Commentary by William Pesek
March 16 (Bloomberg) -- HSBC Holdings Plc’s 24 percent tumble on March 9 had a certain karmic justice to it.
Few banks did more to bring us the subprime-loan debacle than Europe’s biggest. HSBC’s 2003 purchase of Illinois-based Household International added almost 50 million U.S. clients, many with spotty credit histories. The deal brought legitimacy to a business few considered respectable.
The boom in dodgy mortgages that followed set the global crisis in motion. The carnage united 355 of the world’s wealthiest people in a telling way: They are now ex-billionaires, according to Forbes magazine’s annual wealth ranking. It cost Hong Kong tycoon Li Ka-shing $10 billion in the last year alone.
HSBC’s precipitous plunge raised the stakes not just for wealthy Hong Kongers, but the territory’s entire economy.
It’s hard to exaggerate the 144-year-old bank’s importance in Asia’s ninth-biggest economy. Hongkong and Shanghai Banking Corp. moved its global headquarters to London in 1993 and adopted a bland abbreviation. It’s still an icon among icons in Asia. HSBC is one of Hong Kong’s three note-issuing banks and its stock was long seen as a sure bet -- a retirement stock.
Many in the territory refer to HSBC as “big elephant” or simply as “the bank.” Its futuristic building is both a tourist destination and a source of pride for Hong Kong’s 7 million people. The elephant reference relates to HSBC’s large weighting in the Hang Seng stock index.
Global Storm
More importantly, perhaps, is faith in HSBC’s uniqueness. Even as Citigroup Inc. and Lloyds Banking Group Plc stumbled, Hong Kongers believed HSBC would ride out the global storm.
The events of March 9 shattered the veneer of invulnerability. “HSBC is toppled -- the whole city is mourning,” said a March 10 editorial in Hong Kong’s Apple Daily. On that same day, Sandy Flockhart, chief executive of HSBC’s Asia-Pacific operations, held a hastily arranged press conference. He said HSBC shares were “headed for calmer waters.”
The damage had already been done, though. HSBC is clearly vulnerable to the whims of global markets that are growing darker by the day. It’s also worth noting that HSBC’s shares are now trading below the level they were in 1998, when Hong Kong spent $15 billion of public money to support stocks.
Back in Recession
It’s a measure of where Hong Kong finds itself as the world economy slides. The three pillars of Hong Kong’s economy -- exports, financial services and real estate --- all look shaky. By value, home sales fell 69 percent in February from a year earlier to HK$13.6 billion ($1.8 billion), after declining 72 percent in January.
It doesn’t much matter that shares stabilized or if the March 9 plunge was related to end-of-day trading processes that Hong Kong’s stock exchange is now scrapping. It doesn’t matter much that the response by institutional investors to a rights offering this month was, in Flockhart’s words, “very strong.”
Nor should investors be comforted by news that Hong Kong’s financial regulator is investigating whether stock manipulation was behind HSBC’s volatility.
It really does make you wonder if Inspector Clouseau, the bumbling detective of “Pink Panther” fame, is on the case. Investigate all you want. Just remember that in trying to solve cases, the accident-prone Clouseau frequently brings misfortune to himself and others. And he tends to miss the big clues.
Growth Prospects
The real problem in Hong Kong is denial at the highest levels of government about the economy’s growth prospects.
The city’s strong fiscal position means Financial Secretary John Tsang should do more to support an economy heading for its first full-year contraction since 1998. Tsang’s view that gross domestic product will shrink by as much as 3 percent in 2009 might prove optimistic as China slows further.
Hong Kong’s recent move to cut taxes temporarily and boost spending on infrastructure may help. Yet policy makers will need to do far more to keep unemployment from skyrocketing as global demand slides. The deepening U.S. recession will hit Asia hard.
Tsang forecast a HK$4.9 billion budget deficit for the year ending March 31. Steven Hess, a senior credit officer at Moody’s Investors Service in New York, said last month that deficits aren’t a threat to Hong Kong’s debt rating because of its large fiscal reserves and limited borrowings. Hong Kong has plenty of latitude to boost spending.
Recent HSBC headlines won’t help consumer or business sentiment. Seeing one of the bedrocks of the economy wilting amid global turmoil won’t get households spending more of their savings. Nor is it likely to bolster confidence among executives.
Here, breathless attempts to get to the bottom of HSBC’s stock drop are of little help. Officials risk, Clouseau-style, ignoring some basic facts about the troubles heading their way. Taking them more seriously and acting boldly will bolster the stock market. Detective work won’t make much difference.
(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net
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