The fate of one of the world’s largest banks may hinge on the Biden administration’s policies towards China.
HSBC has been placed in a precarious position by the escalation in tensions between the former Trump administration and China. Its survival in its current form could depend on whether the new administration seeks to defuse them or intensify them.
Of particular concern to the world’s sixth-largest bank – HSBC has $US2.7 trillion ($3.5 trillion) of assets – is whether US President Joe Biden pursues and is able to form an alliance of Western economies to try to rein in China’s economic and geopolitical ambitions.
That could force the bank to choose between the East, where it generates the majority of its profits, and its extensive operations in the West. HSBC’s status as a global bank would be destroyed if it were cut off from access to the US dollar financial system. It would essentially become a Chinese bank.
Since its founding in Hong Kong by a young Scot in 1865, HSBC has shown dexterity in navigating the sometimes volatile and threatening shifts in relations between China and the West, maintaining its position as the most important conduit for financing and capital flows between China and the West through wars and the increasingly authoritarian posture of the Communist Party.
It did blink in 1992, in the aftermath of the Tiananmen Square massacre and with the 1997 handover of Hong Kong from the UK to China looming, when it used its acquisition of Midland Bank in the UK to shift its domicile and headquarters to London.
As recently as 2015, the bank considered whether to return its holding company to Hong Kong after the UK authorities forced it, along with four other big UK banks, to withhold its dividend for the first time in its history to preserve capital. It was directed by the Bank of England to do so again last year in response to the pandemic.
The question of redomiciling to Hong Kong has taken on a sharper edge as the friction between the US and China has increased, placing the bank between the proverbial rock and hard place.
The support of its most senior executive in Asia for China’s imposition of its national security laws in Hong Kong and its co-operation with China in freezing the accounts of activists and lawmakers in Hong Kong earned it the ire of the Trump administration. Former US secretary of state, Mike Pompeo, slammed the bank for its “corporate kowtow” to China.
Given the bank’s roles in Hong Kong and China, the sanctions the US placed on Chinese companies and individuals for their alleged involvement in the crackdown on activism in Hong Kong and the treatment of the Uighurs in Xinjiang represent a minefield.
Equally, co-operation with the US enforcement of sanctions – Hong Kong chief executive Carrie Lam is being paid in cash after being cut off by international banks concerned about compliance with the US sanctions – risks the bank being placed on China’s “unreliable entity” list and punished by the Chinese authorities. Some of China’s “Wolf Warriors” have urged the authorities to put HSBC on that list.
Last year, to try to blunt the impact of the US sanctions, China also issued new rules purporting to block its companies and citizens from complying with “unjustified” foreign laws.
While HSBC has demonstrated throughout its history a remarkable ability to walk the tightrope of sporadic tensions between China and the West, the accelerating decoupling of the Chinese and American economies and the potential for the US to be joined by its allies – some of which, like the UK and Australia, have co-operated on issues like Huawei’s involvement in 5G rollouts – is making it more difficult for the bank to avoid choosing sides.
Biden might determine its future. He’s made it clear he wants to reform the alliances with the UK, Europe and America’s traditional allies in Asia that the Trump administration trashed while also re-stating the US view of China as an amoral rival.
Its survival in its current form could depend on whether the new administration seeks to defuse them or intensify them.
His administration might rationalise some of the myriad measures taken by its predecessor and bring some coherency to the trade and other sanctions Trump imposed, but the anti-China sentiment in the US is shared by Democrats and Republicans. Any success in enlisting the Europeans, in particular, to the effort to contain China will only exacerbate the pressures on HSBC.
At face value, the choice for the bank might appear straightforward. Its Hong Kong and China operations are the core of its earnings and value. Its businesses in Europe, the US and elsewhere have always been weaker contributors and have exposed it to massive fines for money-laundering, breaches of sanctions and other misbehaviours.
After its most recent strategic review, the bank committed to sell $US100 billion of its global assets over the next two years and to beef up its operations in Asia and the Greater Bay Area of Hong Kong, Macau and the mainland’s neighbouring Guandong province in particular.
It could retreat to Hong Kong and China and sell, shut down or spin off its other operations, but that would end its global aspirations, turn its back on more than 150 years of financing international trade and risk it becoming just another Chinese bank, possibly ending up state-owned. (China has, reportedly, run the numbers on acquiring it several times in the past).
It’s unclear, however, whether China – which has said it would welcome a redomiciling of HSBC to Hong Kong – would actually be keen for HSBC to be broken up. The bank is a key pipeline for foreign capital into Hong Kong and China, and a mainstay of Hong Kong’s status as an international financial centre.
HSBC has survived existential threats throughout its history and shown that it can usually find a way to walk both sides of a treacherous path. Unless tensions between the US and China – and the West and China – abate, however, this period might produce the most threatening moment of all.