China move to fight sanctions gives Hong Kong banks new worry

China’s top legislative body will take the first steps toward imposing an anti-sanctions law on Hong Kong, local media reported, a move that could create complications for multinationals caught in rising tensions between Washington and Beijing.

The National People’s Congress Standing Committee will add the legislation to Hong Kong’s Basic Law next month, media including the South China Morning Post newspaper reported Wednesday, citing people they didn’t identify. The state-run Xinhua News Agency said Tuesday that the body would consider adding national laws to the annexes of the charters of both Hong Kong and Macau during a closed-door session Aug. 17-20, without specifying what legislation was under discussion.

The move follows the NPC’s passage of an anti-sanctions law last month that gives the Chinese government broad powers to seize assets from and deny visas to those who formulate or implement sanctions against the country. It also empowers individuals and companies to sue “individuals and organizations” to seek compensation for discriminatory practices in Chinese courts.

While much depends on how strictly Beijing chooses to enforce the anti-sanctions legislation, the measure could create new headaches for thousands of foreign companies that operate in the two former colonies. It could potentially create a situation in which firms are forced to choose between competing directives from the governments of the world’s two largest economies.

“International banks have been dealing with increasing concerns over Hong Kong, and they now risk being caught between potentially conflicting U.S. and Chinese laws,” Brock Silvers, chief investment officer of Kaiyuan Capital in Hong Kong, said, adding that few banks would be willing to contravene American law. “This may not be an area where China can operate within a gray area, and the ‘anti-sanctions law’ in Hong Kong may result in encouraging international banks to seek alternatives.”

The addition of the sanctions law to Hong Kong’s charter would be the latest in a series of moves by China to directly legislate in the former British colony, which China promised a “high degree of autonomy.” Since last year, the top legislative body has handed down a sweeping national security law and mandated an election overhaul that creates a system to exclude candidates deemed unpatriotic.

The U.S. flagged the possibility that China could apply the anti-sanctions law in Hong Kong, when President Joe Biden’s administration warned businesses about the growing risks of operating in the city. Chinese diplomats wrote an article last month in state-run Study Times saying that the sanctions legislation should be added to the charters of Hong Kong and Macau, even though it already applied there.

“It certainly would add to the complexity of doing business in Hong Kong,” Tara Joseph, president of the American Chamber of Commerce in Hong Kong, said Wednesday.

The anti-sanctions legislation is part of President Xi Jinping’s attempt to fight back against a widening range of U.S. sanctions on Chinese officials and entities over the Beijing’s policies toward Hong Kong and Xinjiang. Xi’s responses have so far had little impact due to the U.S. dollar’s dominance in the global financial system and China’s desire to avoid any escalation that could blow back on its own economic power centers.

Chinese officials have repeatedly affirmed their desire to defend Hong Kong’s status as a world financial hub — and its supply of foreign capital — and have strong incentives to ensure banks stay. Hong Kong Chief Executive Carrie Lam told Bloomberg Television in January that she would love to see banks like HSBC Holdings PLC expand in Hong Kong and that China probably wouldn’t penalize lenders that comply with U.S. sanctions.

“I don’t see why the central people’s government would take that sort of action,” she said at the time.

China’s largest state-run banks operating in Hong Kong have taken steps to comply with U.S. sanctions imposed on officials in the city, seeking to safeguard their access to crucial dollar funding and overseas networks. And Lam herself has publicly acknowledged struggles to use credit cards while under U.S. sanctions.

The Biden administration hasn’t yet identified any banks and other financial institutions doing business with sanctioned officials in violation of the Hong Kong Autonomy Act. Beijing might feel greater pressure to act if the U.S. follows through on those steps.

In June in the U.S., Republican Sen. Pat Toomey and Democrat Chris Van Hollen wrote Treasury Secretary Janet Yellen to inquire why no banks had been targeted.