On April 14, an editorial by the Wall Street Journal outlined that the Hong Kong government has taken “hostage” the pension assets of some 96,000 Hong Kongers who have moved to the United Kingdom, in what may be considered a cynical act of financial deterrence and revenge.
In normal times the denial of access to pension savings totaling over $2.5 billion in one of the world’s global financial centers would raise alarm bells for international investors, but the willful complicity of Western-based banks in blocking these pension assets is even more concerning. That may spell darker trouble ahead if these financial institutions face similar pressure to seize assets if conflict breaks out in the Taiwan Strait.
HSBC is a powerful case-study. The problem is not that the bank will be forced to choose between its huge profit center in China and Hong Kong, where it takes around two-thirds of its profits, and its retail banking and investment arm in the West. Rather, the problem is that HSBC has already made its decision.
A steady trickle of HSBC executives moving to Hong Kong and China has been paired with enthusiastic support for the crackdown in the city, the freezing of activists’ and civil society organizations’ bank accounts, the adoption of Chinese Communist Party cells within the bank, and now the targeting of ordinary Hong Kongers’ pension savings.
Research by Hong Kong Watch estimates that HSBC, as a trustee of 30 percent of Mandatory Provident Funds in Hong Kong, will have blocked hundreds of millions of dollars in assets.
Alongside the Mandatory Provident Fund (MPF), which criticized the Wall Street Journal’s editorial on the subject, HSBC has just justified this move on moral and legally dubious grounds by citing a simple statement issued by the Chinese Ministry of Foreign Affairs that it will no longer recognize British National Overseas (BNO) passports.
Such blind obedience by HSBC and other MPF trustees to a statement issued by the Chinese Ministry of Foreign Affairs creates a dangerous precedent, particularly if statements from Beijing are now automatically afforded the status of legal fact. It begs the question of what happens if Beijing starts imposing sanctions itself.
It is not hard to imagine a scenario where, in the event of a blockade of Taiwan or a full-scale invasion, HSBC is directed by Beijing to block bank transfers from Taiwan or to enforce capital controls on Western companies and investors seeking to move their money out of China.
In this instance, if the United States placed sanctions on China regarding any action taken against Taiwan, HSBC might not only decline to exit China’s market, but it may well actively assist Chinese officials as they seek to subvert those sanctions.
As of June 2022, foreign investors held over $1 trillion in onshore Chinese bonds and equities that could be put at risk by capital controls, along with a further $1.9 trillion worth of stock of FDI in China, which the authorities could seek to nationalize.
Chinese state banks will likely be marshaled in such a counteroffensive, much as Russian banks have moved to implement President Vladimir Putin’s efforts to curb capital flight. That includes a mandate that Western companies who wish to exit the country must pay a 10 percent tax on the sale of their assets.
For many U.S. banks, their exposure to Russia’s financial markets prior to invasion of Ukraine was minimal, with the Bank of America and JP Morgan not even listing Russia as a top 20 international market by exposure. This naturally meant that few banks were stuck between choosing to support Putin’s invasion or Western sanctions.
The situation would look far different when it comes to conflict over Taiwan and a similar round of sanctions and countersanctions. There is deep uncertainty over what banks like HSBC, whose profit centers are in China, will do.
The destruction of Hong Kong’s autonomy may be written off as a fait accompli by some, but the blocking of pension assets out of the city should render more outcry from U.S. officials. Not least as it places HSBC and others at direct odds with the Hong Kong Autonomy Act, which mandates the U.S. administration to sanction banks that “materially contribute” to China’s failure to uphold its international treaty obligations regarding Hong Kong.
A failure to challenge those Western based banks over their complicity in the crackdown in Hong Kong today, will only make it more likely that they are vulnerable to the same pressure from Beijing tomorrow when it comes to blocking assets in relation to a conflict with Taiwan.