The Hongkong and Shanghai Banking Corporation Limited

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The Hongkong and Shanghai Banking Corporation Limited

1 Queen’s Road Central
Hong Kong
(05) 822-1111

Public Company
Incorporated: 1866
Employees: 52,000
Assets: HK$883.7 billion (US$113.16 billion)
Stock Index: Hong Kong London

The Hongkong and Shanghai Banking Corporation, or HonkongBank as it is commonly known, is one of the largest and most successful banks in the world. Hong Kong, under British control since 1842, has grown into the most dynamic commercial center on the Asian mainland. The HongkongBank has taken full advantage of its position as the leading “home-town” bank and as a natural intermediary between economic interests from politically opposed nations in the region. Few other institutions are as influential in the “China market” as the HongkongBank (indeed, the bank’s Shanghai office has remained open continually since 1865) and fewer still have as much influence in Hong Kong.

In the early 1860s, Hong Kong began to emerge as a major commercial center on the coast of the impoverished south China plain. Western commercial interests, under the protection of British guns, conducted a highly profitable trade in tea, opium, and silk. The hongs, as these interests were called, resented the sudden arrival of India- and London-based opportunists in the mid-19th century.

When the local taipans (”big bosses”) heard that a group of financiers based in Bombay planned to establish a “Bank of China” in Hong Kong, they were outraged that local interests would only be offered a limited number of shares. In response, Thomas Sutherland, the Hong Kong superintendent of the Peninsular and Oriental Steam Navigation Company, formulated a prospectus for a bank based on “sound Scottish banking principles.” He organized a group of local business leaders, and within a matter of days had established a banking cooperative capitalized at HK$5 million. When the “Bank of China” representative arrived in Hong Kong some weeks later, he found no interest in his bank, its shares, or even its directorships.

The Hongkong and Shanghai Banking Company opened for business in Hong Kong on March 3, 1865, in Shanghai April 3, and in London some months later. Members of the cooperative included American, German, Scandinavian, and Parsee Indian merchant houses, as well as representatives from the Bombay-based David Sassoon & Company and Hong Kong-based Dent & Company. The largest companies in Hong Kong, Jardine Matheson and the American firm Russell & Company, were not represented. The highly favorable response to the bank by foreign interests and compradores (Chinese business agents), however, led both to reconsider and join.

An international financial crisis in 1865-1866 could have destroyed the bank. Instead, with financial support from its members, the bank took over the operations of failed competitors and hired their staff. Dent, meanwhile, the dominant Hong Kong member of the group, went bankrupt. But instead of hurting the cooperative, Dent’s failure allowed broader representation by more diverse local interests.

The directors of the bank began to investigate methods of incorporation in order to limit their liability. The two forms of incorporation then available to the bank were under colonial regulations or the British banking code, but both required that it locate its head office in Great Britain—a move which would have defeated the original purpose of the bank. After substantial lobbying of the British treasury, the HongkongBank received special permission to incorporate locally, under colonial banking laws, in December, 1866.

In addition to its branches in Hong Kong, Shanghai, and London, the bank set up offices in Yokohama in 1866, San Francisco in 1875, New York in 1880, Lyons in 1881, and Hamburg in 1889. By 1900, additional offices had been established in India, the Philippines, Singapore, Burma, Ceylon, Malaya, and Vietnam.

The bank established its official status early by lending money to the colonial government and attempting to revive the Hong Kong Mint. It was also actively involved in foreign exchange transactions. Because the bank performed official functions in Hong Kong, its directors, all prominent businessmen in the community, had easy access to insider information. So, in order to preserve the integrity of the bank as well as their own businesses, they voluntarily relinquished management of the bank to non-executives.

During this period, from 1876 to 1902, the bank was heavily influenced by its chief manager, Thomas Jackson. Jackson had attempted on three occasions to retire. Each time, however, severe problems befell his successors and he was called back. Jackson was regarded as a prudent manager who kept the bank from insolvency under highly volatile conditions by backing sterling operations only with sterling funds, and backing operations in the East with silver, the common currency.

The HongkongBank issued currency for the government (a practice which continues today), and advised on currency reforms in Japan, Thailand, the Philippines, China, Korea, and the Straits Settlements (Penang and Singapore). Through a powerful compradore in China, the bank established contacts with local officials in Tianjin and Beijing. The bank was later asked to issue a public loan on behalf of the Chinese government, and directed several more in ensuing years. While some of these loans financed China’s war against Japan (1894-1895) and the enforcement of peace during internal conflicts such as the Boxer Rebellion in 1900, the bulk were used for infrastructural projects such as railroads, coal mines, and shipping lines.

The bank was able to develop a very favorable rapport with the government and business interests in China mainly because it had a widespread presence in China and was incorporated in Hong Kong. By 1910 it was the favored intermediary of the multinational China Consortium, a result of the demonstrated effectiveness of the Bank’s London manager, Sir Charles Addis.

