HONG KONG\/SHANGHAI, June 28 (Reuters) – On a rainy day last November, China Baowu Steel Group, the world\u2019s largest steel maker, gathered its finance department for a training session on the outskirts of Shanghai. One highlight was a presentation featuring a sensitive slide: a \u201cblack list\u201d of 60 lenders that the state-owned steel giant had declared off-limits.<\/p>\n
Virtually all the lenders branded by China Baowu as too \u201chigh risk\u201d to engage with were troubled Chinese banks, large and small. But at the very end of the list, a copy of which was reviewed by Reuters, there was a single foreign lender, one of the largest banks in the world: HSBC Holdings PLC.<\/p>\n
The executive making the presentation did not mince words. China Baowu can\u2019t use these banks to obtain the short-term lending instruments known as commercial paper, the executive said, according to a person who attended the meeting. And in case anyone missed the British bank\u2019s presence on the list, the presenter said: \u201cIf you look at the bottom, of course you can see HSBC.\u201d<\/p>\n
The decision by Baowu to blackball HSBC is part of a clampdown on the global London-based bank by many of China\u2019s gargantuan state-owned enterprises – a campaign described to Reuters in interviews with HSBC bankers, and employees at state companies who have first-hand knowledge of their operations. Controlled by China\u2019s ruling Communist Party, these companies manage the nation\u2019s largest industrial projects and are responsible for $9.8 trillion of revenue annually.<\/p>\n
The reason for the pullback by state firms isn\u2019t HSBC\u2019s financial soundness, which isn\u2019t in question, but rather Chinese politics. People inside the state enterprises and HSBC say Beijing has grown disenchanted with the bank over sensitive domestic and international legal and political issues, from China\u2019s crackdown in Hong Kong to the U.S. indictment of an executive at Chinese national tech champion Huawei Technologies.<\/p>\n
Reuters identified nine state-owned enterprises that have ended or cut back on their business with HSBC as a result of the bank\u2019s falling out of favor with Beijing. Among those who\u2019ve shut out HSBC is Beijing-based China Energy Engineering Group Co., Ltd., a Fortune Global 500 construction conglomerate, which previously used the bank to provide guarantees for international projects, among other things. Early in 2020, the construction giant\u2019s senior leadership sent an e-mail internally instructing employees to avoid HSBC completely, said two executives at the company with knowledge of the matter. The reason for the move, one of the executives explained, was the Huawei incident.<\/p>\n
HSBC has for more than 150 years been a force in banking in Greater China \u2013 its initials stand for The Hongkong and Shanghai Banking Corporation Limited. The bank’s troubles were initially sparked by its role in a high-profile U.S. case against Huawei’s chief financial officer. Beijing was enraged that the bank had provided information in 2017 about Huawei to the U.S. Department of Justice, which helped bolster the ongoing criminal case. HSBC’s involvement was first made public by a Reuters report in 2019 here.<\/p>\n
Pressure on HSBC increased during the pro-democracy protests that shook Hong Kong in the second half of 2019, and when China imposed a tough national security law in the city in 2020. During the protests, Chinese social media users lashed out at the bank, alleging one of its employees had criticized the actions of the Hong Kong police in an online post \u2013 a controversy that was covered by state media.<\/p>\n
The criticism from Beijing has been withering. Citing the Huawei case and what it said was the bank\u2019s lack of support for the national security law, the People\u2019s Daily, the main mouthpiece of the ruling Communist Party, warned last June that HSBC risked losing much of its business and would pay a \u201cpainful price\u201d for having gone \u201cto the dark side.\u201d<\/p>\n
In another sign of displeasure, Chinese regulators in Shanghai last August fined the bank and three senior HSBC bankers on the mainland, and in a rare move publicized their names. In the middle of last year, Chinese regulators also stopped holding one-on-one meetings with senior HSBC bankers, according to two mainland employees at the lender with direct knowledge of the matter.<\/p>\n
As painful as the public blaming and shaming has been, much of the financial pressure on the world\u2019s seventh-biggest lender by assets has been applied via China\u2019s state-controlled enterprises. Reuters pieced together the campaign to humble HSBC, whose financial future depends on China, through interviews with more than 20 employees at state-owned companies, over 50 current and former bank employees, and several staff members at competing lenders. All spoke on condition of anonymity.<\/p>\n
In response to questions from Reuters, HSBC said it doesn\u2019t comment on clients. \u201cThat said, we do not recognise Reuters\u2019 description of our client relationships,\u201d the bank said in a statement. \u201cAs China\u2019s economy continues to recover from the pandemic, the strong client relationships we have maintained have seen us win new business and, in many cases, expand the scope of our mandates.\u201d The bank also said it engages \u201cregularly with Chinese authorities at all levels.\u201d<\/p>\n
