Banks assess China risks after being stung by Russia sanctions -October 13, 2023 at 01:10 am EDT

* Banking industry is assessing China exposures

* Review of risks sent to Western governments – UK Finance

* Bank boards discuss possible impact of any China curbs –
bankers

* Lawyers receive surge in calls for mitigation advice

* West-China tensions have put banks on alert

LONDON, Oct 13 (Reuters) – Big banks in Britain are
preparing for any future escalation of Western sanctions on
China and have shared their “scenario planning” with the British
and U.S. governments, a senior banking official has told
Reuters.

The project involves sharing lessons learned from other
sanctions frameworks, including those on Russia, and discussions
about the effect any measures imposed on China might have, Neil
Whiley, director of sanctions at lobby group UK Finance, said.

After many companies were wrongfooted by the speed and
breadth of prohibitions on Russia, banks are drawing up
contingency plans in case geopolitical tensions between the West
and China escalate, seven finance industry sources said. They
did not expect any imminent changes to sanctions.

The work by UK Finance – which represents around 300 firms,
including HSBC, Barclays and JPMorgan
– examines the transparency of asset ownership and control and
how easily Chinese products can be traced, Whiley said.

It also focuses on the extent of commercial ties between the
West and China across industries, including supply chains in
high-risk sectors like technology, and attempts to highlight
measures that might backfire if applied to China.

The work has been carried out against a backdrop of tensions
between the West and China over the status of Taiwan, which
Beijing claims, growing export controls, accusations of Chinese
spying and a security crackdown by Beijing on companies.

UK Finance convened fortnightly meetings of big British and
overseas banks over several months, Whiley said, before drawing
up a draft document that runs to tens of thousands of words.
Reuters was not able to review the document.

The draft was completed in August and shared with Western
government contacts in recent weeks, he said.

The U.S. Treasury Department, which runs the Office of
Financial Sanctions Implementation, Britain’s Foreign Office and
Barclays did not respond to requests for comment. JPMorgan
declined to comment.

Three senior London-based bankers, who declined to be named
because they were not authorised to speak publicly, said their
boards had discussed the possibility of stronger Western
sanctions on China in future.

Scenarios from major cyber-attacks through to a military
intervention in Taiwan could potentially trigger further
prohibitions on China, one lawyer who advises banks said.

“The biggest financial institutions are … determining
whether the exposure they have (to China) is tolerable given a
pessimistic direction of travel for geopolitics,” said one
security expert, who declined to be named.

TRACING RISKS

The preparations have been driven in part by the
unprecedented sanctions slapped on Russia following its
full-scale invasion of Ukraine, which left some companies
struggling to get assets out of the country or exit positions.

One of the bankers said sanctions on Russia had “removed
naivety” among businesses and prompted the industry to think
more deeply about China risks.

Communications between officials from the United States and
China have increased in recent months, thawing frosty relations
somewhat ahead of a meeting between Chinese President Xi Jinping
and U.S. President Joe Biden next month.

China, the world’s second-largest economy, remains central
to Western supply chains. The European Union’s trade deficit
with China, for example, widened to $276.6 billion in 2022 from
$208.4 billion a year earlier, Chinese customs data show.

British finance also has close ties with China. Two of the
country’s biggest banks – HSBC and Standard Chartered – make
most of their profits in Asia, forcing them to straddle the
geopolitical faultlines.

HSBC and Standard Chartered declined to comment.

SURGE IN CALLS

Whiley said the UK Finance project was designed to be part
of industry-wide “horizon-scanning” to assess potential risks
across multiple countries, in line with regulatory guidance, and
did not reflect expectations or requests for more sanctions.

Nonetheless, financial firms are alive to the risks.

Another banker, who works for a lender with a presence in
Asia, said the bank’s board was planning for more strains
between China and Taiwan and likely consequences for financial
markets, including currency and equity reactions.

Lloyd’s of London underwriters are among insurers that have
raised rates and cut cover for risks involving Taiwan as
concerns grow about possible military action by China, Reuters
exclusively reported in August.

Against that background, four lawyers in London reported a
surge in calls from financial clients seeking guidance on China,
from sanctions compliance and risk assessment through to how to
deal with any investigations or enforcement.

Demand for advice was so keen that one lawyer, who declined
to be identified, said his firm last month held its first
client-only seminar on Russia, China and how geopolitics were
shaping sanctions and compliance.

“Companies will … want to make sure that for long-term
engagements with Chinese entities, they have robust sanctions
provisions in their contracts and agreements,” said Leigh
Hansson, a London and Washington-based lawyer at Reed Smith.

Banks’ concerns are being driven partly by the robust
U.S.-steered approach to the semi-conductor and technology
industry and foreign policy discussions, lawyers said.

The Biden administration has curbed chip exports to China to
deny Beijing access to advanced technology that could further
military advancements or human rights abuses. China hit back
with accusations of economic coercion.

One lawyer said he did not expect any repeat of the Russia
response and for “commercial reality” to enter foreign policy
decision-making in relation to China.

“(Any sanctions) will be very much targeted at specific
companies, specific products and services,” the lawyer said.
(Additional reporting by Sinead Cruise, Stefania Spezzati and
Lawrence White in London and Michelle Price in Washington;
Editing by Catherine Evans)