Russia sanctions’ web can snarl China too

 

It’s a future investors in China must learn to live with: The expanding list of Chinese companies subject to US sanctions or procurement controls. As the US and European Union impose sweeping economic penalties on Russia over its invasion of Ukraine, China Inc can easily become collateral damage, too.
The US government has already put Beijing on notice. US Secretary of Commerce Gina Raimondo warned that Chinese companies wanting to buy American equipment and software would be cut off if they supplied chips and other advanced technology to Russia. Nearly one-third of Russia’s chip imports come from China.
The threat is secondary sanctions. Many of the US penalties related to Ukraine are based on last year’s Executive Order 14024. It allows the US government to pursue companies that provide “material” support to sanctioned Russian entities.
It is a legal gray area. According to the Treasury Department, basic transactions with sanctioned entities are still allowed. What’s not clear, however, is when dealing crosses the line. For example, Chinese companies buying gold from the Russian central bank with US dollars could open doors to secondary sanctions, according to Autonomous Research.
By that logic, many Chinese companies could end up in Washington’s crosshairs. State-owned companies buying stakes in Russian energy and commodities firms at Beijing’s bidding could be seen as aiding Vladimir Putin’s aggression. Raimondo also singled out China’s chip foundry giant Semiconductor Manufacturing International Corp, which is already blacklisted, for further export controls.
So far, China has been careful not to approach the line. Chinese banks have advised some state-owned companies to halt buying coal from Russia, for instance. After all, China knows sanctions do bite — Huawei Technologies Co’s smartphone business had a loss of at least $30 billion last year, a result the company attributed in large part to sanctions. For many Chinese tech firms, the Russian market is not big enough to risk losing access to US technology. However, unless China cuts all ties with Russia, a notion Beijing has rejected, it’s plausible for a company to unintentionally cross the line of “material” support. Despite a years-long push to increase the use of their home currencies, 88% of Russian exports to China is still invoiced in US dollars and euros, according to Rhodium Group.
Beijing thinks Washington overuses and abuses sanctions — and it may well have a point. Procurement controls have expanded to apply to sectors from semiconductors to biotechnology. Biotech giant Wuxi Biologics Cayman Inc lost over 40% of its market value as a result. The US has cited a wide range of political issues: Iran, Hong Kong, Uyghur labour camps. It’s thus not a stretch that some will get sanctioned over Russia, too. For foreign investors, US sanctions are a material risk. Funds might be forced to divest, or at least address investor queries on their holdings’ ESG scores.

—Bloomberg

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