Reports in late April 2024 in the Wall Street Journal suggested that the US government was preparing financial sanctions against a Chinese bank, in response to alleged support for Russia in its war in Ukraine.

Subsequent reporting claimed that the move merely sought to put pressure on Beijing in the context of diplomatic talks, however.  Even so, the claims drew attention to the prospect of Washington’s imposing such measures, and to quite how much is at stake.

The “nuclear” option?

The imposition of sanctions on a major Chinese financial institution would be without precedent, given the scale of China’s economy and the degree of its integration into the international system.  Any impact would far exceed that of sanctions on Russia, a much less-important economy. 

The US has imposed sanctions on smaller banks in China before, such as Bank of Kunlun (昆仑银行), in 2012, owing to its alleged dealings with the Iranian Revolutionary Guards, and Banco Delta Asia (汇业银行) in Macau in 2003, owing to its links to North Korea. 

However, targeting one of the “big four” banks could destabilise not only that institution, but even the broader financial sector in China.  Such a move would effectively warn off many western investors, and could hinder Chinese companies’ access to international financial markets. 

Devil in the detail

Of course, much would depend on the nature and scale of the measures put in place.  Restrictions on individual subsidiaries engaged in trade would likely have limited effect, as prior measures against companies owned by China Ocean Shipping Company, Limited (中国远洋运输有限公司) (“COSCO”), China’s shipping company, have shown. 

Moreover, a key consideration would be whether the US could convince other states to join suit – most notably, other members of the G7.  Unilateral sanctions would have less “bite”.

Most likely, too, measures would be incremental in nature.  The exclusion of Chinese financial institutions from the Society for Worldwide Interbank Financial Telecommunication (“SWIFT”) payment system (as happened to some Russian banks in 2020) would probably come about only in the event of a major Taiwan Straits crisis. 

Rather, the ratchet would tighten bit by bit. 

Chinese responses

Still, these reports will encourage Beijing to think about how best to respond. 

An initial point here is that China already has a controlled capital account, which may protect its financial sector – if to a degree.  Beijing would surely tighten capital controls as a defensive measure, so preventing the repatriation of earnings or dollar debt repayments to foreign companies. 

Beijing would also retaliate.  Its options in doing so include restrictions on trade, such as tariffs on US or G7 imports, intrusive inspections of goods (weaponizing phytosanitary measures, for instance), favouring of competitors from friendly states, and “unofficial” boycotts. 

Beijing could also curtail exports of strategic goods such as rare earths, as with Japan in 2010; items at play might include electric vehicle (“EV”) batteries, solar panels, neodymium magnets, and pharmaceutical ingredients, all crucial in important manufacturing chains. 

Maritime containers are also at risk (China is the world’s biggest producer), and Beijing could limit supplies of cobalt (crucial for mobile phones) from Congo, given its companies’ sway in that trade. 

Foreign businesses operating in China may also face challenges.  China could shut down marketing platforms, augment regulatory burdens, hinder the movement of personnel, and add to restrictions on data.  At worst, expropriation is a possibility. 

The impact

In the event of a major fallout, the consequences for the global economy could also be wrenching. 

After all, portfolio investment in the People’s Republic of China (“PRC”), including Hong Kong and Macau, is worth about USD2.5 trillion, while foreign direct investment over a certain threshold (so an understatement) is valued at perhaps USD3.9 trillion, according to China’s Ministry of Commerce. 

G7 enterprises’ revenues from China in 2022 amounted to perhaps USD470 billion, with USD33 billion in profits, while G7 claims on Chinese banks have a value of about USD158 billion.  An escalatory tit-for-tat could result in major losses, with serious consequences for a world economy already straining under a heavy debt burden. 

A separate point is strategic.  Beijing was already working to protect itself from this risk, by encouraging the internationalisation of the Chinese yuan, making more use of Its Cross-Border Interbank Payment System (“CIPS”), a CNY payment system that facilitates inter-bank transfers, and by ramping up purchases of gold. 

Now, though, these reports will encourage renewed efforts to escape reliance on the US-dominated financial system. 

Sanctions

The Wall Street Journal reports are thus noteworthy. 

Of course, Washington may refrain from imposing sanctions on a major Chinese financial institution for now – too much is at stake. 

Even so, the reports point to a direction of travel, and suggest that it would be wise to start planning for sanctions to come.  

For its part, Beijing is doing so.