World War I deeply divided the bank, still well represented by both Germans and Britons. The German members of its board, identified in the press as “hostile interests,” eventually resigned, marking a more or less permanent end to German participation in the company. Still, the bank’s Hamburg office remained open for the duration of the war.

The high price of silver after the war led the bank to make a rights issue to finance an expansion. Chief Manager A. G. Stephen presided over the construction of new facilities in Hankow, Bangkok, Manila, and especially Shanghai, where a new office was opened in 1923. An office opened in Vladivostok in 1918 but was forced to close in 1924, when Russian revolutionary forces completed their consolidation of control over Siberia.

The optimism of the early 1920s crashed after 1929 and continued to deteriorate through the 1930s, as Japanese interests moved into China, this time supported by Japanese guns. At first, the Japanese domination of China was limited to the rich hinterlands of Manchuria and consisted mainly of the commercial exploitation of resources. While the bank was permitted to establish offices in the Manchurian cities of Dairen, Mukden, and Harbin, its operations were limited only to foreign trade. Meanwhile, in the rest of China, the bank experienced new competition from an increasingly sophisticated Chinese banking community.

At the same time, the bank was losing business from the Philippine government and was discriminated against in Indonesia and Vietnam by Dutch and French colonial authorities. Despite generous lending and other support tactics for customers involved in rubber and other volatile commodities trades, bank profits continued to deteriorate. In many cases, competitors complained that the bank’s extraordinary care “exceeded the limits of prudent lending.” The bank was, however, founded on cooperative precepts, and continued to operate on that basis. Still, it was the shareholders who suffered; shareholder’s funds fell from £9.1 million in 1918 to £8.6 million in 1940.

The number of Hong Kong dollars in circulation, 80% of which were printed by the Hongkong and Shanghai Bank, increased from HK$50 million in 1927 to HK$200 million in 1940. In effect, the bank backed HK$160 million of the colony’s currency—a dangerous exposure to the local economy, despite transferring the currency from a silver to sterling standard. The bank became involved in an even more unmanageable currency-stabilization effort in Shanghai, from which it eventually had to bow out, turning the scheme over to a government board.

The Japanese occupation of China, meanwhile, had become extremely brutal. Terror bombings, invasion, and a Japanese military riot in Nanking stifled commerce in China and isolated Hong Kong from its Chinese hinterland. Sensing imminent danger, the bank’s chief manager, Vandeleur Grayburn, authorized the immediate transfer of silver reserves into sterling assets in London. On December 8, 1940, shortly after completing the transfer, Japanese troops stormed through Hong Kong’s New Territories, and on Christmas won a surrender.

Bank staff in Manchuria, Japan, and Indochina were repatriated, and those in Burma and Singapore escaped to India. Employees in China, particularly Foochow, managed to reach Chungking, where the bank opened a formal office in 1943. The staff in Hong Kong were much less fortunate; most of them who were of European descent were imprisoned.

Under prearranged orders from Grayburn, the bank’s London manager, Arthur Morse, assumed managerial control of the bank. Morse transferred the dollar-denominated assets located in Hong Kong to London, fearing that if the Japanese gained control of them, the assets would be frozen by the U.S. government. In light of the circumstances—the bank’s board was interned in Hong Kong—Morse was named both chief manager and chairman. During the occupation, Japanese authorities forced the bank to issue additional currency in order to support the local economy. Grayburn and his designated successor, D. C. Edmonston, meanwhile, died in prison.

The war ended so suddenly in August, 1945 that Hong Kong remained occupied when Japan surrendered. With colonial authorities back in control, the bank began the difficult and costly task of rebuilding. The amortization of banknotes issued under the occupation cost HK$16 million, and new legislation only permitted the bank to collect debts from enemy interests in depreciated occupation currencies.

Despite its weakened condition, the bank played a major role in the reconstruction of Hong Kong, a task Morse began planning well before the war ended. All the company’s branches were reopened—with the exception of Hamburg which, again, had remained open during the war—including those in Japan. By 1947, however, new problems arose in China, where the wartime alliance between Chiang Kai-shek’s nationalists and Mao Tse-tung’s communists had degenerated into a civil war. The immediate effects were severe inflation and increasing public disorder.

By October, 1949 the communists had gained control of the mainland and the nationalists had fled to Taiwan. When an initial plea by the communists for reconstruction in cooperation with capitalists was suddenly reversed in 1950, industrialists fled China—especially Shanghai—for Hong Kong. The bank maintained offices in Shanghai, Beijing, Tianjin, and Shantou until 1955, when all but the Shanghai branch were closed. The Chinese, it seemed, preferred to do all their business through Hong Kong.

After the war, the British government practiced a “non-extractive” economic policy in Hong Kong which, coupled with the entrepreneurial talent of industrialists transplanted from Shanghai and a labor force swelled by thousands of mainland refugees, created a powerful economic base. The bank financed hundreds of new ventures that helped the colony achieve unprecedented export-led growth. The growth of the textile industry in Hong Kong, however, led the bank to fear that it had become overexposed to that one industry.

