Shortly after we reported that in anticipation of soon-to-be-enacted US sanctions - dubbed the Hong Kong autonomy act - which will penalize Chinese banks for serving officials who implement the new National Security Law in Hong Kong, Chinese commercial megabanks such as Bank of China and Industrial and Commercial Bank of China (ICBC) were looking at the possibility of being cut off from U.S. dollars or losing access to U.S. dollar settlements, as well as planning for a run on Hong Kong branches if customers feared these could run out of U.S. currency, the FT reports that US and European banks in Hong Kong are conducting emergency audits of their clients to identify Chinese and Hong Kong officials and corporates that could face US sanctions over a new national security law.
According to the report, at least two large international banks in Hong Kong were studying which of their clients and partners might be exposed to sanctions under the Autonomy act and with which they might have to terminate their business relationships.
A person at one of the banks said that cutting off the clients could hit revenues from Chinese banks and the country’s state-owned enterprises, but that could not be helped. “If they are sanctioned [we] can’t touch them,” the FT source said.
To be sure, there are plenty of banks that don't want to jeopardize their goodwill with SWIFT: foreign banks such as HSBC, Standard Chartered and Citibank have retail outlets in Hong Kong, while global investment banks JPMorgan, Goldman Sachs, Bank of America, UBS and others have offices in the Asian financial hub. Large Chinese banks with international operations, such as Bank of China (Hong Kong), are also dominant in the city. In addition, the sanctions could hit the territory’s international fund managers and insurers.
“Some of them are going through that exercise of looking at their existing client base and seeing where the risks are,” said Chen Zhu, a lawyer at Davis Polk who advises institutions on the impact of economic sanctions.
While it remains unclear just how forcefully US would pursue its sanctions in Hong Kong, these could range from freezing the property of individuals and companies to cutting them out of the US financial system. They could also stop banks from conducting foreign exchange transactions over which the US has jurisdiction, implying that Washington could try to curb their access to dollars, a move which is seen by many as a nuclear option.
The act could force financial institutions to choose between doing business with the US or China, lawyers said. Hong Kong’s national security law makes it illegal to comply with US sanctions against Hong Kong and China.
Another person at a bank who was familiar with the matter said: "I think at this stage everyone sensible is taking a look through their client lists and mapping out the various different scenarios."
“It’s speculative because the list isn’t out yet and our assumption is that it may not be that long. But the situation at the moment means you also have to consider worse scenarios where it does have an impact on your business and you need to plan how to react,” the person said.
US officials are expected to unveil details of the list in the months following the introduction of the act.
Meanwhile, Hong Kong's financial industry discussed the potential conflict between the Chinese and US laws at a meeting with the Hong Kong Monetary Authority, the territory’s central bank, this week. But few expect firm advice on how business and banks can ensure compliance with the national security law, which outlaws subversion, secession, terrorism and colluding with foreign forces but has been criticized for being vaguely defined. “Who is going to tell [Chinese president] Xi Jinping your law needs a bit more clarity,” said one person at a bank who was familiar with the matter.
Kher Sheng Lee, head of Hong Kong’s Alternative Investment Management Association, said hedge funds typically outsourced sanctions compliance to fund administrators. But some of the “more proactive” funds would also be examining how exposed they were to potentially sanctioned individuals and companies under the act.
Mr Lee said these funds were expecting the impact to be “quite minimal”.
“If the name is caught up on the list they would have to explore appropriate steps, including effecting a compulsory redemption and expelling that investor out of the fund. Unless there are major investors on the list, I expect this is something they will be able to manage,” he said.
Most, however, appear to be in denial: as the FT concludes, many bankers in the city argued that there was a lot of “bluff and bluster” from the US on Hong Kong. They said the implementation of the act could be much less severe than expected, especially as the timeframe for the implementation of the sanctions could stretch beyond the US election.
“Financial institutions are concerned as there is uncertainty and they are looking for additional guidance from US agencies,” said Nicholas Turner of Steptoe, who advises financial institutions on sanctions compliance.
It is this belief that Trump is ultimately bluffing and merely posturing in his hardline stance toward China that has resulted in virtually no impact on risk assets. Some, however, like Rabobank's Michael Hartnett, believe that once the laws have been passed, it is largely out of the hands of both Xi and Trump, as the escalation is now out of both their hands, and it is only a matter of time before global stock markets realize that the world's two biggest superpowers are now in a state of cold war.