Abstract
This article applies a new investigative technique called ‘equity map**’ to the corporate structure of two big Chinese state-owned banks, Bank of China (BOC) and China Construction Bank (CCB), to advance our understanding of the way they use their Hong Kong subsidiaries and holding companies to support their global and domestic strategies. We show that Chinese state-owned banks typically set up a ‘sandwich’ structure of holding whereby a Hong Kong subsidiary holds a British Virgin Islands or Cayman subsidiary which, in turn, holds a publicly listed subsidiary in Hong Kong. The subsidiary holding company in Hong Kong serves as the bank’s face to the world. Indeed, these subsidiaries often control subsidiaries in mainland China, and in that way, state-owned Chinese banks operate as foreign banks on the mainland. This structure can be used to avoid taxation in different regions despite restrictive mainland financial regulations. In addition to creating a formal structure that emulates the legal and corporate governance structure of Western banks and companies, these Chinese banks establish a dual pattern of ownership organizations through personal links and named trusted directors to build an informal structure with ‘floating’ subsidiaries in offshore financial centres.
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Notes
Since 1998, the Chinese state has attempted to stem the flight of capital by imposing stricter capital controls on the international transactions of Chinese banks and other financial intermediaries. But with the development of a sophisticated arm of Chinese banking abroad, with strong links to the domestic economy, bureaucratic influence and tougher capital controls seem to have only increased the incentive for capital flight, arguably changing the preferred route of capital flight but not substantially reducing the volume (Gunter 2017). Indeed, many suggest Hong Kong provides a degree of openness and transparency in the context of an otherwise opaque Chinese market (Haberly and Wójcik 2015; Meyer 2015).
Qichacha (企查查), and Tianyancha (天眼查) are the biggest and most popular websites with official licenses to use government data on enterprises. They aggregate data from ministries, state administrations, and industry associations and have over 50 billion pieces of credit information. On these platforms, natural persons and legal persons are consolidated and stored under a unified social credit code uniquely attributed to each (Krause and Fischer 2020).
Vague offshore structures are presented in several individual cases in their subsidiaries’ bond issues (BOCI Asia Limited 2004), and they hide some subsidiaries held in OFCs.
There are different disclosure rules in different exchange markets; thus, Chinese listed financial institutions present their corporate structures with different degrees of detail. Simplified ownership structures are withheld intentionally in their IPO prospectuses and annual reports (e.g., (BOC 2002); (BOC 2022). Vague offshore structures are presented in several individual cases in their subsidiaries’ bond issues (BOCI Asia Limited 2004), and they hide some subsidiaries held in OFCs.
The 10 banks include Bank of China Hong Kong Branch and the Hong Kong branches of the seven banks incorporated in mainland China (Kwangtung Provincial Bank, Sin Hua Bank Limited, China & South Sea Bank Limited, Kincheng Banking Corporation, China State Bank Limited, National Commercial Bank Limited, and Yien Yieh Commercial Bank Limited), as well as two locally incorporated banks, Hua Chiao Commercial Bank Limited and Po Sang Bank Limited.
The government, through Hong Kong Monetary Authority (HKMA), has authorised three commercial banks to issue banknotes in Hong Kong: Hongkong and Shanghai Banking Corporation Limited, Bank of China (Hong Kong) Limited, and Standard Chartered Bank (Hong Kong) Limited. This authorisation is accompanied by a set of terms and conditions agreed upon by the government and these three note-issuing banks. Banknotes are issued by the note-issuing banks or redeemed against payment to or from the Exchange Fund in US dollars, at a specified rate of US $1 to HK $7.80 under the linked exchange rate system. Banknotes issued by the note-issuing banks are printed in Hong Kong by Hong Kong Note Printing Limited (HKNPL).
Hua Chiao’s businesses, assets, and liabilities were transferred to BOCHK as part of a restructuring and merger. As a result, this entity no longer conducts banking business.
On 11 February 1998, Hong Kong and China signed the Arrangement between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation on Income (a Limited Arrangement) to allocate the right to tax between the two jurisdictions on a reasonable basis to avoid double taxation of income. On 21 August 2006, both parties signed a more comprehensive arrangement titled Arrangement between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (a Comprehensive Arrangement). The latter arrangement broadened the coverage of income by adding income from immovable property, associated enterprises, dividends, interest, royalties, capital gains, pensions, government services etc.
This refers to the nine Southeast Asian entities: BOC Thailand, BOC Malaysia, Ho Chi Minh City Branch, Manila Branch, Jakarta Branch, Phnom Penh Branch, Vientiane Branch, Brunei Branch, and Yangon Branch. (BOCHK 2022)
In 2004, CCB was separated into China Construction Bank Corporation and Jianyin. According to the separation procedure under PRC Company Law and the separation proposal approved by CBRC on 8 June 2004, CCB released its separation announcement on 10, 11, and 12 June 2004. Following the final approval by CBRC on 14 September 2004, Hui**, Jianyin, and CCB entered into a separation agreement on 15 September 2004, completed on 17 September 2004. After the separation of CCB, China Construction Bank Corporation was listed on HKSE in October 2005 (stock code: 939) and SSE in September 2007 (stock code: 601939).
Offshore financial centres: Luxembourg, Dublin (Ireland), Singapore, Cayman Island, and British Virgin Islands.
Abbreviations
- ABC:
-
Agricultural Bank of China
- BOC:
-
Bank of China
- BOCHK:
-
Bank of China Hong Kong (Holdings) Ltd.
- BOCI China:
-
Bank of China International (China) Co., Ltd.
- BVI:
-
British Virgin Islands
- CBRC:
-
China Banking Regulatory Commission
- CCB:
-
China Construction Bank
- CDTA:
-
Comprehensive Double Taxation Agreement
- CIRC:
-
China Insurance Regulatory Commission
- CSRC:
-
China Securities Regulatory Commission
- EME:
-
Emerging Market Economies
- HKEX:
-
Hong Kong Stock Exchange
- HSBC:
-
Hong Kong and Shang Hai Banking Corporation
- ICBC:
-
Industrial and Commercial Bank of China
- IPO:
-
Initial Public Offering
- NDRC:
-
National Development and Reform Commission
- NECIPS:
-
National Enterprise Credit Information Publicity System
- NPL:
-
Non-performing Loan
- OFC:
-
Offshore Financial Centre
- PBOC:
-
People’s Bank of China
- SASAC:
-
State-Owned Asset Supervision and Administration Commission
- SOE:
-
State-owned Enterprises
- SPV:
-
Special Purpose Vehicle
- SSE:
-
Shanghai Stock Exchange
- VIE:
-
Variable Interest Entity
- WFOE:
-
Wholly Foreign-owned Enterprise
- WTO:
-
World Trade
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Acknowledgements
We would like to thank the two anonymous reviewers and the journal's editors for their constructive engagement. We would also like to thank John Heathershaw, Anne Pitcher and Ricardo Soares de Oliveira for their work in organizing this special issue and for their feedback and advice. Research for this article was supported by the European Research Council Advanced Grant no.694943, ‘Corporate Arbitrage and CPL Maps: Hidden Structures of Controls in the Global Economy’ (CORPLINK).
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Wei, X., Palan, R. Global corporate structure of Chinese state-owned financial institutions through Hong Kong. J Int Relat Dev 26, 373–403 (2023). https://doi.org/10.1057/s41268-023-00291-5
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DOI: https://doi.org/10.1057/s41268-023-00291-5