TNAG-2528-FCO40-3698-Proposed-acquisition-of-Midland-Bank-by-the-Hongkong-and-Sha-1992 — Page 7

SECRET: LANDSMAN

COMMERCIAL IN CONFIDENCE

HONG KONG AND SHANGHAI BANKING CORPORATION (HSBC)

Background

(i) HSBC's Role in Hong Kong

1. HSBC's role has declined a bit in the last 5 years as the Hong Kong authorities have taken over some of the central banking functions. But HSBC is still the dominant retail bank in Hong Kong as well as:

A 2.

having 85% of the Hong Kong dollar note issue; managing the clearing operation in Hong Kong;

and operating as the Hong Kong Government's banker.

Mr Purves is

Membership of the HSBC Board is attached. the driving force and has been pursuing the Midland option since becoming Chairman in 1986. Other key Directors include Lady Dunn (she and Mr Purves are the two EXCO members on the Board), Helmut Sohmen, Li Ka-shing and Sir Kit McMahon (Chairman of Midland).

(ii) Previous Rounds in the HSBC/Midland Saga

3. In 1985/86 HSBC proposed a merger with Midland. Ministers concluded, on the advice of the then Governor of Hong Kong, that the impact on confidence and financial stability in Hong Kong would be too great and the merger should not be allowed to proceed. In 1987, HSBC took a 14.9% stake in Midland.

4. In 1989/90, HMG gave Mr Purves an "amber light" to pursue merger negotiations with Midland. In the event, these came to nothing. In 1990 HSBC re-structured its group, establishing a Holding Company incorporated in the UK but with mind and management in Hong Kong. Mr Purves told the Chinese at the time that one reason for doing this was to facilitate a link up at some point with a European bank. Chinese made clear in private that they could not accept the restructuring, but did not oppose it in public.

(iii) HSBC Proposal

5. Mr Purves now proposes that:

The

Midland

the HSBC Holding Company would take over Midland. and HSBC would remain separate banks, although linked at the Holding Company level;

the HSBC Holding Company would move its mind and management to London and come under the supervision of the Bank of England;

but HSBC would remain a bank incorporated and managed in Hong Kong.

BACKGROUND

FIQABP

SECRET:

LANDSMAN

COMMERCIAL IN CONFIDENCE