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TOKYO – Of all the things HSBC Chief Executive Officer Noel Quinn thought 2020 might hold for his bank, becoming a key proxy in the US-China trade war probably wasn’t among them.
Covid-19 was disruptive enough for Europe’s biggest bank. As Quinn warned in August, profit for the first half of the year could be half what investors had hoped and that loan losses could approach US$13 billion this year.
He also signaled efforts to accelerate a pivot to Asia as European growth disappoints. But that won’t happen if US President Donald Trump has anything to say about HSBC’s 2021.
Suddenly, the London-based bank’s historically lucrative status as a bridge between East and West is in the crosshairs of a US leader desperate for re-election.
With November 3 fast approaching and a botched coronavirus response denting his poll numbers, Trump is desperate to look resolute in his dealings with China. And that appears to include blowing up HSBC’s year.
Last month, US Secretary of State Mike Pompeo stepped up Washington’s criticism of HSBC for aiding Beijing’s “political repression” in Hong Kong.
Pompeo said HSBC was “maintaining accounts for individuals who have been sanctioned for denying freedom for Hong Kongers, while shutting accounts for those seeking freedom.”
Pompeo is an odd messenger to complain about opacity, the rule of law and media freedom considering the White House he serves and how late his diplomatic corps was to react to the now suppressed Hong Kong protest movement.
Caught in Trump’s trade war crossfire, HSBC and peers are now “reviewing potential escalation scenarios,” says analyst Monsur Hussain of Fitch Ratings.
“US sanctions on Chinese or Hong Kong-based individuals, some of which are already underway, could lead to reputational risk for banks,” says Hussain.
“Extension of sanctions to corporates with strong links to the Chinese state, or Chinese state-owned enterprises, could increase credit risk in banks’ loan portfolios or limit their growth opportunities.”
China is sending its own shots across HSBC’s bow. The latest threat arose from a September 19 article in the Communist Party’s Global Times newspaper, where it suggested that HSBC could be named an “unreliable entity” because of its participation in the US investigation into Huawei Technologies.
On September 29, the same tabloid reported, citing unnamed legal experts, that HSBC may have “violated Chinese laws for its supposed role in the legal battle in Canada involving Huawei Chief Financial Officer Meng Wanzhou and her possible extradition to the US on fraud charges.
The article cited Huawei lawyers who claimed HSBC was an “accomplice” to “false” US charges against Meng, namely through information provided to US authorities about a presentation she apparently made to HSBC about Huawei’s business with Iran.
HSBC also was named among banks in a report by the International Consortium of Investigative Journalists raising concerns about possible money laundering. It highlighted lenders that “kept profiting from powerful and dangerous players” in the past two decades, even after the US imposed penalties on the institutions.
All this is exacting a price. Earlier this month, HSBC’s stock fell to its lowest level since 1995. That prompted Ping An Insurance, its biggest shareholder, to up its stake – a vital “vote of confidence in HSBC’s long-term fundamentals,” says researcher Ivan Li of Convoy Global Holdings.
HSBC, adds analyst Neil Wilson of Markets.com, is now a “risk appetite resurfaces” story.
Even so, being a trade war proxy presents HSBC with myriad challenges. At the behest of UK regulators, HSBC has already suspended the hefty dividends that drew many investors its way. The bank has tried to placate punters with pledges to review the payout in due time.
The point here isn’t to defend HSBC. It has vast resources to defend itself. Who, though, might have the motive to squeeze HSBC in particular? If you’re thinking the Trump administration, you’re not alone.
Trump, it’s by now well known, rules by anecdote, not data. For a blustery, transactional leader with a notoriously short attention span, hitting Huawei, ByteDance’s TikTok, Tencent’s WeChat and, yes, HSBC, has a certain primal satisfaction.
How, though, do these assaults alter the mechanics of the US-China trade relationship? How do they increase US competitiveness? How do they win America friends or global esteem?
This latter point is coming into focus as November 3 approaches. Earlier this month, the World Trade Organization ruled that Trump’s team broke international rules by slapping tariffs on hundreds of billions of dollars worth of Chinese goods in 2018.
