US dollar vs yuan: why China's threat against HSBC rings hollow - for now
LAST week, HSBC was caught in the middle of a media storm over accusations that the bank colluded with the US government to take down Huawei, and this led to speculation it could lose its business in mainland China. I suspect not. The key lies in China's failure, so far, to internationalise the renminbi (RMB) and, for that reason, local businesses in China have few options aside from HSBC in gaining international access. But that should not be a source of comfort for "The Bank" in the long run.
The US dollar has had no serious contender for the role of global reserve currency: i.e., the pricing and trading mechanism for essential commodities and the fallback currency for developing nations.
The mainstay of the dollar's dominance in the global economy has been the fact that the two most important global commodities, oil and gold, trade in US dollars. As China has become the biggest importer of oil - with about 10 per cent of global consumption - and one of the largest buyers of gold, it made sense for policymakers to make an aggressive push to internationalise the renminbi and thus reduce the country's reliance on the greenback.
After Russia came under US sanctions following the annexation of Crimea, it became China's largest supplier of oil and China started to pay for it in renminbi to avoid the US dollar stranglehold. This led Russia to dramatically cut its dollar reserves and officially join the renminbi fan club, though local businesses have been less keen to seek financing in the currency.
A major step towards internationalisation of the renminbi was taken in 2018 when the Shanghai International Energy Exchange started to offer crude oil futures contracts priced in renminbi, successfully attracting traders from around the world and taking volume away from the two most popular contracts traded elsewhere: Brent and WTI. This move made a lot of sense, given that although a third of the world's oil is consumed in Asia, it's primarily traded elsewhere. However, the trade has seen intermittent spikes in volume, and has yet to demonstrate long-term popularity. Still, it has been much more successful than oil traded in yen on the Tokyo Commodity Exchange.
The fact that the US dollar is the most widely used international currency by a long shot - such has been the success of the Americans promoting its use - continues to be a thorn in China's side. In many developing countries, the greenback is enthusiastically accepted by taxi drivers and storekeepers who usually know the exchange rate of the day down to the digit, something you would be unlikely to find in Britain or western Europe. Meanwhile you would be hard pressed to find a taxi driver in the Philippines or Indonesia, or even Hong Kong, who would accept renminbi.
The US controls the clearing of dollars in New York, allowing it to constantly track the movement of dollars. The exception is of course cash on the street, as big banknotes from all issuers have a habit of disappearing. This control is a powerful tool for keeping the world's banks in check. Should the US deny dollar clearing to any bank that has fallen out of favour, it would make bank operations under the current global financial system very difficult and thus a good reason not to try and circumvent US laws.
Each year, global financial transaction messaging system Swift announces the rankings of different currencies used in international transactions, a good indication of how the Chinese are doing in gaining international acceptance for the renminbi. Since its inclusion in the IMF basket of Special Drawing Rights (SDR) in Q3 2016, the international appeal of the renminbi appears to have diminished - contrary to expectations. At the end of 2017, it ranked 5th; in 2019, it ranked 6th, behind the loonie (CAD) and ahead of the Australian dollar. Most notably, the Hong Kong dollar moved up a position to 8th.
Losing a spot while little brother catches up is quite a blow for Asia's largest economy and the world's biggest exporter.
If China truly wants a global currency, that would mean scrapping exchange controls, a move that would be far too risky at the moment. Which brings me to HSBC's issues.
HSBC is the piggy bank in the middle of a spat between Beijing and Washington which has now descended into accusations of spying, more arrests and forced closures of consulates. This showdown has now bled into the world of banking and could signify the start of a financial cold war, which will likely further pressure stock prices in the sector - including that of HSBC, which is already nearly 60 per cent lower than at the beginning of 2018.
There were suggestions during the week that HSBC could lose its China business as a result of the accusations - denied - that it colluded with the US government against Huawei. If that were to happen, another 10 per cent would easily come off the share price.
The Lions outside HSBC's Hong Kong island office are boarded up. Photo: Neil Newman alt=The Lions outside HSBC's Hong Kong island office are boarded up. Photo: Neil Newman
Some 10 years ago, HSBC employed about the same number of people as the population of Iceland. Today it is about 23 per cent lower, at 257,000, and that is after the staff cuts announced earlier this year of 35,000. It seems the bank is on a path to restructuring, with reports that its chairman, Mark Tucker, is considering shuttering businesses in the US and EU.
HSBC employs about 8,000 staff in China, a drop in the bucket when compared to the global total, and nearly all of them were recruited locally. Yet, its reach is deep and very valuable, with 170 branches in 50 cities, making it the largest geographical network of any foreign bank in the mainland. This is what will save HSBC in the current firestorm.
When doing big business globally, there are only a handful of banks you can turn to for finance and HSBC is the most firmly entrenched in commercial lending to Chinese businesses. For that reason, and the fact that China is struggling to get the renminbi widely accepted, I think this frenzy remains a storm in a media teacup and HSBC will be able to brave it out in Asia - at least for now.
This article originally appeared on the South China Morning Post (SCMP).
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