HSBC Hong Kong Dependence
HSBC is very dependent on the people of Hong Kong as it established itself as a hub there in 1865 and is very vested in the social and economic well-being of the region. The company draws over 60% of their pre-tax income from Hong Kong alone, and 75% if mainland China is included. Greater oversight from China would not affect Hong Kong operations much, however, the current political climate and protests have led to China considering the use of military force to quell the dissent which would further tarnish the economic and financial outlook. The protests and threat of military deployment have already impacted the company. The dependence of HSBC on Hong Kong, information regarding oversight and the current political climate are described in the findings.
DEPENDENCE OF HONG KONG
- HSBC has a 35% share of the retail loan market due to its ownership of local Hong Kong lender Hang Seng Bank, also known by residents as The Hong Kong Bank.
- An old saying is that HSBC is one of the three most powerful people in the territory along with the governor and the head of the Jockey Club.
- HSBC has the biggest share of all banks in Hong Kong and has been the city's biggest mortgage lender in the secondary market for the past two years.
- HSBC reaches over 1.5 million users in Hong Kong through its app PayMe, a digital wallet.
- In 2018, Hong Kong was responsible for over 60% of HSBCs pre-tax income, and last year their adjusted revenue from Hong Kong increased by 14%. Their Hong Kong revenue was one-third of its total global income in 2018.
- Hong Kong maintains its own financial oversight from China, but as the two increase financial interactions, such as Chinese companies operating in Hong Kong, they must adapt their practices to match that of Hong Kong Monetary Authority (HKMA).
- The importance of this is demonstrated by the HKMA reprimand and fine of a Chinese bank, Shanghai Commercial Bank, for money laundering enforcement concerns with numerous customers.
- Hong Kong's increasing financial links to China is noted to have great opportunities but also place the banking sector at risk for some issues especially regarding China's regulations are that are less transparent and prone to political considerations than HKMAs.
- In 2017, China tightened regulations to reduce the leverage in the financial sector, specifically of assets funded by wealth management products.
- In addition, the China Banking Regulatory Commission is also curbing risks of wealth management products and trusts, borrower guarantee chains, and online lending which resulted in numerous financial institutions facing fines and even the arrests for corruption.
- HSBC noted of the regulations that they would result in rising near-term defaults and asset credit risks as some borrowers of shadow loans may not be able to rollover their loans.
- Chinese oversight in HSBC operations in China are slightly strained due to suspicion in the company's role in the US investigation and pending prosecution of Ms. Meng and Huawei for reported dealings in Iran.
- However, now stakeholders are questioning whether HSBC should continue to pursue increasing operations in mainland China given the issues between Beijing and D.C. that led to such investigation. This may lead to HSBC to continue its relationship with Hong Kong while distancing itself from China.
- As a result of the strained relationship, HSBC was recently excluded from China's interest-rate reform largely considered a snub. HSBC has also recently reaffirmed its support of the Hong Kong community and future of Hong Kong in light of the recent protests and threats from the Chinese of military engagement.
CURRENT POLITICAL CLIMATE
- HSBC, along with Bank of East Asia and other business leaders and corporations, are calling for a resolution to the standoff and the recent concerning social events that have been going on for months regarding the city's government and pro-democracy (anti-government) protesters.
- The protesters are wanting to protect the principle of "one country, two systems" that gives Hong Kong political, legal, and financial freedoms and oversights not available in mainland China.
- They are resisting more Chinese government interference in light of a recent extradition proposal.
- The current protests, now in their 12th week, are disrupting businesses and further contributing to the faltering economy of Hong Kong that is already suffering from China's slowdown and the trade war.
- They are also cited to be scaring investors in the premier financial hub. If the extradition bill in question were to have passed then Hong Kong citizens and business entities would be at risk of being grabbed by Chinese officials for political and business reasons.
- Protesters have also targeted the banking industry calling for everyone to withdraw HK $10,000 that caused some ATMs to go out of service and some banks have closed down branches during the protests.
- The full impact of this action is not yet known. The Hong Kong stocks are among the worst performing in the world since the beginning of the protests. HSBC has warned investors that the protests were hurting them and a major slowdown could have an outsized effect on their earnings.
- If China decides to use military enforcement it would further tarnish the city's reputation as a financial hub. This could spur stakeholders of HSBC and other international financial institutions and corporations to further call for less focus on Chinese initiatives and focus on more stable options.