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Hong Kong faces blizzard of red tape

Lucy Burton
HSBC

Banks in Hong Kong have been warned they face a tangle of red tape as the territory prepares to lose its special trade relations with the United States as Beijing tightens its grip.

The US president said on Friday that Hong Kong’s new national security law, which criminalises anti-government movements, means the territory is no longer sufficiently autonomous from China to warrant special treatment and that he had instructed officials to begin dismantling its exemptions.

Bankers had been trying to ease investor concerns about US retaliatory action, dismissing the situation as “noise”, but City sources said lawyers had been called in to try to work out the potential implications.

Benjamin Quinlan, who runs consultancy Quinlan & Associates, said if special trade ties were cut or sanctions imposed, then banks could be forced to ramp up their background checks on clients “to make sure they don’t come under the regulatory spotlight”.

“If you look at banking penalties around the world, some of the biggest are for US sanctions violations,” he added.

“That may force many financial institutions to reconsider politically  exposed clients. Also, banks engaged in cross-border business between China and the US may come under tighter scrutiny, which may impact cross- border payments and M&A.”

Two of HSBC and Standard Chartered’s institutional shareholders said they believe the lenders seek to avoid being drawn into the crisis.

However, Leung Chun-ying, former Hong Kong leader, on Friday criticised HSBC for not publicly backing China.

“The China business at HSBC can be replaced overnight by banks from China and other countries,” he said.  “We need to let ... British companies such as HSBC know which side of the bread is buttered.” 

Economists say the worry for banks is if the slide in relations continues and starts to impact on financial linkages between Hong Kong and the US.

“The White House is already pressuring federal pension funds to divest in Chinese investments and plans to delist Chinese firms from US exchanges,” said Rory Green, China economist at TS Lombard.

Miguel Chanco, Asia economist at Pantheon Macroeconomics, said the US’s change of stance could be “another nail in the coffin for Hong Kong as a financial hub in Asia”.