China: UK, Huawei, and HK Response

Published on July 16, 2020

UK Prime Minister Boris Johnson this week announced a ban on the addition of any new Huawei components to British 5G networks effective December 31 and a phase-out of Huawei equipment from all British 5G infrastructure by 2027.

Senior officials in Beijing say they are assessing the full impact of the UK ban on Huawei and will look to a report from the firm on its impact on their business to craft “all necessary countermeasures to safeguard the legitimate rights and interests of Huawei.”

** But Beijing, from what we understand, has already decided it will scrap negotiations on a post-Brexit China-UK Free Trade Agreement that Prime Minister Johnson had suggested last November take place in the second half of 2020. If confirmed, a threat to FTA negotiations would represent, it would seem to us, a significant development.

** Sources also suggest that in retaliation for the ban on Huawei, Beijing may identify and target a UK company with heavy exposure to Hong Kong and mainland China’s markets for sanctions. Beyond the threat that this response is “under consideration,” we have no further details.

** Any significant escalation with the US is, however, for now unlikely around the signing into law by US President Donald Trump of the “Hong Kong Autonomy Act” and the executive order formally revoking the “Special Status” extended by the US to Hong Kong.

** Visa bans and export restrictions aside, Beijing has been keenly focused on leaks from Washington threatening the Hong Kong peg, and perhaps more credibly, on the real “nuclear” provision in the Toomey-Van Hollen legislation that would, after a one year transition period, sanction Chinese banks that do business with institutions and individuals deemed to be in violation of the rights of Hong Kong (see SGH 7/8/20, “China: Thunder, Sprinkles, and Dollar Jitters”).

** Senior sources in Beijing do not believe the Trump administration – nor Democratic presidential candidate Joe Biden — would really take such drastic measures against Chinese banks. But we are told that just to be sure, there have been three high-level communications from Beijing to Washington warning that in the unlikely case the US were to restrict access to dollar markets by the Hong Kong Monetary Authority or Chinese banks, Beijing would dump US assets, including treasury holdings, without warning.

For all the rhetoric, economic tensions with the US are still, it would appear, managed. But in escalating with the UK, Beijing may have less to lose, and more to prove.

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