Global financial institutions, still reeling from multibillion-dollar losses in Russia, are now reassessing the risks of doing business in China after an escalation of tensions over Taiwan. Lenders including Societe Generale, JPMorgan and UBS have asked their staff to review contingency plans in recent months to manage the exposures, according to sources close to the operations.
Meanwhile, global insurers are moving away from new policies to insure companies that invest in China and Taiwan. In addition, the costs of political risk coverage have skyrocketed by more than 60% since the Russian invasion of Ukraine.
“Political risk around potential US sanctions and the likelihood of China responding by restricting the flow of capital has kept risk managers busy,” said Mark Williams, a professor at Boston University. “A sanctions war would significantly increase the cost of doing business and push US banks to rethink their strategy with China.”
Heated rhetoric between Beijing and Washington over Taiwan has unsettled businesses, just months after Russia’s war unexpectedly forced the world’s biggest lenders out of business and stop serving ultra-rich customers. Last week, US lawmakers stepped up pressure on banks to answer questions about whether they would withdraw from China if it invaded Taiwan.
While the financial services executives who spoke on condition of anonymity said they view the risk of armed conflict in North Asia as low, they see tit-for-tat sanctions between the U.S. and China disrupting the flow of finance and commerce are increasingly likely.
Any withdrawal would represent a dramatic change for Wall Street firms, which have poured billions into China after opening up their industry in recent years. Lenders ranging from Goldman Sachs to Morgan Stanley have taken control of joint ventures and sought more banking licenses, while adding staff by doubling down on the country. The combined disclosed exposure of the largest Wall Street banks to banks in China was approximately $57 billion at the end of 2021.
Those ambitions are now threatened by rising tensions between the United States and China. Last week, Citigroup Inc. CEO Jane Fraser faced questioning from lawmakers over whether the lender would pull out of China in the event of an invasion of Taiwan. She responded online with other banks: She would seek guidance from the US government before making a move.
“It’s a hypothetical question, but it’s very likely that we would have a materially reduced presence, if any, in the country,” Fraser said. Any pushback in China would only hurt these companies, China’s Global Times newspaper reported last week.
“US politicians want to increase pressure to force major US financial organizations away from the Chinese market,” the Communist Party newspaper said. “There is no denying that China’s financial markets may lose some capital, but US banks may also face worsening economic problems as a result of Washington’s poisonous decision.”
In recent months, companies have been conducting stress tests to see if they can manage the risk of a sudden market crash, examining their exposure on currency, bond and stock trading desks, people familiar with the matter said. While banks often make contingency plans without putting them into action, the mounting tensions are adding some urgency.
France’s SocGen has been evaluating staffing in Greater China, including Hong Kong, fueled by nervousness among executives in Paris, one person said. UBS has asked its Taiwan-based trading desk to assess its contingency plan and see how they can reduce exposure to the island, according to a person familiar with the matter. One way would be to reduce foreign exchange trading services for Taiwanese customers, the person added.
Deutsche Bank AG has also prepared and made plans that would allow it to move some regional assets and staff quickly in the event of an emergency around Taiwan, people familiar with the matter said. Officials from all the banks declined to comment.
The most important thing is to ensure the safety of staff, identify customers who may be sanctioned and look for plans to mitigate counterparty risk and potential business losses, according to two of the bank’s executives who asked not to be identified discussing a sensitive issue. .
One banker said staff at his firm had considered the option of liquidating positions on the China Financial Futures Exchange to reduce counterparty risk on land, replicating those contracts on other exchanges, such as in Singapore.
Meanwhile, insurers have raised prices an average of 67% for China-linked political risk coverage, according to Willis Towers Watson Plc. Companies that can get insurance are facing a “steep reallocation” of pricing, which has been “very serious” for China, according to Laura Burns, senior vice president of political risk at London-based Willis Towers Watson.
Insurers are writing new policies, but “cautiously and selectively” in China and have reduced their exposure to Taiwan, said Nick Robson, head of credit specialties at brokerage Marsh & McLennan Cos. Political risk insurance pays if a client loses money due to political events such as civil unrest, terrorism or war.
At HSBC, the global lender most exposed to China and Hong Kong, calls by its largest shareholder to break up the Asian business have been fueled in part by concerns that it is susceptible to a US-China decoupling.
Ping An Insurance would back a breakup of HSBC’s business in Asia or just Asia’s retail operations, a person familiar with the matter said. The lender, which was founded in Hong Kong and Shanghai in 1865, has increasingly been looking to invest in other markets such as India to cushion any financial hit from volatility in parts of North Asia, a person familiar with the matter said. Chief Executive Officer Noel Quinn has resisted calls for a breakup. The bank declined to comment.
Planning for the spectrum of scenarios is no easy task, especially when executives are wary of alienating Chinese officials on a highly sensitive issue. A senior private banker in Hong Kong, who works with wealthy Chinese clients at a European bank, says the subject is so taboo that bankers are reluctant to hold formal discussions or put plans in writing for fear it will return to Beijing.
“Some of the banks that are most exposed are the most afraid to plan for the long term, fearing a backlash from China,” said Isaac Stone Fish, founder of Strategy Risks, which specializes in corporate relations with China. “The banks that have a lot of these conversations are doing it outside of China and Hong Kong.”
Lessons from Russia
In some cases, executives worry about a situation, much like Russia, in which Beijing prevents foreign banks from moving assets or capital abroad as payment for any US sanctions.
Russian authorities plan to review individual applications on the sale of foreign bank units in the country without instigating a blanket ban on such deals, two officials familiar with discussions on the matter said earlier. The government will consider each request and decide to grant the permit if it is deemed beneficial to the nation, the officials said.
The Interfax news service had earlier quoted Deputy Finance Minister Aleksey Moiseev as saying that a government subcommittee on foreign investment would reject all sales requests from foreign banks to sell their units “until the situation has improved”.
European banks, including Societe Generale and UniCredit SpA, have pointed to combined impacts of nearly $10 billion from Russia, mainly from reducing the value of their operations and setting aside money as a shield against expected economic ramifications.
“Russia has proven to be a model of what you don’t want to happen,” said Dale Buckner, chief executive of security services firm Global Guardian, whose clients include banks and private equity firms. “People are wondering ‘what if’: if there was a lockdown, if the cyber system was shut down, if there was naval strikes or an actual war. What would happen?”
The first part of the calculation would be to review tangible assets and intellectual property in the region, understand where a company’s money is parked and who is in control if China decides to take control of the banking system and deny access, he said.
“It’s almost impossible to plan for these things,” said Tom Kirchmaier, a professor at the Center for Economic Performance at the London School of Economics. “While there has been some planning for these scenarios since the financial crisis, there is no doubt that there will be some big surprises when the theory finds its way into practice.”