HSBC Runs into Buzzsaw in Hong Kong & China, its Home Market Generating 75% of its Profits

HSBC’s pleas of innocence have won little sympathy in Beijing.

By Nick Corbishley, for WOLF STREET:

Global banking behemoth HSBC has found itself on the back foot in recent months in its most important market, Hong Kong and China. The unexpected departure of three senior executives within a week, including its CEO and the head of key China business, sparked a broad sell-off of its shares, which are down 13% in just three weeks.

The world’s eighth biggest bank by assets, HSBC is also reeling from the after effects of increasingly violent political unrest on its home turf. Protracted demonstrations in Hong Kong, triggered by opposition to an amendment to the region’s extradition law, have become increasingly disruptive. The proposed bill has been suspended indefinitely, though not withdrawn. And the Asian financial center is facing its most serious crisis in decades.

At the same time, the weakening yuan is causing all sorts of problems for Hong Kong-based lenders. Citigroup analysts have even warned that it could result in a “drastic” decline in loans to mainland China clients as well as undermine asset quality. “We see bigger earnings risk to Hong Kong banks,” the bank’s analysts wrote, downgrading the rating on BOC Hong Kong to neutral.

Unlike BOC Hong Kong, HSBC’s headquarters are based in London. But it’s in Hong Kong where the bank first cut its teeth (laundering the proceeds from the British East Indian company’s opium trade) and where the lion’s share of its business is still done. In fact, as Bloomberg notes, “few if any of the world’s largest financial companies dominate a single market quite like HSBC does in Hong Kong, a city of 7.5 million people that accounted for roughly 60 percent of the bank’s pretax income in 2018.”

Hong Kong is Asia’s biggest financial hub, servicing not just China but many other Asian markets. Through the majority ownership of its subsidiary Hang Seng Bank Ltd., HSBC is the city’s biggest mortgage lender in the secondary market, rules the roost in investment banking, and is one of Hong Kong’s three note-issuing banks. In fact, so entwined is Hong Kong’s recent history with that of HSBC that some of the city’s currency bills still, to this day, carry the bank’s logo.

If anything, that relationship of co-dependency has intensified in recent years as HSBC has staged a strategic retreat from other emerging markets, including Brazil and Turkey, in order to focus its attention on fast-growth Asian markets, in particular China. The number of countries it operates in has gradually dwindled from 87 in 2011 to around 70 today, spurring HSBC to eventually ditch its slogan, “the world’s local bank.”

In 2015, it even went so far as to end its sponsorship of Markit’s EM PMIs, the least government-controlled index in China, a move that was widely perceived as an attempt to forge closer ties with Beijing. As one unnamed source told The Australian Financial Review at the time, “If you are a sizable bank that wants to do more business in China, you don’t want to make parts of the Chinese government angry. Sponsoring the survey is likely to affect your future business expansion in China.”

To begin with, the strategy seemed to pay off. After an agonizing wait for regulatory approval, HSBC in 2017 became the first global bank to launch a majority owned-investment banking venture in mainland China, with its base in Shenzhen, which forms part of the Pearl River Delta metropolis where HSBC earns roughly half of its total China revenue.

In November last year, another new milestone was reached when Chinese insurance giant Ping An overtook BlackRock to become HSBC’s biggest shareholder, with a 7% stake. Ironically, HSBC used to be the largest shareholder of Ping An before the latter’s Hong Kong IPO in 2004, at one point holding 20% of the Chinese insurance firm.

Times have clearly changed. Despite its long history of influence on Hong Kong, HSBC is now a lot more dependent on China and Hong Kong than vice versa. The bank already faces stiff competition from a new generation of virtual lenders that are heavily backed by big hitters like Standard Chartered Plc and Chinese internet insurer ZhongAn Online P&C Insurance Co.

Having pinned its future on China’s massive but slowing economy, which together with Hong Kong, generates nearly 75% of its profits, HSBC must do all it can to keep the country’s government happy. But that’s easier said than done when that same government is engaged in a no-holds-barred trade war with the United States.

The bank’s relationship with Beijing was already severely tested earlier this year when it was revealed that the bank had ratted out Chinese telecoms giant Huawei to U.S. authorities for breaching U.S. sanctions on Iran, which eventually led to the arrest of Huawei’s finance director, Sabrina Meng Wanzhou, in Canada. Both Huawei and Beijing were incensed, the FT reported at the time.

