Tuesday20 August 2019 ★ FINANCIAL TIMES 7FT BIG READ. BANKING
To grow, HSBC needs to expand in mainland China. But it must overcome tough local rivals, rising trade
tensions and Beijing’s irritation over the lender’s role in the diplomatic dispute with the US over Huawei.
By David Crow
Hong Kong tycoon, started to rival and
even supplant the British hongs, the
19th-century trading houses that
became big conglomerates. As some
businesses fled the territory in the
fevered run-up to the signing of the joint
declaration by China and Britain in
1984, HSBC made a show of support by
pressing ahead with a new head office
building designed by Norman Foster,
which opened in 1986.
But executives were plotting a partial
retreat. In 1993, the lender purchased
Britain’s Midland Bank andmoved its
headquarters to London, apparently to
satisfy a demand from British regula-
tors. Some believe the real reason the
company switched its domicile was to
escape the clutches of the Communist
party ahead of the 1997 handover.
“HSBC was positioning itself so it
could continue to have a big stake in
Hong Kong without being subject
entirely to the politics of Hong Kong,”
says Lord Patten. “It has tried to tread
that line, with increasing difficulty.”
HSBC embarked on a buying spree
designed to lessen itsreliance on Hong
Kong. Two of its biggest deals would
prove ruinous. The 2003 takeover of
Household Finance in the US left the
companyexposed to the subprime
mortgage crisis. The lender it bought in
Mexico in 2002 was the bank of choice
for the country’s drug cartels, resulting
in a money-laundering scandal that
threatened HSBC’s very existence.
The fallout from the Mexico scandal
led to the appointment of the independ-
ent monitor in 2012, which forced the
bank’s hand in relation to Huawei.
Stuart Gulliver, HSBC chief executive
between 2010 and 2018, spent most of
his tenure cleaning up the mess.
In 2015, Mr Gulliverannounced the
bank’s “pivot to Asia”, a strategy predi-
cated on cementing HSBC’s status as the
leading international bank in China. Indoing so, hein effect put the bank back
on a path set in 1884, when its chairman
told shareholders itshould only pursue
business “of immediate importance to
the trade of China”.
Today, the lender derives 64 per cent
of its profits from Hong Kong and main-
land China, and its biggest shareholder
is Ping An,the Chinese insurance group,
which has a 7 per cent stake.
Even before the ratcheting up of trade
tensions, there were doubts among
some investors and analysts about
whether HSBC could expand meaning-
fully in mainland China. Managers at
domestic rivals such asBank of China
and ICBCscoff at the idea that a non-
Chinese lendercan win more business
in the country. “It’s like asking an Amer-
ican or French customer to bank with us
rather than JPMorgan or BNP Paribas,”
says one.
When Mr Gulliver unveiled the pivot
to Asia, he identified at least $3bn of
additional annual revenues that the
bank could achieve in the medium term
— usually three to five years. Four years
on, it is hard to detect a meaningful
impact from the plan, although opti-
mists can point to some green shoots.
The bank’s revenues in the mainland
were $1.6bn in the first half of the year, a
9.6 per cent increase compared with the
same period of 2018 (but still a fraction
of overall revenues of $29.3bn). Profit
growth has been more subdued, reflect-
ing heavy investment in the region.
HSBC has arguably done more to
boost its presence in China than rivals. It
has more branches than any other non-
domestic lender and was the first
international bank to assume majority
control of a mainland securities firm.
The chief executive of a major com-
petitor in China says HSBC has been
“smart and visionary” to focus its main-
land push on the Greater Bay Area,
which comprises fast-growing cities in
Guangdong provincesuch as Shenzhen
and Guangzhou, as well as Macau and its
mainstay market Hong Kong.
Ye tHSBC must also walk a diplomatic
tightrope. When the ambassador
addressed the new year party, he ended
by quotingtwo lines from a poem by the
Tang dynasty poet Li Bai. “A time will
come to ride the wind and cleave the
waves; I’ll set my cloud-white sail and
cross the sea which raves.”
Chinese literature experts might be
more familiar with an alternative trans-
lation, and even detect a coded message
for HSBC as it faces a stark choice
between east and west: “A great enter-
prise must find the right moment, hoist
its sails into the clouds, and cross the
mighty ocean.”
