While TikTok has taken Huawei‘s place as the main corporate focal point for escalating tensions between China and the United States, the difficulties of navigating this conflict are confronting companies across a much broader front. Among the most hard pressed and deeply entangled is HSBC, now headquartered in Britain but increasingly leaning on its business in Hong Kong and mainland China. Rochelle Toplensky summed up HSBC’s predicament at The Wall Street Journal on Monday:
HSBC was established to connect the West and the East. It has been a sound strategy for most of the past 155 years, but currently has the bank caught in a geopolitical web over which it has little control.
On Monday, the bank announced disappointing second-quarter results as a result of Covid-19-related provisions. Yet the fallout from the health crisis seems manageable compared with the political uncertainties HSBC faces in each of its main markets: China’s creeping control over Hong Kong, escalating tensions between Washington and Beijing, and the economic impact of Britain’s exit from the European Union.
[…] The bank has no choice but to focus on its Asian operation. It generates most of its profits, has the juiciest growth prospects and is very cost-efficient. In the first half, HSBC’s ratio of cost to income was 44% in Asia, compared to 101% in Europe and 73% in North America.
[…] The bank has traditionally been extremely discrete in its political dealings, but was recently forced to side publicly with China when the tensions over Hong Kong flared up. As Beijing becomes more assertive, and Washington finds unity in a hawkish stance on China, this seems likely to happen more. [Source]
The bank’s Interim Report, released alongside the results on Monday, repeatedly highlighted geopolitical headwinds:
In the first half of 2020, US-China tensions continued to escalate including in relation to Hong Kong. In June 2020, the National People’s Congress of China enacted the Hong Kong national security law. In response, the US took steps to terminate the preferential treatment afforded Hong Kong under the 1992 Hong Kong Policy Act. Additionally, the US President signed into law the Hong Kong Autonomy Act, and issued an Executive Order, providing authority to impose primary sanctions against entities and individuals determined to have undermined Hong Kong’s autonomy. The Hong Kong Autonomy Act also provides authority to impose secondary sanctions against non-US financial institutions determined to have conducted a significant transaction for any individual or entity subject to primary sanctions under the Act. There are other steps that have been taken by the US as tensions with China rise.
Domestic social unrest in Hong Kong remains a risk, with investor and business sentiment in some sectors remaining dampened. There are concerns that ongoing tensions could result in an increasingly fragmented trade and regulatory environment, with the retail and leisure sectors being particularly affected by the lack of tourists. However, the financial services sector in Hong Kong has remained strong and has benefited from stable liquidity conditions.
The plans to roll out 5G telecommunications technology in several countries and its importance to future standard setting and economic growth are likely to lead to heightened corporate and national competition over ownership of the relevant technologies.
[…] The Covid-19 outbreak has heightened existing US-China tensions. US executive branch and congressional action has put pressure on the initial ‘phase one’ provisions under the trade agreement signed in January. Frictions span an increasing range of issues, including trade, technology and human rights. The Covid-19 outbreak has accelerated US efforts to reduce reliance on China in strategic industries such as sensitive technology, pharmaceuticals and precursor chemicals.
Hong Kong also emerged as an additional source of tension in US- China relations, with potential ramifications for the Group, including the impact of sanctions, as well as regulatory, reputational and market risks for the Group. While Hong Kong has experienced lower levels of social unrest in 2020, disagreements over the interpretation of the ‘one country, two systems’ model may continue to drive protest activity in the lead up to Hong Kong’s legislative council elections. For further details see ‘Risks to our operations in Asia-Pacific’.
[…] As geopolitical tensions rise, the compliance by multinational corporations with their legal or regulatory obligations in one jurisdiction may be seen as supporting the law or policy objectives of that jurisdiction over another jurisdiction, creating additional risks for the Group. Geopolitical tensions will continue to present challenges for HSBC. [Source]
American technology companies like Facebook, Twitter, Google and LinkedIn have pledged to defy data requests in Hong Kong under China’s new security law. Manufacturers have disentangled their supply chains to cut out Chinese companies that the American government has banned over human rights violations or national security concerns. Big banks are scouring client lists to ensure compliance after the United States pledged to impose sanctions on individuals considered to be eroding Hong Kong’s autonomy.
Many multinationals also worry that complying with American law may mean breaking the new Chinese rules in Hong Kong — or cost them access to the second largest economy in the world. A recent survey by the American Chamber of Commerce found that nearly half of the firms it surveyed are “extremely concerned” about recent developments with the national security law.
