Stuart Gulliver’s first glimpse of China wasn’t promising. Arriving a decade after the collapse of the Cultural Revolution, he found an economy still in shambles — camels pulled coal carts in the streets of Beijing, televisions were a rarity and city streets lacked night lights. But Gulliver, now an executive director of London-based HSBC Holdings, one of the world’s biggest banks, saw something beyond darkness and ruin: a glimmer of future profit. In 1994 he was appointed HSBC’s head of treasury and capital markets in Hong Kong; two years later he was promoted to oversee the entire Asia-Pacific region. It was on Gulliver’s watch that the bank’s Asia business — keyed to an emerging China — became a money machine, churning out profits at a compound annual rate of 20 percent even through the bleak days of the 1997 Asia crisis. Last year was no picnic for HSBC — in Asia or anywhere else. Still, the bank, founded in Hong Kong and Shanghai in 1865 and currently the largest international bank in the region, withstood the harsh economic winds better than many of its rivals, in large part because of its early and deep commitment to the resilient economies of Asia. Gulliver spoke with Institutional Investor Editor William Inman last month at the annual meeting of the World Bank and International Monetary Fund in Istanbul, Turkey.
Institutional Investor: How soon will China become the world’s largest economy?
Gulliver: I believe it will happen within our generation. The China story is incredible. China is leapfrogging older technologies. It is an early adopter of electric cars, and making huge strides in lowering carbon emissions. The Chinese are waking up to their potential as a world economic power.
Emerging markets seem to be recovering faster from the financial crisis than developed nations. Why is this?
They were better prepared. And bear in mind, many of these markets had already been through a period of crisis. As a result, banks in those countries weren’t allowed to make the kinds of high-risk investments that hurt banks in more-developed countries. This is particularly true in Asia. For many countries in the emerging markets, there was no bubble. Our analysis shows emerging markets will see an economic growth rate of 6 percent next year while developed countries will grow at 1.8 percent. The relative importance of the U.S. is declining.
Where will the next financial crisis come from?
Hedge funds. In my opinion if they are not properly regulated in the next four or five years, I think they could be the next to blow. And by regulation I mean they need to make fewer crowded trades, take fewer risks and show more transparency. Many of the top traders and money makers from large Western firms hurt in the latest crisis are joining or creating hedge funds. Their activities need to be properly regulated.
In 2003, HSBC purchased Household International, a U.S. mortgage lender hard hit by the subprime meltdown. Was that a mistake?
Let’s put it this way: It was a very bad experience and we don’t plan any further acquisitions short-term in the U.S. We had hoped Household might help build value through international connectivity. But as it turns out, Household’s value did not extend beyond the domestic market. It was not a good fit strategically.
Where will your bank make its next acquisition?
I can’t be specific, but I will say we’re inundated with acquisition opportunities. There’s no dearth of ideas. The best tend to be from emerging markets in countries where we have existing relationships. We look at linkages — value we might add connecting markets.
