Banking on change: geopolitical pressure coming to bear on Asian financial services

Data InsightDealspeak 17 May

Banking on change: geopolitical pressure coming to bear on Asian financial services

Tension between Washington and Beijing is reshaping the banking industry in Asia. National security needs emerging from a geopolitical tug of war look set to drive already-frenzied M&A activity across APAC’s financial services sector to fresh highs.

This comes on top of ongoing reorganization within the sector in India that includes the blockbuster HDFC [NYSE:HDB] mega deal; government-driven mergers between regional lenders in China; and exit strategies for their Asian commercial banking operations from Western banks such as Citigroup [NYSE:C].

Earlier this month, HSBC’s [LON:HSBA; NYSE:HSBC; HKG:0005] biggest shareholder, Ping An [SHA:601318], called for a split of the FTSE 100-listed bank’s Asian and Western businesses.

Ping An told HSBC executives, who oppose the idea, that demerging the Asian business would afford investors greater choice in which parts of HSBC to own, while balancing the bank’s interests in China and the West is likely to become increasingly difficult going forward. Approximately two-thirds of HSBC’s total profit of USD 18.9bn in 2021 came from Asia.

HSBC has found itself between a rock and a hard place ever since the early days of the Trump administration. The bank faced criticism in China for providing information to US law enforcement that was used in the arrest of Huawei’s CFO Meng Wanzhou in Canada. It also took hits in the UK and US for expressing support for Hong Kong’s national security laws.

Under current US President Joe Biden, the headaches for HSBC executives have gone from bad to worse. Warnings from the US Department of State about the risks of doing business in Hong Kong have left the bank in an uncomfortable position.

Cold war: countries chilled by freeze on Russian central bank assets

A decision by US authorities to freeze the assets of Russia’s central bank following Moscow’s invasion of Ukraine has unleashed a tsunami of tension across the Asia-Pacific region.

Developing countries are losing confidence in the international financial system, having seen that all of their foreign assets can be frozen in a split second by reserve-currency countries. The situation has been compounded by more recent calls from top EU diplomat, Josep Borrell, to funnel Russia’s seized assets to Ukraine.

The loss of trust has been even greater in China. The Financial Times reports that Chinese regulators held an emergency meeting last month with domestic and foreign banks to discuss how they could protect the country’s overseas assets from US-led sanctions similar to those imposed on Russia. A few days later, the Hong Kong Monetary Authority (HKMA) announced it had prepared emergency plans in the event Hong Kong or mainland China is sanctioned by the US.

Separately, China’s ambassador to Russia, Zhang Hanhui, told TASS (1) (2) that Chinese and Russian central banks are to discuss the use and promotion of their respective national payment systems, Mir and UnionPay, in both countries, while a clearing bank for transactions in Chinese yuan could yet be established in the Russian Federation.

Financial institutions are entering unchartered waters, as a swelling geopolitical storm threatens to reshape the world order. Ping An’s dramatic call on HSBC might, it seems, signal the start of a wave of change.

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