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UK banks may avoid HK sanctions, but little relief expected after US election

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UK banks may avoid HK sanctions, but little relief expected after US election

Foreign banks with large international operations in China, such as HSBC Holdings PLC, are likely to escape the worst potential fallout from U.S. sanctions connected to China's new security law in Hong Kong, according to industry experts.

But political pressure from the U.S. over the new law, along with Sino-American trade tensions, are likely to continue even if Democratic nominee Joe Biden wins the U.S. presidential election in November, the experts told S&P Global Market Intelligence.

London-based HSBC and Standard Chartered PLC both have a significant presence in China. HSBC dominates the banking scene in Hong Kong, where 35% of its customer accounts are located, compared to 29% in the U.K.

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Both have incurred the wrath of U.S. and U.K. politicians after indicating support for China's new national security law in Hong Kong, which allows penalties for crimes of secession and subversion.

Neither HSBC nor StanChart responded to requests for comment for this article.

Security law

The U.S. State Department on Oct. 14 delivered a report to Congress naming 10 people, including Hong Kong Chief Executive Carrie Lam, who it says have "materially contributed" to the Chinese government contravening its promises to maintain a "one country, two systems" approach to Hong Kong in the eyes of the U.S. and the U.K., the latter of which governed the city until 1997.

All the individuals have already been sanctioned. On Aug. 7, the Treasury implemented targeted sanctions on 11 senior Hong Kong officials for allegedly undermining Hong Kong's autonomy and 24 Chinese state-owned entities were put on a list that requires U.S. companies to notify the U.S. government if they do business with them.

The U.S. Treasury is also set to draw up a list of foreign financial institutions that have "knowingly engaged" in significant transactions with sanctioned people, to be delivered within two months.

The sanctions applied to non-U.S. banks could include denial of U.S. dollar clearance via U.S. banks, while sanctions applied to individuals could encompass cutting them out of the U.S. financial system. Banks anywhere in the world could also be involved in secondary sanctions if they act on behalf of sanctioned individuals.

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A regional policy expert with extensive experience of the U.S. government's approach to China sanctions told S&P Global Market Intelligence that the U.S. Treasury is expected to go for an incremental approach to avoid spooking markets at a time of heightened turmoil. This increases the likelihood that major foreign banks would be left off the list, according to the source, who declined to be named in case his comments affect his work in the region.

"I believe that many internationally active banks have gone through their records to distance themselves from the [originally sanctioned] 11 persons," he said.

Anna Bradshaw, sanctions specialist at London-based lawyers Peters & Peters, told S&P Global Market Intelligence that it is "extremely unlikely" the U.S. will adopt sanctions targeting HSBC and StanChart.

S&P Global Ratings, too, said in a Sept. 17 report that it is "very unlikely" the U.S. will impose severe sanctions on banks, at least in the short term.

A Biden administration

Any change in administration in Washington following the election in November is unlikely to see a lessening in U.S. pressure over Hong Kong.

Benjamin Kostrzewa, a lawyer at Hogan Lovells based in Washington and Hong Kong who formerly worked at the Office of the U.S Trade Representative where he handled U.S.-China disputes and negotiations, said Biden would not back off China.

"Those who hope for a dramatic change to the U.S.-China trade relationship under a Biden administration will likely be disappointed. ... The Democratic Party mostly backed Trump's actions against China — even at times finding ways to criticize the administration for not going far enough in confronting China," he said via email.

Biden would "be careful not to appear soft on China by unwinding Trump's actions," including the tariffs on Chinese goods and sanctions on Hong Kong and Chinese entities and persons, and his administration would be more likely to work with its allies and international institutions when confronting China, he said. It would also seek to work together with China on issues such as climate change and the response to the pandemic, he said.

The U.S.-China trade relationship is the largest in the world, with the value of Chinese goods imported by America by sea totaling about $500 billion a year, according to data from Panjiva, part of S&P Global Inc.

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Sam Theodore, managing director of Scope Insights, an independent research arm of Germany-based rating agency Scope Ratings, said a change in the U.S. administration could have further repercussions for China.

"It is likely that a Biden administration will not bring back the pre-Trump cozy relationship with China — on the contrary," he said. "And, because Biden is not Trump, the Europeans might be more attracted to join him in toughening up on China."

'Unreliable entity' list

Foreign banks also face the prospect of sanctions from China itself.

Chinese state-backed newspaper Global Times cited sources who suggested HSBC could be added to China's "unreliable entity" list, which lays out the consequences for a foreign entity deemed a danger to the country's national sovereignty, although the authorities have not confirmed this. Companies on the list could be banned from trading with or investing in China.

"HSBC and Standard Chartered have one eye on the U.S. sanctions and one eye on the Chinese sanctions from the new 'unreliable entities' list," said Bradshaw, the sanctions specialist.

The two banks are engaged in a delicate balancing act, said Bradshaw, as China's response to U.S. sanctions is likely to be dependent on their severity. She pointed to the criticism from China that has been leveled at HSBC for providing evidence to U.S. authorities in its case against Huawei CFO Meng Wanzhou, while U.S. authorities have criticized it for shutting down the bank accounts of Hong Kong protesters.

Banks trading between China and the West are vulnerable, said Scope Insights' Theodore.

"The globalized environment in which such banks were thriving is gradually deconnecting," he said. "HSBC is the global bank par excellence, more so than perhaps any other financial institution, and it happens to have a material presence both in Hong Kong and China, and in the U.S., in addition to its significant U.K. franchise as a universal bank. So, the wiggle space for HSBC inherently shrinks."

HSBC has a leading position in global trade financing, with $17 billion of transaction banking adjusted revenue in 2019.