Asian dissuasion

LIKE many firms with roots in Hong Kong, HSBC has traditionally consulted a feng shui master on the design of its headquarters’ buildings. The bank’s dilemma today is more serious: in which country should its headquarters be? For the past year HSBC has debated moving its domicile, which in turn determines its tax base, lead regulator and lender of last resort.

One option is to stay in Britain, with its bank-bashers, latent hostility towards the City of London and ambivalence about Europe. The alternative is to move back to vibrant-but-riskier Hong Kong, where HSBC was founded 151 years ago and was based until the 1990s. It is not an easy choice, but in the end pub grub and stability trump dim sum and political uncertainty.

HSBC matters. Regulators judge it to be the world’s most important bank, alongside JPMorgan Chase. A tenth of global trade passes through its systems and it has deep links with Asia. (Simon Robertson, a director of the bank, is also on the board of The Economist Group.) Its record has blemishes—most notably, weak money-laundering controls in Mexico. But it has never been bailed out; indeed, it supplied liquidity to the financial system in 2008-09. It is organised in self-reliant silos, a structure regulators now say is best practice.

For Britain, the departure of its best bank would be perverse (if only it could deport Royal Bank of Scotland instead). But HSBC is fed up with Blighty. A levy charged on its global balance-sheet cost 10% of last year’s profits; rules on ring-fencing its retail arm will cost $2 billion. Both are meant to protect Britain from global banks blowing up, but they duplicate other measures aimed at the same problem—silos, capital surcharges, “bail-in” bonds and liquidity buffers. Britain says it will lower the levy. But over time Asia, which accounts for 60% of the bank’s profits, will grow faster than Britain, and so HSBC will too. The tension between HSBC’s ambitions and Britain’s suspicion of giant banks is not going away.

Hong Kong is keen for the bank’s return, which would boost confidence after a torrid time for Chinese markets. HSBC’s biggest subsidiary is already based in the territory and supervised by the Hong Kong Monetary Authority (HKMA), its impressive regulator. By moving, HSBC would not ease its tax bill or capital levels by much. But it would avoid the levy, butt heads with Western regulators less and be closer to its biggest markets.

From a dirty old river to a fragrant harbour

Time to pack the bags? One objection is that HSBC is already thriving in greater China: it does not need to be domiciled there to succeed. Nor would moving to Hong Kong insulate HSBC from a British exit from the European Union (see article). But the biggest worry is that Hong Kong is small and a territory, not a country. The HKMA has $360 billion of foreign reserves but it lacks the crisis toolkit of a central bank. It cannot print an infinite amount of money without undermining its currency peg and it lacks a credit line from America’s Federal Reserve to supply it with dollars, HSBC’s operating currency.

With a balance-sheet nine times bigger than Hong Kong’s GDP, HSBC’s ultimate backstop would be mainland China’s government, whose approach to finance is as transparent as Victoria Harbour. That might deter some customers. It would also annoy America, which might not be keen on HSBC playing a big role in the dollar-clearing system, a privilege that is vital for HSBC’s business. For an Asia-centric bank to be based in London is an anomaly. But, for now, one worth keeping.