By?Nick Corbishley for WOLF STREET:
HSBC, headquartered in the UK, is first and foremost an Asian bank. The Hongkong and Shanghai Banking Corporation Limited cut its teeth in the 19th century in Greater China. In 2020, its Mainland and Hong Kong operations accounted for 39% of its annual $50 billion in revenue, while the United Kingdom, its second largest market, brought in 28%. The bank is now selling off its retail banking units in France and the United States and scaling back its presence in some emerging markets in order to accelerate its eastward pivot.
But there’s a problem with this plan: Its success rests largely on the bank’s ability to maintain good relations with the Chinese government. And that is proving to be a tough proposition.
Relations have soured significantly over the past two years after it was revealed in 2019 that HSBC had ratted out Chinese telecom giant Huawei to the U.S. Department of Justice for breaching U.S. sanctions on Iran. The information provided by HSBC led to the arrest of Meng Wanzhou, Huawei’s chief financial officer and daughter of the company’s founder, in Vancouver in 2018.
As geopolitical tensions have escalated between the US and China, HSBC has had to walk a tightrope in its relations with China on the one hand and Washington and London on the other. The lenders’ travails reveal a core challenge for multinational firms operating in China: the market is vital to their growth prospects, but Western firms doing business there increasingly risk being mired in the ratcheting tensions between Beijing and the West.
But given the size and growth of the market, many big global banks have decided to continue expanding in China, whether organically or through acquisitions. HSBC Holdings PLC, Standard Chartered PLC and Citigroup Inc. have all unveiled plans to beef up their wealth management operations in China, targeting the growing middle class. But with net profits for foreign lenders falling precipitously and Beijing demanding that foreign companies toe the line as the US ramps up sanctions on China, it’s getting more and more complicated.
Like its British arch-rival Standard Chartered, HSBC has already thrown its support behind China’s imposition of security legislation on Hong Kong. It has also frozen the assets of pro-democracy politicians and protesters, at the behest of Beijing. It is also suspected of being among seven as yet unidentified lenders that recently froze the accounts of Apple Daily’s owner Jimmy Lai, forcing the closure of the pro-independence newspaper.
But HSBC still remains in Beijing’s bad books. Citing the Huawei case and HSBC’s initial lackluster support for the security law, the People’s Daily, the main mouthpiece of the Chinese Communist Party, cautioned in June 2020 that HSBC risked losing much of its business and paying a “painful price” for having gone “to the dark side.” In August Chinese regulators in Shanghai fined the bank and three senior HSBC bankers on the mainland and publicized their names. Chinese regulators have also reportedly stopped holding one-on-one meetings with senior HSBC bankers, according to two mainland employees at the lender cited by Reuters.
The Chinese government also appears to have sidelined HSBC’s investment banking operations in the country. Invites from Chinese companies to pitch for investment banking work have begun to wane, while several state-owned companies have become non-committal on previously firm plans, according to a special report published by Reuters last week:
Among those who’ve shut out HSBC is Beijing-based China Energy Engineering Group Co., Ltd., a Fortune Global 500 construction conglomerate, which previously used the bank to provide guarantees for international projects, among other things. Early in 2020, the construction giant’s senior leadership sent an e-mail internally instructing employees to avoid HSBC completely, said two executives at the company with knowledge of the matter. The reason for the move, one of the executives explained, was the Huawei incident.
In total, Reuters has identified nine state-owned enterprises that have ended or cut back on their business with HSBC as a result of the bank’s falling out of favor with Beijing. In response to Reuters’ report, HSBC said in a statement: “we do not recognise Reuters’ description of our client relationships.” But Refinitiv data cited by Reuters would seem to suggest that HSBC’s investment banking operations in China have indeed suffered.
The bank’s ranking in terms of market share for syndicated loans in which it was a lead lender slipped from sixth to ninth. The value of its share of syndicated loans to all Chinese companies, including state-controlled firms, plunged by around 55% in 2020, to $3.2 billion from $7.2 billion in 2019 while the market overall shrank by just 4%. Standard Chartered PLC, which has a similarly long presence in the region, saw an increase in total proceeds from its China syndicated loans in 2020.
HSBC recently suffered another setback when it was forced to apologize to customers in Hong Kong after an update to its online and mobile banking terms stoked fears over overseas access to its services in the financial hub. Access to funds in the city is becoming a growing concern as thousands of Hong Kongers up sticks for Britain, Canada and other places as China consolidates control of the territory, taking their money with them. On June 22, a Twitter post shared a link to updated online and mobile banking terms on HSBC’s website in which the bank appears to say that customers may not be able to use online or mobile banking outside of Hong Kong.
HSBC was quick to deny the reports, reassuring customers that it had only combined terms for its Internet banking, mobile app and mobile security key into one document and that they would “continue to have access to banking services through online banking and mobile banking outside of Hong Kong SAR”. But by then the bank had already suffered yet more reputational damage in its most important market. A number of commenters on LIHKG, one of Hong Kong’s largest online forums, said they plan to transfer funds to other banks.
As these problems continue to stack up, HSBC has little choice but to tough it out. It has already staked its future on fast-growth markets in Asia, particularly mainland China. But there are risks in tying its fortunes to China. Despite its long, storied history of influence in Hong Kong, HSBC is now a lot more dependent on China and Hong Kong than vice versa. That makes it exceptionally vulnerable to the whims of the Chinese Communist Party, which is sending a clear message to the bank’s management: If it doesn’t toe the line, it could be cut off from its largest market. By?Nick Corbishley, for?WOLF STREET.
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