Special Report - How Beijing humbled Britain's mighty HSBC

HONG KONG/SHANGHAI (Reuters) - On a rainy day last November, China Baowu Steel Group, the world’s 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 “black list” of 60 lenders that the state-owned steel giant had declared off-limits.

Virtually all the lenders branded by China Baowu as too “high risk” 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.

The executive making the presentation did not mince words. China Baowu can’t 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’s presence on the list, the presenter said: “If you look at the bottom, of course you can see HSBC.”

The decision by Baowu to blackball HSBC is part of a clampdown on the global London-based bank by many of China’s 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’s ruling Communist Party, these companies manage the nation’s largest industrial projects and are responsible for $9.8 trillion of revenue annually.

The reason for the pullback by state firms isn’t HSBC’s financial soundness, which isn’t 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’s crackdown in Hong Kong to the U.S. indictment of an executive at Chinese national tech champion Huawei Technologies.

Reuters identified nine state-owned enterprises that have ended or cut back on their business with HSBC as a result of the bank’s falling out of favor with Beijing. Among those who’ve 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’s 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.

HSBC has for more than 150 years been a force in banking in Greater China – 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.

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 – a controversy that was covered by state media.

The criticism from Beijing has been withering. Citing the Huawei case and what it said was the bank’s lack of support for the national security law, the People’s Daily, the main mouthpiece of the ruling Communist Party, warned last June that HSBC risked losing much of its business and would pay a “painful price” for having gone “to the dark side.”

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.


As painful as the public blaming and shaming has been, much of the financial pressure on the world’s seventh-biggest lender by assets has been applied via China’s 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.

In response to questions from Reuters, HSBC said it doesn’t comment on clients. “That said, we do not recognise Reuters’ description of our client relationships,” the bank said in a statement. “As China’s 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.” The bank also said it engages “regularly with Chinese authorities at all levels.”

China Baowu Steel didn’t 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’t respond to questions from Reuters. Neither did China’s State Council nor the State-owned Assets Supervision and Administration Commission, which oversees large state-owned enterprises.

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 – lending done by groups of banks.

Syndicated loans and bond underwriting – two key publicly available indicators of the bank’s performance – both showed declines in 2020, according to Refinitiv data.

In syndicated loans, HSBC’s China market share for loans in which it was a lead lender dropped from sixth to ninth. The value of HSBC’s 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.

While HSBC handled 174 bond underwriting deals in 2019, that number dropped to 155 issuances in 2020 – 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.

HSBC’s 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.

HSBC has little choice but to tough it out. The bank’s 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’s second-largest economy.

While Beijing has moved to bring the bank to heel, it doesn’t 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.

“HSBC works with more than 1,200 Chinese holding companies and their subsidiaries, both on the mainland and in over 50 overseas markets,” the bank said in its statement.


HSBC’s 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.

Until a few years ago, HSBC was in favor with China’s 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.

Back in 2016, in an address titled “Life as a banker,” Peter Wong, then HSBC’s Asia-Pacific chief executive, spoke of the promising outlook at an event organized by the Hong Kong University Business School.

“Banking has a future and it has an important future,” said Wong, who was born in Hong Kong in 1951, when the city was under British rule. “As long as there’s trade, as long as there’s investment, as long as there is private wealth, there will be banking.”

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 – an experience that, he said in remarks posted on YouTube in 2015, helped him “learn how to lose, get better and win the game.” After stints at Citibank and Standard Chartered, he joined HSBC, becoming the top Asia executive in 2010.

Like HSBC, Wong adroitly straddled Western finance and Chinese politics. He has been a member of the Chinese People’s 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 – such as the central bank – to submit written analyses of key initiatives such as China’s global “Belt and Road” investment program, according to a former colleague of Wong with direct knowledge of the matter.

“Managing the cultural differences is very difficult,” Wong said in comments posted on the Kelley School website. China, he added, “has just been opened the last 40 years, and so the mentality of China versus that of the Western world is very different.”

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.

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’s leading pro-democracy news outlet, Apple Daily, by arresting its leaders and choking off its funds.

HSBC’s troubles, though, began before the unrest.

