China’s Tough Talk on U.S. Sanctions Leaves Room to Cool Tension

By now it’s become a familiar pattern: the Trump administration takes an unprecedented action against China, Beijing vows retaliation and then life pretty much goes on as normal.

That sequence played out again on Friday, with Chinese Foreign Ministry spokesman Zhao Lijian vowing “firm countermeasures” after the U.S. hit sitting Communist Party officials for the first time with sanctions under the 2016 Global Magnitsky Human Rights Accountability Act for abuses in the far western region of Xinjiang. The prime target, Chen Quanguo, sits on the 25-member Politburo and is seen as a rising star in the party.

But analysts in China downplayed the move, saying that it was unlikely to derail the phase-one trade deal or lead to any more serious escalation. China’s economy was already growing at the slowest pace in almost three decades before the pandemic hit, and officials have held off on measures that could spook foreign investors at a time when companies are reexamining supply chains.

“Beijing is in a tough position,” said Trey McArver, partner at consultancy Trivium China. “They don’t want to look weak, but they are also keen not to further dial up tensions between the two countries, which seem to be spiraling out of control. I would expect some tough words from the Foreign Ministry, but nothing much beyond that at this moment.”

The U.S. action is tied to the widespread detention of Muslim Uighurs in Xinjiang, a policy that has been sharply criticized by top American officials as well as human rights groups. It comes amid soaring tensions between the world’s biggest economies over the origin of the coronavirus pandemic, China’s moves to quell dissent in Hong Kong and a debate over the use of Chinese technology by the U.S. and allies.

Zhao, the foreign ministry spokesman, called the sanctions “deeply detrimental to U.S-China relations.” He didn’t give details of the reciprocal measures against “individuals and institutions,” but said they would be known “soon enough.”

China also has one eye on any sanctions that still may come over Hong Kong. The U.S. has already imposed visa bans on unidentified officials responsible for undermining the former colony’s autonomy, and President Donald Trump has threatened further actions against Beijing in light of a sweeping national security law that came into effect on June 30. Any sanctions against top national officials that sit next to Xi in Beijing would be considered more serious than lower-level functionaries that implement policy.

‘Symbolic Significance’

The timing of the sanctions against Chen and three other officials struck some observers as detrimental, given Chinese Foreign Minister Wang Yi had offered an olive branch just hours earlier. Though he blasted the U.S. for “McCarthy-style paranoia,” he also said both sides could still “find ways to steer this relationship out of the difficulties and bring it back to the right track.”

“China’s recent messaging, including Wang Yi, are striking a conciliatory tone and it doesn’t want things to spiral out of control,” said Wang Yiwei, director of China’s Institute of International Affairs at Renmin University in Beijing. Besides, he said, the sanctions against Chen and others have a very small impact compared to other options.

China’s Tough Talk on U.S. Sanctions Leaves Room to Cool Tension

Chen has become China’s point man for subduing ethnic unrest. During his earlier stint in Tibet, Buddhist temples were told to display Chinese flags and images of party leaders. His implementation of a vast police state in Xinjiang and demonstrations of loyalty to Xi won him a promotion in 2017 to the Politburo, and he may be considered for a spot on its supreme Standing Committee, which now has just seven members, in the coming years.

There’s little likelihood the officials named have financial connections with the U.S. The sanctions block access to accounts or businesses owned, directly or indirectly, by the people or the bureau. It also prohibits U.S persons from doing business with the sanctioned officials or entities.

The move has “more symbolic significance than real impact,” said Zhou Qi, director of the Institute of American Studies at the state-run Chinese Academy of Social Sciences. “If some of them were planning to send their sons and daughters to study in the U.S., there will likely to be some impact on them individually. But in the view of the general public in China, the sanctions may not be a big deal for China as a country.”

Any sanctions on Hong Kong could be more worrisome for companies. New legislation passed by Congress and awaiting Trump’s signature would put global banks at risk of being caught between Beijing-backed penalties under the new national security law and sanctions being debated in the U.S. Senior officials have even discussed ways to undermine the Hong Kong dollar’s peg to the U.S. dollar, although that remains a remote possibility.

Further complicating matters is the U.S. election, in which Trump and Democratic presidential nominee Joe Biden have sought to taint each other as weak in confronting Beijing’s leaders. This week Trump said the U.S. was considering a ban of TikTok, the popular social media app owned by China’s ByteDance Inc. The U.S. is seeking to limit U.S. companies’ ability to do business with Chinese tech giant Huawei Technologies Co., while Secretary of State Michael Pompeo has pushed for U.S. pension funds to cut ties with Chinese companies.

Uncharted Waters

“We’re in uncharted territory right now,” said Daniel Russel, former assistant secretary of state for East Asia and the Pacific, who’s now vice president at the Asia Society Policy Institute. “There’s never been an administration that thought the pursuit of top-level party officials would end well for either side.”

China has plenty of options to hit back if things were to get worse. It could hurt U.S. companies by releasing a long-threatened “unreliable entities” list, stop buying American products, unload Treasuries or curb exports to the U.S. of rare earths, which are critical to everything from smart-phones to electronic vehicles. On the diplomatic side, China could take measures such as halting cooperation on enforcing sanctions related to North Korea and Iran.

Potentially worse than any individual action is the cumulative erosion in trust between the countries in recent years. In Wang’s speech Thursday, China’s foreign minister said it seems the U.S. believes “every Chinese investment has a political purpose, every student studying abroad has a spy background, and every cooperative initiative has an ulterior motive.”

“The sanctions will no doubt mar the political atmosphere for doing trade,” said He Weiwen, who previously served as a commercial attache at the Chinese consulates in New York and San Francisco and is now a senior research fellow at the Center for China and Globalization in Beijing. “How do you trade with someone waving a knife at you?”

©2020 Bloomberg L.P.

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