HSBC’s past may not help its future

The writer is author of ‘The Gate to China: A new history of the People’s Republic and Hong Kong’

Some very sharp minds are currently trying to divine the future of HSBC by working out how its return on equity, dividends, regulation and capital base would change if the bank is broken up as its biggest shareholder, the Chinese insurer Ping An, has recently demanded.

These are prudent calculations. It is politics, not metrics, that decide how China acts and President Xi Jinping is set on dominating the financial sector in Hong Kong as part of his “great national rejuvenation”. However, history is not on HSBC’s side. Ever since the Hongkong and Shanghai Banking Corporation was founded in 1865, its managers have turned adversity into profit. They have ridden out war, revolution and the return of the British colony to China in 1997 with a stiff upper lip and a seemingly effortless insistence that all was well.

Sir John Bond, who led the bank in the 1990s, recalled a “lightbulb moment” on hearing the then reformist mayor of Shanghai, Zhu Rongji, speak about joining the global economy. It would have been “unthinkable” not to be in the first wave of this, Bond told me, and HSBC plunged into the China market. There, its core business of trade finance drove exports, it bought into a local bank, set up a niche retail network and — irony of ironies — took an early stake in Ping An.

The historical record, however, remained one of suspicion and misunderstanding on the Chinese side, which clashed with an instinct among the bankers to put the next deal ahead of the last grievance. Militant dictatorships do not do “moving on”.

China has never forgotten that the bank financed much of the indemnity paid by the Qing empire to Japan after its defeat in the war of 1895, some £54mn in the money of the time, fixed in sterling on the gold standard. This comforted western rentiers and set up the modern Japanese capitalist system. Even the bank’s decision after the second world war to honour Hong Kong currency in “duress notes” issued under Japanese occupation won them no credit. Local leftwing critics said that while it saved countless ordinary people, it also rewarded the rich who had bought the notes at a fraction of their face value.

Distrust has long been mutual. Documents in the archives of UK prime minister Margaret Thatcher quote HSBC’s chair, Michael Sandberg, saying in 1982 that “the idea of the Chinese administering Hong Kong is like a disaster scenario . . . the realm of fantasy”. For most of its history Hong Kong had no central bank, a tribute to its laissez-faire doctrines. In a crisis, it was often HSBC which acted as the informal lender of last resort. The bank’s intervention may have saved the local currency peg to the US dollar when it was introduced in 1983 but it was not all-powerful.

Thatcher herself considered Deng Xiaoping, China’s paramount leader, ignorant of how finance worked in Hong Kong. The declassified record of their talks quotes him saying “no one knew how many banknotes it [HSBC] had issued”. Some of his comrades thought its licence to print banknotes meant it controlled the money supply.

Such conspiracy theories had no maturity date. When Sir William Purves went in 1990 to explain why HSBC, by then a global bank, was moving its headquarters to London, he faced a hostile grilling from premier Li Peng, who turned to his staff and demanded “is this foreigner telling the truth?”. Purves, a Korean war veteran, softened his tone, he told me, “otherwise I might not be leaving Beijing that evening”. Until the handover, Chinese leaders feared that any departure of the bank from Hong Kong would strip the island of its assets. A deceptive calm settled after 1997 but this did not survive the rise of Xi, two rounds of mass protests and the imposition of a national security law, bringing Hong Kong under the vague but absolutist powers which reign over the rest of China.

There is no place in the new Hong Kong for a pre-eminent bank which is not institutionally subject to the Chinese government. As China turns inwards, it makes sense for the ruling party to want its own financiers in command of a smaller standalone lender that will be well-capitalised, regionally-focused and prepared to serve national objectives, not global shareholders.

The installation of a Communist party committee at HSBC’s Chinese investment banking subsidiary, reported by the FT, is a prelude of what is to come: a slow, patient strategy of small steps designed to make inevitable a break-up already determined on high in Beijing.

That is why Ping An has fired the first shot in the final battle over the colonial legacy of Hong Kong — a place China has always called “a problem left over from history”.