HSBC should return home ASAP
In retrospect, HSBC’s decision in 1993 to abandon Hong Kong for London’s Canary Wharf was one of modern history’s worst business moves. It seemed perfectly wise at the time, just four years ahead of Hong Kong’s return to China and amid the early stages of Europe’s common currency boom. When the 1997 Asia financial crash arrived, it probably left Chairman William Purves and his colleagues feeling pretty happy about their decision.
Just a dozen years later, being based in Europe seemed much less attractive. First there was Wall Street’s subprime debacle. That was followed, in short order, by the euro crisis, the Libor controversy, the chipping away of Swiss banking secrecy and a U.K. tax clampdown that cost HSBC $1.1 billion in 2014. It should be no surprise that current HSBC Chairman Douglas Flint now thinks returning to Hong Kong “would be potentially interesting.” Indeed, the only real question is, what is Flint waiting for?
HSBC finds itself in an enviable negotiating position. Hong Kong leader Leung Chun-ying’s superiors in Beijing would relish having one of the world’s premier financial institutions choose greater China over the West. President Xi Jinping would herald the move as a vote of confidence in China’s economic stability and his party’s broader legitimacy. It also would send a message to Hong Kong’s pro-democracy street protesters that their public agitation can’t derail big business.
HSBC would probably be rewarded with as many deals and partnerships in the Chinese market as its bankers can handle. That would cheer the bank’s long-suffering shareholders. But there’s more at stake in Flint’s decision than share prices and balance sheets. A move by HSBC could accelerate the pace of Chinese economic reforms.
The Communist Party has tended to keep a relatively tight grip on the flow of money in China, but an entity HSBC’s size would expect to be granted more freedom in its business transactions. The bank’s presence in Hong Kong would give Xi strong incentive to loosen capital controls and make the country’s banking system more transparent.
That would probably trigger a number of beneficial effects for the Chinese economy. Consider what happened after other Asian governments accelerated the internationalization of their banking and trade systems after the region’s financial crisis in the 1990s. Once countries lowered their financial defenses, businesses had no choice but to adopt global practices and stomach greater competition. Similar shifts would likely occur in China after any HSBC move. State-owned banks that hoped to operate in HSBC’s orbit, for example, would have to improve their corporate oversight and the quality of their assets.
It wouldn’t be a seamless relocation, but the Hong Kong Monetary Authority, created just after HSBC departed for the U.K., is ready to oversee the transition. In just two decades, the HKMA has built a formidable track record. It has protected a dollar peg from numerous speculative assaults and steered the city’s economy through myriad financial and health panics. It has also pursed an aggressive loan-to-value policy that’s kept default rates low and worked with international institutions in ways that have enhanced Hong Kong’s standing as a financial center.
True, the HKMA has never been responsible for a financial institution that’s too-big-to-fail. (Make that too big to save: With a balance sheet of $2.6 trillion, HSBC is nine times the size of Hong Kong’s entire economy.) HKMA head Norman Chan will have to expand operations and hire loads of new regulators and analysts. But the HKMA believes it’s up to the challenge and says it “takes a positive attitude should HSBC consider relocating.”
Reformers in Beijing should, too. HSBC returning to its roots would be a clear win-win, for the short term and long term. The bank may have erred in uprooting itself some 20 years ago, but it’s time to let bygones be bygones.
*The author is a Bloomberg View columnist based in Tokyo and writes on economics, markets and politics throughout the Asia-Pacific region.
by William Pesek