...and "British Banking" in China

06/10/2005 12:00 am EST


Alexander Green

Chief Investment Strategist, The Oxford Club

Alexander Green, investment director for The Oxford Club , is well known for thinking outside the box, and finding investment opportunities off the beaten path. His latest idea is a good example, as he notes, "The best play on China just may be a British bank."

"I think the chances for a revaluation of China's currency, the yuan, are good and getting better every day. The yuan, of course, has been fixed at 8.28 to the dollar since 1994. But because it's pegged artificially low, it gives China's exports an unfair advantage here, and one that is contributing to our gaping trade deficit with that country. This is a problem that has been simmering for years. But now it's reaching the boiling point. As a result, I believe it's likely China will revalue its currency 10%-15% higher before the end of this year. This should cause a jump in the value of our China-related investments, like Huaneng Power (HNP NYSE), PetroChina (PTR NYSE), and Templeton Dragon Fund (TDF NYSE).

"It also bodes well for  HSBC (HBC NYSE). When a bank operates through over 9,800 offices in 77 countries as HSBC does it's hard to consider it a pure China play. But it may be the next best thing. Headquartered in London, HSBC was originally known as the Hong Kong and Shanghai Banking Corporation, and is now the world's fifth-largest bank. And, it’s one of the most profitable. (Since 1999, the bank's share price has risen 62% vs. an 18% decline in the value of London's FTSE 100.)

"HSBC has operated in China for over 100 years. Its branches span the country. And it's still expanding. This month, the bank announced it would pay $1.1 billion to double its stake in Ping An Insurance to 19.9%, the maximum foreign companies are allowed to hold under Chinese law. This comes on the heels of several other major investments in China. Last year, for instance, HSBC bought an 8% stake in Bank of Shanghai, and paid $1.75 billion for a stake in China's fifth-biggest lender, Bank of Communications.

"It’s important for investors to understand what's happening here. For years, hundreds of millions of middle-class Chinese had the desire for modern goods and services. Now they have the means. As a result, the demand for checking and savings accounts, credit cards, commercial and home loans, financial planning, and investment banking services are soaring. And you won't find a major town or city in China where HSBC isn't already firmly established.

"According to Dr. Jeremy Siegel, professor of finance at Wharton, ‘At the rate that China is growing, its economy will exceed the US in 10-15 years. Yet this development is not something to fear. We must look to China and other countries as opportunities, not as threats. Huge markets await those willing to tackle them.’ I couldn't agree more. Meanwhile, there is no other Western bank so well established in this part of the world. If you're seeking a conservative way to capitalize on China's torrid growth, HSBC is a good place to start."

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