Bad call to split up HSBC
Move by major shareholder Ping An to break up global bank is set to undermine economic recovery and signifies the end of globalisation
It has been a very unusual week in a very unusual year. The temperature in Hong Kong dropped to its lowest May level in 105 years – so much for global warming – only a few days after the Hong Kong Observatory issued its earliest-ever hot weather warning when the mercury cracked the 35-degree-Celsius mark. Strange things are happening in this age of transition.
The Chinese look to predict earthquakes by the braying of dogs and the emergence of snakes, so it is no wonder that soothsayers, prophets or indeed financial economists look at signs and phenomena. Of course, if they were mostly right, they would be lying on a beach holding a drink with an umbrella in it.
Nevertheless, the signs are not those of stability but of noisy change, such as the highest inflation in 40 years, the worst month on Wall Street in 52 years, the US long bond breaching the 3 per cent yield and the first fullscale inter-nation European war in 80 years. This is a wild shot in the dark – but do you think they could be telling us something?
And yet, sometimes, we financial economists get it right. In October 2020, I forecast “it would be unsurprising if the Hong Kong and China operations of HSBC [Holding] developed a separate Chinese majority ownership”.
I noted that Ping An Insurance (Group) had just boosted its stake as HSBC’s largest shareholder. So, it should come as no surprise that the insurer has been calling for the 157-year-old bank to be split into Asian and Western operations.
Such a deal has been applauded by many commentators. After all, HSBC’s management themselves are gung-ho on pivoting (even more) to Asia and shifting the focus from commercial banking in the United States and France to wealth management in China.
The bean counters point to HSBC earning 65 per cent of its pre-tax profits in Asia for a lot less capital employed than the miserable 20 per cent of profits from Europe. Perhaps the biggest worry for Ping An is that HSBC is caught in a geopolitical vice, in the unenviable position of being in the bad books of Chinese, French, British and US politicians merely because it has a foot in both East and West.
Ping An only represents 9.2 per cent of the bank’s shareholders. Minority shareholders like jam today rather than jam tomorrow because they can sell their shares tomorrow if things go wrong. And accountants are well practised at screwing up perfectly good firms.
Boeing, America’s most iconic industrial firm, was highly successful for more than a century – as an “inefficient” engineers’ company. When the focus switched to “efficient” accountants in the early 2010s, it pumped up returns for shareholders and top managers by cutting costs, outsourcing and charging for everything.
By knowing the price of everything and the value of nothing, they hollowed out the firm so that today it is burdened with debt, a sickly share price and a depleted reputation, while unburdened as the industry leader. The only people to benefit were the managers who kept their bonuses.
Cheerleaders for the break-up of HSBC are wrong. They are applauding a bad thing. As the bank’s chief executive Noel Quinn said, “we’re the largest trade bank in the world”. It is also one of the largest global payment houses and one of the largest foreign exchange banks.
The units that do not appear to be pulling their weight on paper are actually making good businesses better. HSBC’s shares have outperformed the Hang Seng Index this year and other global banks. They are up by 85 per cent since the coronavirus low – almost twice those of JPMorgan.
And yet that reasoning is not why a break-up would be a bad thing. It is because it signifies the end of the soft globalisation that began in the 1980s and removed barriers to trade and stimulated rapid economic growth. In that world, it was easy to travel, trade or set up businesses in new pastures; peoples of different nations could meet, work, play and understand each other.
It was Ricardo’s Law of Comparative Advantage at its best – the finest example of the rulesbased order. Hong Kong had a reputation for doing great business in an orderly environment; people could go and just do it.
The familiarity with each other bred trust and give and take, eschewing the “what’s mine is mine and what’s yours is mine” attitude. Trust is why the stock market mantra was “my word is my bond”.
Russia’s invasion of a weaker nation has spurred the West to freeze Russian money. Could capital restrictions be applied to the mainland and Hong Kong? I think not, but why take the risk? The call to break up HSBC is but a tiny sign of the burgeoning global restrictions on the freedom of movement of goods, capital, service and people that will undermine any economic recovery.
My reading of the tea leaves is that a break-up of HSBC is a bad thing and should not be welcomed because it foretells a loselose situation, for everybody.
My reading of the tea leaves is that a break-up of HSBC ... should not be welcomed because it foretells a loselose situation, for everybody