hms iron duke

hms iron duke

Friday, 12 June 2015

HSBC: Banking on Asia’s Stability

Alphen, Netherlands. 12 June. Many years ago when I first arrived in Hong Kong I opened an account at the local branch of my local bank, the Hongkong and Shanghai Banking Corporation.  It was clearly an important moment in the bank’s history as since then HSBC has grown into one of the world’s largest banks.  When Hong Kong was returned to China in 1997 HSBC moved its headquarters to London.  Threatening to move the bank back to Hong Kong HSBC Chief Executive Stuart Gulliver this week said, “We recognise the world has changed and we need to change with it”.  Is this sound business strategy or yet another big bank gamble?

All things being equal Gulliver’s threat makes business sense. Excluding Japan Asia grew by 6% in 2014.  China’s economy grew by 8%, although down from the stunning 14% in 2007. These growth figures compared with a lamentable 0.5% in the Eurozone, the real EU. Predictions of structural economic shift are even more compelling.  According to American investment bankers Goldman Sachs, China’s gross domestic product (GDP) surpassed that of Britain in 2005 and Germany in 2008, and could even surpass the Americans as early as next year.  The Carnegie Foundation for International Peace suggests that by 2050 the three so-called ‘mega-economies’ China, India and the US will enjoy a combined GDP worth 70% more than the combined economies of all the remaining G20 states.

It is also true that HSBC has been particularly hit hard by the cult of ‘banker bashing’ beloved of the British media, the British government’s use of a banking levy to boost the national exchequer, and efforts by the European Commission to impose a whole raft of regulation on the City of London.  London clearly is no longer the the unregulated casino that a) made the City attractive to global banks; and b) encouraged casino banking.

However, all things are not equal in the world in which mega-banks live.  ‘The world’s local bank’, like many such super-corporations, believes it is too big for any single national regulator.  However, no institution bank of government is bigger than geopolitics, something British Chancellor George Osborne also fails to appreciate.  In other words, being domiciled in a place which offers sound regulation and the rule of established law clearly benefits corporations.

There is as ever a bigger picture (to which this blog is slavishly devoted). Asia might indeed be growing faster than Europe, which remains mired in the Euro crisis, the longest economic suicide in history.  However, for all of its many challenges Europe, and indeed the UK remains far more politically stable than Asia.  First, while bankers lament the regulation that has been imposed upon them their own egregious disregard for law means such regulation is self-inflicted and clearly necessary.  Second, banks need a sound legal framework in which to conduct their business and Europe/UK offers such legal stability.  Third, much of Asia’s recent growth is the function of an asset bubble and could crash at any moment.  Fourth, many Asian economies remain unreformed and are probably less prepared than many European economies for the inevitable next crash.  Fifth, the emergence of an assertive China has raised the prospect of real conflict in Asia, possibly war.

Now, if the United States succeeds in establishing a Trans-Pacific Partnership alongside a Transatlantic Trade and Investment Partnership then Asia’s economic dynamism might become more embedded in stable pan-regional politics.  However, stabilising institutions, such as ASEAN and the APEC regime, remain weak. China, not without reason, is suspicious that the TPP is an American attempt to constrain and contain Beijing.  Nor is the future attitude or political direction of China at all clear, not least in its treatment of Hong Kong.  HSBC might well find that having moved its headquarters back to Hong Kong it is subject to the most arbitrary of regulatory regimes with no legal recourse or redress.

Furthermore, the evidence suggests that many Western-based or inspired corporations are ever more conscious of the trade-off to be made between the promise of short-term growth and the need for political stability.  In his January 2015 State of the Union Address President Obama said, “More than half of manufacturing executives have said they are actively looking at bringing back jobs from China”.  Just as HSBC thinks about de-shoring from London many corporations are considering re-shoring.

So, Mr Gulliver and his team have a very important strategic decision to make when they make their final judgment at year’s end whether or not to quit London.  The world is indeed changing but not as much as Mr Gulliver would seem to believe.  And. all things being equal, London remains a haven of stability in an unstable world, open to the world (in spite of EU efforts to prevent that) with a culture of government that remains sensitive to the needs of big business, at times far more than I believe appropriate for a modern Western democracy.

My bet is that in a decade or so we will look back at those who predicated the economic eclipse of the West by Asia as misguided prophets.  Rather like today we look at Francis Fukuyama and his 1990 prediction that liberal-democracy and free markets represented the perfect political state and thus the end of history.  Sound business strategy or gamble? 

Julian Lindley-French

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