U.S. Threat to Sanction Hikvision Shows China Ties Near a Tipping Point

(Bloomberg) -- The fate of a Chinese technology giant at risk of unprecedented U.S. sanctions will show whether the Biden administration intends to significantly ramp up tensions with the world’s second-biggest economy.

The U.S. is weighing whether to add Hangzhou Hikvision Digital Technology Co., which makes cameras and surveillance systems, to its Specially Designated Nationals and Blocked Persons List, according to people familiar with the situation. The company’s shares tumbled by the 10% daily limit on Thursday on news of the potential sanctions tied to alleged human-rights violations by China against mostly Muslim minorities in its far-Western region of Xinjiang. 

While Hikvision and seven other Chinese tech companies already face U.S. restrictions, the move would mark the first time a Chinese company faces more severe Treasury Department sanctions that risk curbing its business around the globe. The measure -- used for terrorists, drug kingpins and Russian banks -- would dramatically restrict its ability to work with companies, financial institutions and governments.

More broadly, the sanctions would mark an escalation in how the U.S. uses its dominant position in the global financial system to target Chinese companies, at a time when both governments are starting to curb business ties due to national-security concerns. The emphasis on human rights also exposes potentially any company that deals with the Communist Party’s vast security apparatus to similar penalties.

“That would be a very, very broad category of companies,” said Jon Bateman, a fellow at the Carnegie Endowment for International Peace, adding that the U.S. was struggling to clarify its China policy. “The Biden administration hasn’t yet defined what kind of relationship it does want with China,” he added. “This indicates that human rights will be a focal point.”

President Joe Biden has largely kept in place measures left over from the Trump administration, without clearly spelling out how it would deal with punitive tariffs put in place during the trade war and questions over what sensitive data companies can share with China. He’s also expanded restrictions in other areas, signing a law last year that bans imports of goods from Xinjiang starting in June unless companies can prove they weren’t made with forced labor.

China’s diplomatic support for Russia following its invasion of Ukraine has also strained Beijing’s relations with the U.S., with Biden drawing a firmer distinction between democracies and autocracies. Fears that Chinese companies would be hit with Russia-style sanctions have contributed to declines in China’s markets in recent months. 

Secretary of State Antony Blinken had planned to give an address on the administration’s China policy on Thursday, but it was delayed after he tested positive for Covid-19. Still, people familiar with the remarks said they were likely to offer little new information on basic questions on how the U.S. and China can collaborate on some issues.

‘Grave Concern’

China on Thursday expressed “grave concern” over the reports on Hikvision, reiterating that U.S. claims of human-rights abuses in Xinjiang were the “lie of the century.”

“China firmly opposes the U.S. moves to use human rights as an excuse, and abuse state power and its domestic law to hobble Chinese companies,” Foreign Ministry spokesman Zhao Lijian said.

Hikvision is one of several Chinese companies targeted by Washington for aiding and abetting human rights violations in Xinjiang, a list that includes well-known corporations including AI startups SenseTime Group Ltd. and Megvii, which are backed by traditional industry leaders or financiers including Alibaba.

Founded in 2001 with help from a state-owned electronics research institute in Hangzhou, Hikvision quickly grew into one of the world’s largest makers of surveillance equipment. The company sells CCTV cameras and surveillance software to governments and corporations in more than 150 countries and regions worldwide. It has around 53,000 staff and operates research facilities from Shanghai to London.

Chinese Surveillance

The most important client for Hikivison remains the Chinese government, which spends handsomely each year to oversee the activities of its 1.4 billion citizens. Its surveillance cameras are easy to spot on the streets of Chinese cities and its gear for security checks are widely used in the country’s largest airports and events attended by the supreme leaders of the ruling Communist party.

Hikvision has repeatedly denied U.S. allegations of involvement in abuses in Xinjiang. “We think any such sanction should be based on credible evidence and due process, and look forward to being treated fairly and unbiasedly,” it said in a statement Wednesday. 

In 2019, Hikvision was placed on an entity list that prevents American firms from supplying it with components and software -- similar to Chinese telecom gear maker Huawei Technologies Co. had faced. But the blacklisting had limited impact on Hikvision’s production after it slightly revised its supplier list to buy alternative components from local vendors. The company’s 2021 sales jumped by 28% to over 80 billion yuan ($12.1 billion), according to filings.

‘Technological Containment’

It’s possible the U.S. could be using the threat of more sanctions as a bargaining chip on thorny geopolitical issues like the war in Ukraine or Beijing’s aggression against Taiwan, according to Vivian Zhan, an associate professor specializing in Chinese politics at the Chinese University of Hong Kong. 

“If the U.S. is using it as a tactic to coerce China on an issue it isn’t compromising on, it might potentially work given that the Chinese economy is suffering,” she said, noting the lockdowns and Xi’s regulatory moves against tech companies. 

Sanctions against Hikvision would also help the U.S. maintain its technological edge over China, said Wen-Ti Sung,  a lecturer in the Australian National University Taiwan Studies program.

“Invoking human-rights and values-based justifications can help the U.S. mitigate pushback from U.S. business sector, while perhaps also elicit more Western governments to join in, making it a collective ‘technological containment’ effort,” he said. “This is guided more by interests than ideology.”

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With assistance from Bloomberg