The Imminent Tough Times for Hong Kong's Financial Sector
After the implementation of the Hong Kong National Security Law, the
geopolitical game between China and the Western countries led by the United
States has entered a new stage. As always, the U.S. has
resorted to its usual
tactics - the U.S. Congress has passed the Hong Kong Autonomy Act,
which will become law when it is presented to President Trump for his
signature. It is understood that Trump could sign the Hong Kong Autonomy Act as
soon as this week.
At its core, the Hong Kong Autonomy Act allows the U.S. to impose
sanctions on officials and individuals it deems to be "detrimental to Hong
Kong's autonomy", as well as banks that have significant dealings with the
sanctioned individuals. As the bill includes Hong Kong's
financial institutions on the sanctions list, once the U.S. passes the bill to
impose sanctions, it will impact Hong Kong's financial industry, and the
banking industry in Hong Kong is likely to get into a difficult situation.
Judging from the impact of the relevant U.S. sanctions bill on Hong Kong,
the impact of its sanctions on individuals is far less than that on financial
institutions. There are two broad categories of banks subject to the sanctions
bill: the first is Chinese banks, including the five major banks and other Chinese banks with operations in Hong Kong or overseas.
This is due to the "officials and associates" under the proposed
sanctions are mostly officials from China or the Hong Kong Special
Administrative Region, most of whom use the services of Chinese banks.
Therefore, these Chinese banks are subject to sanctions under the U.S. bill. In
theory, Washington could use this as justification to crack down on all Chinese
banks with operations abroad.
Another group that will be hit by the U.S. bill is foreign banks with
operations in Hong Kong. As an important international
financial center, Hong Kong has many foreign banks, such as the Hong
Kong-based HSBC Bank, Standard Chartered Bank, Hang
Seng Bank, Citigroup, Bank of America, JPMorgan Chase, Deutsche Bank, Union
Bank of Switzerland, BNP Paribas, DBS Bank, and other
commercial banks. There are also a number of European and American investment
banks, i.e. Goldman Sachs, Morgan Stanley and Credit
Suisse, Bank of America Merrill Lynch, etc. These European and American banks,
which have considerable business networks and operations in Hong Kong and
Mainland China, would be vulnerable to sanctions under the legislation.
According to the Financial Times, European and American banks in Hong Kong
are conducting emergency audits of their clients and at least two large
international banks in the territory were studying which of their clients and
partners might be exposed to sanctions under the act and with which they might
have to terminate their business relationships. A source
at one of the foreign banks raised the frustration that termination of
their business relationships with the sanctioned clients would undoubtedly
affect revenues from Chinese banks and state-owned enterprises. In addition,
the sanctions could hit the territory's international fund managers and
insurers. "Some of them are going through that exercise of looking at
their existing client base and seeing where the risks are," said a lawyer
who advises institutions on the impact of economic sanctions. Some bankers
believe it makes sense at this stage for banks to look at their client lists
and work out what to do in different scenarios. Although the U.S. sanctions
list has not yet been published and estimates of the number of people affected
will not be too high, worst-case scenario has to be considered to assess the
impact on the business and how the bank will respond.
In addition to the Hong Kong Autonomy Act in the United States, financial
institutions in Hong Kong are also concerned about the implications of the Hong
Kong National Security Law. According to Bloomberg, Hong Kong financial
executives say they are concerned that financial institutions could violate the
Hong Kong National Security Law if they comply with sanctions requirements
under the U.S. Hong Kong Autonomy Act. According to
Article 29 of the Hong Kong National Security Law, "sanctions, blockades
or other hostile actions against the Hong Kong Special Administrative Region or
Republic of China" are
Hong Kong financiers said the Hong Kong Autonomy
Act would force the city's financial institutions to choose to do business with
either the U.S. or China, rather than both. Some financiers lament that Hong
Kong has become the focus of a tussle between China and the United States, and
that some global banks are in a dilemma between China and the United States.
In addition, Reuters reported on July 10 that China's five largest
state-owned banks are making contingency plans in case of possible sanctions by
the U.S. Congress. The move follows legislation in U.S.
Congress that allows banks to be prevented from clearing dollars through U.S.
institutions. According to people familiar with the matter, Bank of China's
worst-case scenarios include the risk of a run on its Hong Kong branch if a
large number of clients fear the bank's U.S. dollar reserves will run out. Bank
of China and Industrial and Commercial Bank of China are considering the
possibility that, in the worst-case scenario, their dollar businesses could be
cut off or lost. Agricultural Bank of China, by contrast, is considering a
milder scenario as it seeks solutions for clients blacklisted by the U.S.,
particularly those at risk of a sudden liquidity crisis. At least three
state-owned leasing companies, including ICBC Leasing and BOC Aviation, are
also working on contingency plans, the sources said. Leasing companies often
rely on dollar borrowing to buy aircraft, machinery, and equipment.
It can be seen that with the implementation of the Hong Kong National Security
Law enacted by the National People's Congress and the Hong Kong Autonomy Act
enacted by the United States, Hong Kong has become a forefront of geopolitical
friction. The fear is that Hong Kong's financial sector is about to enter tough
times and it would be forced to choose sides between the U.S. and Chinese
businesses. If this continues, it will cause substantial damage to Hong Kong's
banking sector and its status as an international financial center.
Final analysis conclusion:
The U.S. political tactic is driving a change in Hong Kong's financial
environment. If the U.S. sanctions act comes into force, it will be a tough
time for Hong Kong's financial sector.
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