“There are multiple tailwinds pushing the global business world toward this highly geopolitically sensitive environment where the landscape has shifted fundamentally and you can no longer be agnostic,” said Jude Blanchette, a China scholar at the Center for Strategic and International Studies in Washington. “It is the logical extension of this new paradigm where economic security is now considered national security.” [Source]
In early June, HSBC chose its side of the fence regarding the National Security Law, with Asia Pacific chief executive Peter Wong publicly signing a petition in support of it. Photos of the occasion were posted on a corporate WeChat account, with the assurance that "we respect and support laws and regulations that will enable Hong Kong to recover and rebuild the economy and, at the same time, maintain the principle of ‘one country, two systems.’" Jeremy Daum offered a somewhat different perspective on the NSL’s "maintenance" of "one country, two systems" in an analysis at China Law Translate on Saturday:
The new Hong Kong national security law’s central aim is to make it easier for China’s central government to act more directly in Hong Kong to discover and prevent and control perceived threats to national security. This is accomplished both through the central government establishing its own institutions in Hong Kong, and also by its taking greater control of Hong Kong authorities.
[…] It isn’t yet clear how frequently this law will be applied beyond addressing the ongoing protests, but the chilling effect may have as stark an impact as actual enforcement. The authorities and the text itself offer assurances that the law will be used sparingly and civil rights will be respected, but it also calls for closer scrutiny of schools, social organizations, and the internet. The law’s message is clear that the central government authorities are in Hong Kong with sweeping authority, and are watching. [Source]
On Monday, CEO Noel Quinn faced questions about the bank’s support for the new law, The Telegraph’s Michael O’Dwyer reported:
Mr Quinn said the political battle would “inevitably create challenging situations for an organisation with HSBC’s footprint", but insisted it is still possible to run a global bank despite fears that US-China tensions will fragment the international financial system.
He denied that HSBC had ever checked customers’ links to pro-democracy groups following reports that clients were being screened for ties to groups opposing Chinese authoritarian rule in Hong Kong.
Mr Quinn said: “We do not do any particular checks with respect to pro-democracy links.
“We want to continue to support the people and businesses of Hong Kong, for there to be a stable business environment and for the economy to flourish consistent with the principle of one country, two systems.”
Asked how he would respond if the bank’s own staff were arrested for speaking out in favour of democracy, Mr Quinn said: "It would be inappropriate of me to speculate on that, as it would be in any other country in which we operate. I think we’d have to look at the circumstances on a case by case basis." [Source]
On June 8, The Wall Street Journal’s Simon Clark, Jing Yang, and Margot Patrick explained how unusual HSBC’s public stance in favor of the law was, and what had led up to this departure from what a historian of the bank described as "a very deeply entrenched code of behavior":
Mr. Wong’s signing was the culmination of more than a year of internal debate over an issue that, given HSBC’s history and reliance on Asia, is a particularly thorny one for the bank: How to address China’s growing influence in Hong Kong and the trade dispute with the U.S. It also showed the bank’s commitment to President Xi Jinping’s China as it retreats in Europe and the U.S.
[…] Fearing the bank might have to pick a side, HSBC executives considered how its reputation with customers and employees would fare if it spoke out in favor of China, and crunched numbers to simulate outcomes for its financial future, according to people familiar with the planning exercise.
[…] When journalists asked in August about the bank’s standing with Beijing, Chairman Mark Tucker said the bank is “totally aligned with the Chinese view of growth and economic prosperity.”
But pro-Beijing critics called for more than support of China’s economic policies. In a May 29 Facebook post, former Hong Kong Chief Executive Leung Chun-ying called on HSBC directly to express support for the new law or risk losing business.
“HSBC’s China business can be replaced by banks from China or other countries overnight,” he said. [Source]
At The Guardian on Monday, Kalyeena Makortoff described Western responses to HSBC’s decision in the context of its broader dilemma:
Labour frontbenchers chastised HSBC, saying that the laws it had openly backed violated joint declaration treaty commitments between the UK and China, and limited freedoms for Hong Kong citizens. They also warned that the bank risked being the subject of boycotts similar to those aimed in the 1980s at companies that continued to do business in South Africa during the apartheid era.
The foreign secretary, Dominic Raab, later told parliament that the rights and freedoms of Hong Kong citizens “should not be sacrificed on the altar of bankers’ bonuses”.
In Washington, the House of Representatives passed legislation targeting key Chinese officials, putting banks who do business with Chinese authorities at risk of sanctions. This came weeks after the US secretary of state, Mike Pompeo, called HSBC’s endorsement of the security law a “corporate kowtow”.
