Anthony Ruggiero, AGS Senior Vice President
On the eve of Secretary of State Antony Blinken’s trip to China, the Wall Street Journal reported that the Biden Administration is drafting sanctions on Chinese banks as “diplomatic leverage that officials hope will stop Beijing’s commercial support of Russia’s military production.” The report noted that the administration views these sanctions as escalatory and a last resort. The key question, however, is whether Xi Jinping believes Washington’s threat.
During a visit to China earlier this month, Treasury Secretary Janet Yellen issued a stern warning: “Any banks that facilitate significant transactions that channel military or dual-use goods to Russia’s defense industrial base expose themselves to the risk of U.S. sanctions.” But in the same visit Yellen agreed to establish a Joint Treasury-People’s Bank of China Cooperation and Exchange on Anti-Money Laundering. The group’s first meeting was last week, and Yellen delivered opening remarks. The administration’s China policy posture has been focused on finding common ground for cooperation. The Journal also notes that European allies, including Germany, do not support sanctions on China.
Washington has scarce examples of targeting the Chinese financial sector largely for fear of the possible repercussions. The administration could pursue several pathways. They could sanction senior officials at Chinese banks as a signal that the administration wants to continue financial activities while highlighting the problematic actions of the financial institution.
Washington could use Executive Order 14114, issued December 22, 2023,which expands Russia-Ukraine related sanctions to significant financial transactions. This authority matches Yellen’s warning noted above and has not been used before, it includes blocking sanctions or restrictions on the opening and maintenance of accounts in the U.S. Treasury could also use its authorities under Section 311 of the Patriot Act to impose special measures on a financial institution of primary money laundering concern. This authority was used against Bank of Dandong in 2017 for North Korea sanctions violations. Treasury used a separate Iran specific authority to sanction Bank of Kunlun in 2012 for Iran sanctions violations.
Regardless of which authority the administration uses, they would likely target a regional bank with limited to no direct U.S. exposure. This would have two related benefits. First, it would not disrupt the U.S.-China financial relationship. Second, it would be a powerful signal to large Chinese financial institutions that they must sever relationships with the sanctioned bank and curtail the prohibited activities or risk losing their own access to the U.S. financial system.
It is likely that Beijing will react harshly to these reports and any subsequent U.S. sanctions. But Chinese financial institutions value their access to the U.S. financial system and could increase internal pressure to curtail the prohibited activities.
AGS will continue to monitor developments in U.S. – China relations and will provide updates and additional analysis.
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