China’s anti-sanctions law: how companies can avoid picking a side

If the new law is similar to the European Union’s ‘blocking statute’, it may force companies to choose between the US or the Chinese market or motivate them to lobby the US to lift sanctions on China
A third option might be for companies to split into two separate entities serving both markets

Benjamin PoonandZhigang Tao

Published: 10:00pm, 16 Jun, 2021

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The National People’s Congress Standing Committee passed the new anti-sanctions law at its closing session, writing a new chapter in the ongoing Sino-US clash.

While the details are yet unknown, foreign multinationals operating in China are anxious to know how it would affect their future business strategy.

In 2018, then US president Donald Trump began to impose heavy tariffs on Chinese exports, sparking the Sino-US trade war. The battlefield soon shifted, as Chinese tech giants ZTE and Huawei were accused of compromising US national security.

Since last year, many government officials were sanctioned in response to alleged human rights abuses in Hong Kong, Tibet and Xinjiang.

02:23

China passes anti-sanctions law to counter punitive action by foreign countries

Beijing’s responses have largely fallen flat. The Chinese government has repeatedly called for the US to drop these sanctions to no avail.

In September last year, the Ministry of Commerce introduced the country’s first blacklist for trade sanctions. It further issued rules aiming to counteract the US’ long-arm jurisdiction in January this year. Yet, these measures were more bark than bite, as they largely remained at the diplomatic and administrative level.

Now, by bringing matters into the legal sphere, Beijing is taking a leaf out of Washington’s playbook.

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It is likely that the new law will be modelled after those adopted in other regions, such as the European Union. The EU’s “blocking statute” protects EU individuals and companies by “nullifying the effect in the EU of any foreign court ruling” based on certain foreign laws, and allowing them “to recover in court damages caused by the extraterritorial application” of those laws.

Assuming China’s new law has similar effects, it may result in two scenarios, depending on the actions of foreign multinationals. The worst-case scenario is that multinationals must choose between the American and Chinese market – a total decoupling of the global economy.

For example, consider ASML Holding being caught between a US sanction against selling extreme ultraviolet lithography equipment to certain Chinese firms (for instance, SMIC) and China’s new law.

It can either ignore the sanction, in which case it may face a suit from the US government, or follow the sanction, in which case SMIC may have a claim against ASML in Chinese courts. As each option essentially entails forgoing one market for the other, what ASML would do depends on which market is bigger.

This may not be Beijing’s goal, but it is confident that its market is more attractive to multinationals. Indeed, the European Union Chamber of Commerce in China has recently reported that almost 60 per cent of surveyed European corporations intend to expand their operations in China this year.

The best-case scenario is that the law would spur those multinationals to successfully lobby the Biden administration to lift the sanctions.

This is consistent with what was said by Beijing earlier this year when Vice-Minister of Foreign Affairs Xie Feng called on leading Shanghai-based US businessmen to “exert active influence” over Washington to reduce tariffs.

The actual outcome will depend on how sensible Washington is, and how resolute Beijing is in implementing its new law.

There is, however, a third alternative for multinationals: splitting into two separate entities serving both the American and Chinese markets. This strategy would allow them to reap profits from both markets without being bound by government sanctions.

To prevent the entities from being amenable to the other country’s jurisdiction, the two would have no ownership nor management linkage. Absent such a strategy, companies may find themselves caught in an even larger political crossfire when the new law is implemented.

HSBC is a good case in point. The bank came under heavy fire after reports suggested that the US Justice Department obtained documents from it in investigating the case of Meng Wanzhou, Huawei’s chief financial officer.

A Chinese government-backed website accused HSBC of being “maliciously” involved in Meng’s arrest. The bank denied this, stating it had a legal obligation to provide the documents.

Despite having derived most of its profits from Hong Kong and mainland China while having a much smaller business in the US (which, following the announcement that it will exit the retail banking business in the US, will shrink further), HSBC has been trying to distance itself from Hong Kong officials sanctioned by the US.

However, HSBC had also championed the national security law and had, at one point last year, restricted bank account access for Next Media’s executives.

Naturally, the US was unhappy, with former secretary of state Mike Pompeo calling these actions “corporate kowtow”. Yet, Chinese media also slammed HSBC’s support for the law as coming too late.

01:24

Hong Kong leader Carrie Lam says she gets around sanctions by collecting her salary in cash

To exacerbate the problem, HSBC had recently received letters from Hong Kong’s Secretary for Security John Lee Ka-chiu, threatening the bank’s officers with up to seven years’ imprisonment for dealings with the frozen accounts of Next Media founder Jimmy Lai Chee-ying. Simply put, the bank is stuck between a rock and a hard place.

A split will allow multinationals like HSBC to alleviate some of the political pressure coming from both sides. Of course, such a move is not without its costs, as the new entities would not be able to take advantage of the potential synergy between themselves. Hence, HSBC may lose some Chinese customers as it can no longer tap its global network.

However, because such a strategy allows multinationals to get around the US sanctions without losing much, the higher the number of companies adopting it, the lesser the actual impact of the US sanctions, to the extent that the Biden administration may lift the sanctions altogether. This is precisely the aim of the new law.

Benjamin Poon studies business administration and law at the University of Hong Kong. Zhigang Tao is a professor of global economy and business strategy at HKU