China's new fund is aimed at keeping its markets stable. Image: iStock

A report that a US federal judge found three unnamed Chinese banks in contempt for failing to comply with subpoenas in an investigation of North Korea sanctions violations tumbled banks stocks in Hong Kong trading Tuesday.

The reported contempt ruling came just before President Trump will meet President Xi Jinping at the Osaka Group of 20 summit. It brings to mind the arrest of Huawei CFO Meng Wanzhou while Trump and Xi had dinner at the November 2018 G20 summit in Argentina.

Investors do not know whether this is a coincidence, or a negotiating tactic sanctioned by the Trump administration, or an effort by Washington officials to influence Trump’s handling of the negotiations.

According to the Washington Post, the three banks helped a Hong Kong company launder money for a North Korean entity subject to America sanctions. The banks weren’t identified, but Bank of Communications fell 9%, Minsheng Bank fell 8%, Merchants Bank fell 8% and Industrial and Commercial Bank of China fell 6% in Hong Kong. Shanghai Pudong Bank fell about 3% in Shanghai.

The banks denied they were under investigation, Bloomberg News reported.

2017 warning

If the US finds that Chinese banks violated sanctions, the US could cut off their access to dollar funding and effectively shut down their foreign operations. In 2017 Treasury Secretary Steven Mnuchin warned: “If China doesn’t follow these sanctions, we will put additional sanctions on them and prevent them from accessing the US and international dollar system.”

Technically, a contempt ruling from a federal court in an investigation of sanctions violations could allow the Treasury to cut off Chinese financial institutions. US government spokesmen did not respond to inquiries from Bloomberg News.

Shanghai Pudong Bank said that one of its clients was under investigation, but that Chinese law prevented it from disclosing client information without official authorization.

Bloomberg News reported a Chinese foreign ministry official’s statement saying that China was in compliance with all UN Security Council resolutions. The official, Geng Shuang, told a media briefing: “We are against so-called US long-arm jurisdiction against Chinese companies.”

Trump and Xi both appeared to view the North Korea issue as an area in which the US and China could find common ground and smooth the way to a resolution of outstanding disagreements over trade and technology.

In May, Trump overruled his advisers and declared that North Korea’s latest missile launch was not a violation of UN resolutions, contradicting then Acting Defense Secretary Patrick Shanahan. Shanahan since stepped down, reportedly for personal reasons.

Xi last week traveled to North Korea, amid speculation that the Chinese leader would use his good offices to defuse tensions with the US.

North Korea isn’t the only issue where strong disagreements persist inside the Trump administration. Although President Trump has said repeatedly that sanctions against Chinese telecommunications giant Huawei would be resolved in the overall trade negotiations, the neo-conservative wing of the Republican Party, including Senators Mitt Romney and Marco Rubio, have demanded that Trump maintain the export ban on Huawei regardless of the outcome of trade talks.

Trump appeared unaware of the impending arrest of Huawei’s CFO at a Canadian airport transit lounge when he sat down to dinner with Xi last year, and it was widely believed that lower-level officials at the Justice Department acted without consulting the White House.

Trump has an unusually weak degree of control of his own administration and he has clashed repeatedly with his intelligence agencies, most recently over the proposed declassification of files on the 2016 surveillance of his presidential campaign.

Uncertainty about the provenance and motivation of the reported contempt order against Chinese banks adds to market uncertainty.

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