Worsening tensions between US and China puts companies in the crosshairs

Photographer: Shawn Thew / EPA / Bloomberg

The last days of the Trump administration are proving more confusing than ever for companies and investors trapped in the middle of an increasingly contentious relationship between the U.S. and China.

After a week of extensive In the confusion over the scope of the US ban on investment in businesses linked to China’s armed forces, both Washington and Beijing took action over the weekend that threatens to further heighten tensions and cloud prospects for international trade.

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

In both cases, it was not clear how the invitations to bid would be implemented. China, for example, has been expanding its toolkit to fight U.S. sanctions for years, although so far it has refrained from using measures, including blacklists and export controls.

Hovering over everything is the question of how the most important geopolitical relationship in the world will evolve after Joe Biden enters the White House later this month. Any optimism for easing 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 major change in policy with the change in administrations,” he said.

Farewell photos

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

Source: U.S. Department of Commerce on December 21, 2020.

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

“There is an escalation of an eye for an eye,” said Alex Capri, a researcher at the Hinrich Foundation, an Asia-based foundation created by American businessman Merle Hinrich to promote sustainable global trade. “From a corporate governance perspective, multinational companies and individuals will find themselves increasingly hurt.”

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

Chinese shares underperformed their regional peers on Monday, although they recovered losses early on Tuesday’s trading session.

Investors in Taiwan have largely avoided rising cross-strait tensions, bringing the local stock index to a record high. Pompeo suspended the US guidelines on meetings with Taiwanese officials, put in place after Washington’s recognition of China in 1979. They demanded written permission from the State Department for diplomats and military personnel above a given post to visit Taiwan and restricted the places where meetings with Taiwanese Representatives could take place.

The Global Times, supported by the Chinese Communist Party, warned that Pompeo was 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 the Taiwanese independence forces a heavy lesson” and restore “strategic influence” in the Taiwan Strait.

China’s Foreign Ministry, which is opposed to official US-Taiwan interactions, said on Monday that it “strongly opposes and strongly condemns” US action and repeated that Taiwan is an “inalienable” part of its territory.

Beijing’s new rules on foreign sanctions, released by the Ministry of Commerce on Saturday, aim to protect local companies from “unjustified” actions abroad, allowing Chinese citizens or companies to sue for damages in Chinese courts if their interests are harmed by foreign law enforcement.

ByteDance Ltd., for example, was pressured by the Trump administration to give up control over its short video application TikTok for alleged national security concerns, but startup investors could try to use China’s new rules to obtain financial compensation for any losses.

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

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

Beijing’s announcement at the end of Trump’s presidency was probably scheduled to send a signal to U.S. lawmakers without openly antagonizing the new Biden government in its early days, said Sean Ding, partner and analyst at Plenum, a research firm specializing in politics and Chinese economy.

“The new rules are more than anything a signaling mechanism for Chinese and American companies in China: we now have the legal capacity to neutralize the long-standing jurisdiction of US domestic law,” said Ding. “In short, it is more of a sign at this stage than actually trying to put legal efforts into action.”

This approach would be in line with China’s earlier responses to US restrictions, including Beijing’s creation of a “list of untrusted entities”. Although the government has promised to punish companies, organizations or individuals on the list that undermine national security, officials have yet to say whether anyone has actually met the inclusion criteria.

The national security law imposed by the Communist Party on Hong Kong in June also highlights how the United States can have an advantage when it comes to sanctions, especially those that affect the financial sector.

Although Hong Kong’s security law prohibits sanctions against the financial center and China, state creditors, including Bank of China Ltd., have quietly taken steps to comply with U.S. sanctions against authorities such as Hong Kong chief executive 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 good side of American regulators so they can maintain access to dollar financing.

Read more: China Banks Act to comply with Trump sanctions in Hong Kong

A similar dynamic has occurred with international companies navigating conflicting rules in the US and the European Union about Iran, said Angela Zhang, director of the Center for Chinese Law at the University of Hong Kong and author of “Chinese Antitrust Exceptionalism: How A Growth China challenges global regulation. “

“If you look at the EU precedent, I don’t see Chinese rules being very effective in tackling US sanctions,” said Zhang. They will, however, increase compliance costs for companies, she said.

The long range of US sanctions – and the potential for confusion over its implementation – was on display again on Monday, as banks and money managers rushed to comply with Trump’s executive order banning investments in Chinese military companies.

Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co. said in exchange documents over the weekend that they will withdrew 500 structured products in Hong Kong, a move that will impact investors in the United States and around the world.