How important is the HSBC Group in UK-China relations?
Why the CCP will not challenge the dominance of the HSBC Group in Hong Kong
The Investigator | No. 07/2025
As His Majesty’s (HM) Government prepares its ‘China audit’, policy decisions should not be influenced by misplaced fears that the Chinese Communist Party (CCP) aims to replace HSBC Group in Hong Kong with a Chinese state-owned bank.
This ‘Investigator’ demonstrates that these fears are unfounded, and even if it were the case, for various reasons which the piece explains, the CCP would not be able to replace HSBC Group with a viable state-owned option.
The tax contribution of HSBC Group to HM Treasury is often thought to be higher than it actually is, which intensifies the concerns around the group’s significance in UK-PRC relations.
Looking at the specifics
The amount of tax paid by HSBC Group to HM Government is hard to assess from publicly available sources. The annual report of HSBC UK Bank plc (a wholly owned subsidiary of HSBC Group) shows tax paid of £1.508 billion in 2024. This number is unlikely to represent the HSBC Group’s total contribution to HM Treasury, given the presence in the United Kingdom (UK) of the group’s headquarters and group functions, which will generate payroll and social security charges even if they do not generate taxable profits in the UK.
A report prepared by PricewaterhouseCoopers (PwC) for UK Finance calculates total tax contributions (TTC) by the banking sector in a range of countries, including the UK. TTC includes items like payroll taxes and social security contributions collected by the banks as well as the taxes which the banks pay on their profits. Some extrapolation from the numbers in this report appears to be the best way of estimating, from open sources, the value of HSBC Group’s presence in the UK to HM Treasury.
According to the report, the British banking sector in 2024 paid £12.2 billion in corporation tax, bank surcharge and bank levy. The tax paid by HSBC Group in 2024 represents 12.4% of this number. Using this percentage to derive a figure for HSBC Group’s share of the larger figure for bank sector TTCs from the data in the PwC report produces a figure of £5.5 billion in the UK, or 0.5% of HM Treasury tax receipts. Not, therefore, a meaningful enough sum to influence the conduct of relations with the PRC.
Since the CCP has made no policy pronouncements directly relevant to whether or not it would threaten HSBC Group and other banking interests, any assessment must rely upon a range of indicators. These suggest strongly that the Chinese Government does not harbour any such ambition, not least because several policy imperatives to which they are firmly wedded would make it very difficult for such an ambition to be realised.
Mainland banks would not be up to the task
The main reason for discounting the risk that Beijing might seek to displace HSBC Group from its role and replace it with one of the PRC’s state-owned banks is that none of those banks would be capable of fulfilling such a role. The causes of this are deeply embedded in policy choices made during the years since reform began; and which persist, and are being reinforced, under Xi Jinping, General Secretary of the CCP. These causes can be summed up into two key factors:
The growth and profitability of the PRC’s state-owned banks has mostly been handed to them by policy makers and regulators – via a process known as financial repression. The banks’ interest rate margin was set by government decree, and at a level which the banks had done nothing to earn, since they have persistently failed to develop any appreciable competence in credit risk analysis. Nor have they been able to address chronic over-staffing and other costly inefficiencies. To be fair to bank management, they would probably not have been allowed to lay off the large numbers of redundant or under-employed staff – but, it does not matter where ultimate responsibility lies for the incompetence of the Chinese state-owned banks, just that it exists and persists.
Financial repression also resulted, for lengthy periods, in the return on bank deposits being below the rate of inflation – which triggered a desperate search for yield among Chinese savers. This in turn led to the growth of unregulated or poorly regulated savings products promising returns which were either over-optimistic or fraudulent.
The leadership has learned to mistrust Chinese financial institutions
The PRC’s domestic financial institutions, including its state-owned banks, have been heavily complicit in a long series of financial missteps, which have left the Chinese economy and Chinese public finances with a very large, interlocking debt problem. The present leadership is struggling to cope with this legacy. Some examples include:
State-owned banks funded the uncontrolled overseas spending sprees and uncontrolled domestic expansion of companies such as Dalian Wanda, Anbang, Fosun, HNA Group and Tomorrow group, which resulted in the central government having to take drastic action in 2017 to rein in this activity on the grounds that those organisations had created a significant systemic threat to the PRC’s financial system. The PRC set up a new body, the Financial Stability and Development Commission (FSDC), under the State Council in 2017 to remedy the situation. Some of the measures introduced included arresting or placing under investigation the principal managers, introducing drastic curbs on outbound activity in mergers and acquisitions, and outbound financing by the PRC’s banks in order to reduce the extent of the systemic risk.
