Life is getting harder and harder for Europe’s largest lender as it tries desperately to continue bridging two worlds –the West and China — that are drifting further and further apart and may even be on collision course.
The world’s eighth biggest bank by assets, HSBC could soon have little choice but to break up into at least two parts — one serving its largest market, Asia, and the other serving the UK, mainland Europe, the US and its other Western outposts. This comes after Ping An, China’s largest insurance firm and HSBC’s largest shareholder, called for the lender to break up its Western and Asian operations, underscoring HSBC’s increasingly untenable position as a UK-based megabank predominantly serving customers in Hong Kong and mainland China.
The writing has been on the wall for some time as HSBC has tried — and failed — to keep policymakers in both China and the West on its side. Following the collapse of Chinese real estate developer Evergrande, in late 2021, there was a heightened risk that the ensuing economic and geopolitical fallout could end up splattering all over HSBC, Europe’s largest bank by market cap and preferred lender of choice to money-launderers, tax-evaders, narco traficantes and Islamist terrorists alike.
As I noted in a piece in September, titled “HSBC Bet the Bank on China, Now It’s Paying the Price”, the lender’s asset management arm was among the largest foreign holders of Evergrande debt. And foreign debt holders are increasingly looking like the bag holders of Evergrande’s collapse. HSBC also had, at last count, a far-from-insignificant $21.3 billion of exposure to China’s struggling real estate sector.
But HSBC’s problems in China extend far beyond its exposure to Evergrande and the Chinese real estate market. HSBC’s biggest problem, as I noted in the piece, is arguably political, or to be more precise geopolitical. As tensions rise between China (including its special administrative region Hong Kong) and the United States (and by extension the United Kingdom, where HSBC is headquartered), it is going to get more and more difficult for HSBC (and other Western banks and companies with a large market presence in China) to keep both sides of the escalating economic war between Beijing and Washington happy.
China Makes First Move
China, it appears, has made the first move. Peter Ma, the chairman of Ping An, which holds 8.2% of HSBC’s shares according to Market Screener, called on the UK-based lender to split its Asian and western operations, in what would be the largest corporate restructuring in HSBC’s 157-year history. An article on Bloomberg said it would be “the most dramatic split in banking history”, which is not as hyperbolic as it may sound considering that such a restructuring would involve splitting Europe’s largest bank into two entities occupying the polar extremes of the continental landmass of Eurasia.
The bad news for HSBC is that the bank’s second top-ten shareholder, which according to Market Screener is the Pennsylvania-based asset manager Vanguard Group, also seems to like the idea, telling the FT: “For HSBC, it is existential. They are not in a tenable structure. You would not create this institution from scratch.”
Reversal of Fortunes
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. Ping An is now the world’s most valuable insurance brand, with 225 million retail customers, all of them in China, and a market cap of $116 billion, just $10 billion less than HSBC’s. But Ping An is not just an insurance firm, having expanded into many areas of financial services, including banking, as well as healthcare, auto services and “smart city services.”
In a recent private memo, Ping An listed a litany of issues at HSBC, from underwhelming returns to swelling costs. The firm, like many Asian investors small and large, was particularly peeved at the bank’s decision, taken under pressure from the Bank of England, to scrap its dividend payout in 2020. It was the first time the bank had taken cancelled dividends in almost three-quarters of a century.
But it is also perfectly plausible that China’s government had something to do with Ping An’s shock suggestion. After all, despite its long history of influence on Hong Kong, HSBC is now a lot more dependent on China and Hong Kong than vice versa. Moreover, the economic war between the US and China continues to escalate. Reports, at least in Western media, suggest Beijing is increasingly concerned that it, too, could face a similar barrage of sanctions to those unleashed against Russia.
Only last week, the Financial Times revealed that Chinese officials and regulators have been privately consulting banks in China, including HSBC, on how to protect China’s overseas assets in the event of U.S. financial sanctions. It is a prime example of how complicated life has become for HSBC, a Western bank that has long served as a financial fixer between East and West and enjoys exceptionally cozy ties to both the British and US political establishment. Lest we forget, HSBC was the first bank deemed “too big to jail” by President Barrack Obama’s Justice Department.
In the UK the bank has secured the lobbying services of former British Ambassador Sir Sherard Cowper-Coles as well as the former No.10 Downing Street Advisor Lord Edward Udny-Lister. In the last year alone, it has liaised with trade ministers 15 times, with treasury ministers 27 times, with business ministers nine times, and with Cabinet Office ministers six times, including three meetings with the U.K. prime minister.
