As published on asiatimes.com, Monday 12 October, 2020.
HONG KONG – HSBC, Europe’s largest bank with massive exposure to China, is caught in the crossfire of the Sino-US trade, tech and now a budding finance war that threatens to torpedo its signature and most profitable businesses based in Hong Kong.
On one side, the US has taken aim at HSBC’s Hong Kong operations for verbally supporting Beijing’s imposition of a new national security law the Donald Trump administration says has significantly undermined the financial hub’s autonomy, rights and democracy.
On the other, China is threatening to block the bank’s access to the mainland economy – a crucial current and future growth market – for its cooperation with US investigations into Chinese tech giant Huawei’s reputed violation of sanctions on Iran. HSBC is a lender to the Chinese firm.
That uncomfortable middle is raising questions about the bank’s future viability in Hong Kong and as a global gateway to the mainland Chinese economy, with some analysts even speculating it could eventually be driven from the city from which it derives its name.
Speculation is now rife that the US could include HSBC – despite its United Kingdom rather than Chinese origins – in a pending next round of sanctions to be imposed on Hong Kong to punish Beijing for squeezing the semi-autonomous city. The contours of those sanctions are expected to be announced as early as today (October 12) in Washington.
“Large non-US banking groups with meaningful footprints in China or Hong Kong, including HSBC and Standard Chartered, are reviewing potential escalation scenarios,” said Fitch Ratings in a recent report.
“Extension of sanctions to corporates with strong links to the Chinese state, or Chinese state-owned enterprises, could increase credit risk in banks’ loan portfolios or limit their growth opportunities,” the report said.
Secondary sanctions – including most significantly denial of US dollar clearance via US financial institutions – are also potentially on Washington’s punitive menu for Hong Kong and by association HSBC, although Fitch anticipates a more incremental US approach, according to the Fitch report.
Other analysts see a potential shock scenario. Cheng Ka-wa, a Hong Kong-based independent stock analyst formerly with RHB Securities, says if HSBC is indeed heavily sanctioned by the US, it may need to sell its Hong Kong-based Hang Seng Bank to raise capital to pay the potential fines.
He said much depends on the outcome of the US presidential election result, with many anticipating a less punitive US approach to China and by extension Hong Kong if Joe Biden defeats Trump on November 3. Many investors are thus taking a wait-and-see approach.
China’s threats to HSBC are potentially just as severe. The Global Times, a state-run English tabloid affiliated with China’s Communist Party, reported the bank could be one of the first firms to be named on Beijing’s “unreliable entity list” in retaliation for assisting the US’s Huawei probe.
Global Times chief reporter Chen Qingqing wrote in a September 19 tweet that HSBC would “probably” be among the firms put on the Chinese Ministry of Commerce’s entity list, in apparent response to Washington’s ban on China’s WeChat and TikTok apps in the US.
If true, HSBC could face Beijing-imposed restrictions on trade, investment and visas in China – all potential huge impediments to its ambitious expansion plans for mainland China, the bank’s top growth market.
Investors sense the two-sided risk. Shares of HSBC Holdings PLC, the bank’s Hong Kong-listed entity, have declined over 50% so far this year. That’s due to both its slowing business and rising losses caused by the pandemic, as well as the bank’s risk exposure to US-China tensions.
HSBC’s net profit fell 69% in the first six months of this year, according to reports. The lender serves as a major business conduit between East and West, first opening its doors in Hong Kong in 1865 to finance Europe and Asia trade. But hopes HSBC could ride China’s budding economic recovery are clouding.
Indeed, some analysts even speculate that HSBC could eventually be forced by Beijing to sell its Hong Kong and China affiliated businesses, including its Hang Seng Bank subsidiary, one of the city’s leading public companies in market capitalization terms, to a Chinese firm if it is pressed into choosing between the US and China.
Other analysts, however, think Beijing would have too much to lose by black-listing HSBC. “It is unlikely that Beijing will put HSBC on an unreliable entity list,” said Victor Ng Ming-tak, an adjunct associate professor of economics and finance at the Hang Seng University of Hong Kong.
“Why would the central government want to punish HSBC and cause a chaotic situation in Hong Kong?” he asked rhetorically.
Ng said HSBC could, in a worst-case scenario, tap its global network of strategic investors to raise funds to pay any fines or penalties imposed by the US. He suggested the potential for Beijing to force HSBC to sell its Hong Kong businesses, in what would likely be viewed as a de facto nationalization, is still slim.
That’s in part because key Chinese companies have already helped to come to HSBC’s rescue. When HSBC’s shares hit HK$27.5 (US$3.55) on September 23, their lowest level since 1995, China’s Ping An Asset Management Co Ltd bought 10.8 million shares on the same day for HK$305 million, or HK$28.29 per share.
After the purchases, Ping An’s stake in HSBC rose to 8% from 7.95%, making the Chinese company HSBC’s largest individual shareholder. Excluding the latest transactions, Ping An has bought HSBC’s shares at an average price of HK$68.44.
Banny Lam Chiu-kei, head of research at CEB International Capital Corp, a Hong Kong-based brokerage, said Ping An’s latest move to purchase and prop HSBC shares signaled the bank would not likely be put on China’s unreliable entity list.
Lam said even if the bank is sanctioned by the US, its shares would see strong investor support at around HK$26 to HK$27. He predicted that the shares would fluctuate between HK$30 and HK$33 in the short term and rebound to HK$40 when the bank announced plans to resume its now suspended dividend payout.
If neither China nor the US move to punish HSBC, the bank could resume paying dividends or even launch a stock repurchase scheme to support its share price as early as November, stock analyst Cheng said.
While Beijing may not sanction HSBC outright, it will likely continue to apply steady political pressure on the bank over the long run, said two economists monitoring the situation.
“HSBC should not be over-worried about US sanctions as it does not have a lot of businesses in the US,” said Terence Chong Tai-Leung, an associate professor at the Department of Economics at the Chinese University of Hong Kong.
But, he said, HSBC will find it increasingly difficult to stay politically ambiguous if US-China tensions continue to rise after the US election.
Chong, for one, suggests the bank should side more with Beijing over Washington in any future political disputes so it can “further expand its mainland businesses to offset the narrowing margins in the US and Europe.”
“Beijing’s messages about punishing HSBC was only aimed at calling on Hong Kong-based foreign banks to support China oppose the US sanctions when necessary,” surmised Law Ka-chung, an adjunct professor at the Department of Economics and Finance at the City University of Hong Kong’s College of Business.
“Beijing thinks that HSBC … will be willing to give up their US dollar-related businesses for mainland businesses [if] the US announced to stop providing US dollar clearance services for Chinese banks,” Law said. “But will they? Probably not…Their Hong Kong businesses won’t survive without US dollars.”