HSBC is under threat as tensions between the East and the West rise

Markets

HSBC’s roots lie in the financing of trade between the East and the West, but tensions between the two, coupled with some shareholder discontent, now threaten to tear it apart.

At an informal meeting with shareholders in Hong Kong on Tuesday, the bank was forced to defend its decision to reject a campaign by its biggest shareholder, China’s Ping An Insurance Group, to split its Asian and western operations and return its head office to Hong Kong.

That campaign to move its headquarters from London is supported by some shareholders, angry at the bank’s 2020 cancellation of dividends at the behest of British regulators. UK-based banks were directed to cancel the equivalent of about $14 billion of dividends in order to preserve capital at the height of the pandemic.

“Tower of Doom”: There’s pressure on HSBC to move its head office from London to Hong Kong.Credit:Simon Dawson

Ping An, HSBC’s largest shareholder with a stake of about 9.2 per cent, has argued that the bank should carve up its global business to create an Asian business, headquartered in Hong Kong, distancing itself from the tough banking regulations in the UK to base itself at the centre of its largest and fastest-growing business. The bank’s Asian operations contribute about two-thirds of its earnings.

At the shareholder meeting, HSBC chairman Mark Tucker said a split would be a hugely complex and costly exercise over five years, hurting the bank’s share price and dividends and damaging Hong Kong’s status as an international finance centre.

“An international financial centre needs international financial institutions to help flows of revenue into and out of Hong Kong. I think [a split] would negatively impact the ability of Hong Kong to remain a vibrant dynamic international financial centre,” he argued.

HSBC is investigating “alternative structures”, but its work to date suggested that separation of its businesses would destroy shareholder value, he said. The costs and tax implications of separation would be exorbitant.

‘Pivot to Asia’

The bank has looked at returning its domicile to Hong Kong in the past. A decade ago, when the UK introduced a bank levy that was calculated on the basis of a lender’s global assets, it considered moving back to Hong Kong, from which it had relocated in 1993 after its acquisition of Midland Bank (and, not coincidentally, in the lead-up to the 1997 handover of the former British colony to China).

The cancellation of its dividends in 2020 (it has now resumed payouts at a much lower rate) and its own “pivot to Asia” — it has shipped senior executives and moved about $US6 billion ($8.7 billion) of extra capital out of its western operations into the region to capitalise on its superior growth rates – have helped fuel the Ping An campaign and give it credibility.

The campaign, and the proposed division of HSBC’s operations between East and West, highlight the wider issues HSBC has experienced as it tries to straddle the increasing divide between China and the West, and China and the US in particular.

Stuck between the East and the West, the Asia-focused lender is caught up in the increasing tensions between China and the US with its allies.Credit:AP

The bank has been caught up in some controversies amid Donald Trump’s trade war, the increasingly aggressive anti-China stance by an increasingly protectionist US and rising concerns by America’s allies about a more overtly ambitious and belligerent China.

It angered the West when it accepted China’s controversial and heavy-handed crackdown on democracy protests in Hong Kong and the imposition of China’s national security law on the city state, and infuriated China when it co-operated with US prosecutors and handed over bank documents that helped lead to the arrest of Huawei’s chief financial officer in Canada in 2018.

Ping An, China’s largest insurer, isn’t a state-controlled entity, although it has state entities as shareholders. But any systemically important Chinese company effectively does what Beijing wants, and you wouldn’t need to be overly cynical to think that Beijing, at the very least, approves of Ping An’s campaign.

Chinese President Xi Jinping has been exerting ever-increasing and increasingly intrusive control over all facets of China’s economy, and has been strengthening mainland China’s authoritarian approach to governance of Hong Kong.

The UK regulation of HSBC, one of the world’s top 10 and most globalised banks, and the dominance of its western shareholders and executives and its lack of any direct accountability to China would irk Beijing. A split that brought the Asian operations of HSBC firmly within its orbit and control would be more in keeping with China’s own ambitions.

China, having seen the central role the US dollar and the global banking system have played in the sanctions on Russia for its invasion of Ukraine, would also be concerned about the vulnerability HSBC could represent in the event similar sanctions were ever imposed on China.

HSBC dominates dollar-denominated clearance transactions in Hong Kong. Its global operations couldn’t function if it tried to defy financial sanctions imposed by the US.

A split of its operations would, however, effectively gut HSBC and further weaken Hong Kong’s already-damaged status as a global financial centre.

HSBC has throughout its history positioned itself across the trade flows between Asia and the rest of the world, and much of its success and profitability relies on it providing the financing and transactional support for those trades. A split would wipe out a global web of infrastructure, relationships, activity, profits and shareholder value.

Through its 157-year-existence, the bank has adroitly managed to navigate its way through, and exploit, the shifts in the relationship between China and the West, but its pivot to Asia and the sharp rise in geopolitical frictions between China and the West will challenge its ability to maintain its independence.

A business built on being the intermediary between the East and the West in a globalised environment is going to struggle to retain that independence and its current structure during a period where the increasingly adversarial relationship between China and the US is creating a decoupling of their economies and a broader fracturing of that environment.

The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.

Most Viewed in Business

From our partners

Source: Read Full Article