HSBC keeps China at arm’s length

The bank’s decision to keep its headquarters in London signals it will push ahead with its pivot to Asia but limit exposure to China’s markets and regulators.

HSBC’s 10-month long identity crisis is finally over; not only has it decided to remain a London-headquartered bank, it has also pledged to cease periodically navel-gazing about the matter.

The reaction within HSBC and among its peers and clients was agreement and relief, as the alternative may have crippled decision-making with red tape. Investors seemed pleased too, with HSBC's share price in Hong Kong closing up 4.47% on Monday at HK$50.25 and adding 1% in morning London trade.

“London has an internationally respected regulatory framework and legal system, and immense experience in handling complex international affairs,” HSBC said in a statement on Sunday unveiling its decision.

In contrast, the Hong Kong Monetary Authority is woefully undermanned to monitor Europe’s biggest bank by market capitalisation and ill-equipped to understand its global business, said senior bankers in Hong Kong who regularly interact with the Territory’s banking regulator.

If HSBC had relocated its domicile to Hong Kong then decisions to make a large loan to, say, Africa would have had to have been explained to the HKMA, thereby slowing down the process, said the bankers who spoke to FinanceAsia on condition of anonymity given the sensitivity of relations with regulators.

One senior banker at an international institution with a presence in Hong Kong said it took much of his time explaining to HKMA officials why the bank was moving capital around and why they were using different vehicles to do so. He noted that the HKMA’s primary focus and the bulk of its work is regulating local, smaller Hong Kong banks.

HKMA’s chief executive officer Norman Chan said in a statement: "The HKMA appreciates that for a large international bank such as HSBC, relocation of domicile is a very major and complicated undertaking.”

Another senior banker in Hong Kong who counts HSBC among his major clients said he was relieved by the news it will remain lead-regulated by Britain, even though he had expected the status quo to prevail. He said the decision means collaboration on projects with HSBC are now less likely to become bogged down in bureaucracy.

Close but not too close

HSBC is also taking a long-term view on the direction of regulatory oversight in Hong Kong. It said in its statement that it would not continue to review the location of the group’s headquarters every three years as it has done in the past.

As China opens up its financial markets it is becoming more interconnected with Hong Kong. In the past year the HKMA has been coordinating with mainland China’s banking regulator, the China Banking Regulatory Commission, on projects such as providing oversight for clearing systems for the Shanghai-Hong Kong Stock Connect and the accumulation of renminbi deposits in Hong Kong.

To be sure, the bankers FinanceAsia spoke to said that they had not seen examples to date of the CBRC unduly influencing the HKMA but they thought it only a matter of time before the HKMA becomes a unit of its mainland peer.

“It would be very dangerous to be beholden to Beijing’s regulators who don’t understand global markets and won’t for a long time,” said the first Hong Kong-based banker.

HSBC generated about 60% of its pre-tax profits in Asia in the nine months to September 30. Hong Kong is its single biggest market globally. 

One senior banker within HSBC noted that mainland regulators’ handling of financial liberalisation over the past 12 months has dented confidence in their abilities.

“What has been happening in China’s markets over recent months has had to have made Hong Kong a less attractive destination,” he said. 

HSBC sought in its statement to balance lauding the benefits of London as the ideal location to support international trade while defending the pivot to Asia.

“Having our headquarters in the UK and our significant business in Asia Pacific delivers the best of both worlds to our stakeholders,” said HSBC group chief executive Stuart Gulliver in the statement.

HSBC plans to add 4,000 jobs in China’s Pearl River Delta region over the next three to four years.

A second senior banker at HSBC in Hong Kong said that the push in China will not be impacted by the decision on where to domicile. 

"We are not expecting any negative reaction from regulators ... will there be any impact on our growth in the Pearl River Delta and Asean, absolutely not," he said over the phone. 

HSBC said in the announcement that the review process, which kicked off in April, not only considered regulation but also the scale of HSBC’s presence by jurisdiction, economic importance, future growth, and financial impact.

The main financial benefit from a shift to Hong Kong would have been a reduction in the size of the UK bank levy. However, it was announced in the 2015 UK Summer Budget that the bank levy would be charged only on a bank's UK liabilities from 2021 onwards, so HSBC should be able to capture much of this benefit without the need to change headquarters.

“Hence we believe the announcement is in line with market expectations,” Martin Leitgeb, a London-based bank analyst at Goldman Sachs, said.

¬ Haymarket Media Limited. All rights reserved.
Share our publication on social media
Share our publication on social media