US threats to impose sanctions on big Chinese companies over Beijing’s support for North Korea have sparked a guessing game over the form such measures might take, and the potential fallout.
On Tuesday US president Donald Trump warned that the UN’s latest sanctions were “nothing compared to ultimately what will have to happen”, while Ed Royce, chairman of the House foreign affairs committee, said Washington should target “major Chinese banks doing business with North Korea”.
The Financial Times has examined the most likely targets for unilateral US action against Chinese groups and the potential blowback from Beijing. Here are some key questions.
Why is the US considering further unilateral action?
Mr Trump has identified the reining in of North Korea’s nuclear programme as his top foreign policy priority and has consistently urged China to do more to put pressure on its Communist neighbour. But Pyongyang’s weapons trials have continued unabated, with the regime testing numerous missiles this year and its sixth and largest nuclear bomb this month.
While the UN on Monday agreed its strongest sanctions yet against the Kim Jong Un regime, the resolution won support from China and Russia only after stronger US proposals, including a total oil embargo, had been watered down.
Meanwhile, sanctions imposed by the US earlier this year on small Chinese companies such as Bank of Dandong, a regional lender based on the border with North Korea, have not inflicted significant pain on China.
“If the US only sanctions small players it confirms the view of many Chinese that the administration is a paper tiger,” says David Loevinger, former senior co-ordinator for China affairs at the US Treasury and managing director of emerging markets sovereign research at TCW Group. “The big question is whether the US will ‘go nuclear’ and cut off a medium-to-large Chinese bank from the US financial system.”
Which Chinese companies are most likely to be targeted?
Large state-owned banks and energy companies appear to be in the crosshairs. Mr Royce cited state-owned Agricultural Bank of China, the country’s third-largest lender by assets, and China Merchants Bank, the sixth-largest, as possible targets.
Peter King, a US congressman from New York, has also called for Bank of China, the country’s fourth-largest, to be among those facing sanctions. “UN must impose oil embargo on N Korea ASAP,” he said last week on Twitter. “If China or Russia veto, US must sanction any1 doing business with NK, including Bank of China.”
Chinese banks had $142bn in US assets at the end of March, with BoC accounting for the largest share, according to Federal Reserve data.
The Financial Times reported on Monday that branches of China’s five biggest banks had stopped opening new accounts for North Korean individuals and companies. But the impact of these moves was unclear, since much trade with North Korea occurs through Chinese intermediaries.
China National Petroleum Corp is another potential target. China supplies more than 90 per cent of North Korea’s crude oil imports, according to Eurasia Group. Most of that comes from CNPC.
How exposed are Chinese companies?
For China, much would depend on how US authorities calibrate their action. While the US assets of China’s six largest banks comprise only 1 per cent of their global total, a full shutdown of access to the US would have an outsized impact.
The central role of the US dollar in global trade and investment requires foreign banks to clear payments through the US, even if they are doing business elsewhere. That requires a dollar clearing licence from US authorities.