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Opinion | China's new rules against foreign long-arm jurisdiction: A game of chicken

By Alan Leung, Blogger specialized in current affairs

On Saturday (Jan. 9), the Ministry of Commerce of the People's Republic of China issued its first order of the year, "Rules on Counteracting Unjustified Extra-territorial Application of Foreign Legislation and Other Measures", after the US threatened to impose a new round of sanctions on mainland China and Hong Kong earlier in the week. The rules have been approved by the State Council prior to the Ministry announcement and will come into force immediately.

According to the order's official document signed by the Chinese commerce minister, Wang Wentao, the rules are aimed at counteracting the impact of unjustified extra-territorial application of foreign laws and measures on China, safeguard national sovereignty, security, development interests, and protect the legitimate rights of Chinese citizens, legal persons or organizations. The move allows the country to carry out legal self-defense against US long-arm jurisdiction bullying.

The new rules stipulated that any Chinese individual or organization who has been prohibited or restricted by foreign legislation and other measures from engaging in normal economic, trade and related activities with a third State (or region) or its citizens, legal persons or other organizations should report to the Ministry of Commerce within 30 days of their business being affected by the foreign legislation.

The Ministry of Commerce will then assess whether the foreign legislation had violated international law and the basic principles of international relations, the potential impact on China's national sovereignty, security and development interests, the potential impact on the legitimate rights and interests of the citizens, legal persons or organizations of China, and other factors that shall be taken into account to make a decision if the rules applied.

Upon any foreign legislation and measures being assessed to consist of unjustified extra-territorial application of foreign legislation and measures, the Ministry of Commerce may issue a prohibition order against the relevant foreign legislation and measures which mean that legislation will no longer be accepted, executed, or observed in China. However, individuals and entities can apply with the Ministry for an exemption from the prohibition order.

The rules stipulate that Chinese individuals and entities can institute legal proceedings in local courts to parties that had benefited from complying with a prohibited foreign legislation and hasn't been granted an exemption from the Ministry for compensation of losses. The Ministry of Commerce may adopt additional countermeasures against a prohibited foreign legislation, based on actual circumstances and needs.

According to the rules, relevant government departments may provide necessary support based on specific needs and circumstances to individuals and organizations in China who had suffered significant losses as a result from non-compliance with the relevant foreign legislation. It's important to note that the new rules will not apply to extraterritorial application of foreign legislation provided for in treaties or international agreements to which China is a party.

The new rules have been very well thought out and things may become extremely interesting especially when many major foreign banks and investment companies have been looking forward to accessing the $40 trillion financial sector in China as Beijing stepped up the pace of opening up the sector in the past year. In particular American's banks and companies since China had pledged to open up the sector as part of the Sino-US phrase one trade deal.

However, these banks and companies that have been looking to do business in China are now forced to choose between complying with US sanction and paying compensation lawsuits in China, complying with Chinese laws and face US penalties or giving up the world's biggest growing market and largest economy (PPP). What's more, the new rules aren't limited to the financial sector but a host of other industries that may be involved with sanctions, restriction and other long-arm jurisdiction as well.

The semiconductor industry should be another major target, since US Government's sanction has involved the industry heavily over the past few years as the Trump's administration attempted to kill Huawei and restrict the company's 5G dominance. Hence, the rules could push major American banks, investment companies and corporations, when their interests become affected, into applying pressures on the US Government urging them to rethink its sanctions and long-arm jurisdiction tactics against China.

In addition, as China and the EU signed their new investment deal, the rule would affect European banks and companies entering the Chinese market due to dollar dominance within the SWIFT transactions system. As trade and investment increases, it will encourage additional currencies swapping deals between China and EU countries, and increase the attractiveness of creating an alternative non-dollar denominated cross-border transactions systems to lower the reliance on the dollars.

Ultimately, it has become a game of chicken to see who can resist the pressure the longest. However, for China to make such a big move it proves that she is finally ready to open up many previously restricted sectors to international investment and business. This will make the Chinese market even more attractive than it is now, which forces many governments and businesses around the world to make hard choices, and not many will be willing to give up such a big growing market.

China's final objective is to either force the US Government to stop or reduce its long-arm jurisdiction against China under the pressure of their own banking sectors and multinational companies, or create the conditions to settle more of its international trade with the yuan and the incentives for the international community to work together to create an alternative non-dollar denominated cross-border transactions system. We may be seeing the start of the end of the dollar's dominance in international trades.

 

The views do not necessarily reflect those of DotDotNews.

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