China investors face increasing sanctions risk

China-bound investors are facing risks beyond trade tariffs. Sanctions are now part of the process, with major shipping company COSCO getting sanctioned on September 25 as part of Washington’s anti-Iran policies, Forbes writes in the article China Investors Face Increasing Sanctions Risk. Treasury’s Iran-related sanctions against China also included specific subsidiaries of COSCO Group — a name most have seen written on the side of a shipping container sitting portside from Boston to Los Angeles – such as Kunlun Shipping and Kunlun Holding. The Kunlun firms have links to the state-owned China National Petroleum Corporation (CNPC). 

Washington thinks that China’s Bank of Kunlun has been financing Iranian oil shipments, giving them a reason to punish China beyond the trade war. The Bank denies financing Iranian oil shipments in dollars.Future sanctions on CNPC-linked entities are likely. The immediate macroeconomic impact on China might be limited, but sentiment in China can only get worse as markets assess the possibility of sanctions related to other matters.

Two come to mind: human rights violations of Uighur Muslims in the Western province of Xinjiang could lead to sanctions on Hikvision, a surveillance tech company. Or the possibility of Congress framing Hong Kong protests as a human rights issue, leading to the ultimate threat against China – the removal of Hong Kong’s special trade status with the U.S. While sanctions based on human rights are not yet on the table, the table is being set based on at least one piece of legislation filed by Senator Marco Rubio. Shanghai Pudong Development Bank (SPDB), China Merchants Bank and the Bank of Communications are potential targets, the Economist Intelligence Unit (EIU) analysts wrote on September 30.

In July, a U.S. federal court said the three banks were in contempt for failing to comply with earlier subpoenas regarding alleged violations of sanctions on North Korea. The Washington Post referred to the finding as a “financial death penalty” for the banks, two of which are part of China’s big four state owned lenders. The three banks said that Beijing ordered them not to cooperate and share records because, as China says about audits of its state firms trading on the U.S. stock exchange, these are state’s secrets. It is possible that the U.S. authorities will use the lack of compliance in one or more of these cases as grounds to cut off a bank's access to dollar funding via the U.S. financial system, EIU analysts believe.

From the EIU report: “All three banks, including SPDB, have most of their exposure on the Chinese mainland, with most transactions overwhelmingly done in renminbi. Losing access to U.S. financial markets would be disruptive for the banks affected, but their primary markets are domestic. However, the extra-territorial component of U.S. sanctions, which means that all companies around the world must stop their business dealings with sanctioned entities if they use the U.S. dollar, means that these moves would sever the ties of these banks with their international counterparts. Should international banks fail to severe these ties, they in turn could face fines reaching billions of dollars.”

The same pressures could be brought to bear against companies deemed human rights violators by Congress. Of course, Beijing would respond aggressively sanctions hurting dollar inflows, or calling it a human rights violator. Beijing has already threatened to deploy their own black list of U.S. companies. It could also withhold licences to American banks. Wall Street is one of China’s biggest fans, hoping to capitalize on China’s opening markets and recent rule changes that allows for foreign investment banks to set up shop in the mainland with a local partner. Goldman Sachs and JP Morgan are expanding in China, for example.

“The trade war is increasingly shifting into other areas outside of just merchandise tariffs, including technology, but also finance, investment and national security policy,” says Nick Marro, a trade analyst at the EIU. “These are areas that are more disruptive to the global trading system. The U.S. commands quite an asymmetric advantage over China when it comes to applying financial pressure, especially when it comes to limiting access to the dollar denominated financial system. We (expect) targeted sanctions, tied in part to issues like Iran, to emerge as the next stage of the trade war,” Marro says.