(Bloomberg Opinion) -- King dollar still reigns supreme. And that means there are two ways for banks to go: the U.S. way, or the highway.
Hong Kong and Chinese officials scoffed when the Trump administration imposed sanctions last weekend on 11 individuals deemed to have played a role in undermining the city’s autonomy. Luo Huining, director of the central government’s Liaison Office, noted that he had no assets abroad and offered to “send $100 to Mr. Trump for him to freeze.” Chief Executive Carrie Lam said she wouldn’t be intimidated and derided the U.S. notice for getting her address wrong. The Hong Kong Monetary Authority gave banks in the city a pass, saying they had no obligation to follow U.S. sanctions under local law.
The actions of lenders tell a different story. China’s largest state-run banks in Hong Kong are taking tentative steps to comply with the sanctions, Bloomberg News reported Wednesday, citing people familiar with the matter. Major lenders with operations in the U.S. including Bank of China Ltd., China Construction Bank Corp. and China Merchants Bank Co. have turned cautious on opening new accounts for the sanctioned officials, and at least one has suspended such activity.
It’s another demonstration of the realpolitik of the dollar system and the financial power that comes with being the issuer of the world’s dominant reserve currency. China’s state-controlled lenders would be the last to willingly follow a directive condemned as “clowning actions” and “shameless and despicable” by the Chinese and Hong Kong governments. HSBC Holdings Plc, Standard Chartered Plc, Citigroup Inc. and other lenders with operations in Hong Kong and ambitions in China will look on with relief. Squeezed between the conflicting demands of Hong Kong’s national security law and U.S. sanctions, they have been given political cover.
For banks with international operations, the threat of having their access to dollar funding and overseas networks curtailed cannot be countenanced. Just look at how the U.S. has been able to impose its will via sanctions on Iran, despite resistance from Europe.
Dealing in currencies other than the dollar provides little cover, as China’s Bank of Kunlun Co. found out. The country’s main lender for processing Iran-China payments, Kunlun was sanctioned by the U.S. Treasury Department in 2012. The bank responded by starting to handle payments from Iran in yuan and euro instead, yet halted even these in 2018 under sanctions pressure, according to Reuters.
It’s little wonder that China wants to challenge the dollar’s global dominance. While officials have spoken frequently of their ambition to give the yuan a bigger role, there’s little sign of progress. The dollar’s share of international payments rose in the past year, while the proportion of payments in yuan remains negligible, according to data from the Brussels-based Society for Worldwide Interbank Financial Telecommunication, or Swift.
As my colleague Andy Mukherjee and I have argued, banks are cogs in a giant financial machine that Washington keeps aligned with its foreign policy goals. Take the case of Huawei Technologies Co.’s finance chief Meng Wanzhou. The daughter of Huawei’s founder is currently battling extradition from Canada to the U.S. on charges that she misled HSBC into clearing transactions that potentially violated Iran sanctions. Lawyers for Meng, who has denied the charges, have argued HSBC could have avoided making the payments through the U.S. HSBC routed the money through New York’s Clearing House Interbank Payments System, or Chips, which handles 95% of all dollar transactions, or $1.6 trillion a day.
While it’s technically feasible to clear payments in the much smaller offshore dollar market in Hong Kong, when money crosses borders it is accompanied by instructions transmitted by Swift. Since the September 2001 terrorist attacks, the U.S. has watched over financial flows through the organization. In practice, it would have been almost impossible for money destined for Iran to avoid scrutiny.
The message ringing from China’s banks is louder and clearer than the contrary protestations of the country’s officials. Like it or not, it’s still a dollar world.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Nisha Gopalan is a Bloomberg Opinion columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.
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