HSBC's Gulliver has bet the business on change in China
Bank prospering amid renewed growth, but faces pain if reform drive slows
HENNY SENDER, Nikkei Asian Review columnist
In announcing its earnings for the first quarter of 2017, the message HSBC chose to convey to shareholders was one of "strong momentum in Asia," particularly in the Pearl River Delta, across the border from Hong Kong.
After a poorly timed and challenging start two years ago, HSBC's China-centric growth strategy now appears on course. Beijing's ability to stabilize its economy and not crash and burn (to the continuing dismay of many China bears) is good news, especially to Stuart Gulliver, HSBC's chief executive. If Gulliver has his way, HSBC will become a proxy for growth in China, especially in the delta -- with better management, more transparency and fewer bad loans than its Chinese peers, together with a true shareholder culture.
But Gulliver's strategy involves significant challenges -- among them the belief that reform in China will happen as planned, and that the financial playing field will become more level. Gulliver plans to retire sometime in 2018. If he is wrong about China, his successor will have inherited a mess at one of the world's biggest banks, with assets of $2.416 billion at the end of March.
Gulliver first articulated his "pivot to China" strategy in early 2015. At that time, it was Europe that appeared unstable. The opposition Labour party was expected to win national elections in the U.K., HSBC's legal domicile, bringing in its wake a sharp rise in taxes. HSBC was also in trouble with a number of regulators, particularly in the U.S., for money laundering and violations of basic "know your customer" precautions. It is still operating under a deferred prosecution agreement.
China looked far more hopeful. Growth was strong. Central bank officials had suggested that liberalization of capital controls was imminent. Reforms were promised to make debt capital markets come alive. Every day it seemed that shares reached new highs, cheered on by government officials and regulators.
And then it all went wrong. In early summer 2015, the stock market crashed, and regulators intervened in a way that undermined the confidence of international investors. Talk of reform evaporated as swiftly as the value of shares. Capital outflows increased, and the value of the yuan came under downward pressure.
Now, Europe once again appears to be facing an uncertain future in the wake of Brexit, although the results of recent elections in France and The Netherlands were a repudiation of the politics of anger. Meanwhile, the worst days of 2015 appear behind both China and HSBC.
Mainland economic growth came in at 6.7% in 2016. Moreover, mainland China is one of the few places in the world, whether in developed or emerging markets, that can claim income growth for its workers. That means, in turn, that it is registering an improvement in consumption, justifying Gulliver's faith.
Moreover, the delta looks more impressive than ever before. Its gross domestic product is more than $1 trillion, accounting for 10% of the country's output and 25% of its exports, according to data from HSBC. On a per capita basis, most of its residents account for more output than the residents of either Beijing or Shanghai.
Moreover, new economy companies account for 40% of the GDP of Shenzhen, which is at the heart of the delta's economic miracle. Local companies spend about 4% of their revenues on research and development -- a figure comparable to that of Israel, a noted high spender on R&D, and twice what their counterparts spend elsewhere in the country.
These high performing companies, and the growing numbers of wealthy people in the area, are natural clients for the bank as they increase in sophistication and look beyond China's borders. HSBC's customer advances, new insurance sales and growth in assets under management in the delta all grew by healthy margins in the first quarter.
The country as a whole is tying itself ever more closely with the rest of the world. China's non-financial outbound direct investment grew to $170 billion last year, while the number of overseas mergers has increased dramatically.
HSBC plans to insert itself in the middle of these flows. For example, it was responsible for much of the financing of ChemChina's $43 billion purchase of Syngenta. If trade recovers (although this seems a big "if") HSBC will be a big beneficiary, since trade finance has always been one of its core competencies.
Unsurprisingly, Gulliver has emerged as one of China's biggest champions. "The collapse of the Trans-Pacific Partnership, the renewed impetus behind RCEP (a proposed 16-country Regional Comprehensive Economic Partnership) and the sheer expanse of the Belt and Road Initiative means that China is now the lodestar of global economic integration," he said in early April in Hong Kong.
Gulliver added that the terms of the RCEP agreement "will motivate emerging economies towards economic reform, encouraged principally by China." Hopefully, for the world as well as HSBC shareholders, this is not wishful thinking.
Henny Sender is the Financial Times's Chief correspondent for international finance based in Hong Kong and contributes occasional columns to the Nikkei Asian Review. She has extensive experience covering international finance in the U.S. and Asia, including in Japan, Hong Kong and South Asia.
In this "Business Insight" column, we track business activity in Asia, shedding light on changes and structural problems of the region's economy, politics and society.