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HSBC's shares take a tumble as bank's relations with China come under pressure

HSBC Holdings PLC's share price has fallen sharply since the sudden departure of CEO John Flint, amid doubt over the bank's dealings with China.

The lender's stock is down about 6% since Aug. 5 when it announced Flint's resignation and has significantly underperformed the FTSE 100. Flint spent less than 18 months in the role and left after losing the confidence of the board.

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Shortly after Flint's departure, the bank lost another key executive, Helen Wong, its greater China head. Wong's role will be dropped and the Greater China region, including Hong Kong and Taiwan, will be run by their respective country heads.

HSBC said Wong's departure was unconnected to Flint's exit and did not indicate a change in strategy, but the exit of both executives follows a long period of adverse coverage of the bank in the Chinese press over its role in the arrest of Huawei Technologies Co. Ltd. finance director Meng Wanzhou. She faces extradition from Canada to the U.S. after being charged with bank and wire fraud in an indictment that also alleges Huawei conducted business in Iran in contravention of U.S. sanctions.

Challenging position

China's ambassador to the U.K. had summoned Flint to the Chinese embassy in London earlier this year to quiz him over the role the bank played in Meng's arrest. HSBC, which declined to comment on the case, had handed over information to the U.S. Department of Justice, according to media reports. The bank, along with a number of other lenders, is now considered a "victim" institution in the U.S. indictment brought against Meng after it was allegedly misled by Huawei and Meng about deals in Iran.

HSBC, whose biggest shareholder is Chinese firm Ping An with a 7% stake, has also been put in a challenging position by the long-running protests in Hong Kong, the region which accounted for $11.51 billion of HSBC's $19.9 billion pretax profits in 2018 and where it was founded more than 150 years ago. The bank has sought to appear neutral as the protests have continued and has called for a peaceful resolution to the crisis in a series of newspaper advertisements in local papers, though it maintains its stance is apolitical.

Ewen Stevenson, HSBC's group financial officer, said at the company's half-year results that further unrest in Hong Kong would have an effect.

"If the current situation continues for a prolonged period of time, it will impact confidence," he said. Since his statement, the protests have intensified.

Stevenson also said that continued trade tensions between the U.S. and China were gradually affecting growth outlook for both countries.

"We're responding to this changed revenue outlook with a tightened focus on cost. We've slowed investment growth," he said.

Growth plans

China, which returned a pretax profit of $2.86 billion for the bank last year, has been at the center of the bank's plans for growth, particularly the Pearl River delta region. HSBC said it increased revenue in the Pearl River Delta region by 31% in 2018, on an adjusted basis, and in Hong Kong by 21% and mainland China by 22%. It has said it wants to be the No. 1 bank for China's Belt and Road initiative that aims to connect Asia, Africa and Europe at a cost of $1 trillion.

However, there have been reports that HSBC would be placed on China's forthcoming "unreliable entity" list, first announced in May and due to be published by China in response to the U.S. entity list. The list could be used to punish those companies who challenge China's views on Hong Kong, according to reports. When questioned by analysts over HSBC's possible inclusion on the list, HSBC Chairman Mark Tucker responded by reaffirming the bank's commitment to China, but he refused to comment on whether there was a risk the bank would be included.

"We've been in China for 153 years and we have a clear and long-term commitment to China," he said.

John Cronin, analyst at Goodbody, said Flint's replacement could see the bank alter its approach to its investment strategy in China, which had previously focused on the Pearl River Delta region.

The key question that now surfaces is the intensity of focus on China and, specifically the Pearl River Delta, the key contentious element of Flint's strategy — with US/China trade tensions at a boiling point it seems likely that some de-emphasis in the context of the importance of this region to the wider group could be in train," he said. China would, however, remain an important plank of HSBC's strategy, he said.