The funds management industry in China is roiled with rumours that HSBC is going to announce a funds joint venture with Shanghai-based Bank of Communications.

HSBC negotiated a 20% stake in BoComm, the nation's fifth largest lender and its biggest private bank, this summer at the same time as HSBC Asset Management was looking for a local partner to launch a funds operation. HSBC AM had been on the hunt ever since Blair Pickerell had joined as its CEO in the spring of 2003. That objective was finally realized this autumn when HSBC AM teamed up with Shanxi Provincial Trust.

Since that time, the Chinese Securities Regulatory Commission has paved the way for commercial banks to launch their own fund management businesses. Until now, only securities companies and investment trusts could be shareholders of fund houses. Industrial & Commercial Bank of China was the first to announce its intention to launch a funds unit, but all the banks are expected to do so.

Now HSBC - the bank side - is reportedly close to announcing a second tie-up in the funds area with BoComm.

The timing, and the fact that this deal seems to be originating out of HSBC Bank, not HSBC Asset Management, has some observers believing it is due to pressure from BoComm, and not an HSBC initiative. Once BoComm saw it was able to launch its own funds business, it quite naturally turned to its foreign shareholder in expectation of help.

HSBC AM officials are not commenting on market rumours. It remains unknown, therefore, to what extent they support any JV with BoComm, or were even involved in the negotiations. "This looks like a case of the right hand not knowing what the left hand is doing," says one market watcher with M&A experience in the Chinese funds industry.

It is also possible that HSBC may not formalize a funds JV with BoComm but could act in an advisory role. It is common for foreign fund managers to provide technical assistance to local partners in deals that sometimes evolved into JVs.

Nonetheless if the BoComm deal is realized, it could be of huge benefit to HSBC, as a hedge if nothing else, since its other JV partner is a small, state-owned investment company. Also, the big commercial banks are considered to be potentially dominant players in the funds management business if only because of their massive distribution power. A domestic bank that can work with a solid foreign partner gains a further advantage in developing its proprietary product.

On the other hand, HSBC AM already has its hands full working with Shanxi Provincial Trust. Observers believe one reason it is working with a small and obscure investment trust company is because HSBC AM can call the shots, even though it can only now own 33% of the JV (this regulatory barrier will rise to 49% at the end of this year). Working with a powerful partner such as BoComm won't allow HSBC the same degree of leverage.

This would mark the first time a foreign shareholder had stakes in two domestic fund management companies, although it is common among Chinese financial institutions. The law now allows a shareholder to have two stakes in a funds company, of which at least one must be a minority position.