Worsening tensions between the US and China are putting companies in the crosshairs

Photographer: Shawn Thew / EPA / Bloomberg

The last days of the Trump administration are proving as confusing as ever for companies and investors trapped in the midst of an increasingly controversial relationship between the US and China.

Widespread after a week confusion over the scope of a US ban on investment in companies related to the Chinese military, both Washington and Beijing have taken steps this weekend that threaten to build tensions further and cloud the prospects for cross-border trade.

Secretary of State Michael Pompeo overthrew decades of US policy on Saturday by removing self-imposed restrictions on how government officials interact with Taiwan, prompting swift calls for retaliation by the Chinese state media. Pompeo’s announcement came just hours before Beijing enacted new rules that would allow Chinese courts to punish international companies for complying with foreign sanctions – a move that could theoretically force companies to choose between the world’s two largest economies.

In either case, it was far from clear how the edicts would be carried out. For example, China has been expanding its toolkit to fight back against US sanctions for years, although it has so far refrained from measures such as blacklists and export controls.

Hanging all over is the question of how the most important geopolitical relationship in the world will evolve after Joe Biden enters the White House later this month. Any optimism for easing tensions should be tempered by bipartisan US support for recent policies against China, former US ambassador to China Terry Branstad told Bloomberg Television on Tuesday. “I don’t see a chance of a major change in policy through the change of governance,” he said.

Farewell shots

The Trump administration has sanctioned more than 200 Chinese entities, city councils and universities since 2019

Source: US Department of Commerce on December 21, 2020.

The result is persistent uncertainty for companies caught in the crossfire, of Apple Inc. to Tencent Holdings Ltd. and HSBC Holdings Plc. That threatens to scare investment decisions, deal-making and start-up financing at a time when the coronavirus-ravaged global economy needs all the support it can get.

“There is an escalation of tit-for-tat,” said Alex Capri, a research fellow at the Hinrich Foundation, an Asia-based foundation founded by American entrepreneur Merle Hinrich to promote sustainable global trade. “From a corporate governance perspective, multinationals and individuals will increasingly be confronted with a whipping.”

Speaking to Communist Party officials on Monday on China’s development plans, President Xi Jinping said that everyone “needs to be brave to fight and be good at it,” while adopting an optimistic tone that “opportunities outweigh challenges. . “

Chinese stocks underperformed regional counterparts on Monday, although they recovered losses in early trading on Tuesday.

Investors in Taiwan largely managed to shake off the rising tensions between the strait, pushing the local stock index to a record high. Pompeo overruled US guidelines for meeting with Taiwanese officials, introduced after Washington’s recognition of China in 1979. They required written permission from the State Department for diplomats and military personnel above a certain rank to visit Taiwan, and limited the locations where meetings with representatives of Taiwan could take place.

The Chinese Communist Party-backed Global Times warned that Pompeo was pushing the world’s largest economies into military conflict. Hu Xijin, the newspaper’s editor-in-chief, added in a microblog post that China has a “valuable opportunity for mainland China to teach a tough lesson to Taiwan’s ‘independence forces'” and restore “strategic influence” in the Taiwan Strait.

China’s Foreign Ministry, which opposes official US-Taiwan interactions, said on Monday that it “strongly opposes and strongly condemns” the US action and reiterated that Taiwan is an “inalienable” part of its territory. .

Beijing’s new rules on foreign sanctions, unveiled by the Ministry of Commerce on Saturday, are designed to protect local businesses from ‘unjustified’ overseas enforcement action by allowing Chinese citizens or companies to seek damages 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 of its popular TikTok short video app over alleged national security concerns, but the startup’s investors could try China’s new rules to be used to obtain financial compensation for any losses.

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

TikTok, Hong Kong and more US-China Flashpoints: QuickTake

Beijing’s announcement at the end of Trump’s presidency was likely timed to send a signal to US policymakers without too much opposition to a new Biden administration in its early days, said Sean Ding, a Washington. established partner and analyst at Plenum, a research firm specializing in Chinese politics and economics.

“More than anything else, the new rules are a signaling mechanism for both Chinese companies and US companies in China: we now have the legal ability to counter the long-arm jurisdiction of US domestic law,” Ding said. “In short, it is more of a signal at this stage than actually trying to initiate legal efforts.”

That approach would be consistent with previous Chinese responses to US restrictions, including Beijing’s creation of an “untrustworthy entity list”. While the government has vowed to punish listed companies, organizations, or individuals who harm national security, authorities have yet to say whether anyone actually met the criteria for inclusion.

The national security law imposed on Hong Kong by the Communist Party in June also underscores how the US can have the upper hand when it comes to sanctions, particularly those hitting the financial sector.

While Hong Kong’s security law prohibits sanctions against the financial center and China, government bonds, including Bank of China Ltd., have been quietly taking steps to comply with US sanctions against officials such as Hong Kong’s Chief Executive Carrie Lam. With more than $ 1 trillion in US dollar liabilities, China’s four largest state-owned banks have tremendous incentives to stay on the right side of US regulators so they can maintain access to dollar funding.

Read more: Chinese Banking Law to Comply with Trump’s Sanctions on Hong Kong

A similar dynamic has occurred with international companies operating conflicting rules in the US 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 that the Chinese rules are very effective in actually countering US sanctions,” Zhang said. However, they will increase compliance costs for businesses, she said.

The long reach of US sanctions – and the potential for it confusion over their implementation – was seen again on Monday as banks and money managers rushed to comply with Trump’s executive order banning investment in Chinese military companies.

Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co. In exchange requests over the weekend they said scrap 500 structured products in Hong Kong, a move that will affect investors in the US and around the world.