In December 2018, Huawei’s chief financial officer, Meng Wanzhou, who is also the daughter of the company’s founder, was arrested in Vancouver. She’d 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’s relationship with a company operating in Iran. She denies the charges and is fighting extradition. Huawei declined to comment.

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.

In the following months, HSBC bankers say, the bank’s 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.

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.

Even at some state companies that didn’t 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 “mistrust” due to the Huawei incident.

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.

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.

One former senior HSBC banker recounted a meeting in Beijing in September 2019 with the chief financial officer of a large state-owned insurer. “That conversation then quickly turned to the Hong Kong protests and what my opinion was about the protests,” said the banker.

As the demonstrations escalated, HSBC Chairman Mark Tucker gave a carefully worded interview that September to Chinese state television. “We strongly condemn violence of any sort, any kind of disruption, to communities where customers, staff and shareholders are based,” he said.

Tucker didn’t respond to questions from Reuters.


The bank was soon facing a new challenge. In the spring of 2020, the National People’s Congress, China’s 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’s 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.

“China and Hong Kong don’t owe HSBC anything,” Leung warned in May last year, shortly before the law’s implementation. “The China business at HSBC can be replaced overnight by banks from China and other countries.”

Foreign companies like HSBC, he added, needed to be reminded which side their “bread is buttered” on.

Leung, who is a vice chairman of the Chinese People’s Political Consultative Conference, called out HSBC for not supporting the national security law. He declined to be interviewed for this story.

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’s WeChat account. On the same day, China’s official Xinhua news agency published a story in which Wong expressed his support for the law. Standard Chartered also publicly backed the law.

Standard Chartered declined to comment for this story.

Wong’s move drew condemnation in London and Washington. Then-U.S. Secretary of State Mike Pompeo chided the bank for its “corporate kowtow.” British Foreign Secretary Dominic Raab said “the people of Hong Kong should not be sacrificed on the altar of bankers’ bonuses.”

The barrage from Beijing didn’t let up. In June, the People’s Daily, the official Communist Party mouthpiece, wrote that “HSBC will eventually lose all its customers.” The next month, a state-backed website accused HSBC of handing “the knife” to the U.S. government in the Huawei case.

When asked by Reuters at the time about these attacks on the bank, one senior executive involved in HSBC’s global strategy dismissed the pressure campaign. “These are not voices of China,” he said. “We’re not going to get direction from newspapers.”

However, wealth managers at HSBC started examining their clients in Hong Kong for ties to the city’s 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.

Some of China’s largest private companies, meanwhile, began limiting business with HSBC.

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’s primary channels to reach retail customers in China. Tencent has since lifted this restriction on HSBC. Tencent declined to comment.


In August, China’s regulators took aim at the bank. Three senior bankers with HSBC’s mainland operations, and the bank itself, were slapped with a combined penalty of 530,000 yuan (more than $80,000) by China’s central bank. The individuals’ 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 “credit inquiry without the authorization of the customer.”

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’t warrant further action, the executive said.

But the local regulators later told HSBC executives that they’d 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.

“We disagree with Reuters’ representation of this matter,” the bank said. “Information security is a top priority at HSBC and we have taken immediate action to address this isolated incident.” No customer data was compromised, the bank added.

The People’s Bank of China and the China Banking and Insurance Regulatory Commission didn’t respond to questions about the incident.

Two months later came another painful slight. In October, China’s 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 – but not HSBC.

The Ministry of Finance didn’t respond to a request for comment.

There have been recent rays of hope for HSBC. It was included in the Chinese government’s 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.

In its statement, HSBC said despite the pandemic and low interest rates, its business in mainland China has “shown real resilience.” The bank pointed to an 8% growth in total assets for HSBC China last year.

Still, HSBC bankers say they feel like they remain in Beijing’s bad books.

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.

It feels, said one senior HSBC banker, “like we are getting tested for our professional loyalty every day.”

Reporting by Sumeet Chatterjee and Engen Tham. Additional reporting by Andrew Galbraith in Shanghai, and Lawrence White and Sinead Cruise in London. Edited by Tom Lasseter and Peter Hirschberg.