Shares in Chinese banks dropped sharply on Tuesday after the Washington Post reported that a US judge had found three Chinese banks in contempt for refusing to comply with subpoenas in an investigation into violations of North Korean sanctions. The order triggers for the first time a provision that could cut off Chinese banks from the US financial system at the demand of the US Attorney General or Treasury Secretary.
Background to the news
The three banks were not specified in the latest ruling, but the news report cited a US civil forfeiture action two years ago which alleged that Bank of Communications, China Merchants Bank and Shanghai Pudong Development Bank worked with a Hong Kong front company that was accused of laundering more than $105 million for North Korea’s sanctioned state-run Foreign Trade Bank.
The subpoenas were issued in December 2017 as part of a US investigation into violations of sanctions targeting North Korea’s nuclear weapons program, and demanded a wide range of bank records from the Chinese banks dating back to January 2012. According to the US judge, the banks refused to hand over the related information and comply with these subpoenas.
The report said each of the three unnamed banks argued that it acted in good faith under Chinese banking customer privacy laws. The third bank has challenged the U.S. court’s jurisdiction to find it in contempt while it appeals the subpoena, the report added, while it has simultaneously continued to ask authorities in China for permission to turn over documents.
Consequently, the US judge may send the order to impose the sanctions and could terminate the banks’ US accounts, end their ability to process US dollar transactions, or order them to pay specific fines.
What this ruling could mean for investors
As stated above, the relevant case against these three Chinese banks is not new but we acknowledge the importance of the timing of the report ahead of this week’s G20 meeting in Osaka, where US President Donald Trump and China’s President Xi Jinping are expected to meet. Against this backdrop, any meaningful escalation of the trade war to include financial or capital sanctions could lead to counter measures and would be extremely negative for all concerned. However, at the moment we see the chance of such an escalation as low and expect the impact would likely be short-lived.
Despite the news and today’s sell-off, the fundamental impact on Chinese banks and the financial system is likely to be contained due to the related banks’ limited overseas business exposure, low reliance on foreign debt and relatively strong balance sheets.
All three Chinese banks are primarily running domestic business and have little exposure to the US. For China Merchants Bank (CMB), its US branch accounts for less than 1 per cent of its total assets; the overseas branches for Bank of Communications account for less than 6 per cent of total assets and Pudong Development Bank has no US branches.
As to the liability side, Chinese banks are funded mostly by deposits, domestic bonds and domestic interbank liability, rather than by foreign debt.
In the case of potential fines, the amounts remain unknown and the impact on the current year’s balance sheets uncertain, but we can use previous cases against other global banks to estimate what they might be. In this current case, using the alleged transaction violation amounts for the three related banks and assuming a fine of ten times those amounts, the impact on the banks’ total 2018 profits would be manageable.
Worauf sollten wir als Nächstes eingehen?
Schicken Sie Ihre Vorschläge per E-Mail email@example.com
Lesen Sie mehr
The value of investments and the income from them can go down as well as up so you may get back less than you invest. Past performance is not a reliable indicator of future results.
These materials are provided for information purposes only and are intended only for the person or entity to which it is sent.
These materials do not constitute a distribution, an offer or solicitation to engage the investment management services of Fidelity, or an offer to buy or sell or the solicitation of any offer to buy or sell any securities or investment product.
Fidelity makes no representations that the contents are appropriate for use in all locations or that the transactions or services discussed are available or appropriate for sale or use in all jurisdictions or countries or by all investors or counterparties.
Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. They are valid only as of the date indicated and are subject to change without notice.
This material was created by Fidelity International. It must not be reproduced or circulated to any other party without prior permission of Fidelity.
This communication is not directed at, and must not be acted on by persons inside the United States and is otherwise only directed at persons residing in jurisdictions where the relevant funds are authorised for distribution or where no such authorisation is required. Fidelity is not authorised to manage or distribute investment funds or products in, or to provide investment management or advisory services to persons resident in, mainland China. All persons and entities accessing the information do so on their own initiative and are responsible for compliance with applicable local laws and regulations and should consult their professional advisers. This content may contain materials from third-parties which are supplied by companies that are not affiliated with any Fidelity entity (Third-Party Content). Fidelity has not been involved in the preparation, adoption or editing of such third-party materials and does not explicitly or implicitly endorse or approve such content.
Fidelity International refers to the group of companies which form the global investment management organisation that provides products and services in designated jurisdictions outside of North America Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. Fidelity only offers information on products and services and does not provide investment advice personal recommendations based on individual circumstances.
Issued in Europe: Issued by FIL Investments International (FCA registered number 122170) a firm authorised and regulated by the Financial Conduct Authority, FIL (Luxembourg) S.A., authorised and supervised by the CSSF (Commission de Surveillance du Secteur Financier) and FIL Investment Switzerland AG, authorised and supervised by the Swiss Financial Market Supervisory Authority FINMA. For German wholesale clients issued by FIL Investment Services GmbH, Kastanienhöhe 1, 61476 Kronberg im Taunus. For German institutional clients issued by FIL Investments International – Niederlassung Frankfurt.
In Hong Kong, this content is issued by FIL Investment Management (Hong Kong) Limited and it has not been reviewed by the Securities and Future Commission. FIL Investment Management (Singapore) Limited (Co. Reg. No: 199006300E) is the legal representative of Fidelity International in Singapore. FIL Asset Management (Korea) Limited is the legal representative of Fidelity International in Korea. In Taiwan, independently operated by FIL Securities (Taiwan ) Limited, 11F, 68 Zhongxiao East Road, Section 5, Xinyi Dist., Taipei City, Taiwan 11065, R.O.C. Customer Service Number: 0800-00-9911#2.
Issued in Australia by Fidelity Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”). This material has not been prepared specifically for Australian investors and may contain information which is not prepared in accordance with Australian law.