New Rules Would Punish Firms for Complying With U.S. Sanctions

China’s (MOFCOM) published new rules this weekend that would allow it to prohibit companies’ compliance with foreign laws that stop them from trading with China. The rules were an apparent response to a growing slew of issued by Western governments, particularly the U.S., that have targeted Chinese corporate giants such as and chipmaker Manufacturing International Corp (SMIC). Reuters’ Josh Horwitz reported on the details of the new measures:

According to the notice, a Chinese person or organisation that is restricted by foreign legislation from “engaging in normal economic, trade and related activity with a third State or its citizens,” may report it to the commerce department within 30 days.

The commerce department will then assess a case for its potential violation of international law, impact on China’s sovereignty and national security, and impact on Chinese citizens.

When a citizen or other organisation “suffers significant losses” from non-compliance with foreign legislation, “relevant government departments may provide necessary support”, the notice says.

The Chinese government might also enact “necessary counter-measures” in response. [Source]

According to a statement from the Ministry of Commerce, the Chinese government may order that companies or individuals in China not comply with foreign restrictions.

The new rules could have significant implications for multinationals that do business in both the U.S. and China, who have already struggled to straddle the two countries’ differences amid rising tensions. The New York Times’ Amy Qin reported that the new rules could force companies to, in effect, pick sides, and put pressure on the incoming Biden administration to relax sanctions imposed by his predecessor:

“This basically puts many big companies between a rock and a hard place, because they either have to decide to comply with or with the Chinese rules,” said Henry Gao, a law professor from Singapore Management University who specializes in international trade. “And either way, they are going to lose one of their biggest markets.”

It is unclear whether global companies would end up being punished in China for complying with U.S. sanctions. Under the rules issued on Saturday, companies could seek a waiver from the Commerce Ministry in order to comply with American restrictions. They also require Chinese officials to set up an interagency body to determine which foreign laws fall under its scope.

In addition, much of the language of the order released on Saturday was vague, giving the Chinese government and companies wiggle room for compliance. Still, the threat could prompt big American companies with business in China to press Mr. Biden to relax the restrictions against Chinese companies. Mr. Biden has not said whether he intends to press forward with Mr. Trump’s punishing measures, which have contributed to the most toxic relationship between China and the United States in decades. [Source]

Suspicion of efforts to box in the Biden administration have also surrounded recent moves regarding U.S. Taiwan policy, though some observers have also suggested that Biden could benefit from them.

The published language has left some uncertainty about exactly which parties are covered, and whether companies have a right or an obligation to report to MOFCOM. In his Pekingnology newsletter, Zichen Wang, who also reports for Xinhua, analyzed the language of the new rules:

Secondary sanctions put pressure on third parties to stop their activities with the sanctioned country by threatening to cut-off the third party’s access to the sanctioning country. Put this in perspective this could mean U.S. laws banning a non-American (European, Japanese, Korean, etc.) company from selling stuff to a Chinese one.

If Beijing’s Rules target ONLY secondary sanctions, and NOT cover primary sanctions, then, supposedly, Huawei can’t use the Rules against Qualcomm, which is American but can use the Rules against Sony or TSMC, which are NOT American. (Just an example for the sake of an example, not that Huawei would.)

[…] Your Pekingnologist is UNSURE first because this would be too surprising especially given that none of the reports from all the leading international media mentioned this.

[…] 3) The media reports so far largely didn’t mention this, but your Pekingnologist wonders if, citizens and businesses in China now have not only a right to report but an obligation, because the Ministry of Commerce uses the word 应当 which though it translates as SHALL, carries a strong tone in the original Chinese toward MUST, instead of MAY. [Source]

In recent months, the Trump administration has ordered a series of measures targeted at Chinese companies, particularly in the high-tech sector. In August 2020, sanctions against technology Huawei banned U.S. companies from trading advanced tech components and software with the company. The following month, China’s biggest chipmaker SMIC was hit with similar measures, a major blow amid Beijing’s efforts to fast-track the development of a homegrown semiconductor champion. Other measures have included attempts to force the sale of social media app TikTok, and the delisting from U.S. stock exchanges of publicly traded Chinese companies deemed to be tied to the Chinese military.

An analysis by Francis Shin at the think-tank Center for New American Security found that the number of Chinese entities targeted by U.S. sanctions dramatically increased in 2020, with the number of sanctions designations against Chinese actors reached a record high. Sanctions designations have also notably targeted an increasing number of individuals, not just companies. According to the CNAS report, prior to 2017, no human-rights related sanctions were imposed on any Chinese entities. But more than 20 such sanctions were introduced in the first 11 months of 2020, primarily related to state-led repression in Xinjiang and Hong Kong.

Speaking to BBC News’ Justin Harper, one Chinese legal expert said that the new MOFCOM measures may allow targeted individuals to sue banks complying with the sanctions:

Angela Zhang, a Chinese law professor at the University of Hong Kong, added: “Consider a scenario that a European bank freezes the assets of a Chinese official that was sanctioned by the United States, the Chinese statute will allow the official to sue the European bank to recover his loss.” [Source]

U.S. sanctions and the continued downward spiral of U.S.-China relations have put companies that have long sought to do business in both countries under significant pressure. This week, Hong Kong’s Chief Executive said that the city’s financial regulator might force the removal of the U.S.-based manager of the city’s most popular index fund, after it declared it would be unable to buy stakes in sanctioned Chinese firms. Another company under pressure is multinational banking giant HSBC, which has faced pressure from both U.S. sanctions and orders by Hong Kong police to freeze pro-democracy activist’s assets. Anger from both Chinese and Western authorities have seen it harshly criticized in London and Washington, and also excluded from Chinese bond sales.

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