Wall Street’s China dreams get jolt from US Hong Kong warning

US President Joe Biden has a message for Wall Street: Beware in Hong Kong.

And with that, a question suddenly confronts C-suites across Manhattan. If the White House wants banks to reconsider their presence in Hong Kong because China is tightening its grip on the territory's legal and financial systems, what does that mean for their long-held ambitions for expanding in the world's second-largest economy and its market of 1.4 billion people?

That was among the many thoughts racing through financial executives' minds on Friday as they scrambled to absorb the full implications of Biden's warning about living and working in one of the industry's biggest global hubs. While his broad advisory stopped short of ordering them to scale back investments or leave Hong Kong, administration officials worry that major banks haven't yet come to grips with the risks they now face in the region.

"It certainly can cause a major rethink of strategic plans the next decade because China is considered a major growth opportunity," Mike Mayo, a bank analyst at Wells Fargo & Co., said in an interview. It may not cause any immediate pain for banks, he said. But longer term, "could this be disruptive?" he said. "Absolutely."

Banks are, of course, no strangers to Hong Kong and its shifting landscape. Financial firms are longtime residents, often treating the 427-square-mile (1,106-square-kilometer) region akin to New York and London. As tensions flared between pro-Democracy protesters and China's allies in recent years, bankers had a direct view, sometimes watching melees break out in streets just below their towers.

So Biden's warning, in some ways, offered no revelations about local realities, save perhaps for what it said about the direction of US-China relations.

Nevertheless, banks are being publicly urged to rethink how they've long done business with companies in China's rapidly growing economy. They have been thinking about it a lot -- and so far they're still in Hong Kong.

Perhaps no US lender has been more vocal in recent months about its bet on the city than Citigroup Inc. Earlier this year, the firm said it will hire as many as 1,700 people for its operations there as part of a plan to capture more business in China's Greater Bay Area.

In April, under new Chief Executive Officer Jane Fraser, the firm excluded its Hong Kong consumer operations from a decision to exit retail banking in 13 markets across Asia and Europe. Instead, the lender would focus its efforts on four regional wealth hubs, including one in Hong Kong.

'Unfounded Fear-Mongering'

Biden's advisory is "totally ridiculous and unfounded fear-mongering," a spokesman for the territory said in a statement. "The main victims of this latest fallout will sadly be those US businesses and US citizens who have taken Hong Kong as their home."

While China has been building up Shanghai as another financial hub, there are fresh signs of commitment to Hong Kong. In recent meetings with bankers, Chinese officials have outlined plans to exempt companies that go public in Hong Kong from first seeking the approval of the country's cybersecurity regulator, people familiar with the matter said this week. That would give Hong Kong an advantage over New York in winning business with Chinese companies.

For banks, the city isn't just a staging area to China, but also a valuable market in itself. Outposts in Hong Kong have provided growth to overseas firms as some forms of revenue from their home countries were shaken by the pandemic. Morgan Stanley, for instance, saw assets in its Hong Kong unit surge 70% in the last year, making it the fastest growing lender among licensed banks on the island, according to the consultancy KPMG.

Banks have spent years managing the risk of their businesses in Hong Kong, and have shifted some business to alternative locations such as Singapore. But they won't be quick to pull out of a city that has defied dark predictions before only to show resiliency.

Aware of Risks

Executives from BlackRock Inc.'s Larry Fink to Bank of America Corp.'s Brian Moynihan said earlier this week that the flareup in tensions between the US and China had left them unfazed and won't affect their operations in Hong Kong.

Many firms have been digging in. AmCham, or the American Chamber of Commerce in Hong Kong -- which counts Citigroup, JPMorgan Chase & Co. and Goldman Sachs Group Inc. as members -- said it just purchased new offices in central Hong Kong and plans to work with public officials on the recent turbulence.

"AmCham is well aware of an increasingly complicated geopolitical environment and its risks," the group said in a statement. "We are here to support our members to navigate those challenges and risks while also capturing the opportunities of doing business in this region."

Disclaimer: This opinion first appeared on Bloomberg, and is published by special syndication arrangement