In the News: Trump Executive Order; Bond Market Integration; and Huawei UK Ban

There are still many open questions about how the HKAA and executive order will interact and play out in practice. There has been no indication of who the targeted individuals, entities or financial institutions could be. It also remains to be seen whether sanctions will be immediately imposed once an identification is made or whether targeted Chinese officials and banks will be given a chance to adopt corrective measures before sanctions are imposed. Whatever happens, lawyers say that recent U.S. actions and the likely Chinese response will put major multinationals in a difficult spot of having to choose between complying with either U.S. or Chinese laws. "[I]t is conceivable that China may respond to this threat with threats of its own directed against foreign financial institutions should they take actions, or refuse to engage in certain activities, in order to avoid exposure to U.S. secondary sanctions," Covington lawyers wrote in a recent client briefing. U.S. companies in China are already facing backlash from both sides. The Trump administration accuses them of "corporate appeasement" of the Chinese government and is imposing greater restrictions on their business dealings with Chinese partners. China is responding to U.S. threats by heightening its scrutiny of its supply chains through a cybersecurity review and still-unreleased Unreliable Entity List, which threaten to impose massive fines and market restrictions on foreign companies.

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China to integrate interbank, exchange bond markets

China is integrating its two main bond markets to simplify trading for qualified investors and streamline cross-market issuance of bonds. On July 19, the People's Bank of China (PBOC) and the China Securities Regulatory Commission (CSRC) announced in a joint statement the integration of the interbank and exchange-traded bond markets.

The integration of the two markets will allow investors to trade bonds on both markets through a single account, subject to existing investor requirements being met. Intermediary entities such as depository and settlement institutions will also be able to offer their services across the two markets. The statement said that the PBOC and CSRC will "strengthen supervision, cooperation and coordination" moving forward.

Bond issuance is a key channel of direct financing for corporates in China. According to Bloomberg, China's $13.7 trillion bond market is the world's second largest. The interbank bond market is dominated by corporate debt issued by large state-run firms while the exchange market in Shanghai and Shenzhen features debt from smaller firms. The fragmentation of the onshore market has long been viewed as a problem for attracting foreign investors. Currently, the PBOC supervises the larger interbank market while the CSRC supervises the exchange market. This means there are typically different rules and regulations in the two markets governing registration, settlement and other important investment areas. Another key issue is inconsistent ratings as a result of fragmented supervision of rating agencies in the two markets. The government has attempted to reduce fragmentation of the market and the accompanying regulatory regime in recent years. In September 2018, the PBOC and the CSRC began unifying rating qualifications in different bond markets. Then in December 2018, the CSRC took over responsibility to stamp out illegal acts in both the interbank and exchange markets.

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U.K. to bar Huawei completely from 5G networks by 2027

On July 14, the U.K. Department for Digital, Culture, Media & Sport, and the National Cyber Security Centre (NCSC) issued a joint statement outlining plans to bar Huawei from participating in the country's nascent 5G networks. According to the statement, the U.K. government will ban the purchase of new Huawei 5G equipment from 2021. By the end of 2027, all Huawei equipment will be removed from the country's 5G networks.

In January, the U.K. barred Huawei from participating in the country's "core" 5G network but permitted limited involvement of the Chinese telecom giant. Since then, the U.S. government has been pushing the U.K. to impose even greater restrictions on Huawei, who it says represents a national security risk due to alleged ties with the Chinese government. In its latest announcement, the U.K. government said that the reversal of the January decision was made based on a "technical review" by the NCSC in response to U.S. sanctions on Huawei. Digital Secretary Oliver Dowden said that the new plans will soon become law, putting the U.K. on an "irreversible path" for the complete shutout of Huawei from the country's 5G networks.

The announcement cites the U.S. sanctions imposed on Huawei in May as the main driver for the U.K.'s decision. On May 15, the U.S. Commerce Department announced a new rule that would bar any global chip supplier from selling to Huawei without U.S. approval if the chips are made using U.S. technology or equipment. The new rule will force Huawei to do a "major reconfiguration of its supply chain" as it will lose access to its current supply of parts, the announcement says. As the NCSC does not have "sufficient confidence" in the security of Huawei's alternative suppliers, the decision has been made to stop purchasing Huawei 5G equipment from next year. The U.K. government also advises full fiber operators to transition away from Huawei equipment, again due to the impact of U.S. sanctions on Huawei. Moving forward, all eyes will be on whether the U.K. further restricts Huawei from its other existing 2G, 3G and 4G networks. On the same day as the U.K. announcement, the U.S. published an interim rule intending to remove Huawei and four other Chinese telecoms and technology companies from the supply chains of U.S. government contractors, subcontractors, and recipients of federal grants and loans.

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