The Future Financial War with China

The detention of Huawei Chief Financial Officer Meng Wangzhou last month has electrified Sino-American tensions, making 2019 a portentous year for debt markets. Her employer, Huawei, has been the target of China hawks’ ire dating back to the early 2010s, amid scandals tied to sanctions evasion in Iran and possible concerns about espionage. Yet in the buzz about its ties to the People’s Liberation Army, the company’s deep and extensive dollar exposures have received little coverage.

Though not publicly traded, Huawei has raised more than $9 billion from dollar debt markets through both loans and bonds. Its current crisis has sent its financial partners rushing for the exits, with Standard Chartered and HSBC freezing future deals, and Citi paying close attention to future developments.

In an era of financial warfare waged by sanctions and suspicious transaction reports, global banks are becoming increasingly risk averse for fear of being caught in the U.S. Treasury’s crosshairs. Banks are right to be afraid of doing business with Huawei; Washington banned key Russian firms from dollar financing immediately after the Crimea annexation.

This case fits within the broader narrative of US-China geoeconomic tensions. Even under the Obama administration, the Committee on Foreign Investment in the United States (CFIUS), led by the U.S. Treasury, blocked several key Chinese semiconductor acquisitions due to national security concerns.

Such dollar exposures are by no means limited to Huawei, as many other Chinese tech firms have exhibited a passion for American capital markets. US-listed tech giants, like e-commerce hubs Alibaba and JD.com, have shown a similar affinity for dollar-denominated bonds, even after listing on the New York Stock Exchange (NYSE). In 2017, Alibaba sold $7 billion in dollar bonds across several maturity tranches, the longest of which would mature in 2057.

These deals have not been limited to those firms with a listing in New York, as the Huawei case demonstrates. Hong Kong-listed tech giants, like Tencent and Xiaomi, both have large dollar exposures. Earlier this year, Tencent, issued a $5 billion dollar bond deal earlier this year, which some analysts argued mimicked that of Alibaba. Though New York frequently competes with Hong Kong for lucrative Chinese IPOs, the bond market is unquestionably the dollar’s turf. The tech sector is far from the only consumer of these markets, as data confirms the acceleration of Chinese dollar borrowing from 2013 onward.

This has occurred in spite of Beijing’s push to internationalize the renminbi as a currency for both payments and financing. These aspirations have been hindered by the country’s post-2016 deleveraging agenda, pursued in order to stabilize the country’s chaotic and complex financial system.

In the place of the renminbi, the dollar has expanded its hegemony across international bond and loan markets. Its closest competitor, the euro, has seen its international issuance driven heavily by firms based in the US and UK, as opposed to the dollar’s EM-fueled surge. As Washington and Beijing clash over tech, these dollar exposures may prove to be a useful geoeconomic tool for Washington, if utilized in the proper manner.

Despite being privately owned, tech giants like Huawei and Tencent play a key role in Beijing’s quest to dominate global tech. The continued innovative success of these firms will power the landmark Made in China 2025 initiative, as well as enhance the country’s surveillance capabilities.

On a micro level, the existence of broad dollar exposures will encourage Chinese tech firms to respect U.S. sanctions policy, even as they lead the way in global fintech. Even the mere psychological threat of a dollar sanction and the associated reputational concerns will keep these firms in line, ensuring that the U.S. Treasury has a seat at the Chinese fintech table in the future.

On a macro level, the dollar bond market has found itself at the epicenter of Beijing’s efforts to deleverage the country’s indebted property market. Access to dollar financing, typically at lower yields than domestic debt markets, has accelerated the spending binge of developers, like the behemoth Evergrande. Against this backdrop, the imposition of a dollar ban on a Chinese tech firm although unlikely at this time could have a ripple effect through the Chinese dollar bond market, affecting the sustainability of highly leveraged developers.

With this in mind, Washington will need to adopt a scalpel-like approach. If implemented properly, these macro risks could induce Beijing to better police the sanctions infractions of its firms. Should they fail, it is imperative that the U.S. Treasury takes these financial risks into account and carefully weighs its options. Like any powerful weapon, the key is in the proper aim.

Michael Greenwald is a Senior Fellow with the Palm Beach Center for Democracy and Policy Research. This article was originally published in the webpage of the Belfer Center for Science and International Affairs, at the Harvard Kennedy School on 01/02/2019.