The Imminent Tough Times For Hong Kong’s Financial Sector – Analysis

By He Jun*

After the implementation of the Hong Kong National Security Law, the geopolitical game between China and the Western countries led by the United States has entered a new stage. As always, the U.S. has resorted to its usual tactics – the U.S. Congress has passed the Hong Kong Autonomy Act, which will become law when it is presented to President Trump for his signature. It is understood that Trump could sign the Hong Kong Autonomy Act as soon as this week.

At its core, the Hong Kong Autonomy Act allows the U.S. to impose sanctions on officials and individuals it deems to be “detrimental to Hong Kong’s autonomy”, as well as banks that have significant dealings with the sanctioned individuals. As the bill includes Hong Kong’s financial institutions on the sanctions list, once the U.S. passes the bill to impose sanctions, it will impact Hong Kong’s financial industry, and the banking industry in Hong Kong is likely to get into a difficult situation.

Judging from the impact of the relevant U.S. sanctions bill on Hong Kong, the impact of its sanctions on individuals is far less than that on financial institutions. There are two broad categories of banks subject to the sanctions bill: the first is Chinese banks, including the five major banks and other Chinese banks with operations in Hong Kong or overseas. Second is the US bill to slap those European and American banks, which have considerable business networks and operations in Hong Kong and Mainland, would be vulnerable to sanctions under the legislation.

According to the Financial Times, European and American banks in Hong Kong are conducting emergency audits of their clients and at least two large international banks in the territory were studying which of their clients and partners might be exposed to sanctions under the act and with which they might have to terminate their business relationships. A source at one of the foreign banks raised the frustration that termination of their business relationships with the sanctioned clients would undoubtedly affect revenues from Chinese banks and state-owned enterprises. 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 a lawyer who advises institutions on the impact of economic sanctions. Some bankers believe it makes sense at this stage for banks to look at their client lists and work out what to do in different scenarios. Although the U.S. sanctions list has not yet been published and estimates of the number of people affected will not be too high, worst-case scenario has to be considered to assess the impact on the business and how the bank will respond.

In addition to the Hong Kong Autonomy Act in the United States, financial institutions in Hong Kong are also concerned about the implications of the Hong Kong National Security Law. According to Bloomberg, Hong Kong financial executives say they are concerned that financial institutions could violate the Hong Kong National Security Law if they comply with sanctions requirements under the U.S. Hong Kong Autonomy Act. According to Article 29 of the Hong Kong National Security Law, “sanctions, blockades or other hostile actions against the Hong Kong Special Administrative Region or the People’s Republic of China” are expressly prohibited.

Hong Kong financiers said the Hong Kong Autonomy Act would force the city’s financial institutions to choose to do business with either the U.S. or China, rather than both. Some financiers lament that Hong Kong has become the focus of a tussle between China and the United States, and that some global banks are in a dilemma between China and the United States.

In addition, Reuters reported on July 10 that China’s five largest state-owned banks are making contingency plans in case of possible sanctions by the U.S. Congress. The move follows legislation in U.S. Congress that allows banks to be prevented from clearing dollars through U.S. institutions. According to people familiar with the matter, Bank of China’s worst-case scenarios include the risk of a run on its Hong Kong branch if a large number of clients fear the bank’s U.S. dollar reserves will run out. Bank of China and Industrial and Commercial Bank of China are considering the possibility that, in the worst-case scenario, their dollar businesses could be cut off or lost. Agricultural Bank of China, by contrast, is considering a milder scenario as it seeks solutions for clients blacklisted by the U.S., particularly those at risk of a sudden liquidity crisis. At least three state-owned leasing companies, including ICBC Leasing and BOC Aviation, are also working on contingency plans, the sources said. Leasing companies often rely on dollar borrowing to buy aircraft, machinery, and equipment.

It can be seen that with the implementation of the Hong Kong National Security Law enacted by the National People’s Congress and the Hong Kong Autonomy Act enacted by the United States, Hong Kong has become a forefront of geopolitical friction. The fear is that Hong Kong’s financial sector is about to enter tough times and it would be forced to choose sides between the U.S. and Chinese businesses. If this continues, it will cause substantial damage to Hong Kong’s banking sector and its status as an international financial center.

*Mr. He Jun takes the roles as Partner, Director of China Macro-Economic Research Team and Senior Researcher. His research field covers China’s macro-economy, energy industry and public policy