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Chinese Banks Preparing For "Worst Case" Scenario: Being Cut Off From SWIFT, Hong Kong Bank Runs

Published: July 10, 2020
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Source: ZeroHedge

In the latest escalation over China's de facto annexation of Hong Kong, Reuters reports that Chinese state lenders are "revamping contingency plans" in anticipation of the soon to be enacted U.S. legislation (just waiting for Trump's signature) that would penalize banks for serving officials who implement the new national security law for Hong Kong.

In a "worst-case scenario" under consideration by Chinese commercial megabanks Bank of China and Industrial and Commercial Bank of China (ICBC), the lenders are said to be looking at the possibility of being cut off from U.S. dollars or losing access to U.S. dollar settlements, two Reuters sources said.

The worst-case scenario also envisions what would happen in the event of a run on its branches in Hong Kong if customers feared that it would run out of U.S. currency, one of the sources said (this is the scenario discussed in "If 500,000 Rich Hong Kongers Leave The City, The HKD Peg Would Surely Collapse"). The scenario was also looking at the experience of banks in Iran, the same person said. Iranian banks have been hit from time to time by U.S. sanctions dating back to the 1979 Islamic Revolution.

"We are hoping for the best, but preparing for the worst. You never know how things will turn out," one of the sources said.

In a milder scenario being looked at by the Agricultural Bank of China (AgBank), lenders would need to find ways to address the problem of clients blacklisted by the United States, especially those who might face a sudden loss of liquidity.

As Reuters adds, the contingency planning has been initiated by the banks themselves, who have the most to lose should the US effectively trigger a massive dollar bank run.

As Reuters calculates, Bank of China, the country's most international lender, had the biggest exposure of the country's big four lenders to the greenback at the end of 2019, with about $433 billion in liabilities. China's top four banks, which also include ICBC, China Construction Bank and AgBank, had a combined 7.5 trillion yuan ($1 trillion) in U.S. dollar liabilities at the end of 2019, annual reports show.

According to the report, at least three state-run leasing firms, including an ICBC unit and CSIC Leasing, are also making contingency plans. Leasing firms are often heavily reliant on dollar borrowing to fund purchases of aircraft, machinery and facilities.

China's contingency plans are in response to the unanimous passage in the House and Senate of a bill last week which seeks to impose financial sanctions on Chinese banks in response to the National Security Law. It has yet to be signed into law by President Donald Trump. The bill calls for sanctions on Chinese officials and others who help violate Hong Kong's autonomy and on financial institutions that do business with them. But it does not spell out what the sanctions would look like.

"There are sanctions in this bill which could be interpreted to prevent a bank from clearing some dollar transactions via U.S. institutions, but unlike other congressional sanctions bills there are not specific provisions mandating it," said Nick Turner, a lawyer specialising in sanctions and anti-money laundering at Steptoe & Johnson in Hong Kong.

Aside from its contingency planning, China has said it would "launch a counterattack against US hegemony" if Trump was to block access of Chinese banks to dollar funding and the SWIFT payment system

SGH Macro have noted that countermeasures from China could include a speeding up of the use of the Renminbi for China’s own parallel Cross-border Interbank Payment System (CIPS), a surge in issuance of RMB denominated loans to Belt and Road Initiative countries, a push for greater RMB use through the Shanghai International Energy Exchange (INE) crude oil futures, and an acceleration of the implementation of China’s Digital Currency Electronics Payment (DCEP), the first digital currency issued by a central bank. 

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