An anti-sanctions law implemented by the Chinese government last June and planned for Hong Kong sounded off the alarm bells and represented the latest development amidst growing tensions between China and the United States. The law came in the midst of the U.S. imposing several new rounds of economic sanctions against China, who in turn are leveling new security restrictions and anti-sanctions list against individuals and businesses operating within the country.

It was recently announced by the Chinese government, however, that the new law would not be imposed on Hong least for now. This has provided temporary relief for businesses and financial institutions from around the world, but the political and economic ramifications of the proposed law (and the knowledge that it could potentially still be implemented in Hong Kong in the future) are being felt.

In this article, we’ll explore the details of this anti-sanctions law, why China decided to at least temporarily hold back on imposing the law against Hong Kong, and how the law represents the Chinese government’s overarching policy of "long-arm" jurisdiction in the ongoing struggle between the world’s two largest economies.

What Are The Fears Surrounding The Anti-Sanctions Law?

The broad Chinese anti-sanctions law was passed as a general response to sanctions imposed against China by the United States, Canada, United Kingdom, and the European Union. These sanctions were introduced following China’s widely condemned suppression of democratic elections in Hong Kong and the mass internment of Muslims living in the Xinjiang province.

Article 1 of the new law implemented last June sought to preserve “ national sovereignty, security, and development interests.” It provided the Chinese government with the legality to take measures against foreign organizations (or even individuals) engaged in what Beijing would determine to be “discriminatory restrictive measures that violate international laws and basic norms.”

To put this into other terms, it means that foreign companies operating in China could be punished for remaining in compliance with requirements set by foreign countries but that the Chinese government decides are harmful to its own interests.

The exact details of what this law means for companies and firms are, to put it mildly, a bit vague. As an example, could Canadian companies operating in China and also in the process of working to stay compliant with the PIPEDA (Personal Information Protection and Electronic Documents Act) instead find themselves violating the ‘developmental interests’ dictated by the Chinese government?

The only thing that isn’t vague is that the risk of companies becoming non-compliant with Chinese laws are much greater now than they were before. Since the intensifying of the U.S.-China trade war during the Trump administration, the Chinese government has pursued an aggressive policy of more state control over the economy.

This has included measures such as merging of state-controlled enterprises, mandating that all companies operating in China seek Beijing’s stamp of approval before providing data to firms and governments abroad, cracking down on the use of cryptocurrencies in the country, and (in the case of the new sanctions law) imposing strict punishments against companies for non-compliance or applying sanctions imposed by other countries.

Examples of penalties the Chinese government could level against companies or individuals found to be ‘guilty’ include the seizing of assets, civil lawsuits, visa denials, deportation, or imprisonment. Meanwhile, financial institutions and international organizations around the globe are being forced to choose between following compliance regulations from the U.S. and its allies on one side and China on the other. As an example, firms operating in Hong Kong would be forced into a situation of following U.S. sanctions only to potentially face prosecution from Beijing as a least until it was announced the law would not be implemented in Hong Kong.

Why Did China Decide To Shelve The Law For Hong Kong?

Beijing announced in early October that the new anti-sanctions law would not be imposed against Hong Kong, at least for the time being. This was welcome news for global banks and firms around the world, and especially for those operating in the Asian financial sector.

Supposedly, this decision was made when Hong Kong-based financial executives forcefully raised their concerns with Beijing directly, fearing that the implementation of the law would have crashed Hong Kong’s financial markets (the effects of which would have reverberated into China and other Asian countries as well).

This is because forcing companies in Hong Kong straight into the middle of the U.S.-Chinese trade war, and especially at a time when the city’s financial markets have already been hit hard by crackdowns from the Chinese government, likely would have meant more foreign investments flowing into rival financial sectors like Singapore. The result, at the absolute minimum, would have likely been a destabilization of Hong Kong’s economy.

Another problem raised was the fact that legal advisors for law and financial firms in Hong Kong could be prosecuted if they advise organizations applying foreign sanctions or otherwise fail to enforce China’s own anti-sanctions law.

That being said, the National People’s Congress Standing Committee is set to meet at the end of October, and a vote on imposing the anti-sanctions law against Hong Kong is now pending further study from Chinese officials. In other words, you can rest assured Chinese officials are studying whether imposing the anti-sanctions law against Hong Kong would be financially feasible...or how the law can be written or imposed in such a manner as to not scare off foreign investments.

China vs. Long-Arm Jurisdiction

The anti-sanctions law from China can overall be viewed as a counterattack to new sanctions imposed by the U.S. Already, China has repeatedly demonstrated it has no problem with sanctioning American firms and corporations.

As an example, the government implemented sanctions against aviation conglomerates Lockheed Martin and Boeing over arms sales they made to Taiwan. Both corporations have a long history of selling their products to China, as the country already possesses the largest Boeing 737 fleet in the world, for example.

It’s an example of how companies or firms that rely heavily on the U.S. financial systems are still vulnerable to Chinese regulations as well. Any payments, transactions, or operational processes conducted in China or Chinese-claimed territory become subject to Chinese law that just became a lot stricter and more severe.

And as new and retaliatory tariffs alike are imposed by both countries, the basic costs of buying goods have gone up. In fact, it can be argued that U.S. small business owners are the real victims of the economic struggle between the U.S. and China. Large corporations and financial firms can withstand tariffs better than small-to-medium-sized firms, which have been the most heavily affected.

This has been made worse as a result of the lockdowns from the pandemic. According to a recent survey conducted by Freshbooks, over two-thirds of surveyed business owners indicated that they were extremely concerned over the financial impacts from the pandemic. The uncertainty for the future of small business owners is just as great if not greater as it is for corporations and financial institutions.

The Chinese anti-sanctions law, perhaps, can best be viewed not only as the next strike in the US-China trade war but also as part of the government’s policy of standing against long-arm jurisdiction interference within its economy. In other words, the anti-sanctions law is not just a retaliation against sanctions implemented by the U.S. and the EU.

Instead, it’s China telling the world that organizations and firms must adhere to Bejing’s objectives and rules very closely (rather than Washington’s), with severe penalties for failing to comply. Will companies place their bets on the U.S. or China? We don’t have any real-world use cases to answer that question just yet.

What's The Bottom Line?

Commerce and financial investments have become a battleground of confrontation rather than collaboration between the U.S. and China. Hong Kong was set to become the latest front in the economic conflict, and even though China may have at least temporarily withdrawn the law from being imposed against the city, that ultimately means nothing in regards to what could happen next in the very near future.