When Liu Xiaoming, China's ambassador to the UK, gave an address at HSBC's Chinese new year party in February, he was full of praise for the bank. Speaking in the walnut-panelled United Nations Ballroom at the Four Seasons hotel in London, he lauded the company for "spreading confidence in China through its concrete actions".
Following the speech, Liu and Mark Tucker, HSBC's chairman, smiled for the cameras beneath the chandeliers, accompanied by two dancers in bright red dragon costumes. But the bonhomie in the ballroom came at a difficult juncture for relations between Beijing and HSBC, which has made expansion in mainland China a central plank of its growth strategy.
Just days before the party, Liu had summoned John Flint, the chief executive recently ousted from the bank, to the embassy to interrogate him over the company's role in the arrest and prosecution of Meng Wanzhou, the chief financial officer of Huawei.
According to two people briefed on the meeting, Flint told the ambassador that HSBC had no option but to turn over information that helped US prosecutors build a case against Meng, who is in Canada fighting extradition to the US. She denies the charges of bank and wire fraud in an indictment that also alleges that the Chinese telecoms equipment maker conducted business in Iran in contravention of US sanctions.
Beijing's irritation over HSBC's role in the diplomatic row engulfing Huawei is but one challenge facing the bank, set up 154 years ago to capture trade flows between east and west, as it tries to navigate rising tensions between China and the west.
With globalisation in retreat, some analysts and investors are asking whether HSBC's plan to generate billions of dollars of additional revenue in mainland China is compatible with its domicile in London, or its status as one of the world's largest US-dollar-clearing banks. The recent protests on the streets of Hong Kong, where HSBC makes roughly half its profit, have thrown the question into even sharper relief.
"They are straddling this faultline between the east and west and, for the past couple of decades, that has been a win-win position," says Ronit Ghose, a banks analyst at Citi. But with flows between China and the west forecast to slow because of President Donald Trump's trade war, Ghose predicts HSBC will lose its edge.
"What were once tailwinds propelling them forward," he says, "have become headwinds."
When Flint met the ambassador, he explained that when the bank handed Huawei documents to the US Department of Justice in 2017, it was operating under the supervision of an independent monitor with hundreds of staff inside the company. The monitor was appointed in 2012 after HSBC was fined US$1.9 ($2.9b) for breaching sanctions and helping Mexican drug cartels launder money. When the DoJ requested the allegedly incriminating information, the bank had to comply, said Flint.
Flint was ousted as chief executive of HSBC in August. A few days later, the lender said Helen Wong, its greater China head, was also leaving. The timing of the departures has prompted speculation that they are linked to the company's relationship with China, although the bank is adamant that is not the case: Tucker recently said Beijing had put "absolutely no pressure" on the company.
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It is not clear whether Flint managed to placate Beijing over the Huawei affair. The Global Times, a Chinese state-run English-language tabloid, last month reported that HSBC could be included on the country's forthcoming "unreliable entity" list, which is being drawn up as a tit-for-tat measure in response to US restrictions on Chinese companies including Huawei.
The newspaper said HSBC had been "unethical" in handing over the documents and quoted an unnamed source close to the matter accusing the bank of setting "a trap" for Huawei. When asked recently about the Global Times report, Tucker declined to comment but said the bank was "totally aligned with the Chinese view of growth and economic prosperity".
Tucker also pointed to the bank's "active involvement" in a series of high-profile projects in the country, including the internationalisation of the renminbi, the creation of a technology-driven economic zone in the south-east, known in Beijing as the Greater Bay Area, and the Belt and Road Initiative, China's global infrastructure drive.
In a note sent to HSBC investors after the Global Times report, Manus Costello, an analyst at Autonomous, said the bank had a good record of securing the licences it needs to expand in mainland China. "But if HSBC were in some way restricted from participating in the future opening up of Chinese financial markets, it could lower the opportunity [for it] to grow".
Even if HSBC does not end up on the list, the suggestion that it is somehow unreliable could prove problematic, says Christopher Balding, an associate professor at Fulbright University Vietnam who specialises in Chinese economics and finance.
"What is probably going to happen is that every application to open a new branch or get into a new business line is going to be slow-walked from now on," says Balding.
"It gets back to this question of how HSBC navigates these waters," he adds. "[They are] faced with a dilemma. You can be big in the US and Europe. Or you can be big in China. But you cannot . . . please both sides. They are in a very tricky spot."
The furore over Huawei comes as HSBC, like other companies in Hong Kong, wrestles with its response to the escalating protests.
The bank has tried to tread what one executive describes as an "apolitical line". When organisers scheduled a protest on a weekday in June, the company said its Hong Kong-based staff could work from home and managers said employees could attend the demonstration as long as they did not break the law, according to several people briefed on the arrangements.
One employee likened the approach to the "don't ask, don't tell" policy adopted in the US when it was still illegal for gay people to serve in the military.
But Chris Patten, the last British governor of Hong Kong between 1992 and 1997, says the bank should take a more active approach.
"I hope that HSBC, like other more thoughtful members of the business community, is trying to get the [Hong Kong] government to find some way towards reconciliation," he says.
