HSBC could be in big trouble as China-West relations continue to fracture

HSBC could be in big trouble as China-West relations continue to fracture
Operation in Hong Kong is hugely important for HSBC. Source: Getty Images
5 Min Read

Daily US Times: Business in China has long been a boon for HSBC, but it’s fast becoming a liability for the bank as relationships between China and the West continue to fracture. And if Beijing follows through on veiled threats to rein in HSBC, the bank will struggle to contain the fallout.

The headquarter of HSBC is in London but traces its roots to China and makes most of its money in Asia.

It has been repeatedly attacked by Chinese state media outlets in recent months. They have accused the bank, for example, of colluding with the US to build a legal case against the Chinese tech firm Huawei and its chief financial officer, a flashpoint in US-China tensions. Last week, HSBC broke its silence and denied the allegations.

In June, HSBC signaled its support for a controversial national security law Beijing imposed on Hong Kong, but Chinese media have criticized the bank for not backing the measure soon enough.

It’s not fully clear how and whether Beijing would retaliate against HSBC, but media in the country has suggested that its business in China could face consequences. recently, the state-run tabloid Global Times, citing “Chinese observers,” floated the idea that HSBC’s connection to the US criminal case against Huawei could land it in legal trouble in China that could eventually push it “out of the market.”

A compilation of headlines run by the Global Times, a Chinese state-owned media outlet that has repeatedly attacked HSBC over the past year. Source: Shutterstock

The bank could appear on a list of “unreliable” foreign companies that the government is reportedly compiling, according to reports by some Chinese outlets.

Fahed Kunwar, an equity analyst at Redburn who covers HSBC said the tensions are already clouding the bank’s image with investors.

He said: “It’s a predominant concern. Being mentioned by both the Chinese and the US government on a weekly basis, it’s just not seen as a positive message. People really question their business model in this new world.”

HSBC’s shares in Hong Kong and London are both down more than 40% this year, lagging the broader market in each city.

Noel Quinn, HSBC CEO, acknowledged the fact that HSBC has become a political target on a call with investors Monday as the company reported earnings, warning that US-China tensions “inevitably create challenging situations for an organization with HSBC’s footprint.”

Quinn demurred when asked by analysts to elaborate,

He said: “I’m not going to get into speculating on what actions may or may not be taken between respective governments. It’s not my role to do that.”

“At the end of the day, I’m a banker, not an economist or a politician. But clearly, there are potential impacts on general economic confidence from any form of trade tensions.”

No easy way out

Greater China is critical for the business of HSBC. Asia delivered more than 80% of the bank’s profits last year, and its operations in Hong Kong typically account for more than half of its profits alone.

Source: Finanbrokerage

Should access to the mainland Chinese and Hong Kong market ever be cut off, experts warn that HSBC would suffer an existential crisis.

Wilson Chan, an adjunct professor of business at City University of Hong Kong, warned that if that happens, HSBC’s main source of profit will be lost.

The company is also undergoing severe financial challenges that place even more emphasis on the region.

The bank used to employ a strategy it termed the “three-legged stool,” with business based on pillars in Asia, North America and Europe.

However, the bank announced a “pivot to Asia,” in 2015, saying it would invest more in China and Southeast Asia.

The company doubled down on that this year with another restructuring plan, which involves shedding 35,000 jobs and shifting more resources to Asia and pulling back in places like the US, where it has underperformed for years.

According to analysts, one of the reasons the bank is so dependent on China is that it no longer has viable returns in other markets.

Kunwar said even the Middle East, which the bank recently identified as a promising growth area to investors, isn’t hugely significant.

Source: PA

The region, including North Africa, made up about 17% of it’s profits last year.

All roads lead back to China for the bank, but that’s not to say there aren’t any options. It could also try to appease China by moving its primary stock listing from London to Hong Kong, or returning its global headquarters to the Chinese city.

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