Doubling down: HSBC is making a risky bet on China

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It would have been prudent for any superstitious bosses at HSBC to have avoided washing their clothes, eating porridge or sweeping floors on February 12, Chinese New Year. Tradition dictates that doing any of these things on that day could bring bad luck, and HSBC will be hoping for all the good fortune it can get as it plans its future around the world’s second largest economy.

As the Year of the Ox begins, HSBC is doubling down on its push into China.

HSBC is betting its future on China.Credit:Bloomberg

The London-based bank, which already makes most of its money in mainland China and Hong Kong, is this week expected to defy critics who say it has become too cosy with Beijing by outlining its plans to accelerate growth in Asia.

It has already opened an office this month in southern China’s Greater Bay Area, designed to rival Silicon Valley, and is debating whether to relocate some key executives out of London and into Asia. Ahead of its annual results this week chairman Mark Tucker has privately signalled the cold financial logic: follow the money by expanding in China. Meanwhile, it is exiting less lucrative businesses such as retail banking in France and the US. The International Monetary Fund expects China to be confirmed as the only major economy to expand in 2020 after containing coronavirus, and HSBC wants to make sure it is at the front of the queue.

“HSBC will be forced to think bigger than 12 months ago, by which I mean even greater retrenchment in Western markets, including a more radical downsizing of its US businesses, and a more savage cost reduction programme,” says Ian Gordon, bank analyst at Investec.

“It is an ongoing pivot to Asia, but the key deliverables within its control are making its value-destructive businesses smaller.”

London investors, despite being furious that the bank backed Beijing’s controversial security law in Hong Kong last year, agree that there could be huge growth in the Greater Bay Area, which covers 21,800 square miles and 11 cities including gambling mecca Macau, the most densely populated city in the world. More than 70 million people live in the Greater Bay Area, more than the whole of the UK, with the mega-region’s cities connected by the world’s longest bridge over water.

Investors can see full well that China, where stock valuations hit a record high last year, is where the money is for HSBC, yet they have a growing list of non-financial concerns that is dampening any excitement. As one major shareholder puts it, the bank is “behind the curve on human rights and climate change” and efforts to dispel those fears have proved unsuccessful. Tucker recently held a private meeting with investors to discuss climate change issues, though one person says it came across as insincere, while MPs were left unimpressed by chief executive Noel Quinn’s defence of the bank’s relationship with Beijing last month. The bank has heard the message on climate change – it has pledged to become a net zero carbon emissions bank by 2050 and last week hired its first ever sustainability chief – but there are still questions over its relationship with China.

“From an investor point of view it is negative on the ESG [environmental, social and governance] front. China is more important than the US for them, but that’s the risk. This Chinese relationship is becoming less democratic, not more democratic,” a major shareholder says.

“This Asia strategy can work as long as they can get a strategic positive relationship with China, which is currently in the ‘not proven’ category. If you read the local press it’s pretty hostile to HSBC.”

That puts HSBC’s predicament mildly. In the UK, the bank has been lambasted for backing Beijing’s controversial security law, which criminalises anti-government movements. A global coalition of more than 50 politicians, including ex-Tory leader Sir Iain Duncan Smith, wrote to Tucker demanding answers after it froze some pro-democracy activists’ bank accounts. The bank has now replied in a letter Sir Iain says was “deeply disappointing”.

HSBC chairman Mark Tucker is navigating a tricky political and economic path..Credit:Jessica Hromas

He adds: “[It was] a flat statement about their need to obey laws passed by the government. But the real answer is they clearly want to expand in China, which is why they’re not just obeying these laws, but doing so very willingly. It begs the question why anyone who is concerned about China’s behaviour and its abuse of human rights given the bank’s behaviour would bank with HSBC.”

The MPs have now asked for a meeting with the bank. There has been a backlash against HSBC in China after “Princess of Huawei” Meng Wanzhou, daughter of the company’s founder, claimed that HSBC records will reveal top bank executives knew of dealings with Iran at the heart of an extradition case. On Friday, an English judge blocked the release of the documents.

An investor who sold his stake in the bank last year says the US Huawei drama highlights the difficulty with keeping China on side.

“They are strategically challenged,” he says.

Telegraph, London

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