China: Anti-Sanction Law pulls business onto geopolitical frontline

Foreign companies in China are one step closer to becoming sacrificial pawns in the high stakes game of tit-for-tat being played out between Beijing and Washington.

China’s latest gambit, the Anti-Sanctions Law, passed by the National People's Congress (NPC), on June 10th, will see foreign companies or individuals who comply with sanctions against China put on an anti-sanctions list by the authorities. Penalties could include: expulsion from China, denial of entry into the country, restrictions on doing business, freezing or seizure of assets and legal jeopardy – all of which could extend to family members of listed individuals.

Foreign business a pawn Beijing is willing to sacrifice

The new Anti-Sanctions Law is China's most wide-ranging legal tool designed to retaliate against countries perceived to be interfering in China’s internal affairs. Aimed particularly at the US and its allies, the law intends to show that Beijing is willing to sacrifice the interests of foreign business to secure its sovereignty and security. It came just a week after the US expanded restrictions on 59 Chinese companies, including tech giants such as Huawei and SMIC, with alleged ties to the military or surveillance sectors.

The law provides a legal basis for Beijing’s administrative orders designed to retaliate against unfriendly foreign governments. To this end, it uses foreign companies, individuals and their families as political leverage in China’s confrontation with their governments.

Previously, China mostly used administrative tactics with limited legal recourse, such as its trade restrictions against Australian exports or blacklisting foreign entities by placing them on its so-called unreliable entity lists. Beijing is now replicating the tactics of the US, which has passed various acts, such as the Hong Kong Human Rights and Democracy Act and the Uyghur Human Rights Policy Act, as a legal basis for its sanctions against China.

While there are no clear indicators of potential targets, foreign corporates and financial institutions who comply with the US’ or their governments’ sanctions against China, will likely face increasing scrutiny from Beijing both locally and abroad. Other than the greater administrative cost of operating in China, they will be exposed to increasing legal risks under the new law.

What is particularly concerning is that the law does not clearly define “discriminatory measures” against Chinese entities and individuals, which would prompt counter-measures. This lack of clarity allows authorities to apply the law in a wide range of cases, and will make it hard for foreign companies to evaluate and prevent legal risks. It is common for Chinese authorities to have the final say on how to interpret a law in practice – a key factor behind China’s ranking as the third highest risk country globally in our Judicial Independence Index, which examines the judiciary’s ability to pass judgements without improper influence. Only Eritrea and North Korea perform worse.

US unlikely to back down

While China has added a new legal weapon to its geopolitical playbook, we do not expect the law to deter the US from continuing its policy actions against China for alleged human right abuses. Both sides have been trapped in a cycle of retaliatory policies in their deteriorating bilateral relationship over the last three years. Their tit-for-tat actions reflect that there is only a remote chance of de-escalation over the next two years.

We expect China to gradually extend the scope of its legal weapon to Hong Kong and globally. The Hong Kong government will also actively help implement the law via both administrative and legal means, such as adding it into the Basic Law, the city’s mini-constitution. If strictly implemented, the law will likely create significant uncertainty for banks and financial institutions in the global financial centre.

The law will only make it more difficult for China to attract and retain foreign investment at a time when a growing number of overseas companies are already eyeing alternative investment and financial destinations, such as Vietnam or Singapore. While we do not expect to see mass exodus of companies from China just yet, foreign businesses will find it increasingly difficult to balance between the political interests of Washington and Beijing if they plan to enter or remain in the Chinese market.