HSBC representatives claimed that they had little choice but to cooperate with the U.S. investigation. “Stonewalling the Department of Justice was not an option,” an HSBC insider told the FT, given that “between 200 and 400 (U.S. monitors) were inside the bank at any given time.” They reportedly “had access to everything” — a legacy of the bank’s deferred prosecution agreement with the DOJ in 2012, after being found guilty of breaching sanctions and laundering money for Mexican drug cartels.

So far, HSBC’s pleas of innocence appear to have won little sympathy in Beijing. The bank was conspicuously excluded from a group of 18 banks selected by Beijing to help the Bank of China set bank lending rates. In an August 2 article, the Chinese state-owned newspaper Global Times even suggested the lender could be among the first international companies to be included on a black list of “unreliable entities” being drawn up in Beijing. Given HSBC’s massive dependence on the Chinese market, if that were to happen, as unthinkable as it may seem, the impact on the lender would be huge. By Nick Corbishley, for WOLF STREET.

This “crack cocaine for CFOs” was also extensively used by Carillion before it collapsed. Read…  One of World’s Construction Giants Admits Using Risky Hidden-Debt Loophole “Across Group.” Australian Subsidiary Crushed

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  24 comments for “HSBC Runs into Buzzsaw in Hong Kong & China, its Home Market Generating 75% of its Profits

  1. Javert Chip
    Aug 19, 2019 at 2:12 pm

    Well, if you sleep with dogs, expect to get fleas.

    • kevin
      Aug 20, 2019 at 7:22 am

      With their depth of “guanxi” (i.e. relationships) in the China/HK markets, this can be settled over an informal discussion setup at some Hong Kong “dim sum” restaurant; but of course, the conversation has to be scripted and carefully coded to be ambiguous and yet clear enough for the other party without any legally damning implications (just in case the conversation was surreptitiously recorded).

      So don’t worry for HSBC. All they have to do is to gingerly grease the palms of the “relevant” politician in the CCP, and all’s well and ends well.

  2. Iamafan
    Aug 19, 2019 at 2:16 pm

    Asia to the West: We can print our own money. Yours is also fiat anyway.
    Don’t disturb us. Now go away.

    • George Robso
      Aug 19, 2019 at 3:59 pm

      I guess it’s payback for the millions of opium addicted Chinese people during its Colonial rule of Hong Kong.

  3. Petunia
    Aug 19, 2019 at 2:27 pm

    If the Chinese take over HK, all the western bankers will leave, if they haven’t already. When I recently read HSBC had cut 4K jobs, I assumed they were all in HK, a way of divesting themselves without a public announcement.

    • Lemko
      Aug 19, 2019 at 3:33 pm

      china took over HK since 09… HK banks have been tasked for a few years already to get USD for PBOC, look at HIBOR stress yet HK claims b/s of banks is perfect… HSBC has 300 Bil + exposure in UK, similar in HK and 170 something Billion in china, on balance… HSBC is already insolvent like Deutsche Bank if assets were repriced to today, DB has way more derivatives sensible to rates tho. Hong Kong is beyond done, the havoc that will happen will be quite a gong show, already started, RE prices lower by 10 %… Then all those swaps it gave PBOC, ain’t getting paid back.

      HSBC once a great bank turned into a bear stearns by the commies

      • Petunia
        Aug 19, 2019 at 3:53 pm

        If HK loses the western banks they are finished as a financial center, which will be really bad for China, but good for Japan. Nobody is lining up to do banking with China, no matter how much gold they have.

        • Lemko
          Aug 19, 2019 at 4:56 pm

          HSBC is a chinese bank now… Biggest shareholder is Ping An, state owned by the communist party, the communist party is HSBC biggest shareholder. It’s absolutely knee deep in china with USD swaps, their main biz in china and HK, UK numbers will slowly disapear. UK won’t bail out HSBC, it will be a china problem, remember HK is part of china.

          Key execs leaving or being pushed out, Quinn is there now, but Xi will decide who the new CEO will be… Same as Cathay Pacific, everyone dumping it, PBOC through state owned banks and companies is buying Cathay Pacific, xi got CEO fired cause employees of Cathay participated in Protests, new CEO will have to be approved by the commies as well

      • sierra7
        Aug 19, 2019 at 9:29 pm

        Lempko:
        Yeah, I guess a “bunch of commies” did it……..
        https://www.corp-research.org/HSBC
        After u finish reading the article you can jump to the sources for more info on this criminal enterprise…..
        (“Russia, Russia, Russia……………..”)