Some employees complain that HSBC's refusal to take a stand is symptomatic of a culture that puts pleasing Beijing above all else. Executives in the bank's research department in Asia are particularly wary of causing offence, according to two people familiar with the approach. They say negative economic news on China that should be at the front of reports is often buried or given a positive gloss.
An article last year from an HSBC economist entitled "Why trade war will boost China — stronger ties with emerging countries make US tension a blessing in disguise" was dismissed as a "marketing piece for the Chinese government" by the bank's clients, one of the people says.
"They are trying to secure as many points as possible to get access to the Chinese banking market," says Balding.
"If you made a list of all the bank [research] in order of who is pro-China down to the most bearish, I would put HSBC far and away as one of the two most pro-China banks. They bury bad news and hedge their words."
HSBC says it "produces independent, unbiased market and macroeconomic research designed to help our clients make objective investment decisions".
The Hongkong and Shanghai Banking Corporation has been deeply involved in Hong Kong politics ever since it was founded there in 1865 by a group of British merchants led by Thomas Sutherland, a Scottish banker and politician. Some of the bank's staff were interned in camps in the second world war after the territory fell to Japan in 1941, and one of the bronze lions outside its Queen's Road Central headquarters still bears bullet marks from the fighting.
In the 1980s, the bank — long mistrusted by the Chinese Communist party for its colonial-era role in financing the opium trade in China — started to gain favour in Beijing by lending money to local Chinese businessmen.
It was partly thanks to loans from HSBC that the likes of Li Ka-shing, the Hong Kong tycoon, started to rival and even supplant the British hongs, the 19th-century trading houses that became big conglomerates.
As some businesses fled the territory in the fevered run-up to the signing of the joint declaration by China and Britain in 1984, HSBC made a show of support by pressing ahead with a new head office building designed by Norman Foster, which opened in 1986.
But executives were plotting a partial retreat. In 1993, the lender purchased Britain's Midland Bank and moved its headquarters to London, apparently to satisfy a demand from British regulators. Some believe the real reason the company switched its domicile was to escape the clutches of the Communist party ahead of the 1997 handover.
"HSBC was positioning itself so it could continue to have a big stake in Hong Kong without being subject entirely to the politics of Hong Kong," says Lord Patten. "It has tried to tread that line ever since, with increasing difficulty."
HSBC embarked on a buying spree designed to lessen its reliance on Hong Kong. Two of its biggest deals would prove ruinous. The 2003 takeover of Household Finance in the US left the company exposed to the subprime mortgage crisis. The lender it bought in Mexico in 2002 was the bank of choice for the country's drug cartels, resulting in a money-laundering scandal that threatened HSBC's very existence.
The fallout from the Mexico scandal led to the appointment of the independent monitor in 2012, which forced the bank's hand in relation to Huawei. Stuart Gulliver, HSBC chief executive between 2010 and 2018, spent most of his tenure cleaning up the mess.
In 2015, Gulliver announced the bank's "pivot to Asia", a strategy predicated on cementing HSBC's status as the leading international bank in China. In doing so, he in effect put the bank back on a path set in 1884, when its chairman told shareholders it should only pursue business "of immediate importance to the trade of China".
Today, the lender derives 64 per cent of its profits from Hong Kong and mainland China, and its biggest shareholder is Ping An, the Chinese insurance group, which has a 7 per cent stake.
Even before the ratcheting up of trade tensions, there were doubts among some investors and analysts about whether HSBC could expand meaningfully in mainland China.
Managers at domestic lenders such as Bank of China and ICBC scoff at the idea that a non-Chinese bank can win more business in the country. "It's like asking an American or French customer to bank with us rather than JPMorgan or BNP Paribas," says one.
When Gulliver unveiled the pivot to Asia, he identified at least US$3b of additional annual revenues that the bank could achieve in the medium term — usually three to five years. Four years on, it is hard to detect a meaningful impact from the plan, although optimists can point to some green shoots.
The bank's revenues in the mainland were US$1.6b in the first half of the year, a 9.6 per cent increase compared with the same period of 2018 (but still a fraction of overall revenues of US$29.3b). Profit growth has been more subdued, reflecting heavy investment in the region.
HSBC has arguably done more to boost its presence in China than rivals. It has more branches than any other non-domestic lender and was the first international bank to assume majority control of a mainland securities firm.
The chief executive of a major competitor in China says that HSBC has been "smart and visionary" to focus its mainland push on the Greater Bay Area, which comprises fast-growing cities in Guangdong province like Shenzhen and Guangzhou, as well as Macau and its mainstay market Hong Kong.
Yet HSBC must also walk a diplomatic tightrope. When the ambassador addressed the new year party, he ended by quoting two lines from a poem by the Tang dynasty poet Li Bai.
"A time will come to ride the wind and cleave the waves; I'll set my cloud-white sail and cross the sea which raves."
Chinese literature experts might be more familiar with an alternative translation, and even detect a coded message for HSBC as it faces a stark choice between east and west: "A great enterprise must find the right moment, hoist its sails into the clouds, and cross the mighty ocean."
- Additional reporting by Don Weinland and Henny Sender in Hong Kong.
Written by: David Crow
© Financial Times