Shares of China Merchants Bank plunged in Hong Kong and on the mainland Tuesday and it wasn’t hard to trace the source of the problem.
On Monday, The Washington Post detailed yet another potential flashpoint between the US and China, outlining a court order involving, apparently, Bank of Communications, Shanghai Pudong Development Bank and China Merchants Bank.
Although the banks weren’t named, WaPo noted that the specifics of the rulings mirrored a 2017 civil forfeiture action that found the Justice Department accusing those banks of conspiring with a Hong Kong front company to launder money for North Korea.
In one particularly foreboding passage, WaPo writes that SPDB, China’s ninth-largest bank by assets, could lose access to US dollars. That is problematic when you’re, you know, a bank.
“The ruling means that Attorney General William Barr or Treasury Secretary Steven Mnuchin can terminate the bank’s US account and ability to process US dollar transactions — a potentially crippling, if not lethal, punishment in global trade”, WaPo wrote.
The Hong Kong front company also dealt with ZTE, which is an issue for obvious reasons. Nobody (not the Justice Department, not SPDB officials at the Chinese Embassy and not the bank’s US-based attorneys) would comment on the ruling, which found all three banks in contempt for failing to comply with subpoenas, (something America’s attorney general knows all about, by the way). The subpoena fight will go to an appeals court next month.
The only other time a foreign bank has found itself compelled by a US court to comply with a subpoena issued under the Patriot Act was nearly a decade ago, when a Saudi bank got itself caught up in a tax fight involving some traveler’s checks (chuckles).
The case against the Chinese banks is clearly more consequential than that. Indeed, WaPo notes that this is the “first time a US court has upheld subpoenas to a Chinese bank in a criminal sanctions probe, raising national security stakes in a debate over whether to invoke the financial penalty prosecutors informally refer to as a ‘death sentence’ because of its potential to kill a bank’s business.”
All three banks on Tuesday issued statements saying they were not under investigation for sanctions violations.
But, as noted, that did not stop their stocks from falling. In addition to China Merchants Bank’s worst day in Hong Kong since 2015, shares of SPDB and Bank of Communications were hit hard.
Clearly, any kind of US action that impaired the functioning of Chinese banks would be a decidedly unwelcome development at a time when Beijing suspects the Trump administration is after far more than reducing bilateral trade deficits. Additionally, the Baoshang debacle reignited concerns about systemic risk in the Chinese banking system and although the story outlined above isn’t related, this is an inopportune time for exogenous shocks.
China has repeatedly trotted out its financial sector as an example of the ongoing effort to “open up”, and, so far anyway, Trump hasn’t taken aim at the banking system. That said, Bloomberg reminds you that in 2017, Mnuchin warned “the US may impose additional sanctions on China, potentially cutting off access to the US financial system, if it didn’t follow through on a fresh round of United Nations restrictions against North Korea.”
Thanks to the latest exchange of “beautiful letters” between Trump and Kim Jong Un, it looks as though Washington and Pyongyang are set for diplomatic rapprochement months after the Hanoi summit went awry. That could reduce the odds of any North Korea-related escalations against China. Xi was, of course, just in North Korea visiting with Kim ahead of the G20 meeting with Trump.
China’s Foreign ministry pushed back on Tuesday. “We consistently oppose the so-called long-armed jurisdiction of the United States on Chinese companies”, spokesman Geng Shuang said, adding that China has always complied with UN Security Council resolutions.