Reputable analysts’ estimates of the total amount of debt linked to the PRC’s real estate industry vary, but none is less than ¥40 trillion (£4.3 trillion) or about 30% of the PRC’s 2024 nominal gross domestic product (GDP), and some are much higher. Although much of the first line debt of real estate developers is owed to local government financing vehicles (LGFVs), the overall indebtedness of the real estate system is still substantially underwritten by bank lending or by banking activity, since banks distribute the wealth management products created by the LGFVs, and the local governments use the proceeds of these borrowings to help repay their own borrowing from the state-owned banks.
Continuing capital controls also contribute to the difficulty of having a PRC bank assume the kind of role played by HSBC Group. Although Beijing has sanctioned a number of official pipelines enabling some capital account ‘leakage’ – such as the stock and bond connect arrangements with Hong Kong – the abolition of capital controls is unlikely to happen in the foreseeable future.
So the PRC’s state-owned banks will remain firmly embedded in a system which enables them to earn an interest rate margin and a return on capital without having to develop the credit risk analysis and other competitiveness-enhancing skills which underpin success in banks like HSBC, which have grown up in a world of open financial borders and free but regulated competition.
In the land of cover-up, does the leadership know?
Given the deeply ingrained habit of trying to cover up when things go wrong, one cannot automatically assume that the leadership are fully aware of all the problems in the PRC’s banking and financial system nor that these wounds are also attributable to policy options chosen by the leadership itself. However, the events of 2017 and the creation of the FSDC suggests strongly that the leadership has indeed taken the trouble to find out what has been going wrong and to identify rogue players. The fact that many ownership restrictions on foreign financial services companies operating in the PRC were removed in the aftermath of 2017 events also suggests an awareness by the leadership that foreign financial institutions are significantly more compliance-minded than the PRC’s own ones.
Issues specific to HSBC Group
After the imposition of the National Security Law in Hong Kong, the CCP wants to ensure that Hong Kong remains stable. The party keeps exhorting the Hong Kong Government to ensure Hong Kong resumes its role as a leading financial hub in Asia. HSBC Group and its 61% owned subsidiary, Hang Seng Bank, control 40% of all bank deposits in Hong Kong. Any attack on HSBC Group would therefore be highly destabilising to Hong Kong.
The importance of HSBC Group to Hong Kong is not just about its role as the territory’s leading commercial bank. In the absence of any meaningful taxpayer funded pension system in Hong Kong, the shares of large companies like HSBC Group, which pay regular and reasonably generous dividends, have become an important element in the savings and retirement revenues of millions of ordinary Hong Kongers and other Asians, notably the Chinese diaspora.
The decision by the British regulator to prevent all UK regulated banks, including HSBC Group, from paying a dividend in the aftermath of the Covid-19 pandemic, caused financial pain and massive resentment on the part of many ordinary people in Hong Kong and elsewhere in Asia, and was the stimulus for demands among such shareholders for HSBC Group to split itself up and remove its consistently profitable Hong Kong and Asian operations from the purview of the UK regulator. The senior management and board of HSBC Group resisted this effort, although the group has continued to shrink its global presence.
The structural changes recently announced by the new group CEO may result in some geographical separation along the lines being advocated by some shareholders; but the announcements made so far are not clear on this. Although they seemed to envisage some sort of geographical separation, they also refer to global functional overlays.
Conclusion
HSBC Group’s tax contribution to HM Treasury would not be significant to cause damage to the UK economy, even if the CCP harbours the ambition to displace HSBC from its prominent role in Hong Kong, which it does not. As this ‘Investigator’ has shown, the belief that the CCP would displace HSBC Group in Hong Kong and internationally, in favour of a state-owned bank of the PRC, is unsubstantiated and would be unfeasible for the party to enact even if it were the case.
The key point for HM Government to remember is that the only recent source of material damage to HSBC Group’s standing in its traditional markets in Hong Kong and the rest of Asia was caused by decisions taken by the UK banking regulator and not by any action from Beijing.
Richard Margolis is a retired former diplomat and businessman with 40 years of China experience.
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