By William Mauldin 

WASHINGTON -- As U.S. officials weigh sanctioning China over its recent moves in Hong Kong, the city's status as a global financial center limits the menu of effective levers available to Washington.

Major actions against Hong Kong's financial system risk hitting U.S., Western and Hong Kong companies and consumers, officials and analysts say. More targeted sanctions against Chinese officials and trade measures against products made in Hong Kong would have little impact on Beijing's integration of the city into the mainland's political and security system, these people say.

Trump administration officials discussed Hong Kong plans Thursday in a White House meeting, according to people familiar with the gathering. Officials will regroup early this week and may announce sanctions or other measures, one official said.

"You want to find sanctions that hurt the perpetrators of the law without shooting yourself in the foot, and it's a difficult exercise," said Wendy Cutler, vice president of the Asia Society Policy Institute and a former senior U.S. trade official. "There are a lot of options, but none of them are great."

Beijing last month unveiled a new security law that gives the mainland greater role in policing and limiting political movements on the territory, a step that the U.S., U.K. and other Western countries say violates the "one country, two systems" principle and the treaty that transferred Hong Kong to Chinese administration in 1997.

China has warned the Trump administration to stay out of what it describes as a domestic political matter, and has threatened to retaliate against measures the U.S. levels against it.

"China and the U.S. should not seek to remodel each other," Chinese Foreign Minister Wang Yi said Thursday in a speech in Beijing. "Instead, they must work together to find ways to peaceful coexistence of different systems and civilizations."

President Trump in May laid out possible steps Washington would consider if Beijing went ahead with its security law, including ending both the U.S.'s extradition treaty with Hong Kong and the territory's special trade and travel status for exports and travelers. But so far the administration has only announced it would prevent an unknown number of Chinese citizens from getting visas and limit military and security-related exports to Hong Kong.

Some State Department officials have discussed the possibility of undercutting Hong Kong as a top financial center -- one that benefits China -- by taking steps to destroy Hong Kong's pegged exchange rate to the U.S. dollar, according to two people familiar with the discussions.

But a senior Trump administration official said that the move against Hong Kong's currency has been excluded from the measures under consideration, at least in the near term. Also, many U.S. economic officials would oppose major new financial sanctions when the global economy is swooning under the coronavirus pandemic.

The State Department declined to comment on economic policies toward Hong Kong. The White House declined to comment.

A more likely option is a suite of narrowly targeted sanctions, current and former U.S. officials say. The House and Senate unanimously passed a law this month enabling the State and Treasury departments to impose sanctions on people or entities involved in carrying out the Hong Kong security law. It would also target banks that facilitate significant transactions involving those people or entities.

Mr. Trump is expected to sign the bill, given the broad congressional support, say people following the legislation. The administration is already likely able to rely on previous authorizations for targeted sanctions, including a 2019 law aimed at Beijing's moves in Hong Kong after massive protests erupted on the territory.

"Washington will probably impose some sanctions on midlevel Chinese officials over the new Hong Kong law, but it will avoid actions that threaten the territory's financial stability or its peg against the dollar," Michael Hirson, the top China expert at the Eurasia Group, wrote Friday in a note.

Mr. Trump has previously hesitated to confront China over certain issues, given the concerns over negotiations to end the tit-for-tat trade war he pursued upon taking office. He signed a "phase-one" trade agreement in January that requires China to purchase tens of billions of extra U.S. exports this year. China isn't on track to meet those purchase requirements this year.

China experts expect the U.S. to soon cancel its extradition treaty with Hong Kong due to concerns about the lack of independent police and courts on the territory under China's new security law. Mr. Trump has already threatened to end it. The president also has mentioned the possibility of ending Hong Kong's special trade and travel status.

Mainland Chinese goods still face tariffs, even after the phase-one trade deal. Yet Hong Kong's exports to the U.S. last year totaled just $4.7 billion, compared with $452 billion from the mainland.

Last month, U.S. lawmakers from both parties introduced a bill to give refugee status to Hong Kong residents at risk of persecution under the new national security law.

In the U.K., Prime Minister Boris Johnson said his government plans to change immigration rules to permit as many as 3 million holders of British national (overseas) passports to stay and work in the U.K. for five years on a path to citizenship.

With overall U.S.-China tensions still rising, friction over Hong Kong may be wrapped into overall pressure on Beijing, much as Russia's annexation of Crimea presaged friction and sanctions in other areas.

The U.S. is considering taking further steps against China's hacking efforts targeting the U.S., the senior official said. Secretary of State Mike Pompeo, when asked this past week during a Fox News interview if the U.S. should ban Chinese social-media apps including TikTok, said the government was looking into the issue.

This month the U.S. sent two aircraft carriers to the South China Sea, which extends south of Hong Kong and surrounds islands disputed among China and other Asian nations. The Treasury and State departments last week imposed sanctions against top officials in China's Xinjiang region over the treatment of Uighur Muslims and other minority groups there.

Mr. Pompeo met his Chinese counterpart Yang Jiechi in Hawaii last month for a gathering seen as an effort to derail escalating tensions. U.S. officials didn't cite any concrete progress coming from the meeting.

--Alex Leary contributed to this article.

Write to William Mauldin at william.mauldin@wsj.com

 

(END) Dow Jones Newswires

July 12, 2020 14:14 ET (18:14 GMT)

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