Citi uncomfortably straddles Hong Kong-China fence

Citigroup has a busy time ahead staying out of Chinese politics. Chief Executive Mike Corbat has so far avoided taking sides on Beijing's controversial security law targeting sedition, terrorism, and "foreign interference" in Hong Kong. But if the White House follows through on threats to sanction Chinese banks over the issue, the $124 billion lender might make a convenient target for retaliation.

HSBC and Standard Chartered publicly backed the law last week; HSBC even published a photo of regional chief Peter Wong signing a supportive petition, although major shareholder Aviva Investors pointed out this is premature at best given the actual legal text hasn't been published yet. American companies in Hong Kong, reticent so far, might feel pressure to follow suit. After all, in 2014 the big four US accounting firms came out against the pro-democracy demonstrations snarling Hong Kong's streets.

Citi sticks out in the Asian financial hub, with its logo slapped on retail branches and ATMs, while most US peers stick to the corporate side. It has won some high-profile business of late, helping Alibaba launch a secondary listing on the local exchange in late 2019 and advising trading house Li & Fung on its May take-private deal. Anti-Beijing sentiment could work in Citi's favour if demonstrators migrate their HSBC accounts.

So China might lean on Citi's Asia Pacific boss Peter Babej to speak up, too. Were he to demur, mainland license applications might get put on hold, Citi could be locked out of Belt and Road projects, and its pipeline of Chinese initial public offerings could freeze.

Were Babej to take Beijing's side, however, it would not go down well in Washington. And Citi might get punished by China regardless, depending on the scope of US sanctions against mainland lenders. Indeed on Tuesday state tabloid the Global Times dismissed Wong's photo op and said HSBC is still on the hook for cooperating with a US investigation into telecommunications giant Huawei.

The pandemic left Citi more reliant on Asia, which in the first quarter comprised 53% of the bank's profit. Fortunately its regional business is diversified, with markets like Vietnam driving growth, so any Chinese punishment will sting, not cripple. With little political room to manoeuvre, Corbat's best hope lies in Beijing letting Citi stay on the fence.