        • HowNow
          Aug 20, 2019 at 1:44 am

          Wow… everyone should read that report. Thanks, Sierra7. Astonishing amount of corruption. And I thought U S bankers were rotten…

  4. Joe
    Aug 19, 2019 at 2:36 pm

    What China does not directly control, it does not want.
    Far easier to boot out foreign companies and steal intellectual property when they have no controlling interest.

    • David Hall
      Aug 19, 2019 at 7:18 pm

      HSBC is not the only one testifying against Huawei. Chinese hackers stole Nortel Network’s technology.

  5. 2banana
    Aug 19, 2019 at 2:50 pm

    Part of the the “No Banker Goes To Jail” Act.

    “They reportedly “had access to everything” — a legacy of the bank’s deferred prosecution agreement with the DOJ in 2012, after being found guilty of breaching sanctions and laundering money for Mexican drug cartels.”

  6. HR01
    Aug 19, 2019 at 3:56 pm

    Nick,

    Thanks.

    Once a money launderer, always a money launderer. HSBC seems to be running out of ‘friends’ though. The old friends probably scrambling to get out of the way of Brexit at HQ. The new friends? Well, now they’re REALLY married to the mob.

    As for the exec departures, no surprise. Probably sipping drinks on some tropical island half a world away by now. Beats becoming ‘disappeared’ when the hammer falls.

    • Frederick
      Aug 20, 2019 at 12:07 am

      So, hanging out with Epstein somewhere Would be my guess

  7. tommy runner
    Aug 19, 2019 at 4:05 pm

    happy for the guard and couple of tellers left that got the good parking spots. next up, to be absorbed by a smallish payday lender.

  8. David Hall
    Aug 19, 2019 at 4:39 pm

    China nationalized another shaky bank; the Heng Feng bank. The percentage of Chinese non-performing loans continues to rise.

    China was trying to sell its distressed debt to foreigners without access to information about financial conditions.

    A China sponsored Belt and Road rail construction project in Kenya was halted as its initial tracks could not generate enough money to pay the bills.

    China built empty cities to boost its official GDP. Am not sure if they were adequately appraised, in as much as tenants have not been seen on the empty city streets.

    • envo
      Aug 19, 2019 at 10:56 pm

      Surely there must be a Danish pension fund willing to invest and purchase all those non-performing loans. (sarc)

  9. Old Engineer
    Aug 19, 2019 at 5:04 pm

    After reading this article I went over to Zero Truth to check it out and found this article, which seems relevant to the discussion above. https://www.zerohedge.com/news/2019-08-19/beijings-secret-plan-b-converting-shenzhen-new-hong-kong

    (You will note my order of precedence for blogs, Wolf Street first.)

  10. Iamafan
    Aug 19, 2019 at 6:20 pm

    One belt One Road Nations do.
    African nations do.
    America is the one who is losing influence in those large areas.

    Only Japanese loans are cheaper if available.

  11. Chauncey Gardiner
    Aug 19, 2019 at 6:52 pm

    When the CEO of HSBC and other bank officers resigned earlier this month, it was rumored it was because HSBC was lending US dollars to and entering into $USD swaps with China’s central bank against the wishes of western officials. Hard to tell, though, and Nick Corbishley’s account makes sense.

    Noted that the Hong Kong dollar peg to the $USD is currently near the top of its upper band of 7.85.

  12. Maximus Minimus
    Aug 19, 2019 at 10:09 pm

    “The bank was conspicuously excluded from a group of 18 banks selected by Beijing to help the Bank of China set bank lending rates.”
    I guess, that should be People’s Bank of China?
    HSBC was formerly called Hongkong Bank.
    One interesting tidbit is missing: why would Huawei choose to do business with Iran through HSBC, when Chinese owned and operated state banks are the biggest in the world? If it didn’t, what material information did HSBC have, that it felt must pass on?

  13. Leser
    Aug 20, 2019 at 4:17 am

    Excellent article and interesting to see how the changing realities in China affect this criminal enterprise.

    Good documentary for those interested in HSBC’s shady dealings and miraculous escapes from prosecution ever since: “Too Big to Jail” by arte (on settings button within video window set subtitles to English): http://www.arte.tv/fr/videos/069080-000-A/les-gangsters-de-la-finance/

  14. Rcohn
    Aug 20, 2019 at 9:41 am

    How will world wide financial markets react when Deutsch Bank, Commerzbank and HSBC get into trouble at the same time?

Comments are closed.