HONG KONG - Ask western bankers about the hottest prospect in Asia and they will doubtless point to China, with its one-billion-plus population and its thirst for capital.

But while foreigners talk in the future tense, David Li speaks of history. His Hong Kong-based Bank of East Asia entered China early in the century and was the only bank not forced to leave when revolutions drove out businesses not owned by the state.

Even now, as many expect China to open further by the end of the century, Mr. Li, Bank of East Asia's deputy chairman and chief executive, isn't waiting. Since the late 1970s, Bank of East Asia has expanded its China business. More recently, Mr. Li has spent heavily to build a staff that he says will make his company the leading investment bank for China.

Few doubt that Mr. Li's bank will be a player as the world's largest market opens for business. The third-biggest bank in Hong Kong, Bank of East Asia is largely owned by prominent Chinese families in a market where critically important relationships span generations.

"They are, as you Americans say, connected," said a British banker working from Hong Kong. "David Li is known for his aggressiveness, for his willingness to take risks - but not excessive ones."

But the 56-year-old lawyer-turned-banker is also hedging his bets. Bank of East Asia has been aggressively expanding elsewhere in Asia. His joint- venture partners include leading niche players in businesses ranging from leasing to export finance.

The diversification comes as analysts worry that the Hong Kong real estate market - a major business for Bank of East Asia - is due for a sharp decline. Though Mr. Li is bullish on the outlook for the lending market, he is working to create a Fannie Mae-style secondary market where Asian banks can pass off some of the risk to investors.

Q.: What is your outlook for China?

LI: China is in for an era of adjustment from a command economy to a market economy. With that kind of dramatic adjustment, there is bound to be pain.

For the longer run, many people may not be comfortable with that, but we are. Where else can you get that kind of opportunity?

Q.: You have been building your presence on the mainland. When do you expect your operations there to match the 1.8% ROA your bank earned last year?

LI: Although our return from China is not that great, we are investing in the future. I think that before the year 2000, we will have reached our (profit) goals.

We don't see investing in China as dragging on profits, because most of our investment has already been done. It was basically to obtain critical mass, and we think that from now on our return from China should increase, because we have been hiring a lot of new people.

We aim to be the best investment bank in China, and that has required an investment in human resources.

Q.: Yours was the only bank not forced out of China during the Cultural Revolution. Does that give you an advantage?

LI: By having competition, you really sharpen your wits. We have a head start, but we also do our homework.

Q.: It is no secret that your bank is tied into the overseas Chinese network. Where are you expanding?

LI: The Philippines, Thailand, Korea, Malaysia, and other countries.

Our strategy is very simple. We team up with the best partner we can in each of the countries. We team up with the Chinese in each of those countries. We assist them outside their own countries, and they help us with our investments in their country and enterprises. I can call up my colleagues and get the inside story of a deal, and that is extremely valuable.

Q.: You are also involved in some acquisitions, including the purchase of United Chinese Bank in Taiwan. What are your plans?

LI: We feel that sooner rather than later we'll do even more business than today in Taiwan. My ambition would be that we will be able to unite, by being shareholders, that bank with a mainland bank. So we would truly be a united Chinese bank, with Bank of East Asia to be the majority shareholder.

Q.: You once were in a joint venture with BankAmerica. Do you see working again with U.S. banks?

LI: I find Americans are very entrepreneurial, that they are very open to new ideas. The one problem with American corporations is their quarterly reporting. Therefore, all chief executives and chief financial officers are looking at the next quarter's results, and they are not prepared to work for the longer term. I think that is very sad. I hope Hong Kong is not going to follow that.

Q.: So you view American banks as more short-term in their thinking. Are there are other reasons?

LI: At American banks there are so many changes among the people. Once you start a relationship with someone, he may move. There is a different mentality about joint ventures, that if they didn't start it, then it is no longer their baby. In Asia, we like long-term commitment, so I can look at you eyeball-to-eyeball and say, "Hey, you promised me this. When will you deliver?"

Q.: Looking at your core market in Hong Kong, what is your near-term outlook for real estate?

LI: Real estate is cyclical, and one hopes that one can invest close to the bottom. The Hong Kong real estate market is basically a cycle of five to eight years. It has gone up and up and up. But I think the government is right to put a damper on the real estate market.

Q.: But you have been very vocal in your criticism of efforts to curb lending by requiring banks to lend less to borrowers.

LI: I believe in the free market. I don't believe the government should interfere with the banks.

I really don't like the government telling bankers what to do, since they are not responsible for the profit and loss of the bank. If the market does go bust, the government does have a responsibility, but I think the Hong Kong government has been too heavy-handed in dealing with this.

They are the central bank. They know who are the good banks and who are the banks that are speculating on the market. They shouldn't have one sledgehammer for everyone.

Q.: Your bank continues to be very bullish on real estate and continues to make many loans. Are you taking exceptional risks?

LI: We are not taking a lot of risk. We have been very selective, lending to people we trust.

I'm not aggressive at all. I am investing in my future. Our real estate exposure is roughly 50% (of total portfolio), which is below the government's standard.

Q.: So where do you see the property market in this cycle?

LI: I think we are at the bottom.

Q.: But higher interest rates are already affecting the profits of Hong Kong banks.

LI: I think the interest rate war is already on. We have seen the margin squeeze on deposit rates, and borrowers come and bargain with you on rates. There is a lot of discounting on new business as a lot of banks give them (borrowers) incentives to do business.

Q.: What will the effect of that be?

LI: I think you will see the smaller banks getting together with the larger banks (through mergers). I think you will see it in the next year or two.

Q.: You believe that part of that risk can be distributed if a U.S.- style secondary market for mortgages is created. What is happening on this issue?

LI: The top three banks in Hong Kong, of which we are one, have the ability to create this market, but they are not willing to create something that competes with themselves. I am.

Q.: How soon till you see action?

LI: Hopefully, by 1997. I am looking to create something like Fannie Mae, so that we have a way to spin off some of our loans.

Mr. Racine, a former senior editor of the American Banker, is now editor-in-chief and a principal of SNL Securities and editor-in-chief.

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