By Nick Corbishley, for WOLF STREET:
Global banking behemoth HSBC threw its full weight behind China’s imposition of security legislation on Hong Kong, arguing that the new law will help bring much-needed political stability and economic growth and development to the city. The bank’s kowtowing to Beijing is the inevitable culmination of the UK-based lender’s multiyear Asian re-pivot, but it also risks attracting U.S. ire. And if recent history is any indication, that tends not to end happily for global lenders.
In a post on one of HSBC’s social media accounts in China, the bank’s Asia-Pacific head Peter Wong signed a petition backing the law. “HSBC respects and supports any laws that stabilize the social order in Hong Kong and revitalize economic prosperity and development in Hong Kong,” Wong said in the post.
Mr. Wong’s comments were quickly seconded by the institution he represents. Asked to comment on the social media post, an HSBC spokeswoman in London said: “We respect and support laws and regulations that will enable Hong Kong to recover and rebuild the economy and, at the same time, maintain the principle of ‘one country two systems.’”
The governments of the U.S., the UK and their five-eye partners, Australia, Canada, and New Zealand, would beg to differ. They assert that China’s new security law obliterates the one country, two systems principle, “dramatically eroding,” in the words of UK Premier Boris Johnson, the partial autonomy Hong Kong was granted when London handed back control of the city to Beijing in 1997. Yesterday, Johnson offered refuge to up to 3 million Hong Kong citizens, which is unlikely to have gone down well in Beijing.
Relations between the UK and China have not been this strained for decades. Until recently, the UK government had viewed China as a key strategic partner in its post-Brexit future. At Davos in 2016, the then Chancellor of the Exchequer George Osborne said the UK wanted to be China’s best partner in the West. As part of this charm offensive, Downing Street awarded the tender to design and build a number of nuclear power stations to a consortium led by China’s state-owned General Nuclear Power Group and France’s EDF. Chinese participation in one of those projects, Sizewell C, is now being reconsidered.
But the British banks and companies that depend on Hong Kong and mainland China for most of their revenues and profits do not have that luxury. They are stuck where they are and they know what side their bread is buttered on. Just in case they forgot, former Hong Kong chief executive Leung Chun-ying was on hand last week to remind them. In a Facebook post the pro-Beijing former apparatchik urged everyone with HSBC bank accounts, particularly HK officials and HK delegates to the legislative and consultative bodies in the mainland, to stop using them, until the bank made its position clear on China’s security law, which it did five days later.
On the same day, fellow British bank that is heavily invested in China and Hong Kong, Standard Chartered, did the same.
That declaration will have pleased Beijing and its loyalists in Hong Kong no end, but it could also alienate many of the bank’s traditional customers that have more separatist leanings. It is also likely to infuriate ministers in London and further strain the lender’s relations with the U.S., where authorities in 2012 slapped it on the wrist after being found guilty of breaching sanctions and laundering money for Mexican drug cartels. US regulators have hit HSBC with $5.5 billion in fines since 2012 for a laundry list of offenses, including money laundering.
Headquartered in London, regulated by the Bank of England and generally considered to be Europe’s biggest bank by assets, HSBC is in reality first and foremost an Asian bank. It’s in Hong Kong, the city where it first cut its teeth over 150 years ago, that the lion’s share of its business is done. The city accounted for 35% of HSBC’s revenues and 60% of its global pretax income in 2019. Throw in mainland China and it reaches 75%.
But Hong Kong’s local economy is now in the throes of its deepest recession on record as it reels from the combined impact of over a year of political unrest, protracted trade war, and the coronavirus. That is bad news for HSBC, for whom commercial real estate in the city accounts for 45% of its total group equity, according to analysts at Jefferies. Hong Kong’s commercial real estate market is already under huge pressure after mainland Chinese investors stopped buying a couple of months ago. Now there are concerns that China’s plan to impose national security legislation could trigger a flight of capital out of the city.
Until this week HSBC, like so many Hong Kong-based businesses, had tried to stay above the fray of politics, even while the city was roiled by political unrest last year. It refused to criticize the pro-sovereignty protests out of fear of alienating many of its customers. But it also had to keep Beijing on side, which probably explains why the lender shut down an account used to finance protest-related causes late last year, after which protesters vandalized some of its bank branches.
Keeping Beijing on your side is easier said than done when Beijing is engaged in an escalating trade war with Washington, to whom HSBC is also heavily indebted thanks to the deferred prosecution agreement it was gifted by the DOJ in 2012, after being found guilty of breaching sanctions and laundering money for Mexican drug cartels.
Last year, HSBC paid off part of that debt by ratting out Chinese telecoms giant Huawei to U.S. authorities for breaching U.S. sanctions on Iran. But in doing that, it infuriated Beijing, which threatened to place the bank on its black list of “unreliable entities,” which would have cut the lender off from its biggest market. In the end, that didn’t happen and since then, HSBC has further cemented its position as the biggest Western bank in China.
But every now and then, the bank is given a not-so-gentle reminder about who’s boss: “HSBC’s profits mainly come from China, but the board of directors and senior management are almost all British,” wrote Leung Chunying in a Facebook post, adding that the bank’s lucrative position should not be taken for granted. Its China business could be “replaced overnight” by Chinese or other overseas banks.