"HSBC's China fund management strategy today is the strategy of two years ago," complains one former HSBC staffer in Hong Kong. "It's has missed out becoming a dominant player in China's asset management industry."

Indeed, despite the bank's historic tie-up with Bank of Communications (BoComm), the asset management unit of the world's second largest banking giant by assets has so far signally failed to capitalize on its unequalled stature in China and may soon lose out to one of its chief rivals in Hong Kong.

HSBC has officially invested some $4.6 billion in China since 2001, including $2.75 billion for a 20% stake in BoComm, $62 million in Bank of Shanghai and $1.81 billion for a 19.91% stake in Ping An Insurance. The total is even higher if the calculation includes the capitalization cost of HSBC's ten branches (the greatest number of any Western bank).

These are around $60 million per branch. That brings HSBC's total investment in China to just over $5 billion.

The question on everyone's lips is why HSBC Investment (formerly known as HSBC Asset Management) did not manage to lay the groundwork for an asset management JV with BoComm when it invested in the Chinese bank last summer. By contrast, China's fifth largest lender is said to be in advanced negotiations with Britain's Schroders.

HSBC supporters say the bank may have been the victim of bad timing. In September last year, it signed an agreement to form a fund management arm under the umbrella of Shanxi Trust.

This deal was signed after two years of negotiations and at the time, HSBC sources say there was still no firm indication that domestic banks would be allowed to set up a fund management JV. Official permission was finally granted in February, with rumours about a BoComm/Schroders tie-up emerging last month.

Peter Wong, HSBC's newly appointed Executive Director for Hong Kong and Mainland China also says foreign investors such as HSBC had previously been told about proposals for a '1+1' rule, whereby they could have one majority stake and one minority stake in two separate companies.

"In the end, this rule was never ratified, but of course there was no way we would turn our back on our commitment to Shanxi," he says.

But being trumped by Schroder Investments for a tie up with BoComm must rankle. Schroders, traditionally an arch rival to HSBC in Hong Kong, may have benefited from an improved focus after selling off its investment banking operations.

Unlike HSBC, present in China since 1865, Schroders has little or no previous history on the Mainland, and has invested a fraction of what HSBC has invested.

BoComm would be an ideal partner for any foreign asset management company given the distribution firepower it can offer through its 3,000 branches. Customers do not have to make a separate trip to the fund management company's office to open account. They can do so at their habitual bank branch and set up a direct debit on the spot.

"The main selling point about BoComm is that it's the number five lender and more crucially is not one of the Big Four state banks with their rotten corporate governance and lending practices," says one observer. "So too it's much bigger than the tiny and mainly regional stock holding banks."

HSBC will not be benefiting from this however, since it is tied up with a trust that has no distribution and very little savvy about fund management. "It's hard to see what value Shanxi Trust brings to the table, apart from the office they supply to the JV," says the former staffer.

It is true that HSBC has total control of the trust. This was indeed one of the key considerations when it first signed the agreement, as it is for many foreign investors. But observers question whether total control over a lemon is more profitable than shared control with a powerful partner such as BoComm.

"It's all very well going for a bit player in order to achieve control, but in this case, the mismatch between HSBC and Shanxi is just too great," one fund manager concludes.

The absence of a banking partner means a fund company has to work hard to attract customers through competitive pricing, good performance and expensive marketing. That is a process which can take years.

It also means a fund has to pay a bank to distribute its products. Increasingly in China that involves paying the bank a cut of the management fee, a sales fee, and custody fees.

All of this can make serious inroads into the fund's bottom line.

Even more embarrassingly for HSBC, Schroders looks likely to set up a functioning JV with BoComm in the next few months. In contrast, HSBC began hiring staff for the JV two years ago, yet nothing has happened.

"Naturally, Shanxi Trust is pretty keen to get the show on the road. After all, they have one of the biggest banks in the world in their corner. But the HSBC side seems to be dragging its feet," says one observer.

HSBC asset management is run by Blair Pickerell in Asia. Insiders say Pickerell - a former CEO of JF Asset management - was picked for the job in 2003 by his close friend David Eldon, then chairman of the Hong Kong & Shanghai Banking Corporation.

Eldon has since retired and been replaced by former Hang Seng CEO Vincent Cheng

Blair, a Mandarin speaker, was chiefly instrumental in building up Jardine Fleming's Taiwan operations in the 1980's, making it a leading funds house and the first to be run along international lines. His chosen number two in China is a Taiwanese, Steve SC Lee (Director and head of China Business), with whom he first worked in Taiwan.

But some observers say Lee's operational experience is far less than that of his friend and mentor. "Lee has little day-to-day experience of fund management administration. His experience is principally in e-commerce in Taiwan," says one observer.

"HSBC has been talking to all the Chinese players since the asset management market opened up in 1998," says one observer, "but it has still wound up without a decent partner."

Indeed, HSBC was previously deep in negotiations with China Southern in 2001 (now one of the biggest fund managers in China), but balked at the asking price.

"In retrospect, the price was quite reasonable, and we missed out," is the gloomy assessment of one observer close to the deal.

Yet the asset management unit's hesitant progress in China is not all that surprising. Asset management brings in under 1% of the group's profits worldwide, and the head of the division - Alain Dromer - has no seat on HSBC's board.

Pickerell, however, answers to Vincent Cheng who does sit on the board and therefore can give asset management a voice - albeit indirectly.

Some observers say the lack of the AM unit's internal heft during the BoComm negotiations may have caused confusion about the prospect of a tie up with BoComm on the fund management side. .

In any case, HSBC's fund management arm has always been a minor player worldwide. The exception is Hong Kong, where it is a major force thanks to its unmatched distribution, and to a lesser extent in Asia ex-Japan where it ranks as one of the major players.

Following the recent sale of its Australian fund management unit, HSBC's low profile globally looks unlikely to change.

Critics says it is ironic that while HSBC's investment banking arm is being expanded globally and the commercial banking arm is making great strides in China, the fund management arm seems to be swinging in the wind.

But news this week that HSBC has restructured its asset management business globally into two new entities, HSBC Investments and HSBC Halbis Partners, to replace HSBC Asset Management, shows that the bank has been having a hard think about the direction of its asset management arm.

That has to be a good thing. HSBC's strategy, especially in China, can only benefit from deciding whether its asset management is a core function, or just a rather inconvenient add-on.