Citigroup Inc, JPMorgan Chase & Co, HSBC Holdings Plc and their peers face a threat to their massive expansion plans in China from a US move that would sanction Chinese and Hong Kong officials involved in imposing a national security law on the former British colony. Wall Street and their European rival's push for Chinese riches could be further imperiled should China retaliate.
1. What's in the bill?
The US Congress passed a bill that would require the State Department, in consultation with the Treasury, to report on and establish penalties for foreign persons and entities who have "materially" contributed to undermining Hong Kong's "one country, two systems" framework. It gives the president the power to block assets and deny US entry to those involved.
2. How are banks drawn in?
The legislation would also penalize foreign financial institutions that knowingly do business with sanctioned individuals. Big US banks are at risk since their foreign subsidiaries may have Chinese officials, their relatives and associates as customers. 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 US could be even more exposed because most global transactions are done in US dollars and flow through the US banking system. The report on banks will be submitted after individuals are disclosed, giving lenders time to adjust.
3. What are the penalties?
Banks singled out could face a cascade of sanctions, including a block on assets, restrictions on access to loans from US institutions, bans on being a primary dealer in US debt, conducting foreign exchange and banking transactions as well penalties on executives among others, according to the bill.
4. What's at stake?
The five big US banks had a combined $701 billion of exposure to China in 2019, with JPMorgan clocking the biggest investment at $19 billion. They now could also face the risk of a tit-for-tat if China chooses to retaliate over the US sanctions, clouding their growth plans and threatening 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.
Spokespeople at Citigroup, JPMorgan and HSBC declined to comment.
5. How worried are they?
While the US has broad authority to impose penalties under the act, the initial fallout may be limited to the most senior Chinese officials since the US is unlikely to take action that will significantly disrupt trade or hurt the global economy, according to estimates from bank executives who asked not to be identified discussing an internal analysis.
6. What are banks doing now?
Global banks are reviewing their client base to identify people who may be exposed to sanctions and looking over agreements to make sure that they have clauses that allow them to ditch customers without penalty. Once the sanction list is released, banks will need to ensure they have effective procedures to cut ties with those individuals.
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 sanctioned, the president can also ban US 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.
9. What's the timing?
President Donald Trump hasn't indicated yet whether he will sign the bill, but it has veto-proof support in Congress. If enacted, the State Department has 90 days to submit a report on whether any individuals or companies merit sanctions. Reports on financial institutions must be submitted within 60 days after that. The president has the leeway to wait one year before imposing sanctions.
10. Has this happened before?
Similar. Treasury's Office of Foreign Assets Control included the Venezuelan central bank in its list of sanctioned entities in April last year. In 2018, the Trump administration sanctioned seven Russian tycoons, 12 companies and 17 senior government officials including key allies of President Vladimir Putin. BNP Paribas SA was fined $8.9 billion by the US in 2014, the largest ever for an individual bank, for transactions with Sudan and other blacklisted nations.
Disclaimer: This article first appeared on Bloomberg.com, and is published by special syndication arrangement.