China Baowu Steel didn\u2019t respond to questions from Reuters, including whether the ban on HSBC was still in place. The other state companies named in this story also didn\u2019t respond to questions from Reuters. Neither did China\u2019s State Council nor the State-owned Assets Supervision and Administration Commission, which oversees large state-owned enterprises.<\/p>\n
In interviews with Reuters, bankers at HSBC said the broader campaign against the bank in China curtailed efforts to expand its business: freezing it out of bond issuances, stymying its access to retail customers and locking it out of pitches for syndicated loans \u2013 lending done by groups of banks.<\/p>\n
Syndicated loans and bond underwriting \u2013 two key publicly available indicators of the bank\u2019s performance \u2013 both showed declines in 2020, according to Refinitiv data.<\/p>\n
In syndicated loans, HSBC\u2019s China market share for loans in which it was a lead lender dropped from sixth to ninth. The value of HSBC\u2019s share of syndicated loans to all Chinese companies, including state-controlled firms, plummeted by about 55% in 2020, to $3.2 billion from $7.2 billion in 2019, Refinitiv data shows. The market overall slipped just 4%. Standard Chartered PLC, a British archrival of HSBC with a similarly long presence in the region, saw an increase in total proceeds from its China syndicated loans in 2020, according to the data.<\/p>\n
While HSBC handled 174 bond underwriting deals in 2019, that number dropped to 155 issuances in 2020 \u2013 even as the total number of bond issuances by the industry jumped 29%. Overall, the value of those bonds managed by HSBC rose from $13.8 billion to $15.4 billion between 2019 and 2020. That 12% increase for the bank was below a 26% rise in total volume for the industry.<\/p>\n
HSBC\u2019s experience reveals a core challenge for multinational firms operating in China: The market is crucial to their growth prospects, but Western firms doing business here increasingly risk being mired in the growing tensions between Beijing and the West.<\/p>\n
HSBC has little choice but to tough it out. The bank\u2019s mainland and Hong Kong operations accounted for 39% of its annual $50.4 billion in revenue in 2020, while the United Kingdom, its second largest market, brought in 28%. And mainland China offers HSBC the biggest potential for growth globally: Last year, the bank was getting only about 6% of its revenues from the mainland itself, home to the world\u2019s second-largest economy.<\/p>\n
While Beijing has moved to bring the bank to heel, it doesn\u2019t appear set on completely disrupting its business. As the biggest foreign lender in China, enjoying long relationships with some of its largest firms, HSBC plays an important role in providing credit, foreign exchange options, and bond- and equity-underwriting services to Chinese businesses abroad.<\/p>\n
\u201cHSBC works with more than 1,200 Chinese holding companies and their subsidiaries, both on the mainland and in over 50 overseas markets,\u201d the bank said in its statement.<\/p>\n
\u2018LIFE AS A BANKER\u2019<\/p>\n
HSBC\u2019s pedigree in the region runs deep. It opened in Hong Kong in March of 1865. Its Shanghai operations started a month later. In 1984 it was the first foreign recipient of a banking license after mainland China re-opened to the world.<\/p>\n
Until a few years ago, HSBC was in favor with China\u2019s rulers. In 2009, it became the first foreign bank in China to underwrite yuan-denominated bonds issued by financial institutions. In 2015, the bank announced it was adding hundreds of staff to bolster the southern Pearl River Delta region as its gateway to the mainland. And in 2017, it became the first foreign bank in China to launch a majority-owned securities joint venture.<\/p>\n
Back in 2016, in an address titled \u201cLife as a banker,\u201d Peter Wong, then HSBC\u2019s Asia-Pacific chief executive, spoke of the promising outlook at an event organized by the Hong Kong University Business School.<\/p>\n
\u201cBanking has a future and it has an important future,\u201d said Wong, who was born in Hong Kong in 1951, when the city was under British rule. \u201cAs long as there\u2019s trade, as long as there\u2019s investment, as long as there is private wealth, there will be banking.\u201d<\/p>\n
In the early 1970s, Wong moved from Hong Kong to the United States, earning an MBA from the Kelley School of Business at Indiana University. He played for the college soccer team \u2013 an experience that, he said in remarks posted on YouTube in 2015, helped him \u201clearn how to lose, get better and win the game.\u201d After stints at Citibank and Standard Chartered, he joined HSBC, becoming the top Asia executive in 2010.<\/p>\n
Like HSBC, Wong adroitly straddled Western finance and Chinese politics. He has been a member of the Chinese People\u2019s Political Consultative Conference, a top political advisory body. In 2018, he was among the Hong Kong business leaders who were asked by major institutions in Beijing \u2013 such as the central bank \u2013 to submit written analyses of key initiatives such as China\u2019s global \u201cBelt and Road\u201d investment program, according to a former colleague of Wong with direct knowledge of the matter.<\/p>\n
