China banks, oil giants at risk from Donald Trump's sanction threat over North Korea

A sign of the Bank of China is seen in Rome, Italy, on April 11, 2016.
A sign of the Bank of China is seen in Rome, Italy, on April 11, 2016.PHOTO: REUTERS

BEIJING (BLOOMBERG) - US President Donald Trump's rhetoric about imposing widespread sanctions on China for propping up North Korea's economy may put pressure on some of its banks and oil companies.

Harsh critics of China's support for its neighbour have argued that American efforts to stop North Korea's nuclear weapons programme must include tougher sanctions against Chinese state-owned companies. So far, the United States focused on small entities such as Bank of Dandong.

But now the bigger players may be at risk after Mr Trump threatened on Twitter to cut off trade with any country doing business with North Korea because of its latest nuclear test.

One Republican congressman called out Bank of China as a potential sanction target, and Treasury Secretary Steven Mnuchin said punishing specific entities is an option.

China is the US' largest trading partner, with US$578.6 billion (S$783 billion) in two-way trade last year, according to the Office of the US Trade Representative.

"UN must impose oil embargo on N Korea ASAP," Representative Peter King of New York wrote in a Sept 3 message on Twitter. "If China or Russia veto, US must sanction (anyone) doing business with NK (North Korea), including Bank of China."

When asked by Fox News whether the US would impose tougher sanctions against Chinese financial institutions and companies, Mr Mnuchin said: "We're going to strongly consider everything at this point.

"If countries want to do business with the United States, they obviously will be working with our allies and others to cut off North Korea economically."

Stocks fell as the tensions escalated, with US equities sliding on Tuesday (Sept 5) and markets in Tokyo, Hong Kong and Sydney declining early Wednesday.

Chinese banks are especially vulnerable to sanctions because they had US$144 billion of assets in the US at the end of December, according to data from the US Federal Reserve. Most of those assets are held by Bank of China and the Industrial and Commercial Bank of China (ICBC). Beijing-based press officers for the two banks separately declined to comment.

"The household names - Bank of China, all the Chinese banks on the large scale - would be on the target list," said Mr John Park, director of the Korea Working Group at Harvard University's John F. Kennedy School of Government.

Bank of China was the first Chinese bank to set up operation in the US. It currently has four branches in New York, Los Angeles and Chicago, with US$78.5 billion of total assets. It is a fully licensed bank with services including corporate finance, trade finance and personal finance.

ICBC started its US operation in 2008. Its financial services holding unit offers securities clearing and financing services for corporate clients. This unit had US$40 billion of assets by June, according to its semi-annual report.

It also has a fully licensed banking unit offering services including deposits, loans, trade finance, settlement and clearing, cash management and bank cards. It had US$2.14 billion of assets as of June 30, according to the report.

China's oil companies also may be exposed. China is the biggest oil supplier for Mr Kim Jong Un's regime, providing almost all the estimated 15,000 barrels a day of crude and products reportedly imported by North Korea, according to the US Department of Energy.

Most of those exports are from state-owned China National Petroleum Corp, the nation's biggest oil producer, said senior research fellow Kim Kyung Sool at the Korea Energy Economics Institute. CNPC is the controlling shareholder of PetroChina, a Hong Kong-listed company with investors including JPMorgan Chase & Co, Blackrock Inc, and Citigroup Inc.

CNPC and PetroChina do not have any exploration or production assets in the US, but other oil giants - including China Petroleum & Chemical Corp and Cnooc - do.

Also, Sinochem Group in 2013 bought a 40 per cent stake in Texas oil-shale acreage from Pioneer Natural Resources in a US$1.8 billion deal. There was nothing to indicate that any of the other companies sell to North Korea.

China's oil companies also buy burgeoning US energy exports, including crude and liquefied natural gas, which the Trump administration has encouraged.

CNPC's Beijing-based spokesman declined to comment on Tuesday. PetroChina, China Petroleum and Cnooc's Beijing-based spokesmen did not reply to requests for comment. Sinochem's Beijing-based spokesman did not answer calls to his office and mobile phone seeking comment.

"Any US sanctions against PetroChina or even its parent CNPC will trigger a tit-for-tat kind of retaliation from China," said Mr Laban Yu, head of Asia oil and gas equities at Jefferies Group in Hong Kong.

A comprehensive oil embargo would have to be approved by the UN Security Council, which China can veto as a permanent member. The council last month agreed to ban North Korean exports of coal, iron ore, lead ore and seafood.

China called Mr Trump's threat "unacceptable" and said on Monday it is ready to participate in any Security Council discussions.

"China has always stayed committed to the denuclearisation of the Korean Peninsula, upholding peace and stability on the Korean Peninsula and promoting the peaceful settlement of the relevant issue through dialogue and negotiation," Mr Geng Shuang, a Foreign Ministry spokesman, said.

Others caution that it is better for the US to cooperate with China President Xi Jinping's government than to slap it with sanctions. That is because China could retaliate against US companies doing business there, such as Apple, Boeing, Starbucks and automakers.

The leaders of other major countries are divided over the question of further sanctions. Russian President Vladimir Putin dismissed them as ineffective, while German Chancellor Angela Merkel and Japanese Prime Minister Shinzo Abe spoke on Tuesday and agreed on the importance of new sanctions, according to a statement from the German government.

"The sabre rattling that has gone on has caused some concern, but it's the sanctions that are really worrying markets - and the potential disruption to global trade," Mr Michael McCarthy, Sydney-based chief market strategist for CMC Markets, said on Bloomberg Television.