New U.S. sanctions add uncertainty for global banks looking to tap Chinese market

United States sanctions on Hong Kong leader Carrie Lam raises uncertainty for international banks that were looking at a historic opening of the China’s financial market.

The U.S. Treasury announced Friday sanctions on the semi-autonomous region’s chief executive and 10 other government-related individuals for “undermining Hong Kong’s autonomy” and restricting freedom of expression. The decision generally prohibits the targeted individuals from accessing their U.S. assets and transacting with U.S. persons, including provision of funds.

“It is at the very least awkward for US and foreign banks wanting to take advantage of market opening in China,” Michael Hirson, practice head, China and Northeast Asia, at consulting firm Eurasia Group, said in an email to CNBC on Monday.

He expects that while the Chinese government will not retaliate against the foreign banks, they will fall under greater pressure from the U.S. “Banks that don’t comply with these sanctions risk losing access to the US financial system, which is of course an existential threat,” Hirson said.

In response, China on Monday sanctioned 11 American citizens including lawmakers such as Senators Ted Cruz, Marco Rubio and Tom Cotton. It was not immediately clear what the sanctions entailed. The massive U.S. financial system had assets of about $100 trillion as of the end of 2019, according to the International Monetary Fund. About 22% of those assets were in the banking system, the fund said.

It’s not clear how large China’s financial system overall is. However, Chinese banking institutions had assets of 285 trillion yuan ($40.7 trillion) at the end of September 2019, according to state reports. China’s stock and bond markets are among the largest in the world. But the mainland financial industry is generally in the early stages of development, presenting both risks and significant growth opportunities.

After decades of keeping the mainland financial market relatively closed to foreigners, the central Chinese government began to roll back restrictions on investment and ownership in the last two years. Many European, Japanese and American financial firms have responded with plans to expand in the Chinese market, although some say years of policy restrictions have given local players an unfair advantage.

The U.S. sanctions are intended to force major multinational corporations, foreign banks and U.S. allies to choose between China and the U.S., said Shen Yamei, deputy director and associate research fellow at state-backed think tank China Institute of International Studies’ department for American studies. That’s according to a CNBC translation of her Chinese-language remarks in an email Monday.

Theoretically, major banks’ cooperation with U.S. banks may be cut off, potentially restricting U.S. dollar transactions, she said, noting the sanctions ultimately undermine the fairness of the international business environment.

″(In taking countermeasures), China will not choose the method of sacrificing its own interests and the overall reform and opening up, but will promote reform and opening up, according to its own plan. This is the established policy (direction),” Shen said.

New U.S. sanctions add uncertainty for global banks looking to tap Chinese market via @MasterMindUpdate
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