HSBC Runs into Buzzsaw in Hong Kong & China, its Home Market Generating 75% of its Profits

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HSBC’s pleas of innocence have won little sympathy in Beijing.

By Nick Corbishley, for WOLF STREET:

Global banking behemoth HSBC has found itself on the back foot in recent months in its most important market, Hong Kong and China. The unexpected departure of three senior executives within a week, including its CEO and the head of key China business, sparked a broad sell-off of its shares, which are down 13% in just three weeks.

The world’s eighth biggest bank by assets, HSBC is also reeling from the after effects of increasingly violent political unrest on its home turf. Protracted demonstrations in Hong Kong, triggered by opposition to an amendment to the region’s extradition law, have become increasingly disruptive. Despite the withdrawal of the proposed bill, the Asian financial center is facing its most serious crisis in decades.

At the same time, the weakening yuan is causing all sorts of problems for Hong Kong-based lenders. Citigroup analysts have even warned that it could result in a “drastic” decline in loans to mainland China clients as well as undermine asset quality. “We see bigger earnings risk to Hong Kong banks,” the bank’s analysts wrote, downgrading the rating on BOC Hong Kong to neutral.

Unlike BOC Hong Kong, HSBC’s headquarters are based in London. But it’s in Hong Kong where the bank first cut its teeth (laundering the proceeds from the British East Indian company’s opium trade) and where the lion’s share of its business is still done. In fact, as Bloomberg notes, “few if any of the world’s largest financial companies dominate a single market quite like HSBC does in Hong Kong, a city of 7.5 million people that accounted for roughly 60 percent of the bank’s pretax income in 2018.”

Hong Kong is Asia’s biggest financial hub, servicing not just China but many other Asian markets. Through the majority ownership of its subsidiary Hang Seng Bank Ltd., HSBC is the city’s biggest mortgage lender in the secondary market, rules the roost in investment banking, and is one of Hong Kong’s three note-issuing banks. In fact, so entwined is Hong Kong’s recent history with that of HSBC that some of the city’s currency bills still, to this day, carry the bank’s logo.

If anything, that relationship of co-dependency has intensified in recent years as HSBC has staged a strategic retreat from other emerging markets, including Brazil and Turkey, in order to focus its attention on fast-growth Asian markets, in particular China. The number of countries it operates in has gradually dwindled from 87 in 2011 to around 70 today, spurring HSBC to eventually ditch its slogan, “the world’s local bank.”

In 2015, it even went so far as to end its sponsorship of Markit’s EM PMIs, the least government-controlled index in China, a move that was widely perceived as an attempt to forge closer ties with Beijing. As one unnamed source told The Australian Financial Review at the time, “If you are a sizable bank that wants to do more business in China, you don’t want to make parts of the Chinese government angry. Sponsoring the survey is likely to affect your future business expansion in China.”

To begin with, the strategy seemed to pay off. After an agonizing wait for regulatory approval, HSBC in 2017 became the first global bank to launch a majority owned-investment banking venture in mainland China, with its base in Shenzhen, which forms part of the Pearl River Delta metropolis where HSBC earns roughly half of its total China revenue.

In November last year, another new milestone was reached when Chinese insurance giant Ping An overtook BlackRock to become HSBC’s biggest shareholder, with a 7% stake. Ironically, HSBC used to be the largest shareholder of Ping An before the latter’s Hong Kong IPO in 2004, at one point holding 20% of the Chinese insurance firm.

Times have clearly changed. Despite its long history of influence on Hong Kong, HSBC is now a lot more dependent on China and Hong Kong than vice versa. The bank already faces stiff competition from a new generation of virtual lenders that are heavily backed by big hitters like Standard Chartered Plc and Chinese internet insurer ZhongAn Online P&C Insurance Co.

Having pinned its future on China’s massive but slowing economy, which together with Hong Kong, generates nearly 75% of its profits, HSBC must do all it can to keep the country’s government happy. But that’s easier said than done when that same government is engaged in a no-holds-barred trade war with the United States.

The bank’s relationship with Beijing was already severely tested earlier this year when it was revealed that the bank had ratted out Chinese telecoms giant Huawei to U.S. authorities for breaching U.S. sanctions on Iran, which eventually led to the arrest of Huawei’s finance director, Sabrina Meng Wanzhou, in Canada. Both Huawei and Beijing were incensed, the FT reportedat the time.

HSBC representatives claimed that they had little choice but to cooperate with the U.S. investigation. “Stonewalling the Department of Justice was not an option,” an HSBC insider told the FT, given that “between 200 and 400 (U.S. monitors) were inside the bank at any given time.” They reportedly “had access to everything” — a legacy of the bank’s deferred prosecution agreement with the DOJ in 2012, after being found guilty of breaching sanctions and laundering money for Mexican drug cartels.

So far, HSBC’s pleas of innocence appear to have won little sympathy in Beijing. The bank was conspicuously excluded from a group of 18 banks selected by Beijing to help the Bank of China set bank lending rates. In an August 2 article, the Chinese state-owned newspaper Global Times even suggested the lender could be among the first international companies to be included on a black list of “unreliable entities” being drawn up in Beijing. Given HSBC’s massive dependence on the Chinese market, if that were to happen, as unthinkable as it may seem, the impact on the lender would be huge. By Nick Corbishley, for WOLF STREET.


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