China sanctions can bite

Richard Ip April 14, 2021 08:45

Since Joe Biden was sworn in as the US president in January 2021, China has imposed sanctions against several dozens of individuals and organisations in the US, Canada, the EU and the UK for interfering in China’s internal affairs and spreading misinformation in relation to human rights issues in Xinjiang.

The affected parties are not troubled by the sanctions beyond the righteous anger over being sanctioned for speaking up for the values of human rights and democracy. However, they should be concerned if they aspire to join the private sector following their public services, in that China’s sanctions are not just about travel bans but restrictions over how sanctioned parties may engage with China.

Defiance and reality

The sanctioned parties have been defiant, playing down the impacts of the sanctions. That said, they appear to have missed the pressure point.

One of the sanctioned, Michael Chong, who is a member of the Canadian Conservative Party, said he would “wear [the sanctions] as a badge of honour”. The general public also appears to believe that China’s sanctions have no bite, and that the biggest consequences would be the sanctioned parties being unable to visit the Great Wall in Beijing or Wulingyuan in Zhangjiajie, where the mountains inspired those in Avatar. In fact, Chong made a similar remark that he believed the sanctions would have no practical effect because he had no plans to travel to China.

But the devil is in the details. China’s sanctions are not toothless because they are not only about travel bans or asset freezes but also restricting one’s commercial engagements with China. The restriction that exists across different Chinese sanctions prohibits Chinese citizens and institutions from doing business with or having any exchanges with the sanctioned and their associated companies and institutions.

The bite

This restriction could inflict real pains on the targeted as a lot of politicians and government officials move to the private sector following their public services, a practice generally referred to as the revolving door. For example, José Manuel Barroso, former president of the European Commission, is currently a non-executive chairman of Goldman Sachs International. Timothy Geithner, previously a long-term senior finance official in the US, joined Warburg Pincus as a senior executive following his appointment as the secretary of the Treasury.

Both Goldman Sachs and Warburg Pincus have extensive businesses in and related to China. In December 2020, Goldman Sachs signed an agreement to buy out the China-based joint venture from its Chinese partner, Gao Hua Securities. Warburg Pincus just recently applied to the China Securities Regulatory Commission to set up a brokerage joint venture in the country.

Now, let’s take a step back and think if Goldman Sachs and Warbung Pincus would have given Barroso and Geithner a job at all if either had been sanctioned by Beijing. The answer is surely no because this will likely make these companies become “associated companies” of the sanctioned, facing collateral damages.

As an experienced due diligence analyst, I would even argue that companies having any business relations with China may need to start checking for China’s sanctions exposure when conducting counterparty or pre-employment due diligence.

Effective deterrence?

The goal of sanctions is to take actions or measures against a party to influence its behavior. In this sense, whether China’s sanctions meet the goal depends on if the measures can change the calculations of “business-minded” politicians.

The answer is yes. The bottom line is, though, that no one will ever publicly admit that the fear of China sanctions deters them from going against the country. In other words, it is nearly impossible to ever test my theory. That said, we could still infer from the behavior of certain corporations and politicians in the West. Corporate executives and politicians have tried hard to please China. For example, the CEO of Ericsson Börje Ekholm not only lobbied on Huawei’s behalf against the 5G ban by the Swedish government, but even helped Huawei to look for a lawyer in Sweden to legally challenge the ban. Michael Bloomberg, a billionaire and former mayor of New York whose Bloomberg LP runs a thriving business in China, made a China-friendly remark during an interview in 2019 that President Xi Jinping was not a dictator.

Chinese sanctions - the implication

If the above examples are of any guide, China sanctions will likely create concerns for Western politicians and officials about their future options of entering into the private sector. They may be more reluctant in, at least, publicly supporting punitive measures against China imposed by their governments. After all, earning more renminbi and a tour to the Great Wall, why not do both?

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Richard Ip

Founder of Richard Ip Consultancy, a due diligence and sanctions compliance advisory business, the writer is a global political and compliance risk consultant with a special focus on Asia.