MARKeT WATCH

OPINION

The Nature of Foreign Capital

The partnership between HSBC Holdings and Ping An Insurance, once a much-told success story, seems to be coming to an end. The two companies recently announced that HSBC Holdings planned to sell all its H shares in Ping An. According to sources, the offer is likely go to Thailand-based Chia Tai Group.

As a saying goes, “there are no permanent enemies, only permanent interests,” which rings relevant for HSBC Holdings and Ping An, who joined hands a decade ago and broke up due to declining synergy.

HSBC Holdings’ entry into Ping An was a successful move. Ten years ago, Ping An was still a pawn in the game. Then HSBC Holdings managed to buy into Ping An at roughly 2 yuan ($0.32)per share. It now holds 1.23 billion H shares and is the biggest shareholder of the company, accounting for 39.39 percent of the total H shares and 15.57 percent of the total issued share capital.

As Ping An is evolving into a full- fl edged player, the market value of the shares held by HSBC Holdings has quintupled. Among all the candidate offers, Chia Tai Group has prepared to take over the shares at a premium of$HK60 ($7.74)per share.

Without HSBC Holdings as an incubator in its early years, Ping An could not morph into a fi nancial magnate it has become from its humble beginnings as a small firm. The business talent and risk control system transplanted from HSBC Holdings have been the two reasons why Ping An rose in the insurance world.

But now the marriage is heading for break up. On the surface, it appears HSBC Holdings decided to end the partnership. Since Stuart Gulliver became CEO of HSBC Holdings two years ago, the company began selling its non-core assets around the globe in order to concentrate on its own key commercial and banking businesses. Ping An was a desirable sell off.

More importantly, in June 2011, the Basel Committee on Banking Supervision announced an increase in the required ratio of additional paid-in capital of the Global Systemically Important Banks. In early November, sources said the G-20 might jack up the ratio to 2.5 percent, the upper limit. Without a doubt, banking giant HSBC Holdings is among the banks accepting the new requirement. Selling out Ping An shares will solve its pressing need for money.

Regarding foreign investment in China,and especially concerning the country’s big four state-owned commercial banks, a hidden rule can be found: Foreign fi nancial institutions often team up with Chinese companies as strategic investors or longterm stakeholders, and then withdraw as fi nancial investors.

The difference lies in speculation and investment. In most cases, foreign capital arrives under the pretext of helping to alleviate fund pressure and speculates in the name of investing.

As for Chinese fi nancial institutions, only those whose stock rights have long-term value can attract foreign investors. Nevertheless,when the investors get into trouble or huge profits can be reaped, these once-generous strategic investors always show a speculative nature.

The evolution of Ping An and the streamlining of HSBC Holdings mirror a constantly changing financial world, where domestic companies rise should-to-shoulder with international giants. Free competition rather than administrative protection can better arouse the vitality of financial enterprises and facilitate the healthy development of the financial industry. Chinese financial institutions should not expect foreign investors to hold onto their shares in the long term.

This is an edited excerpt of an article by Ma Hongman, a business commentator, published inThe Beijing News.

yushujun@bjreview.com

1.606 million

The number of auto sales for October in China.

446,100

The number of units sold by the top fi ve carmakers in October, accounting for 49.29 percent of total car sales.

137,400

The number of units sold from the country’s top fi ve car brands in October,accounting for 15.18 percent of total car sales for the month.

Auto Output and Sales, October (units)

Top Five Carmakers by Sales, October (units)

Top Five Car Brands by Sales, October (units)

THE MARKETS

Untapped Bond Market

China should boost its bond market to solve the fi nancing dif fi culties of some corporations,said Frank FX Gong, Managing Director of J.P. Morgan Asia-Paci fi c.

Gong said China’s bond market is severely underdeveloped. At present, bank loans account for 70 percent of the fi nancing structure while the bond market only accounts for 20 percent, compared with 85 percent in the United States.

Compared with the limited variety of stock products, the variety of the financial products in the bond market means that there is tremendous potential for growth, said Gong.

“Only through the development of the bond market can the difficulty of financing for small and medium-sized enterprises be solved,” he said.

Appliance Chain’s Loss

Gome Electrical Appliances Holdings Ltd.,China’s second largest home appliance retail chain operator, swung to a loss in the third quarter from a profit a year earlier due to sluggish demand, rising costs and a loss at its e-commerce business.

Gome and bigger rival Suning Appliance are both being pressured by weak consumer demand. Consumers have eroded spending on appliances such as televisions, refrigerators and washing machines.

Gome, which is backed by private equity fi rm Bain Capital, recorded a net loss of 686.7 million yuan ($110.22 million)for the nine months ending in September, against a 1.79-billion-yuan ($287.30-million)profit a year earlier. Revenue fell 18 percent to 36.06 billion yuan ($5.79 billion).

Its net loss amounted to 185.6 million yuan ($29.76 million)for the July-September quarter, compared with a 539-million-yuan($86.51 million)pro fi t a year ago.