The View

Is it impossible to protect Hong Kong investors from their worst instincts?

Action against HSBC Private Bank (Suisse SA) is a “fading, withering volley.”

PUBLISHED : Thursday, 12 May, 2016, 9:41am
UPDATED : Thursday, 12 May, 2016, 10:37am

HSBC Private Bank (Suisse SA) was recently fined HK$605 million and had its advisory licence revoked by the Securities and Futures Commission (SFC) over alleged misconduct related to the sale of Lehman Brothers-related structured products and some other forward accumulators between 2003 and 2008.

It is a fading, withering volley by the SFC in an old war for local investors that was long lost due to the insuperable greed of the investors themselves.

At best it says that the SFC is willing to inflict world-class fines on local banks. At worst, it is a belated attempt to redress history by coercing financial institutions to do the impossible – to safeguard Hong Kong investors from their own worst instincts which have time and time again proven to be like driving a Ferrari over a cliff at full speed.

The history of booms and busts in securities and the property market attest to Hong Kong’s acute appetite for returns regardless of risk.

Banks can deal with this through investor education or curtailing the products they offer and types of clients they serve. It’s easier to do the latter and it will have intended and unintended repercussions.

The typical Hong Kong investor, whether they be ultra high net worth or ordinarily wealthy, also share common and tragic characteristics rooted in the city’s longstanding stock broking history.

Clients certainly demand advice and service, but worst of all they tend to blame their banks or advisors when things go wrong.

The blind search for more yield while ignoring the fine print created its own imploding financial black hole. That explains the bitter protests over mini bonds and accumulators that stretched on and on. For years, protesters sought justice with the voracity once reserved by the Holy See for investigating apparitions of the Holy Mary during the Inquisition.

And even worse, today’s excessive compliance and byzantine internal documentation makes financial institutions too inward looking.

It distracts their collective ability to think about the next market eruption. No amount of well-intentioned compliance can protect markets and ultimately investors from their own march of folly. Or from what problems lie ahead with US monetary policy and interest rates, and Donald Trump.

Since the subprime crisis, if investors and government planners believe that monetary policy has been effective in maintaining price stability and the source of the problem is failed regulatory oversight of the financial system, then they should exclude an outright inflationary monetary policy response. However, if they do not understand the pervasive and unsustainable levels of private credit that continue to exist, then they will underestimate the amount of government stimulus necessary to offset deflation. That could account for sluggish real growth. But then there is deus ex machina in economics.

During an interview with CNBC last week, Donald Trump, the presumptive Republican nominee, said that America’s formula for economic recovery might involve repaying its creditors at a discount. This is a major development that should rewrite the assumption of the risk-free nature of US Treasuries. Any change in investor confidence will be costly to the American taxpayer.

It followed Trump’s remarks that rising interest rates would be disastrous for the economy. And if the economy falters he “can make a deal”… “One never has to default if one is printing the money,” said the property developer who has employed savvy bankruptcy tactics to save his assets.

The difference is that countries and companies differ in their ability to create debt and money. Once sovereign bond holders sense that a discount is being foisted on them, not only will they start dumping the bonds, they will also refuse to buy any more paper. Interest rates immediately skyrocket as a result, so that not entirely smart plan collapses.

Then on the other side of the yield curve, few analysts are willing to talk about the effect of negative interest rates if they should come to Hong Kong - especially how it might provoke panic among local depositors. The experience in Denmark, Sweden and Japan suggests that the costs can be passed on to household borrowers. However, below-zero rates have increased the sales of safes in Japan, which may suggest households are hoarding cash.

Hong Kong’s panic-prone investors and depositors may not be so tolerant. Mass withdrawals of cash, a pumped-up real estate market or surging demand for gold could destabilise our local system as people seek anything that stores rather than depletes value. Anything could happen between now and January.

Peter Guy is a financial writer and former international banker