China Chaos Suggests HSBC Holdings plc Is A Sell

Over the past six months, shares in HSBC (LSE: HSBA) have fallen by around 14% excluding dividends as the market frets about the bank’s exposure to emerging markets, China in particular. 

And investors are right to be concerned about HSBC’s exposure to Asia’s powerhouse. HSBC has staked its future growth on China to counteract slower growth in the US and the Eurozone. If China’s growth starts to splutter, then HSBC’s going to have a hard time conjuring up similar growth elsewhere. 

Lower returns 

Last year HSBC unveiled a grand plan to refocus its operations on China, specifically the Pearl River Delta area of southern China, which includes the mega city Shenzen and Hong Kong. As part of this restructuring, the bank is slashing 50,000 jobs from its global headcount but increasing the number of workers it employs within China. 

Along with job cuts, HSBC is looking to cut $290bn of risk-weighted assets from its global  balance sheet, excluding China. Of these, management is looking to redeploy $150bn of assets into Asian markets.

Management has already started this redeployment, cutting $38bn of risk-weighted assets from the bank’s balance sheet during the third quarter. However, redeploying these assets is proving to be harder than the bank first imagined.

Indeed, as HSBC’s chief executive Stuart Gulliver explained on its third quarter conference call, HSBC has been forced to slow its redeployment of assets because of the slowdown in Asian economic growth. In other words, HSBC’s relocation to Asia is now on hold.

Until economic activity picks up across Asia, HSBC has a big problem. The bank is shrinking itself outside Asia, but isn’t growing inside Asia, the net result being that HSBC is shrinking in size overall. 

With a declining asset base, HSBC will struggle to generate steady, consistent sales and profit growth as it has done in the past, which isn’t good news for investors. 

Outlook for growth 

HSBC’s future is tied to China’s economic growth. However, China’s economic outlook is becoming more depressing with every passing day. 

For example, official plans call for slower growth in 2016 and beyond, with the 7.5% growth target reduced to 6.5%. What’s more, capital is rapidly fleeing the country, moving back into European and US assets. More than $500bn of overseas investment left China during the first eight months of last year.

Outflows accelerated during the last four months of the year and topped $140bn during December. China does have $3.4trn in foreign currency reserves to counter outflows but these are being depleted rapidly. In the 12 months through November 2015, reserves fell by 10%. 

Too late  

All of the above is bad news for HSBC. China is no longer the unstoppable economic powerhouse it once was and HSBC’s decision to go overweight in China but underweight in the rest of the world seems to have been made about 10 years too late.