The decision of Dr Guocang Huan to join HSBC was a major signal of the banks intentions vis-a-vis investment banking in China. Formerly head of Salomon Smith Barney's China business, he brought over five senior bankers to HSBC, where he is now vice chairman, Investment Banking and Markets, China. Here, he and Peter Au-Yang, co-head, Investment Banking, Asia Pacific, speak about HSBCs plans for China
Q: What does Dr Huans hire mean for HSBCs investment banking business in China?
Au-Yang: For investment banking it is definitely a big plus. We've been strong in executing transactions. But with Dr Huan joining us that will really beef up our origination side. So we now have a great combination of origination and execution capability and we obviously look forward to doing more.
Q: HSBC has a very long history in China, what does that means for you in terms of building this business?
Huan: There are several reasons why I joined HSBC. One is thanks to the long commitment of the group to China for more than a century. The top management has a very focused perspective on this part of the world. After all, more than one third of group profits came out of Hong Kong, which is very different to any other multinational financial services company. And most senior managers in London have spent a long time in Asia, so the understanding of the Asian and China markets is far better than in other banks because this is home. And if you look at the financial crisis, the bank did not cut back their exposure or credit lines to key companies in Hong Kong, including Chinese companies in Hong Kong. That is remarkable and many of my Chinese clients in Hong Kong have called me and expressed their appreciation of the bank which supported them during the worst times.
Q: How is HSBC viewed in China? Is it still perceived to be a colonial bank?
Huan: I dont think so. On the commercial banking side if WTO membership is granted to China there will be tremendous multinational access to China. The two banks that will benefit are HSBC and Citibank. Everybody knows about HSBC and they and Citi will do the most retail and commercial banking business in China going forward. So I dont think it is viewed as a colonial bank anymore. Frankly, it is no different to any other multinational bank as far as image is concerned.
Q: How will the reporting lines work in the investment bank? You now have four co-heads and Dr Huan is chairman of the China business.
Au-Yang: Myself and Nick Bryan-Brown will look after the equity side, and Mark Bucknall and Avi Bindra will be more on the debt side. Dr Huan is heading our PRC operations for investment banking so he will report to myself and Nick on the equity side. His focus is more on the equities side.
Q: So, Dr Huan, your mandate is to manage the relationships in China?
Huan: Yes, and with Chinese clients based in Hong Kong.
Q: At BZW, you were very successful at bringing in red chip mandates in early 1997.
Huan: At BZW, the management support was very important. Roger Davis [now head of Barclays Capital Asia] is a very good manager, and we had a team that supported one another. The worst thing that can happen is if research, sales, ECM and investment banking all move in different directions. That makes everything impossible, even if you have good mandates. What I can see in HSBCs internal structure is that people work together very well and that gives me confidence things will work out well.
Q: The US banks play up the vital importance of the US market and ADRs. How are you going to win mandates when HSBC is not perceived to be strong in the US?
Huan (pictured, right): If you look at the major deals out of China, US institutional placement is important. But US retail is never important. And as far as the 50 big US institutional investors are concerned, they are looking for a good story. If you have a good story to tell, they are not difficult to approach. And if you look at Asia, HSBC has a pretty strong track record. The MTR IPO performed well. Thats because we have a very strong local sales force and good relationships with high net worth accounts in Hong Kong. But everybody has the same access to big US institutional investors. The issue is not sales, but your track record.
Au-Yang (pictured, left): yes, we dont have access to US retail demand. We do have people in the US focusing on institutional investors and these are what count in an H share issue.
Q: The deals that have made headlines such as Sinopec have involved enormous amounts of restructuring work. Do you feel HSBC will be disadvantaged versus a Morgan Stanley that can say, look, weve done it before?
Huan: To be honest, we have done those pre-IPO reorganizations for H shares. In terms of scale they are not so big, but we have done them. We are not lacking experience on that front. And we have done lots of privatization and advisory work. The issue might be that as a firm, HSBC has not done many transactions in China in the past couple of years. This is a disadvantage we must overcome. How? First, we now have a team on the ground and strong management commitment. Second, my view is that latecomers always have to make more effort, but there are a lot of opportunities the US houses dont always identify and in the Chinese market there are a lot of opportunities. We can compete and work creatively.
Q: Which sectors will the next round of Chinese IPOs come from?
Huan: Banking and finance is important. Currently, people are looking at Bank of China. But there are others. As you know, HSBC and SSB are now working on a mandate to restructure ICBCs Hong Kong operation. [HSBC was awarded this mandate, jointly with Salomon Smith Barney two weeks after Huan left Salomon to join HSBC]. Second, transportation and logistics will be important. Were talking about the future restructuring of the airline industry, the restructuring of the logistics and transportation sector from railways to express delivery services. Third, technology, media and telecom. Media is very interesting. I believe the policy of the government will be to separate the editorial function which will be under tight control from the government from the business side. In other words, the editorial side will remain under government supervision for ideological reasons, but the business part will be liberalized in order to get the capital to fund it.
Q: How big a percentage of the Asian corporate finance business will come from China?
Au-Yang: I would expect at least a third will come from the PRC market.
Q: How will you select which transactions to do? Will the four co-heads sit in the room with Dr Huan and decide which ones will enhance the franchise and which wont?
Au-Yang: We will have to discuss which deals we should and shouldnt take on, whether there are conflicts or because it might hurt our franchise. The decision will be taken on a team basis.
Q: Do you think it will prove challenging to do China deals for the rest of the year?
Huan: No. At this point, the market is low, reflecting what is going on in the US. Investors are cautious. But at the same time, interest rates have been cut and yields are lower. People are in cash and ready for good stories. People are waiting for the signal of the market turning around. Towards the middle to second half of the year we will see a hungrier equity market. And towards the end of the year, WTO membership will most likely be granted to China and there will be a movement of multinationals into China. Perception-wise the China market should be attractive.
Q: How will you judge your success over the next couple of years?
Huan: Its difficult to talk about numbers. My view is that, in order to be successful, we have to focus on the bottom line, which is profits and revenues. Its very important I hit the budget and make profit. And also, we must work on good mandates and increase our market share.
Q: But profitability isnt going to come quickly, since you are building
Huan: Let me put it this way. We are building a new team. But most of my clients follow people, and so we are not building from scratch. We currently have a pretty good flow of mandates. So its not building from zero.
Q: How many people in the China team?
Au-Yang: There are 11 including those people we hired with Dr Huan, those dedicated to China ECM and those to China DCM.
Q: Are you still hiring?
Huan: We are still looking for a couple more key people. They will probably be based in Beijing.
Au-Yang: In addition, we will probably hire one or two more juniors to complete the picture.
Q: When you are trying to win mandates, will you take Stuart Gulliver [HSBCs overall head of investment banking and treasury in Asia] and David Eldon [CEO of The Hongkong and Shanghai Banking Corporation Limited] to meetings?
Huan: Yes, thats important. They were in Beijing last week. HSBC Group chairman John Bond is still in Beijing at the moment. He was invited to a forum by the State Council and is a guest of Zhu Rongji. Our senior people already know Chinas leaders.