UK banks assess China risks after being stung by Russia sanctions

BIG banks in Britain are preparing for any future escalation of Western sanctions on China and have shared their “scenario planning” with the British and US governments, according to a senior banking official.

The project involves sharing lessons learned from other sanctions frameworks, including those on Russia, and discussions about the effect any measures imposed on China might have, says Neil Whiley, director of sanctions at lobby group UK Finance.

After many companies were wrong-footed by the speed and breadth of prohibitions on Russia, banks are drawing up contingency plans in case geopolitical tensions between the West and China escalate, according to sources. They do not expect any imminent changes to sanctions.

The work by UK Finance – which represents around 300 firms, including HSBC, Barclays and JPMorgan – examines the transparency of asset ownership and control and how easily Chinese products can be traced, Whiley says.

It also focuses on the extent of commercial ties between the West and China across industries, including supply chains in high-risk sectors like technology, and attempts to highlight measures that might backfire if applied to China.

The work has been carried out against a backdrop of tensions between the West and China over the status of Taiwan, which Beijing claims, growing export controls, accusations of Chinese spying and a security crackdown by Beijing on companies.

UK Finance convened fortnightly meetings of big British and overseas banks over several months before drawing up a draft document that runs to tens of thousands of words.

The draft was completed in August and shared with Western government contacts in recent weeks.

The US Treasury Department, which runs the Office of Financial Sanctions Implementation, Britain’s Foreign Office and Barclays did not respond to requests for comment. JPMorgan declines to comment.

Three senior London-based bankers say their boards had discussed the possibility of stronger Western sanctions on China.

Scenarios from major cyber-attacks through to a military intervention in Taiwan could potentially trigger further prohibitions on China, according to one lawyer who advises banks.

“The biggest financial institutions are determining whether the exposure they have (to China) is tolerable given a pessimistic direction of travel for geopolitics,” says one security expert, who declined to be named.

The preparations have been driven in part by the unprecedented sanctions slapped on Russia following its full-scale invasion of Ukraine, which left some companies struggling to get assets out of the country or exit positions.

One of the bankers says sanctions on Russia have “removed naivety” among businesses and prompt the industry to think more deeply about China risks.

Communications between officials from the United States and China have increased in recent months, thawing frosty relations somewhat ahead of a meeting between Chinese President Xi Jinping and US President Joe Biden next month.

China, the world’s second-largest economy, remains central to Western supply chains. The European Union’s trade deficit with China, for example, widened to US$276.6bil in 2022 from US$208.4bil a year earlier, Chinese customs data show.

British finance also has close ties with China. Two of the country’s biggest banks –HSBC and Standard Chartered – make most of their profits in Asia, forcing them to straddle the geopolitical faultlines.

Surge in calls

Whiley says the UK Finance project is designed to be part of industry-wide “horizon-scanning” to assess potential risks across multiple countries, in line with regulatory guidance, and does not reflect expectations or requests for more sanctions.

Nonetheless, financial firms are alive to the risks.

Another banker, who works for a lender with a presence in Asia, says the bank’s board was planning for more strains between China and Taiwan and likely consequences for financial markets, including currency and equity reactions.

Lloyd’s of London underwriters are among insurers that have raised rates and cut cover for risks involving Taiwan as concerns grow about possible military action by China, Reuters exclusively reported in August.

Against that background, four lawyers in London report a surge in calls from financial clients seeking guidance on China, from sanctions compliance and risk assessment through to how to deal with any investigations or enforcement.

Demand for advice is so keen that one lawyer says his firm has held its first client-only seminar on Russia, China and how geopolitics are shaping sanctions and compliance.

“Companies will want to make sure that for long-term engagements with Chinese entities, they have robust sanctions provisions in their contracts and agreements,” says Leigh Hansson, a London and Washington-based lawyer at Reed Smith.

Banks’ concerns are being driven partly by the robust US-steered approach to the semiconductor and technology industry and foreign policy discussions, lawyers say.

The Biden administration has curbed chip exports to China to deny Beijing access to advanced technology that could further military advancements or human rights abuses. China hit back with accusations of economic coercion.One lawyer does not expect any repeat of the Russia response and for “commercial reality” to enter foreign policy decision-making in relation to China.

“Any sanctions will be very much targeted at specific companies, specific products and services,” the lawyer says. — Reuters