HSBC in Big Trouble in its Biggest Market, China
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.
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