Although it quite clearly violates the Sino-British handover agreement for China to lay down the law in supposedly autonomous Hong Kong, the British banks HSBC (HSBC) and Standard Chartered (SCBFY) have come out in support of Beijing's new treason law. They have put a commercial decision to protect profits over a moral or legal cause.
The investment arm of the British insurer Aviva (AVVIY), one of the biggest shareholders in both banks, has warned that such a stance cuts both ways. It says it is "uneasy" about the support of China's position by HSBC and StanChart, voiced even before the law is drafted.
"If companies make political statements, they must accept the corporate responsibilities that follow," David Cumming, the chief investment officer for equities at Aviva Investors, quite rightly says.
"Consequently, we expect both companies to confirm that they will also speak out publicly if there are any future abuses of democratic freedoms connected to this law," Cumming adds.
Shares in the banks rose after they supported Beijing's position; they fell after Aviva took the unusual decision of voicing public opposition, with HSBC down 6.0% and StanChart off 5.3%.
The Chinese authorities have made it clear that they intend to pressure companies to accept its rule if they want to continue to do business in Hong Kong.
C.Y. Leung, a former leader as Chief Executive in Hong Kong who is now vice chairman of China's top congressional body, had warned HSBC that it better pick a side.
"In terms of political issues, this self-proclaimed British bank can't make money from China while following other Western countries trying to damage the country's sovereignty, dignity, and the feelings of the people," Leung wrote on Facebook.
And London-based HSBC and Standard Chartered have fallen in line. So, too, have the British conglomerates Jardine Matheson Holdings (JMHLY), owner of the Mandarin Oriental hotel chain, and Swire Pacific (SWRAY), which owns the airline Cathay Pacific (CPCAY).
Jardine Matheson, like Swire, is a traditional hong trading house, one that in 1841 bought the very first plot of land ever sold in Hong Kong. It published a full-page ad in pro-Beijing newspapers. "Establishing a legal framework for safeguarding national security is very important and can ensure continued investment in Hong Kong," the ad says.
HSBC last week posted a photo on its China subsidiary's WeChat social media account of its Asia CEO, Peter Wong, signing a petition in support of the treason-and-sedition law in Hong Kong. Wong, like Leung, is a member of the Chinese People's Political Consultative Conference, a rubber stamp body that's equivalent to the U.S. Senate.
The accompanying blog item on HSBC's account was headlined "Hong Kong financial and commercial sectors back the implementation of the national security law; CPPCC member and HSBC Asia-Pacific CEO signed his name in support."
Its statement says HSBC "supports all laws that stabilize Hong Kong's social order and boost the economy to develop," declining to comment further to the South China Morning Post.
HSBC gets half its profits from Hong Kong and another 13% from mainland China. Its initials date to its founding by British merchants in 1865 as The Hongkong Shanghai Bank.
Though its executive ranks have bowed to Beijing's pressure, they are sure to now feel a shareholder squeeze. Retail investors in Hong Kong own one-third of its shares, and the treason law is highly unpopular here. Hong Kongers, already pulling out their money and moving it to offshore centers such as Singapore, may close bank accounts and sell shares if they feel betrayed.
Battleground: Hong Kong
Hong Kong's colonial ties make it a political and business battleground. During last year's demonstrations, China's civil aviation authority threatened to close off China's air space to Cathay Pacific unless it conducted a witch hunt for staff members who posted or expressed pro-democracy sentiments. CEO Rupert Hogg and his chief deputy Paul Loo stepped down, and the airline fired numerous staff who supported the protests.
Now the airline has also thrown its backing behind the treason law. "We believe that safeguarding national security is essential in maintaining the stability and prosperity of Hong Kong," a spokesperson said, according to the SCMP.
China's hold over Hong Kong's flagship airline is only growing. Air China (AIRYY) already owns 30% of Cathay, which is now receiving a bailout from the Hong Kong government. The administration, which answers to Beijing, will own a 6.1% stake in Cathay after contributing HK$27.3 billion (US$3.5 billion) by buying preferential shares and awarding a bridge loan, all part of a US$5 billion rescue plan.
Swire Pacific, which grew out of a Liverpool textile trading company founded in 1816, will retain 42% of Cathay, down from 45%, while Air China's stake will shrink to 28%. Qatar Airways will see its stake fall to 9.3%, from 9.9%.
Former leader Leung has been the Chinese Communist Party's chief firebrand in Hong Kong. Chief Executive during Hong Kong's first round of pro-democracy demonstrations in 2014, Leung has frequently taken to social media to express his Communist sympathies and denounce what he sees as political transgressions in Hong Kong, however petty. But he has not always seemed so reticent to accept profits from British businesses.
Leung studied real estate in Britain, at Bristol Polytechnic, and became a multimillionaire working for British companies in Hong Kong. He worked as a chartered surveyor for five years at the British precursor to what is now Jones Lang LaSalle (JLL) , reportedly earning a salary of HK$10 million (US$1.3 million); he sold his own surveying company into the London-listed property consultancy DTZ Holdings, profiting to the tune of HK$330 million (US$42 million) in cash and stock, and headed the British company's Asia business as chairman before entering politics. Although now a Communist party official, he has kept that capital cash.
Corporate kowtowing alleged
HSBC ran into difficulty with Chinese officials after it supplied information used to bring the criminal case against Huawei Technologies executive Meng Wanzhou. She is accused of conspiring to defraud HSBC and other banks by misrepresenting Huawei's link to what U.S. authorities claim is its de facto subsidiary in Iran.
U.S. Secretary of State Mike Pompeo took HSBC to task on Tuesday for such "corporate kowtows" to Beijing. He also criticized the Chinese Communist Party's "coercive bullying tactics."
In a statement, he said Asia CEO Wong's "show of fealty" for the "disastrous" treason law seems to have earned little respect in Beijing. Pompeo noted that the Chinese leadership is still willing to punish HSBC if it does not encourage Britain to use the Chinese telecom Huawei to build its 5G network.
The Chinese Communist Party's "browbeating of HSBC, in particular, should serve as a cautionary tale," Pompeo said. "Beijing's aggressive behavior shows why countries should avoid economic overreliance on China and should guard their critical infrastructure from CCP influence."
Will Citigroup feel heat?
The political crosscurrents leave Citigroup (C) in a difficult position. The U.S. bank has a street-level retail banking presence in Hong Kong, whereas the bulk of its American peers restrict themselves to commercial banking. Citi, too, may face calls to express support for the new law, or else. It's also in the crossfire of U.S. sanctions and the Chinese reaction.
The public corporate support for Beijing's position differs sharply from last year's pro-democracy protests, which started as opposition to a proposed Hong Kong law to allow extradition into China's rigged court system. At the time, many companies and executives expressed concern about that law.
The treason law is far more extreme. Though the wording is yet to be confirmed, it will be designed to punish "treason, secession, sedition," as well as "subversion against the Central People's Government," which could be almost anything the government doesn't like.
With that law in place, there's no need for extradition. Dissidents and China critics can be prosecuted and imprisoned in Hong Kong. Yet companies are tripping over themselves to say they're all for it.
British diplomats talk a lot but have done nothing to enforce the Sino-British Joint Declaration on Hong Kong, a treaty lodged with the United Nations. Their current response to the treason law is to propose offering open-ended visas to Hong Kongers, but only if China continues down this path -- which it will. Britain has taken no action against China itself.
So it is currently only U.S. politicians who are taking companies and China to task. With Aviva's action, perhaps shareholders will also use their voice and exert their own pressure on the companies they own. We in Hong Kong count on you, the owners of these companies, to do so.