WARS are fought with weapons, but also with money. To understand the global balance of power in the coming decades, it helps to pay attention to the commercial subplot of the North Korean crisis. For the first time, America is attempting to use its full legal and financial might to change the behaviour of Chinese companies and banks, which it believes are propping up North Korea by breaking UN and American sanctions. Some American politicians have concluded that, as China’s firms have integrated with the global economy, they have become more vulnerable to Uncle Sam’s wrath. America has potent weapons, but the trouble is that China can retaliate in devastating fashion.
North Korea is highly dependent on China. Some 60-90% of its trade is with its northern neighbour. China’s state-run energy giant, CNPC, is thought to have sold it oil in recent years—and is the parent of PetroChina, which has depositary receipts listed in New York. North Korean banks and firms operate in China, and it is likely that Chinese banks have dealt with them or their proxies.
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After months of American pressure, on September 21st China’s central bank was reported to have told the country’s lenders to stop writing new business with North Koreans. But America’s Treasury is still on the warpath. On September 26th it blacklisted 19 North Korean bankers working in China and eight North Korean firms. In private it is excoriating China’s largest lenders, which own $125bn of assets in America, equivalent to 14% of their total capital. On September 28th a Senate committee demanded an ever tougher crackdown on Chinese banks.
Such extraterritorial reach by American regulators (and courts) is a feature of international business. Misdeeds anywhere can be punished, if the firm in question issues securities in America, has a subsidiary there or makes electronic transactions in dollars. America has pursued eight of Europe’s biggest 50 companies by market value for breaking sanctions in the past decade, and 18 of them for corruption. After the attacks of September 11th 2001 America stepped up efforts to police the global dollar payments system. It aggressively enforced sanctions against Iran. European financial firms faced $13bn of related fines and France’s BNP Paribas and Britain’s Standard Chartered almost lost their American licences, which would probably have put them out of business.
Yet until a year ago, big Chinese firms were exempt, at least informally. America probably worried about starting a trade war. Sanctions in 2013 on four small Chinese firms that traded with Iran met a furious response from China’s foreign ministry. In some cases Uncle Sam’s relaxed attitude was obvious. In 2015 China Construction Bank’s New York office was found by the Federal Reserve to have deficient anti-money-laundering processes but was forgiven. In 2014-15 Agricultural Bank of China’s New York office processed over $100bn of payments without adequate controls. It got a token $215m fine. When PetroChina listed in New York in 2000, it sidestepped sanctions by transferring assets in Sudan to CNPC, according to the memoirs of Hank Paulson, a Goldman Sachs banker who was later treasury secretary.
Now China Inc would appear to be a sitting duck. Hundreds of firms have securities listed in America. There is lots of graft in China and it is a large trading partner not only of North Korea but of Iran, Syria and Cuba, which also face American sanctions. A sharp change of mood was signalled in March when Wilbur Ross, the commerce secretary, announced a $1.2bn fine on ZTE, an IT company which had done business with Iran and North Korea. Huawei, a rival, is under scrutiny for a possible breach of American trade controls on Iran and Syria. While China may hope that its recent order to its banks may calm things, there is a fever in Washington to punish its firms, both for patriotic reasons and because protectionists are newly influential.
China’s banks run large businesses in dollars as well as in yuan, which has made them especially vulnerable to American pressure. The four largest—Agbank, Bank of China, CCB, and ICBC—have $940bn of dollar liabilities, including debt and deposits raised from international markets. If America excluded them from its financial system, they would face big problems as global investors shied away. China’s central bank might need to help fund them. For American lawmakers they are thus a tempting target—especially since America’s big banks, with only $54bn of loans in China and few liabilities in yuan, hardly need China.
Taking it to the brink
Yet China, no stranger to the dark arts of bullying firms for geopolitical ends, has other means of retaliation. In 2009, for example, BP was warned to abandon an offshore oil project near Vietnam. If it did not, the word was, all of its contracts in China would be reconsidered and China would be unable to guarantee the safety of its staff, according to “Asia’s Reckoning”, a new book by Richard McGregor. Today General Motors and Apple together make $20bn of profits a year in China. Fining them heavily or prohibiting their operations would hit American interests hard. China could escalate by putting pressure on its autonomous territory of Hong Kong to punish large Americans banks based there.
North Korea is a geopolitical flashpoint and a humanitarian catastrophe. But it also highlights a faultline in the world’s business architecture that will cause problems for decades to come. It is almost inconceivable that China will accept the extraterritorial reach of America’s legal and financial system in the same way that America’s allies in Europe, and Japan, have done.
Perhaps America will later decide to limit its reach. For its part, China is erecting defences to avoid the long arm of Uncle Sam, such as its own cross-border payments system, which it began around a decade ago, but this will take years. Until then, simmering tension and the risk of mutually assured financial destruction are bound to continue. The only consolation is that commercial war does not necessarily come with a mushroom cloud.
American efforts to control Chinese firms abroad are dangerous