China or the US: Hong Kong firms could soon face difficult choice

A new anti-sanctions law threatens to punish foreign entities and individuals who comply with sanctions against China. The laws create new headaches for firms caught between the US and China as tensions rise.

Beijing is planning to introduce new anti-sanctions laws in Hong Kong and Macau to prevent foreign firms and individuals from complying with sanctions against China.

The rules would give the Chinese government a legal basis to retaliate against foreign sanctions at a time when the US and Europe are piling pressure on Beijing over its crackdown on pro-democracy activities in Hong Kong and human rights abuses against the Muslim Uyghur minority in Xinjiang. The US and the European Union have slapped sanctions on several Chinese businesses and nationals over the past year.

The "anti-foreign sanctions law," enacted on the mainland in June, is expected to be adopted in Hong Kong by writing it into Hong Kong's mini-constitution. The Chinese mainland laws do not apply in the China-ruled city unless listed in an annex of Hong Kong's constitution or the Basic Law. A formal blessing for the move could come from the Chinese parliament during a fourday session beginning August 17.

"Chinese officials have stated that they view certain foreign sanctions as being contrary to basic principles of international law and to Chinese national interests and security," Nicholas Turner, a lawyer at Steptoe & Johnson and an expert in economic sanctions, told DW. "These new laws are designed to give the Chinese government tools for responding to foreign measures to protect Chinese national interests and security, particularly when it comes to China's domestic affairs."

What is the new anti-sanctions law?

While it's not yet known how different the Hong Kong law would be from the mainland law if at all, it is largely expected to mirror the rules introduced in June.

Under the law adopted by Beijing, if a foreign entity or individual complies with sanctions against Chinese entities or individuals, then they could be put on a Chinese government antisanctions list.

Those individuals or entities could then be denied entry into China or be thrown out, their assets in China seized or frozen. They could also be barred from doing business with Chinese nationals or firms. The law allows Chinese firms to drag their foreign business partners to court if they suffer any losses in complying with foreign sanctions.

In July, China used the new law to sanction former US Commerce Secretary Wilbur Ross and six other Americans in response to US sanctions on Chinese officials over Hong Kong crackdowns.

What China hopes to achieve? China has been critical of the US and the EU for interfering in what it calls its internal matters. It has been beefing up its "legal toolkit" to counter "foreign sanctions, interference and long-arm jurisdiction."

Beijing cites Canada's arrest of Huawei senior executive Meng Wanzhou in 2018 and Washington's action against Chinese firms Huawei and ZTE for violating US sanctions on Iran or North Korea as examples of "long-arm jurisdiction."

"China previously had neither the economic power nor the political will to use legal means to retaliate against US sanctions. It now has both," Wang Jiangyu, a law professor at the City University of Hong Kong, told Reuters news agency.

"Cooperation is the best option but the US doesn't want it. So, retaliation, such as with this new law, is the secondbest option. Sucking it up is the worst."

What does the law mean for Hong Kong's financial hub status?

The new rules are expected to create fresh headaches for Western firms operating in the city, leaving them in a precarious position of having to straddle two regulatory regimes.

"US companies with operations in China are caught in a geopolitical crossfire," Doug Barry of the US-China Business Council told DW. "They are required to simultaneously comport with two sets of laws — US and China."

Critics say the law could damage Hong Kong's reputation as a global financial hub and turn away foreign investors already alarmed by the gradual erosion of the "high degree of autonomy" that Beijing promised to the former British colony. In June last year, China passed a sweeping national security law to crack down on pro-democracy activists, tightening its grip on the city.

The Biden Administration has warned US businesses of the growing risks to their operations and activities in Hong Kong.

"Developments over the last year in Hong Kong present clear operational, financial, legal, and reputational risks for multinational firms," the administration said in a July business advisory.

The advisory also warned of possible retaliation by Beijing against companies that complied with US sanctions through the enforcement of the mainland anti-sanctions law.

"International banks and financial institutions in particular may be required to implement US sanctions, which in turn may expose them to legal risk under the new anti-foreign sanctions law framework in Hong Kong," Shaun Wu, a partner at law firm Paul Hastings, told DW. "Companies must therefore look out for this new Hong Kong legislation and seek necessary counsel to ensure that they observe the relevant laws and regulations across different jurisdictions."

Nicolas Turner from Steptoe & Johnson does not expect the new anti-sanctions law to deal a blow to Hong Kong's role as an international financial hub.

"Many financial institutions in Hong Kong have been able to navigate recent US sanctions on Chinese military companies and other targets while continuing to benefit from Hong Kong's capital market, which has shown tremendous strength over the past year."

How strictly will Beijing enforce the anti-sanctions law?

Barry says the enforcement of the new law would be key.

"China needs to be careful and selective. The quandary for China's leaders is to avoid driving businesses out of China and compromising their goal and need to reform and open the domestic economy," he said.

Beijing has strong incentives to protect Hong Kong's status as an international financial center that attracts foreign capital for China thanks to its world-class financial and legal systems.

Hong Kong Chief Executive Carrie Lam, herself sanctioned by the US, told Bloomberg in January that China probably wouldn't penalize banks like HSBC that comply with US sanctions.

"I don't see why the central people's government would take that sort of action," she said, adding that she didn't see a prospect of banks in Hong Kong having to choose between China and the US and its allies.

Experts say how strictly Beijing enforces the new rules would likely depend on how heavily Washington comes down on firms doing business with sanctioned entities or individuals in violation of the Hong Kong Autonomy Act.

In May, the US Treasury Department said it hadn't yet identified any foreign financial entities doing business with those subject to sanctions.

The new rules would mean Western firms in Hong Kong will have to straddle two regulatory regimes