How Hong Kong Sanctions Could Threaten Wall Street

(Bloomberg) -- Citigroup Inc., JPMorgan Chase & Co., HSBC Holdings Plc and their peers face a threat to their massive expansion plans in China as a deepening standoff between the U.S. and China over Hong Kong has sparked tit-for-tat sanctions on politicians and officials on both sides in a conflict that could escalate.

1. What’s happened so far?

U.S. President Donald Trump sanctioned 11 officials, including Hong Kong’s Chief Executive Carrie Lam and China’s two top officials in the city, following passage of a law that calls for penalties on foreign persons and entities who have “materially” contributed to undermining Hong Kong’s autonomy from the mainland. It also allows for penalties on foreign financial institutions that knowingly do business with sanctioned individuals. China retaliated with sanctions on 11 Americans, including five members of Congress, but provided no details on what they would entail.

2. What’s the impact?

Citigroup took steps to close accounts linked to some of the 11 individuals on the U.S. list as lenders overall stepped up scrutiny of customers in preparation for a potential escalation, a person familiar with the moves said. Others may follow suit. The fear is that the list could be expanded to include Chinese companies or Communist Party members, a group of about 90 million people, who are connected to state-owned enterprises. That would mean Wall Street banks couldn’t do business with those firms, cutting into potential revenue.

3. How are they connected?

Investment banks get a big chunk of their Chinese revenue from stock sales, financing for companies and big shareholders. Commercial and retail banks in the U.S. could be even more exposed because most global transactions are done in U.S. dollars and flow through the U.S. banking system.

4. What are the penalties?

Under U.S. law, banks singled out could face a cascade of sanctions, including a block on assets, restrictions on access to loans from U.S. institutions, bans on being a primary dealer in U.S. debt, conducting foreign exchange and banking transactions as well penalties on executives among others.

5. What’s at stake?

The five big U.S. banks had a combined $71 billion of exposure to China in 2019, with JPMorgan clocking the biggest investment at $19 billion. An escalation could cloud their growth plans and threaten income they have generated over the years from advising giants such as Alibaba Group Holding Ltd. Profits in China’s brokerage industry could hit $47 billion by 2026, Goldman Sachs Group Inc. estimates, with foreign firms gunning for a considerable share. Insurers, asset managers and commercial banks are also pushing into China.

6. How worried are they?

While the U.S. has broad authority to impose penalties under the act, bank executives have assessed that the initial fallout may be limited to the most senior Chinese officials, since the U.S. is unlikely to take action that will significantly disrupt trade or hurt the global economy.

7. What about Chinese banks?

China’s biggest state-owned lenders, led by Industrial & Commercial Bank of China Ltd., are the most exposed given their close ties to the country’s government officials. Severing those links would be difficult, if not impossible. Chinese lenders have $1.1 trillion in dollar funding at stake, according to Bloomberg Intelligence. If they are eventually also sanctioned, the president can also ban U.S. investors from holding equity or debt in the lenders.

8. Can companies be sanctioned?

Yes, sanctions would also apply to entities. A broad application to companies, especially ones that have a significant footprint in China or Hong Kong, would pose a greater risk to global banks because it can be harder to untangle those relationships. Banks will likely be prohibited from doing business with a company that’s 50% or more controlled by a sanctioned individual, according to Office of Foreign Assets Control guidance.

The Reference Shelf

• QuickTakes on Hong Kong’s special status, the laws China is imposing on the city, and China’s efforts to open its financial markets.
• What’s at stake for Wall Street.
• Bloomberg Opinion’s David Fickling on how Hong Kong brokers already take cues from China, and Anjani Trivedi on an attempt to build a Chinese JPMorgan.

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