\u201cManaging the cultural differences is very difficult,\u201d Wong said in comments posted on the Kelley School website. China, he added, \u201chas just been opened the last 40 years, and so the mentality of China versus that of the Western world is very different.\u201d<\/p>\n
The bank declined a request to interview Wong, who stepped down as Asia chief this month. He will be the non-executive chairman of HSBC Asia Pacific.<\/p>\n
The East-West balancing act has grown trickier for HSBC and its peers in Hong Kong. Since the pro-democracy protests erupted in 2019, Beijing has systematically dismantled the liberties enjoyed by residents of the former British colony. Dozens of democracy activists have been arrested. Last week, the authorities in Hong Kong effectively shut down the city\u2019s leading pro-democracy news outlet, Apple Daily, by arresting its leaders and choking off its funds.<\/p>\n
HSBC\u2019s troubles, though, began before the unrest.<\/p>\n
In December 2018, Huawei\u2019s chief financial officer, Meng Wanzhou, who is also the daughter of the company\u2019s founder, was arrested in Vancouver. She\u2019d been charged by the U.S. Department of Justice, which is still seeking her extradition from Canada, with conspiring to defraud HSBC and other banks by misrepresenting Huawei\u2019s relationship with a company operating in Iran. She denies the charges and is fighting extradition. Huawei declined to comment.<\/p>\n
As Reuters reported in February 2019, the U.S. case against the Chinese tech powerhouse was built in part on presentations given by HSBC to American law enforcement.<\/p>\n
In the following months, HSBC bankers say, the bank\u2019s enquiries to some state-owned companies about previously agreed plans were met with non-committal responses. Then, some corporate clients transferred deposits held at HSBC to competitors, said three HSBC bankers with direct knowledge. Invitations to HSBC from borrowers to pitch for new business started to dry up, according to one senior executive at the bank and another source at a competing bank who attends pitch meetings.<\/p>\n
The senior HSBC executive, as well as a second senior banker in Hong Kong, said they were later told by colleagues in mainland China that in the wake of the Huawei case, the Chinese government had asked state firms to report any business ties they had with HSBC.<\/p>\n
Even at some state companies that didn\u2019t enact a blanket ban, some executives acted on their own to avoid HSBC. At Beijing-based Sinohydro Corporation Ltd., a state engineering and construction company, a person who selects which banks handle deals for the firm ruled out doing business with HSBC. One reason, the person said, was \u201cmistrust\u201d due to the Huawei incident.<\/p>\n
A senior deals manager with authority to select banks at Shanghai Electric Group Co., Ltd., an energy equipment manufacturing company, decided against including HSBC on loan proposals. After reading about the Huawei case in official media, the deals manager grew concerned that company records could be handed over to U.S. authorities.<\/p>\n
The fallout intensified in the second half of 2019 as the protests swamped Hong Kong, where HSBC has about 30,000 employees. That summer, hundreds of thousands of people marched through the city, some chanting insults at the Chinese Communist Party. Demonstrations turned violent. HSBC bankers, including the two senior executives, told Reuters that Chinese regulators and clients began to ask where the bank and its employees stood politically.<\/p>\n
One former senior HSBC banker recounted a meeting in Beijing in September 2019 with the chief financial officer of a large state-owned insurer. \u201cThat conversation then quickly turned to the Hong Kong protests and what my opinion was about the protests,\u201d said the banker.<\/p>\n
As the demonstrations escalated, HSBC Chairman Mark Tucker gave a carefully worded interview that September to Chinese state television. \u201cWe strongly condemn violence of any sort, any kind of disruption, to communities where customers, staff and shareholders are based,\u201d he said.<\/p>\n
Tucker didn\u2019t respond to questions from Reuters.<\/p>\n
The bank was soon facing a new challenge. In the spring of 2020, the National People\u2019s Congress, China\u2019s largely rubber-stamp parliament, prepared to pass a sweeping security law for Hong Kong. Legal experts said it would give Beijing cover to gut Hong Kong\u2019s democracy movement, civil liberties and rule of law. Influential former Hong Kong leader Leung Chun-ying released a blistering attack on the bank on Facebook.<\/p>\n
\u201cChina and Hong Kong don\u2019t owe HSBC anything,\u201d Leung warned in May last year, shortly before the law\u2019s implementation. \u201cThe China business at HSBC can be replaced overnight by banks from China and other countries.\u201d<\/p>\n
Foreign companies like HSBC, he added, needed to be reminded which side their \u201cbread is buttered\u201d on.<\/p>\n
Leung, who is a vice chairman of the Chinese People\u2019s Political Consultative Conference, called out HSBC for not supporting the national security law. He declined to be interviewed for this story.<\/p>\n
