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Monday, Jul 06, 2020

What HSBC and Cathay Pacific’s bow to Beijing on Hong Kong national security law tells investors about management in political crises

Businesses from HSBC to Swire join tycoons in pledging support for Beijing’s tailor-made security law for Hong Kong. Investors, analysts look to security law’s implementation and potential ESG pitfalls

Cathay Pacific chairman John Slosar said in August he “wouldn’t dream” of telling the firm’s 27,000 Hong Kong employees what to think about politics – that was one of his last public acts. Under new management, the airline quickly backed the city’s clampdown on protesters.

Amid mounting pressure from Beijing and its surrogates, Hong Kong’s business leaders are once again lining up to pledge support for politically-charged security measures.

Li Ka-shing, one of Asian’s richest men, and Peter Wong Tung-shun, the Asia-Pacific chief executive of the city’s biggest bank, HSBC, were among the prominent businessmen to take the unusual step of publicly backing a national security law that Beijing is drafting for Hong Kong that is aimed at suppressing anti-government protests.

A Cathay spokesperson said: “We believe that safeguarding national security is essential in maintaining the stability and prosperity of Hong Kong.”



Some state-owned Chinese banks, including Bank of China, Bank of Communications and Industrial and Commercial Bank of China have taken their show of support a step further and asked staff to sign statements backing the legislation as well.

Investors used to expect business executives to keep their mouths shut on politics and focus instead on making them money. However, they believe an epoch-making shift in the role of a company is under way, to one where managers have to be seen to align with the general norms of society and comment on everything from Britain’s exit from the European Union to the death of George Floyd in the United States.

For multinationals, spanning multiple jurisdictions and ways of life, pleasing all policymakers everywhere is like spinning plates. For global companies with a seat in Hong Kong, their job has become even harder as tensions between the US and China have ratcheted higher and turned the city into a geopolitical flashpoint.

“It’s going to be a case of balancing out views. China and America are both critically important markets for multinational companies, and they don’t want to be drawn into ongoing flare-ups. We can understand that as investors,” said Josh Kendall, senior environmental, social and governance (ESG) analyst at Insight Investment, BNY Mellon. Kendall and other ESG experts talk to executives about managing political risks, which may result in uprooting factories and realigning supply chains.

“These are issues that are too big for one company to control, so they have to actively manage political risk,” said Christine Chow, head of engagement in Asia and emerging markets at London-headquartered Federated Hermes, long known for its stress on ESG. Although, she notes, there will be situations where a company’s stronghold is in a political hotspot like Hong Kong and there is no simple answer.

Looking ahead, investors and analysts are concerned how the US and other Western governments might respond to the national security law. The responses could range from sanctions against government leaders to the worst-case scenario of banning Hong Kong from accessing the US dollar clearing pool.

“The city sits on a fault line between two great powers, which will present real challenges to businesses,” said Steve Vickers, chief executive of Steve Vickers and Associates, a specialist political and corporate risk consultancy.

Vickers is also watching carefully how the national security law is implemented in Hong Kong, in case it infringes on ESG commitments, in particular whether trials are presided over by impartial judges or ones hand-picked by Beijing, and whether the law is used to persecute political critics of Beijing.

Investors such as Chow’s Federated Hermes actively screen for any human rights violation allegations.

“[Does] it create reputational damage and lead to a process which raises their cost of capital and depresses their valuation in the longer term? That is an interesting question,” said Simon Pritchard, global research director at Gavekal Research in Hong Kong. “It clearly depends on how the relationship between China and the rest of the world goes. It depends on the application of this law. It depends on the degree of which freedoms in Hong Kong are curtailed.”

China’s top legislature, the National People’s Congress, said on May 28 it would enact a national security law for Hong Kong. The move to sidestep Hong Kong’s legislature and curb anti-government protests triggered an outcry from democratic governments, with the US declaring that Hong Kong no longer maintained a “high degree of autonomy” from China.
Foreign businesses have long used Hong Kong primarily as a gateway into China’s vast market, while locally headquartered firms usually have extensive business interests on the mainland.


Hong Kong’s business community, which has most to lose from incurring Beijing’s wrath and continuing protests across the city, was broadly supportive of the proposed law. Most members in The Hong Kong General Chamber of Commerce said the law would have a positive effect or no effect on their business.

