In the News: Hong Kong Sanctions; Shortened Negative Lists; and Securities Licenses
June 29, 2020 | BY
Vincent ChowU.S. Senate passes bill threatening sanctions against financial institutions, officials over Hong Kong; China shortens negative lists to further open up economy to foreign investment; and CSRC plans to grant securities licenses to domestic commercial banks
Hong Kong Stock Exchange
US proposes sanctions on financial institutions, officials over Hong Kong
The United States is ramping up its response to Hong Kong's controversial national security law (NSL) as a new bill threatening sanctions on foreign officials and entities moves one step closer to becoming law. On June 25, the Hong Kong Autonomy Act passed the Senate. The bill proposes to sanction individuals and entities that "materially contributed to China's failure to comply with the Joint Declaration or the Basic Law" and financial institutions that "knowingly conducted a significant transaction with such identified individuals and entities." The following day, Secretary of State Mike Pompeo announced visa restrictions against Chinese officials, although the names of the officials were not disclosed. China responded on June 29 with visa restrictions on U.S. officials who "behave egregiously" in relation to Hong Kong.
The bill was passed by the Senate relatively quickly, around a month since it was introduced in late May. Section 5 stipulates a reporting requirement for the Secretary of State to identify individuals and entities for sanctions within 90 days of the law coming into effect. The Secretary of Treasury will then identify financial institutions for sanctions "[n]ot earlier than 30 days and not later than 60 days" after the identification of the targeted individuals and entities. This clarification of the timeline for the identification of financial institutions was added to the bill during the revision process.
The sanctions for foreign financial institutions outlined in the bill are menu-based. There are 10 possible options, including prohibitions on securing credit loans from U.S. financial institutions; prohibitions on entry to the U.S. of executives; as well as prohibitions on access to U.S.-origin goods and technology. The bill stipulates that the first round of sanctions against a financial institution must include at least half of these 10 options. Then all of these sanctions must be imposed after two years from when a financial institution is identified. The bill still has to be passed in the House of Representatives before it can be signed into law by the president. But even if that does not happen, the president has other options to impose sanctions in response to what is happening in Hong Kong. For example, the 1977 International Emergency Economic Powers Act allows the president to impose sanctions through executive orders, while the 2019 Hong Kong Human Rights and Democracy Act provides for blocking sanctions and travel bans against those deemed responsible for human rights abuses in Hong Kong. The Hong Kong NSL is expected to be passed by China's top lawmaking body imminently.
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China shortens negative lists to further open up economy
China is shortening its negative lists for foreign investment to give foreign investors more access to China's financial services and agricultural sectors. On June 23, the National Development and Reform Commission and the Ministry of Commerce jointly issued the 2020 Special Administrative Measures for Foreign Investment Access (外商投资准入特别管理措施) and its equivalent for China's free-trade zones, which outline areas of China's economy restricted to foreign investors. The updated lists will come into effect July 23.
The new negative list reduces the number of restricted areas from 40 to 33, while the negative list for free-trade zones has seen its number of restricted areas fall from 37 to 30. Highlights of the shortened negative lists include the further opening up of the financial services, traditional Chinese medicine, and nuclear industries. In the education industry, wholly foreign-owned institutions for vocational education will be allowed for the first time. China has shortened the lists for four consecutive years.
China's negative list regime is underpinned by the principle that any sectors not listed on the list are open to foreign investment, which will have equal treatment with domestic investment. Although shortening of the negative list is good news for foreign investors, the list is not exhaustive however as there are other forms of restrictions on foreign investment such as the Negative List for Market Access (2019 Edition) (市场准入负面清单 (2019年版)), which stipulates market access restrictions for both domestic and foreign investment. The Chinese authorities have said that they are working on streamlining the country's negative list regime by consolidating various regulations related to foreign investment restrictions in order to make the regime easier to navigate for foreign investors.
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China plans to allow commercial banks into securities sector
China is reportedly moving to allow domestic commercial banks to provide securities services. On June 28, Chinese financial news outlet Caixin reported that the China Securities Regulatory Commission (CSRC) will grant securities licenses to commercial banks for the first time, citing regulatory sources with knowledge of the matter. The CSRC has neither confirmed nor denied the report.
The move will coincide with the accelerated opening-up of China's financial industry to foreign firms and is designed to "empower domestic players to compete with global rivals," the report said. At least two major commercial banks are likely to be allowed to conduct just investment banking activities initially to pilot the program, rather than the full range of securities services.
If true, this move by the CSRC will have massive implications for China's financial services industry as the big domestic commercial banks such as state-owned Industrial and Commercial Bank of China (ICBC), the world's largest bank by assets, are currently barred from providing securities services on the mainland and can only do so overseas via subsidiaries in Hong Kong. Bloomberg reports that policymakers are considering amendments to the PRC Commercial Banking Law (中华人民共和国商业银行法) to pave the way for lenders to enter the securities and futures sectors. The entry of big commercial banks into these market will be bad news for China's domestic brokerages, whose combined assets amount to less than a third of ICBC's, according to Bloomberg.
The change will also be bad news for foreign firms who are only just starting to see foreign investment restrictions in China's securities sector loosened. Since late 2018, global investment banks UBS, Goldman Sachs, Credit Suisse and Morgan Stanley have been approved to become majority shareholders of their local securities joint-ventures (JV). In 2019, JPMorgan and Nomura also received approval to establish new majority-owned securities JVs in China. Foreign banks have been able to apply for full ownership of their local securities JVs since April, a pledge that was included in the phase one U.S.-China trade deal.
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