Pompeo claimed HSBC’s efforts had been in vain and earned it no respect in Beijing, after China reportedly threatened to punish the bank if the UK blocked technology firm Huawei from involvement in building its 5G network. He warned that HSBC would continue to be used as political leverage by the Chinese Communist party.
[…] HSBC is now walking a precarious line between offending China – which is its most lucrative market – and losing the support of the UK and other western states. [Source]
Aside from the threat of punishment over the UK decision on Huawei, HSBC was also named in state media as a possible target of Chinese retaliation after the U.S. placed restrictions on several Chinese tech companies by adding them to a Commerce Department "entity list."
As Makortoff notes, HSBC’s involvement with Huawei’s own situation goes much deeper than the risk of becoming collateral damage. The U.S. fraud charges which the company’s CFO and founder’s daughter Meng Wanzhou faces if successfully extradited from Canada revolve around assurances given to HSBC about the termination of Huawei’s relationship with Iranian equipment supplier Skycom. In another WeChat post late last month, the bank defended itself against accusations of "laying traps" for Huawei to appease U.S. authorities. From Gabriel Crossley at Reuters:
The HSBC statement comes a day after China’s official People’s Daily newspaper published a report accusing HSBC of being an accomplice of the United States and lying about Huawei, resulting in the arrest of its CFO Meng Wanzhou.
[…] “The context of the development of the Huawei incident clearly shows that the U.S. investigation of Huawei was not triggered by HSBC,” the bank said in its WeChat post, without directly referring to the People’s Daily report.
“HSBC has no malice against Huawei, nor has it ‘framed’ Huawei,” it said.
“In response to information requests from the U.S. Department of Justice, HSBC only provided factual information. HSBC has not ‘fabricated’ evidence or ‘concealed’ facts, nor will it distort facts or harm any customers for our own benefit.” [Source]
The People’s Daily Online article accuses HSBC of feigning ignorance of Huawei’s Iranian ties and working to ensnare Meng personally in order to assist the U.S.’ "frantic global suppression of Huawei" and avoid prosecution for money laundering and sanctions violation charges under a 2012 deferred prosecution agreement with the U.S. Department of Justice. "Public evidence makes clear that the so-called ‘Meng Wanzhou’ case is political, entirely cooked up by the United States," it argues. "HSBC participated in framing her, maliciously setting traps, putting together materials, fabricating evidence, and acting extremely dishonorably. Meng Wanzhou is innocent! […] Which of its customers will HSBC sell out next?" Although citing recently released evidence, these accusations echo earlier claims like those made by Huawei’s lawyers to a New York court in February.
The Wall Street Journal account of the bank’s deliberations over the National Security Law noted that "when HSBC’s involvement in the case [originally] became public, bank executives made private apologies to Chinese officials, including one to the Chinese ambassador in London by then-Chief Executive John Flint, according to people familiar with the events." Late last month, Bloomberg’s Harry Wilson, Ambereen Choudhury, and Donal Griffin wrote that "having worked for decades in the former British colony, [HSBC chairman Mark] Tucker is finely attuned to the background music, leading a renewed push into China." They noted some of the bank’s other efforts to smooth its path:
Last year, the bank launched a public-relations campaign targeted at the elite in Beijing. The plan envisaged everything from social media ads localized within 500 meters of government buildings to a relationship-building tour among the editors of mainland newspapers by a senior executive. More recently, along with endorsing China’s crackdown in Hong Kong, the bank has begun holding daily meetings to monitor how it’s portrayed in the local media, according to one person familiar with the matter. [Source]
In the U.K., HSBC has faced criticism over reported efforts to intercede on Huawei’s behalf with the British government. From Christopher Williams, Lucy Burton, and Edward Malnick at The Telegraph on June 6:
Mark Tucker, the bank’s chairman, made the private representations to Boris Johnson’s advisers, according to industry and political sources. HSBC is understood to have claimed that it could face reprisals in China if Huawei was blocked from selling equipment to the next generation of networks being built by Britain’s mobile operators.
One source said Mr Tucker had been “on manoeuvres” in Westminster in relation to Huawei in recent weeks.
[…] Tom Tugendhat, the Conservative chairman of the foreign affairs select committee, warned Mr Tucker this weekend that with its support for Beijing tightening its control of Hong Kong, HSBC was “burning bridges with friends and hurting those who have helped create and defend the global, free markets on which it is built”. He added: “Quite clearly, Beijing is now putting pressure on other businesses in relation to Huawei, which tells you the importance they attach to this.
“It is all about who writes the code of international trade for the next generation, not just a telephone network, and that’s why they’re pushing it so hard.” [Source]