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How the U.S. Could Really Hurt China

The U.S. determination that Hong Kong is no longer autonomous from mainland China has significant implications for the city’s exporters and businesses. But that could pale in comparison to further action by the U.S. to use its dominant position in the global banking system against Beijing.The most immediate threat is the possible end of the city’s special status as separate from mainland China for import and export purposes under the Hong Kong Policy Act of 1992. Sensitive U.S. technologies could no longer be imported into Hong Kong, and the city’s exports might be hit with the same tariffs levied on Chinese trade.

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But the act doesn’t cover the far more extensive role Hong Kong plays as China’s main point of access to global finance. That’s the context in which the Senate’s tentative discussion of penalties against banks that do significant transactions with “persons or entities that materially contribute to the contravention of China’s obligations” should be viewed.
As of 2019, mainland Chinese banks held 8,816 trillion Hong Kong dollars ($1.137 trillion) in assets in the semiautonomous city, an amount that has risen 373% in the last decade.
That’s just a sliver of China’s $40 trillion in total bank assets, but much larger in relation to the $2.215 trillion that the country’s banks extend to borrowers outside the mainland. China’s banks do much of their international business, mostly conducted in U.S. dollars, from Hong Kong. 

China A50 20200611 16.57

Putting the ability of Chinese banks to conduct dollar-denominated activities at risk would be deleterious to China’s ability to operate financially overseas, posing a challenge for the largely dollar-denominated Belt and Road global infrastructure initiative. It would also put the more financially fragile parts of the country, like its debt-laden property developers, under strain.

Any action from the U.S. that strikes a serious blow to Chinese banks is likely to come in piecemeal stages rather than all at once. But the determination that Hong Kong is no longer autonomous could mark the beginning of a squeeze on China’s international financial operations, for which Beijing has no equivalent ability to retaliate.

Oversea Chinese Banking Corp Ltd 20200611 17.00

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Applications for unemployment insurance are expected to have declined for the eighth straight week. Bad news: The number of workers seeking assistance remains about 10-times higher than before coronavirus-related lockdowns began in March. The figures suggest the pace of layoffs is slowing as businesses slowly reopen and people start to move about more freely. But many economists expect a labor market recovery to take many months, if not years, to replace the tens of millions of jobs lost since February, Eric Morath reports.

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