has renewed its interest in Royal Bank of Scotland, capitalised at pounds 5bn. However, almost any British financial institution would be well within HSBC's price range. With the continued shake-up in the financial services sector, HSBC could reinvest its Hang Seng windfall among building societies, past and present, or the insurance sector.

Last month, HSBC said it was keen to expand into other international markets through acquisitions after a successful buying spree in Latin America. Although the company is adamant it does not need acquisitions to grow, it has demonstrated that it is prepared to make investments when necessary.

Analysis, page 3