Additional reporting by Don Weinland
and Henny Sender in Hong KongHSBC’s China headwinds
W
hen Liu Xiaoming,
China’s ambassador to
the UK, gave an address
at HSBC’s Chinese new
year party in February,
he was full of praise for the bank. Speak-
ing in the walnut-panelled United
Nations Ballroom at the Four Seasons
hotel in London, he lauded the company
for “spreading confidence in China
through its concrete actions”.
Following the speech, Mr Liu and
Mark Tucker, HSBC’s chairman, smiled
for the cameras beneath thechande-
liers, accompanied by two dancersin
bright red dragon costumes. But the
bonhomie in the ballroom came at a dif-
ficult juncture for relations between
Beijing andHSBC, which has made
expansion in mainland China a central
plank of its growth strategy.
Just days before the party, Mr Liu had
summonedJohn Flint, the chief execu-
tive recently ousted from the bank, to
the embassy to interrogate him over the
company’s rolein the arrest and prose-
cution ofMeng Wanzhou, the chief
financial officer ofHuawei.
According to two people briefed on
the meeting, Mr Flint told the ambassa-
dor that HSBC had no option but to turn
over information that helped US prose-
cutors build a case against Ms Meng,
who is in Canada fighting extradition to
the US. She denies the charges of bank
and wire fraud in an indictment that
also alleges that the Chinese telecoms
equipment maker conducted business
in Iran in contravention of US sanctions.
Beijing’s irritation over HSBC’s role in
the diplomatic rowengulfing Huaweiis
but one challenge facing the bank, set up
154 years ago to capture trade flows
between east and west, as it tries to
navigate rising tensions between China
and the west.
With globalisation in retreat, some
analysts and investors are askingwhether HSBC’s plan to generate bil-
lions of dollars of additional revenue in
mainland China is compatible with its
domicile in London, or its status as one
of the world’s largest US dollar-clearing
banks. The recent protests on thestreets
of Hong Kong, where HSBC makes
roughly half its profit, have thrown the
question into even sharper relief.
“They are straddling this faultline
between the east and west and, for the
past couple of decades, that has been a
win-win position,” says Ronit Ghose, a
banks analyst at Citi.But with flows
between China and the westforecast to
slowbecause of President Donald
Trump’strade war, Mr Ghose predicts
HSBC will lose its edge.
“What were once tailwinds propelling
them forward,” he says, “have become
headwinds.”Reliability test
When Mr Flint met the ambassador, he
explained that when the bank handed
Huawei documents tothe US Depart-
ment of Justice in 2017, it was operating
under the supervision of an independ-
ent monitor with hundreds of staff
inside the company. The monitor was
appointed in 2012 after HSBC was fined
$1.9bn for breaching sanctions and
helping Mexican drug cartels launder
money. When the DoJ requested the
allegedly incriminating information,
the bank had to comply, said Mr Flint.
Mr Flint was ousted as chief executive
of HSBC earlier this month. A few days
later, the lender saidHelen Wong, its
greater China head, was also leaving.
The timing of the departures has
prompted speculation that they are
linked to thecompany’s relationship
with China, although the bank is
adamant that is not the case:Mr Tucker
recently said Beijing had put “absolutely
no pressure” on the company.
It is not clear whether Mr Flint man-
aged to placate Beijing over the Huawei
affair. The Global Times, a Chinese
state-run English-language tabloid, last
month reported that HSBC could be
included on the country’s forthcoming
“unreliable entity” list, which is being
drawn up as a tit-for-tat measure in
response to US restrictions onChinese
companies including Huawei.
The newspaper said HSBC had been
“unethical” in handing over the docu-
ments and quoted an unnamed source
close to the matter accusing the bank of
setting “a trap” for Huawei.
When asked recently about
the Global Times report,
Mr Tucker declined to
comment but said the
bankwas “totally aligned
with the Chinese view of growth
and economic prosperity”.Vietnam who specialises in Chinese eco-
nomics and finance.
“What is probably going to happen is
that every application to open a new
branch or get into a new business line is
going to be slow-walked from now on,”
says Mr Balding.
“It gets back to this question of how
HSBC navigates these waters,” he adds.
“[They are] faced with a dilemma. You
can be big in the US and Europe. Or you
can be big in China. But you cannot...
please both sides. They are in a very
tricky spot.”
The furore over Huawei comes as
HSBC, like other companies in Hong
Kong, wrestles with its response to the
escalating protests.
