HSBC Set to List in Shanghai

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HSBC's old Shanghai head office at located at the Bund and now occupied by the Shanghai Pudong Development Bank.  By Chris Devonshire-Ellis

Aug. 12 – HSBC is set to list their operations on the Shanghai stock market in a move that would see them return to their roots. The bank was founded by Thomas Sutherland in 1865 in Hong Kong and Shanghai and was called the Hongkong and Shanghai Banking Company Limited. It financed railways, weapons and the opium trade for the colonial British government.

Later, it would also finance the Qing Dynasty government. The first office was established in Hong Kong in March of 1865 and a Shanghai office was set up the following month with Shanghai branch being the larger one. It handled the first public loan in China in 1874 and eventually expanded across Asia. Following the Communist revolution, the bank closed its Shanghai branch and decamped to Hong Kong. It remained listed in Hong Kong until 1993, when it moved its head office to London.

The bank made a rights issue in Hong Kong just a few months ago, with a shareholder take up of 98.2 percent – the highest ever – demonstrating the confidence many feel in the bank and identifying it still as a premium Asian bank. An offering in Shanghai is currently being discussed with the China Securities & Regulatory Commission, and is likley to take place next year – regulatory changes in terms of current restrictions of foreign ownership of listed companies in China need to be made, which may hold up the issue. The bank is being advised by China International Corp and Citic Securities concerning the matter.

China would certainly welcome HSBC back into the fold, and the bank may also relocate its head office back to Hong Kong considering the changes in the U.K. tax system and the political goodwill it would generate by being listed back at its original home.

Legally however, obstacles remain. Apart from the 25 percent cap on foreign ownership of listed companies, Beijing will also have to revise corporate securities laws, in addition to the Shanghai Stock Exchanges A listing rules, to make the exchange more accessible to foreign businesses.

Beijing has long wanted to see Shanghai as an open exchange and the city is being primed to be the center for domestic and foreign companies seeking to raise renminbi financing for their mainland-based activities. Hong Kong increasingly is being positioned as China’s true gateway to international funds for Chinese companies seeking to raise money for expanding overseas.

Changes in the law to allow foreign companies access to Chinese funding are likely to have a massive impact also on China’s accounting and audit standards and the development of global renminbi trading. Such matters though are highly contentious, and the issue would likely go hand in hand with a slower approach to overseas bank activities in China.

Quite simply, the general thought is that Chinese banks need time to adjust to what would inevitably be a stricter application of international standards that apply to finance, and there is also the question of the renminbi position. However, the HSBC listing – when it occurs – would be a benchmark event in China’s ongoing reform, and ultimately lead to greater transparency and professionalism throughout the financial and regulatory sectors.

Chris Devonshire-Ellis is the founding partner of Dezan Shira & Associates and lived in China for 21 years. He is now based in Mumbai.