Under Michael Turner, the HongkongBank adopted a new strategy of expansion using subsidiaries during the mid-1950s. Initially made necessary by American banking legislation, the subsidiary form of organization was first used in 1955 to establish a branch in California—one step toward reducing its dependence on Hong Kong.

Because Britain relinquished much of its empire after the war, British companies were forced to rationalize, by merger, acquisition, or nationalization. Indeed, many went bankrupt. Two such companies, the Mercantile Bank (formerly the Chartered Mercantile Bank of India, London and China) and the British Bank of the Middle East (known as BBME, formerly the Imperial Bank of Persia), were purchased by the Hongkong and Shanghai Bank in 1959. The addition of the Mercantile Bank, with an extensive branch network in India, and the BBME, strongly represented in the Persian Gulf, made the HongkongBank the largest foreign bank in most of the countries from the Far East to southwest Asia.

Having reduced its exposure to Hong Kong, the bank moved next to diversify operationally. In 1960 it created Wayfoong, a consumer financing group whose name translates loosely as “focus of wealth.”

A banking crisis in Hong Kong in 1964 led to a serious run on a competitor, the Hang Seng Bank. As the primary financial institution in Hong Kong and de facto central bank, the HongkongBank, while under no statutory duty to do so, acquired a majority interest in Hang Seng in 1965. Hang Seng subsequently recovered, and today is the second-largest bank incorporated in Hong Kong.

The HongkongBank’s expansion through subsidiaries began in earnest with the creation in 1972 of Wardley Ltd., a merchant bank, and an insurance company called Carlingford. The bank also made numerous other investments—in Cathay Pacific Airways, the World-Wide shipping group, and the South China Morning Post. All these investments proved highly profitable in light of Hong Kong’s rapid economic growth. In addition, the BBME benefited greatly from the newly prosperous oil-based economies in the Persian Gulf. In 1978, however, BBME branches in Saudi Arabia were taken over by the Saudi British Bank, a Saudi-controlled bank in which BBME retained management control, but only 40% ownership.

Under the leadership of Michael Sandberg, the HongkongBank re-examined its position in America as part of a wider strategy to gain greater representation in the major Western economies. The Hongkong and Shanghai Bank of California was sold and the bank purchased a 51% share of the Marine Midland Banks, a New York-based bank holding company, in 1980. The HongkongBank bought the outstanding shares of Marine Midland in 1987. This acquisition inspired substantial debate in the U.S. Congress about whether banking laws should be strengthened to prevent foreign companies from gaining control over American banks.

The bank expanded in several ways during 1980. In China, the Shanghai branch was expanded and a representative office was established in Beijing. In addition, the BBME relocated from London to Hong Kong, and the bank gained control of Concord International, a leasing and finance group, and Anthony Gibbs, a British merchant bank. The following year, a Canadian subsidiary, the Hongkong Bank of Canada, was established in Vancouver. In 1986 the Hongkong Bank of Canada acquired the business of the Bank of British Columbia, bringing the number of branches across Canada to 61.

A bidding war over the Royal Bank of Scotland Group between the HongkongBank and Standard & Chartered (which issues Hong Kong’s other currency) was halted by the British Monopolies & Mergers Commission in 1981. Meanwhile, the bank succeeded in establishing a presence in Africa in 1981 through the acquisition of a controlling interest in Equator Bank by its merchant bank subsidiary Wardley; in Cyprus in 1982, also primarily through Wardley; and in Australia in 1985, when it established HongkongBank of Australia.

In December, 1987 HongkongBank entered into an association with Midland Bank, one of four major British clearing banks, when it made the friendly acquisition of 14.9% of Midland’s stock. HongkongBank has agreed not to increase its stake in Midland until December, 1990, but to date the association has allowed mutual rationalization. Where this partnership will ultimately lead has yet to be determined.

Despite the bank’s growth outside of Hong Kong, it still maintains a commanding presence there. With over 260 branches in the colony and an impressive new headquarters building in the financial district, the HongkongBank has demonstrated a commitment to the territory’s future—a future that includes the transfer of Hong Kong from British to Chinese control in 1997.

The bank’s most worrisome competitor may well be the mainland-incorporated Bank of China, which has erected an even more impressive skyscraper, designed by I. M. Pei, down the street. Regarded by many as a demonstration of China’s willingness to maintain the economic dynamism and stability of Hong Kong, the Bank of China’s high profile has led the HongkongBank to improve banking services in the territory. In addition to its traditional banking operations, the bank has emphasized growth in international capital markets, centered in London and New York, and has disposed of other peripheral interests, such as that in the South China Morning Post .

Having endured virtually every kind of crisis in the most volatile environments, the Hongkong and Shanghai Bank has emerged older, wiser, and stronger. Its excellent relationship with the Chinese government surely places it in a preferred position to lead future investment in Chinese ventures, as well as to play a major role in Hong Kong after 1997.