On the one hand, the United States has targeted HSBC operations in Hong Kong for verbally supporting Beijing’s imposition of a new national security law that the Donald Trump administration says has significantly undermined autonomy, rights and democracy of the financial center.
On the other hand, China threatens to block the bank’s access to the mainland economy – a crucial current and future growth market – for its cooperation with the US investigations into the alleged violation of sanctions against Iran by the Chinese tech giant Huawei. HSBC is a Chinese company lender.
This uncomfortable environment raises questions about the bank’s future viability in Hong Kong and as a global gateway to mainland China’s economy, with some analysts even believing it could possibly be kicked out of the city it is from. takes its name.
Speculation is now common that the United States could include HSBC – despite its UK rather than Chinese origins – in an upcoming round of sanctions to be imposed on Hong Kong to punish Beijing for squeezing the semi-autonomous city. The outlines of these sanctions should be announced today (October 12) in Washington.
“Large non-US banking groups with significant footprints in China or Hong Kong, including HSBC and Standard Chartered, are examining potential escalation scenarios,” Fitch Ratings said in a recent report.
“Extending sanctions to companies with close ties to the Chinese state, or Chinese state-owned enterprises, could increase credit risk in banks’ loan portfolios or limit their growth opportunities,” the report said.
Secondary sanctions – including the most significant denial of US dollar clearance via US financial institutions – are also potentially on Washington’s punitive menu for Hong Kong and by the HSBC association, although Fitch anticipates a more US approach. progressive, according to the Fitch report.
Other analysts see a potential shock scenario. Cheng Ka-wa, a Hong Kong-based independent stock analyst formerly at RHB Securities, says that if HSBC is indeed heavily sanctioned by the United States, it may have to sell its Hong Kong-based Hang Seng Bank to raise capital to pay potential fines. .
He said it all depended on the outcome of the US presidential election, with many anticipating a less punitive US approach to China and, by extension, Hong Kong if Joe Biden defeats Trump on November 3. Many investors are therefore adopting a wait-and-see approach. .
China’s threats to HSBC are potentially just as serious. The Global Times, an English state tabloid affiliated with the Communist Party of China, reported that the bank could be one of the first companies to be named to Beijing’s “list of untrusted entities” in retaliation for aiding the US investigation into Huawei .
Global Times chief reporter Chen Qingqing wrote in a September 19 tweet that HSBC is “likely” among the companies on the Chinese Commerce Department’s Entity List, in apparent response to Washington’s ban on Chinese apps WeChat and TikTok in the United States.
If true, HSBC could face Beijing’s restrictions on trade, investment, and visas in China – all potential huge hurdles to its ambitious expansion plans for mainland China, the country’s top growth market. bank.
Investors sense the bilateral risk. Shares of HSBC Holdings PLC, the bank’s Hong Kong-listed entity, have fallen more than 50% so far this year. This is due to both the slowdown in its business and increased losses caused by the pandemic, as well as the bank’s risk exposure to US-China tensions.
HSBC’s net profit fell 69% in the first six months of this year, according to reports. The lender serves as a major trade channel between East and West, opening its doors in Hong Kong in 1865 to finance trade between Europe and Asia. But hopes that HSBC could profit from China’s nascent economic recovery are fading.
Indeed, some analysts even speculate that HSBC could possibly be forced by Beijing to sell its affiliated companies in Hong Kong and China, including its subsidiary Hang Seng Bank, one of the city’s main state-owned enterprises in terms of of market capitalization, to a Chinese company if it is. in a hurry to choose between the United States and China.
Other analysts believe, however, that Beijing would have too much to lose by putting HSBC on the blacklist. “Beijing is unlikely to put HSBC on an unreliable entity list,” said Victor Ng Ming-tak, assistant associate professor of economics and finance at Hang Seng University in Hong Kong.
“Why would the central government want to punish HSBC and cause a chaotic situation in Hong Kong?” he asked rhetorically.
Ng said that HSBC could, in the worst case, use its global network of strategic investors to raise funds to pay fines or penalties imposed by the United States. He suggested that the potential for Beijing to force HSBC to sell its Hong Kong business, in what would likely be considered de facto nationalization, is still slim.
This is in part because major Chinese companies have already helped come to the rescue of HSBC. When HSBC shares hit HK $ 27.5 (US $ 3.55) on September 23, their lowest level since 1995, Chinese company Ping An Asset Management Co Ltd bought 10.8 million shares on the same day for HK $ 305 million, or HK $ 28.29 per share.
After the purchases, Ping An’s stake in HSBC fell from 7.95% to 8%, making the Chinese company HSBC the largest individual shareholder in the company. Excluding the latest trades, Ping An bought the shares of HSBC at an average price of HK $ 68.44.
Banny Lam Chiu-kei, head of research at CEB International Capital Corp, a Hong Kong-based brokerage firm, said Ping An’s latest decision to buy and back HSBC shares indicated that the bank would likely not be not on China’s list of unreliable entities.
Lam said that even if the bank were sanctioned by the United States, its shares would have strong investor support, between HK $ 26 and $ 27. He predicted that stocks would fluctuate between HK $ 30 and HK $ 33 in the short term and rebound to HK $ 40 when the bank announced plans to resume its now suspended dividend payment.
If neither China nor the United States wants to punish HSBC, the bank could start paying dividends again or even launch a share buyback program to support its share price as early as November, said stock analyst Cheng.
While Beijing is not outright sanctioning HSBC, it will likely continue to exert constant political pressure on the bank in the long run, said two economists monitoring the situation.
“HSBC shouldn’t be too worried about US sanctions because it doesn’t have a lot of companies in the US,” said Terence Chong Tai-Leung, associate professor in the economics department at Chinese University of Hong Kong.
But, he said, HSBC will find it increasingly difficult to remain politically ambiguous if US-China tensions continue to rise after the US election.
Chong, for his part, suggests that the bank should side with Beijing rather than Washington more in any future political dispute so that it can “further expand its business on the continent to offset shrinking margins in the United States and Europe”.
“Beijing’s messages on HSBC’s punishment were only intended to call on foreign banks based in Hong Kong to support China to oppose US sanctions if necessary,” assumed Law Ka-chung, assistant professor in the Department of Economics. and finance from the City University of Hong Kong College of Business.
“Beijing believes HSBC… will be willing to abandon its US dollar business in favor of mainland companies [if] the United States has announced that it will stop providing US dollar customs clearance services to Chinese banks, ”Law said. “But will they do it?” Probably not… Their Hong Kong businesses will not survive without US dollars. “