The worsening US-China tensions put companies on the cross

Photographer: Shawn Thew / EPA / Bloomberg

The last days of the Trump administration are proving as confusing as ever for companies and investors stuck in the midst of an increasingly controversial US-China relationship.

After a week of spreading confusion over the scope of the US ban on investing in Chinese military-related businesses, both Washington and Beijing have taken steps over the weekend that threaten to further create tensions and cloud the prospects for cross-border trade.

Secretary of State Michael Pompeo on Saturday outraged decades of US policy by removing self-imposed restrictions on how government officials interact with Taiwan, prompting quick calls for retaliation from the Chinese state media. Pompeo’s announcement came just hours before Beijing issued new rules that would allow Chinese courts to punish global companies for foreign sanctions – a move that could theoretically force companies to choose between the world’s two largest economies.

In both cases, it was far from clear how the edicts would be implemented. China, for example, has expanded its toolkit to combat US sanctions for years, although so far it has refrained from using measures, including blacklists and export controls.

Closer to all is the question of how the world’s most important geopolitical relationship will evolve after Joe Biden enters the White House later this month. Any optimism for a reduction in tensions should be tempered by US bipartisan support for recent policies imposed on China, former US Ambassador to China Terry Branstad told Bloomberg Television on Tuesday. “I don’t see the likelihood of a big policy change with the change of administrations,” he said.

Sharing shots

The Trump administration has sanctioned more than 200 Chinese entities, municipal governments and universities since 2019

Source: US Department of Commerce as of December 21, 2020.

The result is continued uncertainty for companies caught in the crossfire since Apple Inc. to Tencent Holdings Ltd. and HSBC Holdings Plc. This risks freezing investment decisions, concluding transactions and initial financing at a time when the global economy affected by the coronavirus needs all the support it can get.

“There is a tit-for-tat escalation,” said Alex Capri, a researcher at the Hinrich Foundation, an Asian foundation set up by American entrepreneur Merle Hinrich to promote sustainable global trade. “From the perspective of corporate governance, multinational companies and individuals will wake up more and more.”

In a speech to Communist Party officials on China’s development plans on Monday, President Xi Jinping said that “everyone must be brave to fight and be good at it,” while giving an optimistic tone that “opportunities overcome the challenges ”.

Chinese equities outperformed regional performance on Monday, although they recovered early trading losses on Tuesday.

Taiwanese investors have largely eliminated rising tensions in the cross-strait, bringing the local stock index to a record high. Pompeo lifted US guidelines on meetings with Taiwanese officials, implemented after Washington’s recognition of China in 1979. They had sought written permission from the State Department for diplomats and military personnel of a certain rank to visit. Taiwan and restricted the places where they met with Taiwanese representatives could take place.

The Global Times, backed by the Chinese Communist Party, has warned that Pompey is pushing the world’s largest economies into military conflict. Hu Xijin, the newspaper’s editor-in-chief, added in a microblog post that China has a “precious window of opportunity for mainland China to teach a hard lesson to the forces of” Taiwan independence “and restore” strategic leverage “in the Taiwan Strait. .

The Chinese Foreign Ministry, which opposes official US-Taiwan interactions, said on Monday that it “strongly opposes and strongly condemns” the US movement and reiterated that Taiwan is an “inalienable” part of its territory.

Beijing’s new rules on foreign sanctions, unveiled by the Ministry of Commerce on Saturday, are meant to protect local firms from “unjustified” enforcement actions abroad, allowing Chinese citizens or companies to sue in Chinese courts if their interests are affected. enforcement of foreign laws.

ByteDance Ltd., for example, has been pressured by the Trump administration to relinquish control of its short-lived TikTok application for alleged national security issues, but startup investors could try to use China’s new rules to gain financial compensation for any losses.

Other potential scenarios raised by the new rules: If Apple removes Tencent’s WeChat or TikTok from its app store, could it be sued in mainland China for damages? Or if TSMC complies with the sanctions against Huawei Technologies Co. by refusing to supply its chips, could the Chinese company claim financial compensation?

TikTok, Hong Kong and more US-China flash points: QuickTake

The announcement in Beijing at the end of Trump’s presidency was likely scheduled to send a signal to US decision-makers without undermining a new Biden administration in its early days, said Sean Ding, a Washington partner and analyst at Plenum, a Research in Chinese Politics and Economics.

“The new rules are more than anything a signaling mechanism for both Chinese and US companies in China: we now have the legal capacity to counter the long-arm jurisdiction of US domestic law,” Ding said. “In short, it is a signal at this stage rather than trying to set in motion legal efforts.”

This approach would be in line with China’s previous responses to US restrictions, including the creation by Beijing of a “list of insecure entities”. While the government has promised to punish companies, organizations or people on the list that are detrimental to national security, authorities have not yet said whether anyone has actually met the inclusion criteria.

The National Security Act imposed by the Hong Kong Communist Party in June also highlights how the US could have an advantage in terms of sanctions, especially those affecting the financial industry.

Although Hong Kong security law prohibits sanctions against the financial center and China, state creditors, including Bank of China Ltd., have quietly taken steps to comply with US sanctions against officials such as Hong Kong Executive Director Carrie Lam . With more than $ 1 trillion in US dollar-denominated liabilities, China’s four largest state-owned banks have huge incentives to stay on the side of US regulators so they can keep access to dollar funding.

Read more: Chinese banks’ law to comply with Trump’s sanctions on Hong Kong

A similar dynamic has unfolded with international companies navigating US and European Union conflict rules over Iran, said Angela Zhang, director of the Center for Chinese Law at the University of Hong Kong and author of “Chinese Antitrust Exceptionalism: How China Rises Challenges Regulation global. “

“If you look at the EU’s precedent, I don’t see that Chinese rules are very effective in countering US sanctions,” Zhang said. However, compliance costs for businesses will increase, she said.

Long-term approach to US sanctions – and the potential for confusion over their implementation – was again displayed on Monday, as banks and money managers rushed to comply with Trump’s executive order banning investment in Chinese military companies.

Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co. they stated in exchange deposits over the weekend that they would withdraws 500 structured products in Hong Kong, a move that will impact investors in the US and around the world.