On Tuesday, President Donald Trump signed the Hong Kong Autonomy Act into law, passing a bill introduced in the Senate in May to rebuke Beijing’s imposition of a harsh national security law on Hong Kong. On Wednesday, China’s Ministry of Foreign Affairs condemned the passage of the law and vowed to enact retaliatory sanctions against “relevant individuals and entities of the United States.”
The Hong Kong Autonomy Act will sanction individuals that the State Department determines are “involved in the erosion” of Hong Kong’s autonomy and punish banks that continue to serve them as clients. But Hong Kong’s new national security law threatens to imprison people who “collude” with foreign powers, including passing sanctions like those just triggered by the U.S. The competing laws threaten to leave international banks torn between two obligations: one to Washington and the other to Beijing.
“It’s a real bind for banks that have both U.S. and China exposure,” said a Hong Kong-based partner at a law firm, who wished to remain anonymous due to the sensitive nature of the topic. “There’s real potential for banks to fall foul of one set of laws while implementing the other.”
Beijing promulgated its wide-ranging national security law in Hong Kong on June 30. In general, the law prohibits four loosely defined offenses: secession, subversion, terrorism and collusion with foreign forces. Article 29 of the law, however, specifically outlaws “imposing sanctions” against Hong Kong or China. Violators face up to life in prison.
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Meanwhile, the U.S.’s new Hong Kong Autonomy Act lists ten punishments for a financial institution that “knowingly conducts a significant transaction” with a person the State Department has marked for sanctions. Penalties include travel bans for bank executives, a blockade on loans issued by U.S. banks, and a ban on trading in U.S. dollars.
Violating U.S. sanctions could effectively cut off targeted banks from the international market, where the U.S. dollar is supreme. According to Reuters, China’s leading state-run banks began making contingency plans for such a scenario ahead of Trump signing the bill into law. But loss of access to the dollar would be the worst case. The actual strength of the U.S. law remains to be seen.
“The risks of exposure for international and Chinese banks is very low at this point. China will likely retaliate if there is a ‘real and serious’ sanction, but I think it will adopt a wait-and-see approach now,” said Angela Zhang, associate professor in Hong Kong University’s law department.
Under the U.S.’s Hong Kong Autonomy Act, the State Department has 90 days from the law’s signing to submit a list of individuals for sanction. Banks that continue to serve those individuals will then be punished over the course of a year, with the U.S. executive branch retaining power to waive the penalties at any point. Zhang, for one, considers the measures mostly symbolic. “In my opinion,” she said, “the Act is only a political ploy to demonstrate U.S. discontent over the NSL and that the United States is tough on China. But that’s all.”
It also isn’t obvious from the wording of Hong Kong’s national security law, whether banks that comply with U.S. sanctions would be guilty of “imposing sanctions” themselves, the Hong Kong lawyer says. Authorities in Hong Kong could be lenient in their interpretation, but the growing uncertainty will be of concern for international banks with business interests in both China and the U.S.
What’s more, authorities in Beijing may be reticent in using the national security law to punish banks that comply with U.S. sanctions, says Wang Jiangyu, law professor at the City University of Hong Kong.
“I don’t think complying with foreign sanctions would fall under endangering China’s national security; that would put international business in Hong Kong in a very difficult, uncertain situation,” said Wang. Beijing instead may punish the banks that comply with sanctions via fines or other measures that would be less detrimental to Hong Kong’s overall business environment, Wang said.
HSBC was compelled by officials in China to voice support of the national security law in June, before the law had even passed. The bank’s capitulation earned it a rebuke from Secretary of State Mike Pompeo, who called HSBC’s “browbeating” a “cautionary tale” for other businesses that chase business from Beijing.
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