A few days later, on June 3, HSBC posted a picture of then Asia chief Wong signing a petition in support of the law on the bank\u2019s WeChat account. On the same day, China\u2019s official Xinhua news agency published a story in which Wong expressed his support for the law. Standard Chartered also publicly backed the law.<\/p>\n
Standard Chartered declined to comment for this story.<\/p>\n
Wong\u2019s move drew condemnation in London and Washington. Then-U.S. Secretary of State Mike Pompeo chided the bank for its \u201ccorporate kowtow.\u201d British Foreign Secretary Dominic Raab said \u201cthe people of Hong Kong should not be sacrificed on the altar of bankers\u2019 bonuses.\u201d<\/p>\n
The barrage from Beijing didn\u2019t let up. In June, the People\u2019s Daily, the official Communist Party mouthpiece, wrote that \u201cHSBC will eventually lose all its customers.\u201d The next month, a state-backed website accused HSBC of handing \u201cthe knife\u201d to the U.S. government in the Huawei case.<\/p>\n
When asked by Reuters at the time about these attacks on the bank, one senior executive involved in HSBC\u2019s global strategy dismissed the pressure campaign. \u201cThese are not voices of China,\u201d he said. \u201cWe\u2019re not going to get direction from newspapers.\u201d<\/p>\n
However, wealth managers at HSBC started examining their clients in Hong Kong for ties to the city\u2019s pro-democracy movement, Reuters reported in July last year. Like other bankers in the city, they were looking to avoid any trouble with the sweeping new national security law, under which many forms of political activity can be deemed subversive.<\/p>\n
Some of China\u2019s largest private companies, meanwhile, began limiting business with HSBC.<\/p>\n
In July, online giant Tencent blocked HSBC from placing advertisements on any of its platforms, according to three people at HSBC and one former employee with knowledge of the matter. That deprived HSBC of one of the lender\u2019s primary channels to reach retail customers in China. Tencent has since lifted this restriction on HSBC. Tencent declined to comment.<\/p>\n
In August, China\u2019s regulators took aim at the bank. Three senior bankers with HSBC\u2019s mainland operations, and the bank itself, were slapped with a combined penalty of 530,000 yuan (more than $80,000) by China\u2019s central bank. The individuals\u2019 full names and titles were posted on the central bank website in Shanghai, a rare public humiliation. The central bank said each penalty was for making a \u201ccredit inquiry without the authorization of the customer.\u201d<\/p>\n
One senior HSBC executive, who has direct knowledge of the matter, said the case arose when a customer in Shanghai complained his personal data was accessed after he closed his account. The Shanghai branch of the regulator told HSBC at the time that it was a minor clerical error and didn\u2019t warrant further action, the executive said.<\/p>\n
But the local regulators later told HSBC executives that they\u2019d been overruled by their bosses in Beijing. Inspectors began visiting the Shanghai branch and asking HSBC for one document after the next. Then, senior HSBC executives linked to the retail and wealth management business were summoned for long interviews.<\/p>\n
\u201cWe disagree with Reuters\u2019 representation of this matter,\u201d the bank said. \u201cInformation security is a top priority at HSBC and we have taken immediate action to address this isolated incident.\u201d No customer data was compromised, the bank added.<\/p>\n
The People\u2019s Bank of China and the China Banking and Insurance Regulatory Commission didn\u2019t respond to questions about the incident.<\/p>\n
Two months later came another painful slight. In October, China\u2019s Ministry of Finance issued $6 billion of sovereign bonds. Since 2017, when China resumed sovereign dollar bond issuances after a 13-year hiatus, HSBC always got a piece of the business. Almost all the usual names in Chinese and international banking were part of the deal \u2013 but not HSBC.<\/p>\n
The Ministry of Finance didn\u2019t respond to a request for comment.<\/p>\n
There have been recent rays of hope for HSBC. It was included in the Chinese government\u2019s euro-denominated bond issuance in November. In January, HSBC was the first foreign lender to launch a fintech subsidiary on the mainland, allowing it to distribute financial products outside of physical branches.<\/p>\n
In its statement, HSBC said despite the pandemic and low interest rates, its business in mainland China has \u201cshown real resilience.\u201d The bank pointed to an 8% growth in total assets for HSBC China last year.<\/p>\n
Still, HSBC bankers say they feel like they remain in Beijing\u2019s bad books.<\/p>\n
For example, the bank is waiting to receive a custody license, a potentially lucrative permit which would allow it to hold securities for safekeeping on behalf of mutual funds and private funds domiciled in China. In 2018, HSBC was one of the first lenders to apply for such a license, according to one current and two former bank employees. Several major foreign rivals have all since received custody licenses.<\/p>\n
It feels, said one senior HSBC banker, \u201clike we are getting tested for our professional loyalty every day.\u201d<\/p>\n