China wants to tear HSBC apart and we cannot stop it
Despite the commercial logic, at some point relations between East and West will mean that the bank’s structure will become untenable
At a time when HSBC faces growing pressure to break itself up, it is unfortunate that the bank’s Asian arm continues to steal the limelight. Its operations in the region now account for an incredible 70pc of group profits.
True, that’s only a small increase from 64pc last time around, but it won’t help the board’s attempts to resist calls, led by Beijing-controlled insurance giant Ping An, for its Asian business to be carved out of the rest of the bank and listed in Hong Kong.
Indeed, it is hard to see how HSBC can keep ducking the issue. At some point, relations between the East and the West will mean that its current structure becomes untenable – a question of “when” not “if ” it does “the splits”, in investment banker speak.
For now, the board remains stubbornly focused on the financial and commercial logic, as well as the technical complexities of such a move. That is to say, it sees little of the former and plenty of the latter.
A decision to resume its quarterly dividend is clearly meant to address Ping An’s concerns head on and see off any further dissent after the Bank of England forced Britain’s big lenders to halt payouts during the pandemic. The edict is said to have prompted Ping An’s manoeuvring, the rationale being that basing its Asia operations in Hong Kong would put them out of the reach of a meddlesome Threadneedle Street.
It’s a perfectly reasonable argument, but it would be fiendishly hard to carry out. Breaking up any financial institution is hugely difficult as RBS discovered when Brussels tried to force it to offload the Williams & Glyn branch network. After years of trying, and £1.5bn of costs, the bank eventually abandoned the plans in 2017.
Similarly, attempts by Lloyds to sell TSB proved to be a long, painstaking and expensive process, while the offshoot’s ageing IT network quickly turned into a technical nightmare for eventual buyer Banco Sabadell.
HSBC is in an entirely different league. With a £3trillion balance sheet, some analysts believe dismembering a financial institution of its scale would be practically impossible.
As well as having greater independence, Ping An argues that a stand-alone Asian business would be more profitable and be required to hold less capital because it would no longer be considered of global systemic importance. However, others say that the costs of such a vast shake-up would probably wipe out any financial benefits. By swapping its London headquarters for a Hong Kong base, a huge chunk of HSBC would fall outside of the orbit of the Bank of England, while simultaneously exposing itself to greater interference at the hands of China’s Communist Party, a trade-off that comes with massive financial and political risk.
Yet, all of that assumes the lender is in control of its own destiny. HSBC naively continues to treat Ping An as if it is just another big institutional shareholder, albeit one whose £9bn-plus stake makes it the bank’s largest investor, rather than the Chinese state seeking control over HSBC through the backdoor.
The idea that Ping An is in the same mould as other shareholder activists is absurd. It may not be state-controlled but nothing of consequence happens in China without, at the very minimum, the green light from Beijing. It is unthinkable that China isn’t agitating in the shadows as relations with the West become more tense.
A decision to revive dividend payments might placate shareholders in the short term, but it won’t improve the political backdrop.
Ties between China and America were already frayed but a planned visit by US House Speaker Nancy Pelosi to Taiwan this week threatens to cause a major diplomatic incident that could accelerate Beijing’s decision to reassert its claims to sovereignty over the island.
With Xi Jinping warning Joe Biden that the US was “playing with fire” in allowing Pelosi’s trip to East Asia to go ahead, the world’s only two true superpowers may be on a collision course.
Though all out military conflict seems unlikely, China began preparing for the possibility of sweeping Western sanctions soon after Russia invaded Ukraine.
Chinese officials have long regarded a strategic conflict with the West to be a matter of time. If not over Taiwan, then a further crackdown in Hong Kong or material support from Beijing for Russia in Ukraine, in the form of weapons or financial aid, could also force the West to act.
Indeed, so concerned is China about the possibility of recriminations that it ordered a stress-test of its economy just weeks after Vladimir Putin’s tanks thundered over the Ukrainian border, as officials scrambled to understand how resilient China is to being shut out of the Western financial system.
This is not just deeply awkward for HSBC but commercially dangerous too because the bank would find itself thrust into the centre of hostilities by virtue of its significant presence in China.
At an emergency meeting in April of Chinese regulators, and domestic and foreign banks operating in China, including HSBC, executives were asked what action could be taken to protect the nation’s overseas assets, especially
$3.2 trillion in foreign reserves.
Yet US sanctions would almost certainly prevent the bank from doing business there so it’s hard to see how HSBC continues to exist in its current form. In the end, geo-politics always trump bureaucratic concerns. Brexit was proof of that.
‘The idea Ping An is in the same mould as other activists is absurd’