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Cablegate: China's Banking Reforms Fast Enough for Hsbc

VZCZCXRO1393
RR RUEHCN RUEHGH
DE RUEHGH #0330/01 1511520
ZNR UUUUU ZZH
R 311520Z MAY 07
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 5887
INFO RUEHBJ/AMEMBASSY BEIJING 1142
RUEHCN/AMCONSUL CHENGDU 0696
RUEHGZ/AMCONSUL GUANGZHOU 0676
RUEHHK/AMCONSUL HONG KONG 0804
RUEHSH/AMCONSUL SHENYANG 0698
RUEHIN/AIT TAIPEI 0568
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHINGTON DC
RHEHNSC/WHITE HOUSE NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 6294

UNCLAS SECTION 01 OF 02 SHANGHAI 000330

SIPDIS

SENSITIVE
SIPDIS

FRANCISCO FRB FOR CURRAN/GLICK/LUNG; NEW YORK FRB FOR
CLARK/CRYSTAL/MOSELEY
STATE PASS CFTC FOR OIA/GORLICK
CEA FOR BLOCK
USDOC FOR ITA DAS KASOFF, MELCHER AND OCEA/MCQUEEN
TREASURY FOR OASIA - DOHNER/CUSHMAN
TREASURY FOR IMFP - SOBEL/MOGHTADER
NSC FOR KURT TONG

E.O. 12958: N/A
TAGS: EFIN ECON PREL CH
SUBJECT: CHINA'S BANKING REFORMS FAST ENOUGH FOR HSBC

REF: A. 06 Shanghai 5846

B. Shanghai 247

(U) This cable is sensitive but unclassified and for official
use only. Not for distribution outside of USG channels.

1. (SBU) Summary: At a meeting with visiting Embassy Finatt on
May 16, HSBC China Deputy CEO Bryan Stiles and Global Markets
Managing Director David Liao said HSBC's local incorporation had
gone smoothly. HSBC believed that Chinese regulators would soon
allow foreign banks to offer retail RMB customers debit cards.
Removing regulatory obstacles would not necessarily allow
foreign banks to expand more quickly, given the scarcity of
qualified staff. HSBC hoped that China soon would allow all
banks to hold net open positions shorting the dollar rather than
giving one bank (Tianjin Commercial Bank) a competitive
advantage by allowing only it to do so. End summary.

-------------------------------------------
Local Incorporation Smooth; CBRC Responsive
-------------------------------------------

2. (SBU) In a meeting on May 16, HSBC's Stiles and Liao told
visiting Embassy Finatt that HSBC's local incorporation in China
had gone "very smoothly." Stiles said that the China Banking
and Regulatory Commission (CBRC) had been especially responsive
in working out the "significant finer details." In fact, said
Stiles, it was "incredible" that China had managed to
incorporate four major banks in one year. He attributed this to
all sides -- both the banks and CBRC -- wanting the process to
succeed.

3. (SBU) Though locally-incorporated foreign banks were now able
to take RMB deposits, the CBRC had not yet allowed them to issue
debit cards to their customers to access their accounts. Stiles
felt that this was "a relatively small speed bump" and expressed
his confidence that this would be resolved within three months.
(Note: During the subsequent May 22-23 Strategic Economic
Dialogue discussions in Washington, DC, the Chinese government
agreed to allow foreign incorporated banks qualified for RMB
retail businesses to issue RMB bank cards which meet the
operational and technical standards of China's banking cards,
and enjoy the same treatment as Chinese banks. End note.)

-----------------------------------------
HSBC Struggling To Expand at Pace Allowed
-----------------------------------------

4. (SBU) While USG officials often focused on regulatory
obstacles, Stiles stressed that recruiting, training and
retaining qualified staff was as important a factor in
constraining growth by foreign banks (Ref A). Stiles said that
HSBC had opened branches in western and central China in order
to receive CBRC blessing to open new branches in economically
more-vibrant areas. "Some cities that we have opened branches
in, we wouldn't actually have planned to be there for 15 years,"
he added.

----------------------------------------
Opening Up Means More Chance to Regulate
----------------------------------------

5. (SBU) Stiles suggested that the USG message to China on
capital account liberalization should be that bringing informal
sector activities into the formal sector would improve
regulation and oversight. Stiles said that the hot flows of
foreign currency already coming into China to take advantage of
the expected RMB appreciation was one area that could be
addressed by lifting the quota caps on the Qualified Foreign
Institutional Investor (QFII) program.

------------------------------------
HSBC FOREX Traders Gaming the System
------------------------------------


SHANGHAI 00000330 002 OF 002


6. (SBU) HSBC's Liao commented that the China Foreign Exchange
Trading System (CFETS) much-vaunted new trading software
platform (Ref B) was "not at all user-friendly." The worst
aspect of the new software was that the price shown on the
trading screen was only an "indicative" price and not binding
for a trade. Once a trader decided to make a trade, he or she
had to call up to find out what the actual price was. Liao
described how HSBC traders had attempted to use this feature to
their benefit, saying that it was like "kids with a new computer
game." (Note: In a separate conversation on May 14 with
Pol/Econ Chief, JP Morgan Greater China General Manager Andrew
Zhang explained how JP Morgan had to work through a broker with
access to Reuters to find out the actual prices being offered
and then confirm trades by phone, sending other business to the
broker to compensate for the fact that JP Morgan couldn't pay
for the "informal" services being provided that were supposed to
be provided by CFETS. Zhang planned to raise the issue with
CFETS President Xie Duo. End note.)

7. (SBU) HSBC's Liao said that the next step necessary in
creating a more liquid foreign exchange market was to allow
banks to take a short position on the dollar. In an unwritten
rule, banks were allowed a five day average in longing and
shorting the dollar -- but if the average reflected a net short
position the bank would be fined. Liao said that the one bank
in Tianjin that was permitted to short the dollar, Tianjin
Commercial Bank, was "enjoying it very much." It would be
preferable if CFETS could allow every bank to take a short
dollar position, even if subject to strict limits, he suggested.

--------------------------------------------- ------
Foreign Debt Restrictions Not Slowing HSBC's Growth

--------------------------------------------- ------

8. (SBU) According to Liao, recent CBRC rules restricting banks'
access to foreign debt did not make any sense. While one reason
for this policy was to limit banks' ability to borrow in dollars
and short the dollar to speculate on RMB appreciation, Liao said
that there was no way that HSBC could convert borrowed foreign
currency into RMB without getting approval from the State
Administration of Foreign Exchange (SAFE). According to Liao,
given HSBC's large branch network relative to foreign
competitors, it had ample access to RMB for the time being and
thus the reduced quota for foreign debt would not yet limit its
ability to expand its loan portfolio.

9. (SBU) Comment: As has been the case in prior meetings with
HSBC executives, the general view is that China's progress and
pace of banking reform is appropriate and HSBC continues to be
well-positioned in the market, in part due to benefits it
derives as a foreign bank able to benefit from the Closer
Economic Partnership Agreement with Hong Kong. Unlike some of
their counterparts at American banks, HSBC very clearly does not
want to rock the boat.

10. (U) Embassy Finatt cleared this cable.
JARRETT

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