As The Diplomat documents, the bank still wields significant influence in Hong Kong, where it first cut its teeth laundering the proceeds of Britain’s opium trade:
The bank’s non-executive director, Laura Cha, is not only the chairperson of the Hong Kong Stock Exchange, but a close friend of outgoing Hong Kong Chief Executive Carrie Lam, and a member of the Hong Kong Executive Council. In addition, the CEO of HSBC Asia-Pacific, Peter Wong, was appointed to represent the financial services sector in July last year on the selection committee overseeing Lam’s replacement for chief executive.
Similarly, it has not gone unnoticed that current Chief Secretary John Lee’s son, Gilbert Lee, works for Hang Seng bank as a senior executive. On Sunday John Lee will be selected as the next chief executive of Hong Kong. In June 2021, Gilbert Lee was appointed to the Financial Reporting Council, which audits Hong Kong’s financial market on behalf of the government.
Ratcheting US-China Tensions
Now, HSBC is staking its future growth and fortune on China. But trying to do that while maintaining its close ties to the British and US establishment is becoming increasingly challenging, especially with the looming threat of the US imposing further sanctions on China, which are likely to trigger counter measures from China. HSBC’s relationship with Beijing was already severely tested in 2019 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.
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 and Islamist terrorist groups.
Tensions between Washington and Beijing have done nothing but escalate since then. Last year, China introduced anti-sanction legislation aimed at counteracting what it perceives as Western economic bullying. The new law allows authorities to punish companies that comply with foreign sanctions. As The Diplomat noted at the time, it is not the first to take such action. The EU has also enacted policies specifically aimed at circumventing certain sanctions regimes.
HSBC, arguably more than any other lender, is slap bang in the middle of these ratcheting tensions. Last year, two-thirds of its profits came from Asia, in particular Hong Kong and the Chinese mainland. 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, its dependency on China has intensified in recent years as HSBC has staged a strategic retreat from other emerging markets, including Brazil and Turkey, as well as mature markets in Europe in order to focus its attention on fast-growth Asian markets, in particular China.
But times have 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. In trying to balance its strategic interests in both Asia and Europe, all it has achieved is to piss off everyone, as its second largest shareholder told FT:
“HSBC is in the least tenable position of any financial institution in the world on the US-China conflict. They are in a position where everyone hates them — the UK, France, the US, Hong Kong and China. I don’t see a path out of their current situation today and I don’t see the geopolitical tension getting better.”
In fact, it could be about to get worse, if President Biden adds Hangzhou Hikvision Digital Technology Co, the world’s largest manufacturer of surveillance cameras, to its Specially Designated Nationals and Blocked Persons (SDN) List for enabling human rights violations under the Global Magnitsky Act. The company is accused by the US of providing cameras for detention centers, mosques, and schools in Xinjiang, where Beijing has carried out mass internments.
The firm, which manufactured almost a quarter of the world’s surveillance cameras in 2019, selling them to more than 180 countries, is already on a number of US lists. It is barred from from importing U.S.-origin goods without a license; receiving American investment; or selling products to U.S. telecoms, federal agencies, or federal contractors. Yet as the Carnegie Endowment for International Peace notes, the current restrictions on Hikvision pale in comparison to what Washington is now considering, since inclusion on the SDN list is the harshest financial penalty in Washington’s tool kit, often used against terrorists, drug lords, and the worst human rights abusers:
An SDN designation would vault Hikvision past Huawei to become the most-sanctioned Chinese tech company. It would grievously (perhaps fatally) wound the company, depending on how sanctions are implemented—specifically, what scope of transactions are blocked and whether any exemptions are offered. Hikvision’s fate would also depend on how China, and other countries and companies, choose to respond.
The most severe sanctions would freeze all of Hikvision’s assets and create civil and potential criminal penalties for anyone globally who sends Hikvision money or property, provided there is some nexus to U.S. legal jurisdiction (such as use of the dollar-denominated international financial system). In other words, U.S. sanctions could stop Hikvision from selling anything to or buying anything from all countries friendly with (or at least afraid of) the United States. The sanctions could block Hikvision from using reputable international banks.
That is where the travails could be about to get even worse for HSBC (though some may argue that the lender, with one of the longest rap sheets in the banking world, may struggle to qualify as “reputable”). If Washington places Hikvision on its SDN list and Beijing responds by mobilizing its own counter sanctions, allowing it to punish companies that comply with foreign sanctions, life for HSBC, and other Western banks and companies that have staked their growth model on China, could be about to get even more complex.