Sanctioning China could have international economic implications

While the U.S. debates its next move following a report from North Korea that it has successfully tested a hydrogen bomb, suggestions have been made to further isolate the rogue nation. One such suggestion includes sanctioning major Chinese banks as the most effective way to pressure North Korea into halting its dangerous weapons program.

On Sunday, President Donald J. Trump tweeted a message that suggested he was considering cutting off trade with countries doing business with North Korea, which would include China.

The president tweeted: “The United States is considering, in addition to other options, stopping all trade with any country doing business with North Korea.”

His warning came on the heels of North Korea’s claim that it had successfully launched a hydrogen bomb, possibly triggering the magnitude 6.3 earthquake in the country.

According to CNBC, targeting lenders from China, which has the world’s second-largest economy, isn’t a novel idea. The suggested sanctions aren’t even necessarily a condemnation of China, as a whole, but against certain Chinese banks, like the Bank of China, which may have helped North Korea evade previous sanctions.

With Treasury Secretary Steven Mnuchin reportedly drafting a sanctions package to send to the president in order to address North Korea’s “unacceptable” behavior, China’s foreign ministry spokesman, Geng Shuang, said China is working hard “to peacefully resolve this issue.” He disagrees with the idea that China’s interests be subjected to sanctions.

“This is unfair,” Shuang reportedly said.

Yet, as CNBC reports, “the big Chinese banks have so far avoided any punishments by the U.S., which has instead blacklisted smaller players such as Bank of Dandong for financing North Korea.” Reportedly, that could change.

With China being North Korea’s largest trading partner, reportedly accounting for 85 percent of Pyongyang’s trade, it has leverage over the rebellious nation. Mnuchin has been attempting to put pressure on North Korea by “isolating them from the American financial system,” which means adding Chinese entities to the U.S. sanctions list.

According to CNBC:

All big four state-owned banks in China have in recent years increased their presence in the U.S., where their operations now include providing loans, issuing bonds and financing trade activities.

The four major Chinese banks are also the largest lenders by assets in the world, according to the latest ranking by S&P Global Market Intelligence.

        • The Industrial and Commercial Bank of China, in 2016, assets of $3.47 trillion
        • China Construction Bank, assets between $2.60 trillion and $3.02 trillion
        • Agricultural Bank of China, assets between $2.60 trillion and $3.02 trillion
        • Bank of China, assets between $2.60 trillion and $3.02 trillion

JPMorgan Chase, the largest American bank, is in sixth place on the S&P ranking. By means of comparison, it had assets of $2.49 trillion as of the end of 2016.

According to an analysis by the Financial Times, China has overtaken the euro zone as the world’s biggest bank system, a sign, as CNBC points out, that the country has increased its influence in world finance as it relies on debt to drive growth.

Reuters reports that sanctioning the largest players would have implications on “international economy and market.”
Scott Seaman, director for Asia at geopolitical consultancy Eurasia Group, told CNBC’s “Squawk Box:”

“The U.S. Treasury Department has often been hesitant to expand the secondary sanction regime to include, for example, restrictions on Chinese SOEs (state-owned enterprises) and Chinese large banks in part because the Chinese government will react very negatively, but also it will have an impact on international economy and markets.”

“But we do expect the U.S. to come up with additional restrictions on things that will probably make Beijing upset,” Seaman added.

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