On the surface, there is a non-stop tide of daily diplomatic drama and escalating jawboning between the US and China which - quite theatrically - will be at each other's throat at least until the conclusion of the Nov 3 election. However, behind the scenes, one can discern just who has the upper hand.
According to Bloomberg, China’s largest state-run banks operating in Hong Kong have taken "tentative steps" to comply with US sanctions imposed on officials in the city, seeking to safeguard their access to crucial dollar funding and overseas networks, and putting their financial future above their patriotic duty to defend questionable Hong Kongers who have fallen in the crossfire. As a reminder, last week Trump sanctioned Chinese and Hong Kong officials including Hong Kong Chief Executive Carrie Lam, Xia Baolong, director of the Hong Kong and Macau Affairs Office of China’s State Council, and Chris Tang, commissioner of the city’s police for their role in implementing a security law in Hong Kong. The officials will have property and assets in the U.S. frozen; they also will be increasingly frozen by their own financial institutions.
China's bank giants, most of which have operations in the U.S. including Bank of China, China Construction Bank, and China Merchants Bank have turned cautious on opening new accounts for the 11 recently sanctioned HK officials, including Lam, and at least one bank has suspended such activity. To avoid Trump's ire, at some banks transactions via the U.S. are banned, while compliance must now review and sign off on others that would previously have been immediately processed, Bloomberg sources said.
At the same time, foreign banks operating in Hong Kong such as Citigroup have already taken aggressive steps to suspend accounts or are increasing scrutiny of Hong Kong clients.
The quick capitulation by China's biggest lenders once again underscores how Trump has weaponized the greenback and the ability of the U.S. to use the dollar's dominance in international transactions as a critical pressure point in the standoff with China. And since China’s state-owned lenders need to preserve their access to global financial markets - with the Yuan years if not decades from even thinking about thinking about becoming a global reserve currency - they have quietly bent the knee to Trump to preserve dollar access at a time when Beijing has leaned on them to prop up the economy from the fallout of the coronavirus.
The bottom line is that China’s "big four" banks had $1.1 trillion in dollar funding at the end of 2019; it is that $1.1 trillion that gives Trump virtually unlimited scope to extract any concessions he wishes, and despite Beijing's angry and belligerent rhetoric, China has no choice but to fall in place.
Not that any of this is a surprise to China: as we reported last week, Yu Yongding, a former adviser to the nation’s central bank, said at a forum this week that China faces a series of threat from a potential financial war with the US, including sanctions on banks, financial ransom, freezing of Chinese assets offshore and a push for a capital flight. Yu recalled when Washington sanctioned Bank of Kunlun in 2012 for its oil financing dealing with Iran, cutting the small Chinese lender off from the greenback payment system and suffocating its cross-border business.
To save face diplomatically, China on Monday retaliated by sanctioning 11 individuals including U.S. senators Marco Rubio and Ted Cruz, but the retaliation was seen as a paper tiger as Beijing stopped short of putting any senior American government officials on its list. Its top diplomat, Yang Jiechi, on Friday said the door for talks with the U.S. remains open. It didn’t clarify the potential implications for any financial institutions that keep doing businesses with those named.
“China’s position on the U.S. sanctions is clear and consistent,” Foreign Ministry spokesman Zhao Lijian told reporters in Beijing on Wednesday in response to a question about the banks’ move to comply. “The U.S. sanctions are irrational and groundless. They are unanimously opposed and condemned by all Chinese people, including our residents in Hong Kong.”
Sure they are, but none of that matters because the US has the world's reserve currency and China doesn't. The rest is just political theater, full of sound and fury, signifying nothing.
In an attempt to ease tensions, on Saturday the Hong Kong Monetary Authority, i.e., the city’s de facto central bank, said lenders in the city have no obligation to follow U.S. sanctions under local law, urging banks to treat customers fairly in assessing whether to continue to providing services. However, as the Bloomberg report suggest, none of the lenders decided it was prudent to test Trump's resolve.
Indeed, despite the HKMA's announcement, “banks that have U.S. operations or conduct dollar businesses may still need to consider their U.S. compliance obligations,” JPMorgan wrote in a note. “Risks for listed China banks are relatively muted, in our view, as the four China officials on the list may obtain banking services with local unlisted Chinese banks that do not have dollar or U.S. businesses."