U.S. Hong Kong Sanctions Risk $1.1 Trillion in China Funding

(Bloomberg) -- China’s largest banks have $1.1 trillion in dollar funding at stake and face potentially steep fines from U.S. legislation that targets penalizing lenders doing businesses with Chinese officials involved in Hong Kong’s controversial security law, according to Bloomberg Intelligence.

The bipartisan measure, which was passed by the U.S. Senate and still needs to go through the House and be signed by the U.S. President, bars financial institutions from providing accounts to sanctioned officials, many of whom may be assumed to use the services of China’s biggest banks, Francis Chan, a senior analyst at BI in Hong Kong, said in a June 30 note. Banks in violation risk being cut off from accessing the U.S. financial system, he said.

Industrial & Commercial Bank of China Ltd., China Construction Bank Corp., Bank of China Ltd. and Agricultural Bank of China Ltd., the nation’s four largest state-backed lenders, had a combined 7.5 trillion yuan ($1.1 trillion) equivalent of U.S. dollar liabilities at the end of 2019, of which 47% were deposits, according to their annual reports. The rest came from interbank borrowing and issuing securities to global investors.

The legislation would apply penalties against financial institutions only if a bank knowingly does business with an official under sanction. The bill is intended to keep the penalties from capturing a broad swath of U.S. companies, an administration official familiar with the discussions said earlier. Banks will be informed of what entities are on the sanctions list before penalties are imposed, the person said.

Among Chinese banks, Bank of China had the biggest exposure to the U.S. dollar with about $433 billion of liabilities, followed by ICBC. Chinese lenders have been expanding their presence globally over the past decade by adding branches, making acquisitions and granting loans to fund everything from local power plants to toll roads.

Global banks could also be at risk since they may also have Chinese officials, their relatives and associates as customers, Chan said. Standard Chartered Plc paid more than $600 million in fines in 2019 for breaching sanctions against Burma, Cuba, Iran, Sudan and Syria. BNP Paribas SA was fined $8.9 billion by the U.S. in 2014, the largest ever for an individual bank, for transactions with Sudan and other blacklisted nations.

Read more: Chinese banks at risk from sanctions

The Trump administration overnight escalated pressure on China over its crackdown on Hong Kong by making it harder to export sensitive technology to the city, while lawmakers in Beijing on Tuesday approved the landmark security law. The Commerce Department said it’s suspending regulations allowing special treatment to Hong Kong over things including export license exceptions.

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With assistance from Bloomberg