HSBC Holdings PLC (LON:HSBA) and Standard Chartered PLC (LON:STAN) saw their shares sink on Friday following fresh moves by the Chinese government to rewrite Hong Kong’s legal code, sparking fresh fears of protest and erosion of the independence of the financial hub.
Shares in HSBC fell 4.2% to 382p in late morning trading while Standard Chartered slipped 1.9% to 384.1p. Both banks have significant operations in Asia and derive a large portion of their profits from the region.
The banks worsening fortunes followed a sharp fall this morning in the value of Hong Kong’s Hang Seng stock market index as investors fretted that increased Chinese interference in the territory could cause yet more violent clashes between authorities and pro-democracy activists as well as potentially jeopardising the city’s status as a liberal trade hub.
“Last year, pro-democracy protests were common in Hong Kong, some of which caused major disruption, so traders are now worried the situation will flare up again”, said David Madden at CMC Markets.
Recent events place HSBC in a particularly tricky position, with the bank having previously considered moving its headquarters to Hong Kong from London.
Pressure to relocate increased in April after HSBC suspended dividend payments under pressure from the Bank of England, attracting the ire of Hong Kong retail investors.
New security laws
The catalyst for the share price slide came overnight when China’s rubber stamp parliament, the National People’s Congress, said it will draw up plans to impose national security legislation on Hong Kong after multiple failed attempts to pass similar laws in the territory’s local legislature.
The law, which will be added to Hong Kong’s mini-constitution, the Basic Law, will target subversion, terrorism and foreign influence, however, critics have voiced concerns that the legislation will be used against political dissidents and also breach the ‘One Country, Two Systems’ framework that has governed the relationship between Hong Kong and mainland China since the city was handed over from British rule in 1997.
Analysts have also highlighted that Beijing’s heavy-handed intrusion into Hong Kong’s governance has the potential to spark further tension with the US.
“At a time of already strained relations between China and the West, this decision will only isolate Beijing even more. Investors will need to add renewed Hong Kong-Beijing tensions into their mix of geopolitical risks, whilst the way it fits into the broader US-China rivalry will be closely watched”, said Markets.com’s Neil Wilson.
An additional risk from the US is the designation of Hong Kong as a distinct trading jurisdiction compared to mainland China, which grants it special trade privileges that are not available to the rest of the country.
If the US government decides to revoke these privileges, Hong Kong’s economy, which is already suffering its steepest recession since records began in 1974 following last year’s protests and the coronavirus pandemic, could find itself in even more jeopardy.