The WTO recommended that the US bring practices “into conformity with its obligations.”
That’s not Trump’s brand, of course. In fact, the lack of conformity is the policy. Examples abound: Trump breaking with the World Health Organization; violating the multilateral Iran nuclear deal; pulling out of the Paris climate change agreement; withdrawing from the United Nations Human Rights Council and UNESCO; forsaking arms-control treaties.
He left key allies like Japan picking up the pieces after reneging on the Trans-Pacific Partnership trade deal initiated by the predecessor Barack Obama administration, specifically to challenge China’s rising economic dominance in the region.
Exiting TPP made Chinese President Xi Jinping’s 2017 and it’s given China a new leg up on Trump in terms of influence in Asia. Champagne corks popped across Beijing as Trump neutered a 12-nation effort to counter China’s rise and check its own mercantilist tendencies.
Sure, the 11 remaining TPP members tried to soldier on. But without the involvement of the world’s biggest economy, the odds of China bowing to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership are as long as the grouping’s new name.
Since then, World Bank economist Caroline Freund has warned that a “misguided” Trump obsession with bilateral trade deficits over the structure of the trading system would backfire.
According to Trump’s zero-sum worldview, any trade surplus means the holder is a thief. But America’s deficits are symptoms of its economic challenges, not underlying causes. Freund argues they should “be considered in the context of macroeconomic, not trade policy.”
This might just be the one macro point that Kyle Bass of Hayman Capital Management has really nailed in recent years. Ever since Trump began touting a “phase one” deal with Xi in early 2019, the US hedge fund manager of Hayman Capital Management warned that to “squander this opportunity would be a catastrophe not only for Trump’s administration but for the West.”
Bass is perhaps best known for shorting Japanese and Chinese government bonds and betting against Hong Kong’s peg to the US dollar. He’s also been an outspoken critic of the short-termism bedeviling Trump’s China tariffs, a strategy from the 1980s doomed to fail in the more globalized present.
In one February 2019 Bloomberg op-ed with Daniel Babich, Bass said the game plan should be to dismantle “an industrial policy that grants unique advantages, namely widespread government subsidies, protected domestic markets and regulatory preferences, to Chinese government-affiliated national champions.”
The objective, Bass argues, is to “end China’s long-standing policy of bulk economic espionage and theft, which annually costs America’s economy at least $300 billion, according to US government estimates.”
That means prodding Xi to scrap the joint-venture requirement, a central mechanism China Inc. has used to appropriate foreign technology.
Trump has done exactly the opposite. None of the targeted trolling of TikTok, Huawei or HSBC morphs China into a stakeholder in global affairs, rather than a mere shareholder. What’s more, as China circles the wagons to fend off Trump’s broadsides, Xi’s party has even greater incentive to protect its state-owned national champions Trump hopes to crush.
The “Art of the Deal” president has blundered into giving Xi even more reasons to slow market-opening steps.
Sure, Trump can argue he’s being tough on China to win applause on the campaign trail. But Xi has so far conceded little. Now that the WTO has sided with Beijing over Washington, Xi even has justification to rethink purchases of US soybeans and other agricultural goods.
The more Trump targets proxies like HSBC, the less time he’s spending building economic muscle to keep pace with China’s rapid growth. Yale University’s influential economist Stephen Roach has concluded simply that Trump has “utterly failed in managing this important relationship.”
Indeed, hitting individual companies or China’s 5G industry won’t increase American competitiveness, raise productivity or catalyze innovation. Nor will these maneuvers improve America’s crumbling infrastructure or strengthen its education system.
Nothing about pulling the rug out from under a few Chinese companies makes corporate America more inclined to hire or fatten paychecks, and most certainly not great again.
It won’t make the US healthcare system more efficient and equitable or rescue Trump’s Covid-19 response from worst-in-the-developed world infamy.
The more Trump obsesses over proxies like HSBC, the more he’s missing the bigger picture of a China outmaneuvering his White House at every turn. And that’s a fact he can bank on.