HSBC in big trouble in its biggest market, China

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As HSBC leans more towards Asia and moves away from the West, its business in China becomes more and more complicated.

By Nick Josse for WOLF STREET:

HSBC, headquartered in the UK, is primarily an Asian bank. The Hong Kong 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 $ 50 billion in annual revenue, while the UK, its second-largest market, reported 28%. The bank is now selling its retail banking units in France and the United States and is reducing its presence in certain emerging markets in order to accelerate its pivot to the East.

But there is a problem with this plan: its success depends in large part on the bank’s ability to maintain good relations with the Chinese government. And that turns out to be a difficult proposition.

Relations have deteriorated significantly over the past two years after it was revealed in 2019 that HSBC had denounced Chinese telecommunications giant Huawei to the US Department of Justice for violating US sanctions against Iran. Information provided by HSBC led to the arrest of Meng Wanzhou, chief financial officer of Huawei and daughter of the company’s founder, in Vancouver in 2018.

As geopolitical tensions escalated between the United States 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. Lender struggles reveal a major challenge for multinational companies operating in China: The market is vital to their growth prospects, but Western companies doing business there are increasingly at risk of becoming mired in growing tensions between Beijing. and the West.

But given the size and growth of the market, many major global banks have decided to continue their expansion in China, either organically or through acquisitions. HSBC Holdings PLC, Standard Chartered PLC and Citigroup Inc. have all unveiled plans to strengthen their wealth management operations in China, targeting the growing middle class. But with the net profits of foreign lenders falling sharply and Beijing demanding that foreign companies follow the line as the United States tightens sanctions against China, it becomes more and more complicated.

Like its big British rival Standard Chartered, HSBC has already supported China’s imposition of security legislation in Hong Kong. He also froze the assets of politicians and pro-democracy protesters, at Beijing’s request. He is also suspected of being among the seven as yet unidentified lenders who recently froze the accounts of Apple Daily owner Jimmy Lai, forcing the independence newspaper to shut down.

But HSBC still remains in Beijing’s bad books. Citing the Huawei affair and HSBC’s weak initial support for the security law, the People’s Daily, the main spokesperson for the Communist Party of China, warned in June 2020 that HSBC risked losing much of its business. and paying a “painful price” for going “to the dark side. In August, Chinese regulators in Shanghai fined the bank and three senior HSBC bankers on the mainland and made their names public. Chinese have also reportedly stopped holding one-on-one meetings with key HSBC bankers, according to two mainland employees of the lender cited by Reuters.

The Chinese government also appears to have ruled out HSBC’s investment banking operations in the country. According to a special report released by Reuters last week, invitations to Chinese companies to advocate for investment banking jobs have started to fade, while several state-owned companies no longer commit to plans previously. farms:

Among those who have excluded HSBC is China Energy Engineering Group Co., Ltd., a Fortune Global 500 construction conglomerate, which previously used the bank to provide collateral for international projects, among others. In early 2020, the construction giant’s senior management sent an internal email asking employees to avoid HSBC entirely, said two company executives 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 companies that have ended or reduced their activities with HSBC due to the bank’s disgrace with Beijing. In response to the Reuters report, HSBC said in a statement: “We do not recognize Reuters’ description of our customer relationships.” But Refinitiv data cited by Reuters seems to suggest that HSBC’s investment banking operations in China have indeed suffered.

The bank’s ranking in terms of market share of syndicated loans, of which it was a leader, fell from sixth to ninth place. The value of its share of syndicated loans to all Chinese companies, including state-controlled companies, plunged by about 55% in 2020, to $ 3.2 billion from $ 7.2 billion in 2019 , while the overall market fell only 4%. Standard Chartered PLC, which has an equally long presence in the region, saw an increase in total proceeds from its syndicated loans in China in 2020.

HSBC recently suffered another setback when it was forced to apologize to its customers in Hong Kong after an update to its online and mobile banking terms stoked fears over access to its overseas services in the financial center. Access to funds in the city is becoming a growing concern as thousands of Hong Kongers turn to Britain, Canada and other places as China consolidates control of the territory, taking their money with them. On June 22, a post on Twitter shared a link to updated online and mobile banking terms on HSBC’s website, in which the bank appears to say customers may not be able to use the services. online or mobile banking outside of Hong Kong.

HSBC was quick to deny the information, reassuring customers that it had only combined the terms of 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 and mobile banking services outside Hong Kong SAR.” But by then, the bank had already suffered even greater reputational damage in its most important market. A number of commentators on LIHKG, one of Hong Kong’s largest online forums, said they plan to transfer funds to other banks.

As these problems continue to accumulate, HSBC has no choice but to resist. It has already bet its future on high growth markets in Asia, especially in mainland China. But there are risks in tying your fortune to China. Despite its long and rich history of influence in Hong Kong, HSBC is now much more dependent on China and Hong Kong than the other way around. This makes her exceptionally vulnerable to the whims of the Chinese Communist Party, which sends a clear message to the bank’s management: if it doesn’t stick to the line, it could be cut off from its biggest market. By Nick Josse, for WOLF STREET.

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