Hong Kong-headquartered companies that have vowed to support the law include the Jardine Matheson Group, which owns the Mandarian Oriental Hotel Group, Swire Pacific, the parent of Cathay, state-owned conglomerate China Resources, Hong Kong property developers Sun Hung Kai Properties and New World Development, and Li Ka-shing, the former chairman of CK Hutchison Holdings and CK Asset Holdings.

In contrast, US companies for whom Hong Kong is an important but not critical market were more circumspect. About 83 per cent of the US members surveyed by the American Chamber of Commerce said they were “moderately concerned” or “very concerned” about the law.

Even then, only about 30 per cent of the 180 US companies surveyed said they would consider moving out of the city.
HSBC and Standard Chartered are particularly vulnerable to a backlash from either China or the US. Both have prestigious licences to issue bank notes in Hong Kong, while their business models – as global banks reliant on international trade – require them to clear US dollars, and therefore to maintain a presence in the US.

While both are based in London, they generate most of their revenue in Asia, which is dependent in part on the goodwill of regulators, particularly in Hong Kong and Beijing.

HSBC said Peter Wong had signed his support of the legislation and that the lender supported “laws and regulations that will enable Hong Kong to recover and rebuild the economy and, at the same time, maintain the principle of ‘one country, two systems’” on one of the bank’s social-media accounts in China on Wednesday.

Hugh Young, a managing director at Aberdeen Asset Management Asia, said HSBC and other western companies did not have much choice but to fall in line, particularly after Leung Chun-ying, Hong Kong’s first chief executive, and Chinese state media criticised HSBC for not making its stance clear on the law earlier. “Having seen how China can react and has reacted when there are any political disagreements, it’s hard to avoid, much as I’m sure they all would have liked to have avoided [it],” he said.

Under CEO Noel Quinn, the bank has placed an even greater focus on Asia as part of a massive restructuring unveiled in February. Hong Kong and mainland China accounted for 75 per cent of HSBC’s pre-tax profit in 2019.

“HSBC provides a vivid example demonstrating how China will use the national security law as new leverage for more political influence over [the] foreign business community in this global city,” Joshua Wong Chi-fung, a Hong Kong pro-democracy activist, said in a Twitter post on Thursday.

HSBC was forced to go on a charm offensive with Beijing officials after Meng Wanzhou, the Huawei Technologies chief financial officer and daughter of the company’s founder, was arrested in Canada on US charges in 2018. It emerged last year that HSBC had provided information to US authorities about its dealings with Huawei as part of its obligations under a court ordered monitorship.

“A key plank in HSBC’s strategy, agreed with shareholders and board, is that they would be operating in Greater China. If they don’t abide by the political reality on the ground by subscribing to new laws, they would in effect be rewriting their strategy, as there is a chance they would eventually not be able to operate in the country,” said Sam Olsen, co-founder at Metis Intelligence, which advises companies and investors on strategic risks.



Standard Chartered followed in HSBC’s footsteps, saying it believed the law would help maintain “the long-term economic and social stability of Hong Kong”. American and British politicians reacted negatively to the news, questioning whether the decision fit with the bank’s public stance on social responsibility. Standard Chartered’s commercials, for example, have the tagline: “We’re here for good”.

US Sen. Rick Scott, a Florida Republican, tweeted HSBC had “chosen profits over human rights”. “I wonder why @HSBC and @StanChart are choosing to back an authoritarian state’s repression of liberties and undermining of the rule of law?,” Tom Tugendhat, a Conservative member of parliament and chairman of the UK Foreign Affairs Select Committee, said in a June 4 tweet. “Where does this fit in their definition of corporate social responsibility?”


Shareholders at HSBC and Standard Chartered, however, shrugged off the announcement. As of Friday’s close, HSBC’s shares had risen 6 per cent in Hong Kong since the announcement, while Standard Chartered’s shares jumped 9.3 per cent over the same period. Their shares recorded even broader gains in London, increasing 7.7 per cent and 11.6 per cent, respectively, between Wednesday’s announcements and Friday’s close.

Gavekal’s Pritchard said investors generally will look beyond the politics and focus on whether the banks’ businesses in Hong Kong remain profitable. He noted HSBC and Standard Chartered have more at stake in terms of keeping in the good graces of the local government than other foreign lenders operating in the city, such as the American banks.

“They’ve dually been squeezed and dually worked out which way their bread is buttered,” he said.




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