(Bloomberg) -- Three big Chinese banks extended their drop Wednesday, after a U.S. media report suggested they could face fallout from an investigation into North Korean sanctions violations.
China Merchants Bank Co., Bank of Communications Co. and Shanghai Pudong Development Bank Co. fell in Shanghai and Hong Kong trading after the Washington Post said that a U.S. judge found three unidentified Chinese lenders in contempt for refusing to comply with subpoenas related to the probe. Details in court rulings “align with a 2017 civil forfeiture action in which the Justice Department alleged” that the three worked with a Hong Kong company accused of laundering money for a sanctioned North Korean entity, the newspaper said.
All three banks said in statements that they were not under investigation for sanctions violations.
While the report didn’t suggest any U.S. action against the banks was imminent, the sell-off shows how sensitive investors have become to any indication of a heightening in tensions between China and America. In recent months, news of comments and deliberations by U.S. officials have triggered declines in Chinese stocks, including Iflytek Co. and Hangzhou Hikvision Digital Technology Co. Merchants Bank’s fall in Hong Kong on Tuesday was the most in nearly four years.
“People are very sensitive about news related to politics now,” said Jackson Wong, Hong Kong-based director at Amber Hill Capital Ltd. “The North Korea news report can be a big thing, turning into a bargaining chip between the U.S. and China in the trade talks, or it can be a very small thing. The market doesn’t know yet, so it became an excuse for them to sell.”
The U.S. court order triggers a provision that could see Pudong Development Bank lose access to dollars, the Washington Post said, a decision that the paper said could be made by U.S. Attorney General William Barr or Treasury Secretary Steven Mnuchin.
Mnuchin said in 2017 that the U.S. may impose additional sanctions on China, potentially cutting off access to the U.S. financial system, if it didn’t follow through on a fresh round of United Nations restrictions against North Korea. A spokeswoman for the U.S. District Attorney’s office declined to comment to the Washington Post about whether the government is considering invoking the penalty.
Merchants Bank’s stock extended Tuesday’s 4.8% drop and was down 1.6% as of 11:41 a.m. in Shanghai Wednesday and 0.8% in Hong Kong. Shares of Bocom, China’s fifth-biggest bank by assets, were 0.3% lower in the mainland city and down 0.5% in Hong Kong. Pudong Development Bank was trading little changed after falling as much as 0.9% earlier. Bocom’s dollar-denominated, loss-absorbing debt instruments, known as AT1 bonds, fell on Tuesday by the most since March 2018.
“We believe it’s likely for the three banks to face fines by the Fed though it’s difficult to predict the verdict,” Dexter Hsu, a Taipei-based analyst at Macquarie Capital Ltd., wrote in a report. He predicts that any penalty will be based on the lenders’ dollar-denominated assets, which could see Bocom take the biggest hit. A 50 basis-point fine could impact the 2019 earnings-per-share for Bocom and Merchants Bank by 7% and 2.8%, respectively, Hsu said.
Financial companies have largely avoided being targeted in the trade war between China and the U.S. Chinese officials have often pointed to the opening of their financial system to international firms as an example of its desire to embrace cross-border business. As the dispute has escalated, U.S. President Donald Trump’s administration has focused mostly on China’s technology companies, notably Huawei Technologies Co.
“Compared with zooming in on Huawei, targeting systematically important financial companies can potentially deal more damage and brings bigger uncertainty,” said Dickie Wong, executive director of research at Kingston Securities Ltd. in Hong Kong. “The fact that one story sent the banking stocks tumbling showed that investors are still high-strung amid the trade war tension.”
Chinese foreign ministry spokesman Geng Shuang said Tuesday that the country has “always seriously implemented” UN Security Council resolutions and also asks its companies to comply.
“We are against so-called U.S. long-arm jurisdiction against Chinese companies,” Geng said at a media briefing. “We hope the U.S. will step up bilateral cooperation in financial regulation with other countries and come up with information sharing mechanisms in accordance with domestic laws, and share information through bilateral channels.”
Pudong Development Bank said in a statement that the news report related to a U.S. investigation into one of its clients and a subsequent demand for the client’s information. Current rules prevent Chinese entities from disclosing such information to overseas entities without authorization, the lender said, adding that it has not been probed in relation to sanctions violations.
Merchants Bank said in an emailed statement that it has always strictly followed Chinese laws, UN regulations and other applicable sanctions and rules, and that it hasn’t been probed in connection to any such violations. Bocom said it isn’t being investigated for a sanctions violation, 21st Century Business Herald reported. Calls to Bocom representatives were unanswered.
(Updates shares in eighth paragraph, analyst estimate on the extent of fines in ninth.)
--With assistance from Will Davies, Livia Yap, Lucille Liu, Matt Turner and Russell Ward.
To contact Bloomberg News staff for this story: Evelyn Yu in Shanghai at firstname.lastname@example.org;Jeanny Yu in Hong Kong at email@example.com
To contact the editors responsible for this story: Sam Mamudi at firstname.lastname@example.org, Jeanette Rodrigues
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