Worsening tensions between the US and China put companies in the spotlight

Photographer: Shawn Thew / EPA / Bloomberg

The last days of the Trump administration are as confusing as ever for companies and investors caught up in the midst of an increasingly contentious relationship between the United States and China.

After a week of extension Confusion over the scope of the U.S. ban on investments in Chinese military-linked companies, both Washington and Beijing took action over the weekend threatening to raise tensions and cloud the prospects for cross-border trade.

Secretary of State Michael Pompeo resigned from U.S. policy on Saturday by removing self-imposed restrictions on the way government officials interact with Taiwan, prompting rapid calls for retaliation from state media Chinese. Pompeo’s announcement came just hours before Beijing enacted new rules that would allow Chinese courts to punish global companies for enforcing foreign sanctions, a measure that could theoretically force companies to choose between the world’s two largest economies.

In both cases, it was far from clear how the edicts would be implemented. China, for example, has been expanding its toolkit to fight US sanctions for years, although it has so far refrained from using measures such as blacklists and export controls.

Leaving everything aside is the question of how the world’s most important geopolitical relationship will evolve after Joe Biden enters the White House later this month. Any optimism to ease tensions should be dampened by U.S. bipartisan support for recent policies imposed on China, former U.S. Ambassador to China Terry Branstad told Bloomberg Television on Tuesday. “I don’t see the possibility of a big change in policy with the change of administrations,” he said.

Separation shots

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

Source: United States Department of Commerce as of December 21, 2020.

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

“There’s a climbing breast,” said Alex Capri, a researcher at the Hinrich Foundation, an Asia-based foundation created by U.S. entrepreneur Merle Hinrich to promote sustainable global trade. “From a corporate governance perspective, multinational companies and individuals will be increasingly reassured.”

In a speech to Communist Party officials on China’s development plans on Monday, President Xi Jinping said everyone “must be brave to fight and be good at it,” although he gave an optimistic tone. that “opportunities outweigh challenges.”

Chinese equities outperformed regional pairs on Monday, although they recovered losses during early trading on Tuesday.

Taiwanese investors far outweighed rising cross-strait tensions, bringing the local stock index to an all-time high. Pompeo lifted U.S. guidelines on meetings with Taiwanese officials, established after Washington’s recognition of China in 1979. They had required written permission from the State Department for higher-ranking diplomats and military to visit Taiwan and went restrict the places where they met with Representatives of Taiwan could take place.

The Global Times, backed by the Chinese Communist Party, warned that Pompey was pushing the world’s largest economies toward military conflict. Hu Xijin, the newspaper’s editor-in-chief, added in a microblog post that China has a “beautiful window of opportunity for mainland China to give a strong lesson to the forces of” Taiwan independence “and restore” leverage. strategic ”in the Taiwan Strait.

The Chinese Foreign Ministry, which opposes official US-Taiwan interactions, said Monday that it “strongly opposes and strongly condemns” the US measure and reiterated that Taiwan is an “inalienable” part of the its territory.

Beijing’s new rules on foreign sanctions, unveiled by the Ministry of Commerce on Saturday, are intended to protect local businesses from “unjustified” enforcement measures abroad, as they allow Chinese citizens or companies to sue for compensation in Chinese courts. if their interests are harmed by the application of foreign laws.

ByteDance Ltd., for example, has been pressured by the Trump administration to relinquish control over its TikTok short video app for alleged national security concerns, but startup investors could try to use China’s new rules to win financial compensation for any loss.

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

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

Beijing’s announcement at the end of Trump’s presidency was probably the time to send a signal to U.S. policymakers without overly opposing a new Biden administration in its early days, Sean Ding said. partner and analyst at Plenum, a Washington-based research firm. Chinese politics and economics.

“The new rules are more than anything a signaling mechanism for both Chinese and American companies in China: we now have the legal capacity to counter the jurisdiction of long-standing U.S. national law,” he said. dir Ding. “In short, it is more of a signal at this stage than trying to launch legal efforts.”

This approach would be in line with China’s previous responses to U.S. restrictions, including Beijing’s creation of a “list of unreliable entities.” Although the government has promised to punish companies, organizations or people on the list that harm national security, authorities have not yet said whether anyone has actually met the criteria for inclusion.

The national security law imposed by the Communist Party in Hong Kong in June also underscores how the US can have an advantage when it comes to sanctions, particularly those affecting the financial industry.

Although Hong Kong security law prohibits sanctions against the financial center and China, state lenders, including Bank of China Ltd., have quietly taken steps to comply with U.S. sanctions against officials such as the chief executive. of Hong Kong, 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 U.S. regulators so they can maintain access to finance in dollars.

Read more: China’s banking law enforces Trump’s sanctions on Hong Kong

A similar dynamic has taken place with international companies navigating conflicting rules in the United States and the European Union over Iran, said Angela Zhang, director of the Center for Chinese Law at the University of Hong Kong and author of “Chinese Antitrust Exceptionalism : How the Rise of China Challenges Global Regulation “.

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

The long range of US sanctions and their potential confusion over its implementation: It was shown again Monday when banks and money managers came forward to comply with Trump’s executive order banning investments in Chinese military companies.

Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co. they said in exchanges presented over the weekend that they will withdraw 500 structured products in Hong Kong, an action that will affect investors in the US and around the world.