Euromoney, August 22 2019
HSBC is stuck between several rocks and several more hard places.
It’s irresistible to join dots. It’s natural, and just a bit exhilarating, to see patterns, messages, truths.
Observers of HSBC are seeing a lot of dots and are pondering how many of them to connect. Among them: the ousting of John Flint as chief executive; the departure of Helen Wong as head of Greater China; HSBC’s supposed cooperation with the US Department of Justice in its investigation of Huawei; China’s retaliation on the US’s treatment of Huawei, and the forthcoming list of unreliable entities it intends to publish; protests all over Hong Kong; and Chinese pressure on iconic Hong Kong bodies, exemplified by the departure of Cathay Pacific CEO Rupert Hogg, who resigned after being ordered to name staff who took part in demonstrations.
So, how many of them ought we to connect? Not the first two, apparently; Flint was ditched by his own board for reasons they have made clear, whereas Wong has resigned to take up another opportunity in financial services, one she apparently hasn’t even told colleagues about.
The timing is unhelpful but apparently coincidental; Wong resigned before Flint was removed. There are no immediate plans to replace her.
That being said, it’s clearly a challenging time to run Greater China for HSBC.
The bank has an awful lot on the table in the region: Hong Kong alone is responsible for roughly half of all group profit, Greater China for 64%, and the ‘Pivot to Asia’ has been a mainstay of group strategy since previous chief executive Stuart Gulliver announced it in 2015.
So, HSBC, surely, is a friend to China? It has committed to it, invested in it, consistently said it believes in it. Its biggest shareholder, Ping An, is Chinese. It was rewarded with the first Sino-foreign joint venture licence to allow it to have majority foreign control, HSBC Qianhai, in 2017. It has one of the strongest track records of all foreign banks in securing the licences it needs on the mainland, and it has been supportive of signature Chinese projects like Belt and Road and the Greater Bay Area.
The bank is not known for critical research commentary on China. Memorably, it recently argued in a report that the trade war would be positive for the country.
But there are two particular problems here. The first is Huawei, and more specifically the suggestion that the bank assisted the US Department of Justice by handing it information on Huawei’s alleged breaches of sanctions against Iran, leading to the attempted extradition of deputy chairwoman and CFO Sabrina Meng Wanzhou. Material sourced from HSBC is thought to be central to the case US prosecutors have built against her.
Here, one can understand HSBC’s position. The documents were apparently handed over in 2017, at which point the bank was still under a five-year deferred prosecution agreement made with US prosecutors in 2012 for failing to prevent Mexican drug cartels from money laundering through the bank. When asked for documents by the DoJ, it was hardly in a position to refuse to give them; also, the bank was under the supervision of an independent monitor at the time.
But few things enrage China more right now than the Huawei matter. In May, the US Department of Commerce placed Huawei on its Entity List – businesses the country considers a threat to American strategic interests. In response, on May 31, China’s Ministry of Finance said it would draw up what it calls an “unreliable entity” list, which will be made up of foreign entities that boycott or cut off supplies to Chinese companies for non-commercial purposes, or cause serious damage to Chinese companies. Chiefly, this has struck fear into US tech companies rather than international banks. But it would be HSBC’s worst nightmare to find itself on that list.
Then there are the protests in Hong Kong. At a pragmatic level, clearly this isn’t good for business. There have been issues with HSBC (and others) having to close branches temporarily because of unrest, with some protestors calling for people to withdraw all their money from their accounts and switch it into US dollars, partly as a matter of asset protection but also to signify the autonomy of Hong Kong. All banks have had to face questions about whether they have a sufficient supply of banknotes; HSBC, of course, is one of the three houses that issues them.
“Do we expect some impact on the second half? Yeah, inevitably there will be,” said CFO Ewen Stevenson during an analyst call to present the bank’s interim results on August 5. “If the current situation continues for a prolonged period of time, it will impact confidence. It probably will have some impact on the retail sector.”
But there is a more emotional issue at play in Hong Kong too. In mid August, Cathay Pacific’s chief executive Rupert Hogg resigned, reputedly after being ordered by China’s Civil Aviation Administration to provide a list of employees who were involved in the Hong Kong protests. It has been reported that he quit rather than do so, though it appears he had been under pressure from China to resign regardless.
In such an environment, there is a sense in Hong Kong that its population expects its leading institutions to take a side, which is an exceptionally difficult thing for HSBC to do. It wants to be liked by both sides, China and Hong Kong, and by western governments and regulators too (it is London-headquartered, after all) – but it’s not clear that it’s possible to please all of these disparate interests in today’s fractured geopolitical environment.
So, instead of taking sides, HSBC would rather the whole dispute went away. On August 22, HSBC was one of several banks to take out advertisements in Hong Kong’s biggest newspapers calling for calm and the resolution of disagreements through communication.
We shouldn’t, of course, forget the practical matter of business performance, and here HSBC has a brave face on. Stevenson pointed out on the earnings call that loan growth was 7% in Hong Kong in the first half, suggesting good customer activity.
“There’s been a few localized branch closures for very short periods of time… fundamentally I think Hong Kong remains robust,” he said.
Chairman Mark Tucker pointed out on the same call that HSBC has been in China for 153 years, with a clear long-term commitment.
“We’re actively participating in the opening of China’s financial markets, we’re actively participating in the Belt and Road Initiative, we’re actively participating in the development of the Greater Bay Area,” as well as the internationalization of the renminbi and the growth of green finance, he said.
“Our business operations in China continue as normal and we are confident about our China business.”
But HSBC needs to be more than good at banking now. It needs to be a diplomat, a friend to all and ideally a peace broker too. A big ask.