The bank has tried to tread what one
executive describes as an “apolitical
line”. When organisers scheduled a pro-
test on a weekday in June, the company
said its Hong Kong-based staff could
work from home and managers said
employees could attend the demonstra-
tion as long as they did not break the
law, according to several people briefed
on the arrangements. One employee lik-
ened the approach to the “don’t ask,
don’t tell” policy adopted in the US
when it was still illegal for gay people to
serve in the military.
But Chris Patten, the last British gov-
ernor of Hong Kongbetween 1992 and
1997, says the bank should take a more
active approach. “I hope that HSBC, like
other more thoughtful members of the
business community, is trying to get the
[Hong Kong] government to find some
way towards reconciliation,” he says.
Some employees complain that
HSBC’s refusal to take a stand is sympto-
matic of a culture that puts pleasing Bei-
jing above all else. Executives in the
bank’s research department in Asia are
particularly wary of causing offence,
according to two people familiar withthe approach. They say negative eco-
nomic news on China that should be at
the front of reports is often buried or
given a positive gloss.
An article last year from an HSBC
economist entitled “Why trade war will
boost China — stronger ties with emerg-
ing countries make US tension a bless-
ing in disguise” was dismissed as a “mar-
keting piece for the Chinese govern-
ment” by the bank’s clients, one of the
people says.
“They are trying to secure as many
points as possible to get access to the
Chinese banking market,” says Mr Bald-
ing. “If you made a list of all the bank
[research] in order of who is pro-China
down to the most bearish, I would put
HSBC far and away as one of the two
most pro-China banks. They bury bad
news and hedge their words.”
HSBC said it “produces independent,
unbiased market and macroeconomic
research designed to help our clients
make objective investment decisions”.Repeat pivots
The Hongkong and Shanghai Banking
Corporation has been deeply involved
in Hong Kong politics ever since it was
founded there in 1865 by a group of Brit-
ish merchants led by Thomas Suther-
land, a Scottish banker andpolitician.
Some of the bank’s staff were interned in
camps in the second world war after the
territory fell to Japanin 1941, and one of
the bronze lions outside its Queen’s
Road Central headquarters still bears
bullet marks from the fighting.
In the 1980s, the bank — long mis-
trusted by the Chinese Communist
party for its colonial-era role in financ-
ing the opium trade in China — started
to gain favour in Beijing by lending
money to local Chinese businessmen.
It was partly thanks to loans from
HSBC that the likes ofLi Ka-shing, theHSBC's fluctuating share price
Pence per share Acquisition of UK Midland
Bank; HQ moves to LondonPurchase of Mexico’s
Grupo Financiero BitalAcquisition of
Household International bn written o in goodwill related
to Household deal; unit shutsRecord bn fine for breaching US sanctions
and Mexico money laundering scandal; US DoJ
installs independent monitor for five yearsChief executive Stuart Gulliver
announces “pivot to Asia”Source: RefinitivMr Tucker also pointed to the bank’s
“active involvement” in a series of high-
profile projects in the country, including
the internationalisation of the ren-
minbi, the creation of a technology-
driven economic zone in the south-east,
known in Beijing as the Greater Bay
Area, and the Belt and Road Initiative,
China’s global infrastructure drive.
In a note sent to HSBC investors after
the Global Times report, Manus
Costello, an analyst at Autonomous, said
the bank had a good record of securing
the licences it needs to expand in main-
land China. “But if HSBC were in some
way restricted from participating in the
future opening up of Chinese financial
markets, it could lower the opportu-
nity [for it] to grow”.
Even if HSBC does not end up on
the list, the suggestion that it is
somehow unreliable could
prove problematic, says
Christopher Bald-
ing, an associate
professor at
Fulbright
University‘I hope that HSBC is
trying to get the [Hong
Kong] government to
find some way towards
reconciliation’
‘You can be big in the
US and Europe. Or you
can be big in China. But
you cannot... please
both sides’
Source: companyAsia leads the way for HSBC Hong Kong and China profits
Profit/loss before tax in
by region (bn)
- Middle East
& North AfricaAsiaNorth AmericaLatin AmericaEuropeProfits before tax in
by division (bn)
Retail and
wealthCommercialCorporate
centreBanking and
markets
Private
bankingChina
OtherHong KongAfter the departures of CEO John
Flint, left, and greater China head
Helen Wong, HSBC chairman Mark
Tucker, right, must make the
renewed focus on China pay off for
shareholders
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