HSBC's decision to stay put is unsurprising, not just because of the reduced UK bank levy, but because of the risks of moving to what is increasingly seen as one country rather than two systems.

Home Shan't Be China
15 February 2016

The decision of HSBC Holdings plc (HSBC, 0005) to remain headquartered in the UK comes as no surprise, but it is worth considering the factors that must have been taken into consideration.

By threatening to leave, HSBC and Standard Chartered plc (2888) succeeded in persuading the UK government last July to cut a bank levy on global liabilities and instead introduce an 8% surcharge on UK banking profits. The levy had placed both banks at a competitive disadvantage to global banks headquartered outside the UK, who were not charged on their non-UK business.

But there is a second major reason. In its announcement, HSBC cited the UK's "internationally respected regulatory framework and legal system". HSBC had to have regard to the way China and Hong Kong are regarded by the legislatures, governments and citizens of every country in which it does business. The actions of China with respect to HK in the last 2 years, as well as the complicity of HK's leadership, have undermined the promised "high degree of autonomy" and produced a global shift in perception away from "two systems" to "one country".

First, there was the refusal of China to offer HK any sensible version of universal suffrage for electing its leader, something that could have happened under Annex I of the Basic Law in 2007. The offer of an Iranian-style candidate selection system triggered the Umbrella Movement of 2014 which, if it achieved nothing else, informed the world of the "actual situation" in HK.

Secondly, more and more, HK's senior figures are singing from the "belt and road" hymn sheet and emphasizing integration with, rather than differentiation from, the mainland. Recently they also appeared powerless when seeking information on citizens who have been subject to extraordinary rendition by mainland agents. It is also clear from its actions that HK's Immigration Department operates a blacklist prohibiting entry by individuals whom China regards as politically undesirable, despite denials to the contrary.

If China were progressing smoothly towards an open society then perhaps that gradual fusion of the "two systems" into "one country" would not negatively impact global perception, but it isn't, and China's increasing belligerence in the South China Sea isn't winning friends either.

Hong Kong is once again living on borrowed time. The promise of no change to HK's legal system for 50 years from 1997 now has only 31 years to run, and HSBC's decision had to be a long-term choice in that timeframe. It simply couldn't take the risk of shifting headquarters to Hong Kong and subsequently being perceived as a "Chinese" bank in its global markets. Its choice of headquarters would also have factored into its global funding costs. Paying a UK levy at the reduced rate of 0.05% to 0.10% (from 2021 onwards) was on balance a better choice than the possible higher funding costs of future "China risk".

For Hong Kong, that is a shame. Unless and until China is perceived as a trustworthy open society with an "internationally respected legal system", the continued convergence of the two systems limits HK's role to that of a Chinese service centre rather than the global financial centre that it aspires to be.

©, 2016

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