RUTHFULLY YOURS

The larger Chinese banks, in response to stern U.S. warnings, have this year been exiting transactions involving Russia.

Are America’s sanctions efforts finally working?

No. Beijing is merely shifting transactions to smaller banks and non-banking channels. China, to help Russia’s war effort in Ukraine, is employing a decades-old stratagem: the shell game.

At best, America’s sanctions are crimping the fast-growing China-Russia trade, not ending it.

Beijing, Moscow’s “no-limits” partner, has provided across-the-board support for the Russian war effort since the start of the conflict. In recent months, China has been supplying machine tools, semiconductors, and other dual-use items. It has also helped out with weapons technology and satellite imagery. Reporting from last year shows that Chinese parties were selling ammunition in large quantities.

Moreover, China has lent bank support. Now, however, Chinese banking institutions have become wary of working with Russia, especially since March. “Concern over the possibility of sanctions,” Reuters reported in June, “has already caused China’s big banks to throttle payments for cross-border transactions involving Russians, or pull back from any involvement altogether.”

There is no mystery why China’s big banks have run from Russia: These behemoths — the four largest banks in the world ranked by assets are Chinese — know the U.S. can effectively impose a death sentence. The Secretary of the Treasury, for instance, can designate, pursuant to Section 311 of the USA PATRIOT Act, Chinese banks to be of “primary money laundering concern.” Designated banks can no longer clear dollar transactions through New York, where every dollar transaction clears.

Because the dollar reigns supreme in international transactions, Section 311 designations would put the Chinese state banks out of business most everywhere outside China and even reduce their business inside that country. The Treasury Department, to great effect, imposed Section 311 on Bank of Dandong, a small Chinese bank, in 2017 for participating in prohibited transactions with North Korea.

In addition, Washington has other tools to hit Chinese banks. In 2012, Treasury also cut China’s Bank of Kunlun off from the U.S. financial system by invoking the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010.

As big Chinese banks began to withdraw from Russian business, other Chinese banks moved in. “Some Chinese companies are turning to small banks at the border,” Reuters reported in late April.

The move to smaller banks had to have been orchestrated in Beijing. The Chinese central government and the Communist Party tightly control the banking system, and the banks cannot do anything — especially something as sensitive as helping Russia in the middle of a major war — without approval from the top of the Chinese political system.

Beijing is clever. “So if they move their transactions into smaller banks that can be sanctioned, you know, that allows them a certain ability to let a bank fall and not be affected,” Jonathan Ward, author of The Decisive Decade: American Grand Strategy for Triumph Over China, explained to Maria Bartiromo of Fox Business in the middle of June.

Chinese officials are also trying to inoculate their banks. As “the head of a trade body in a southeastern province that represents Chinese businesses with Russian interests” explained to Reuters, “Transactions between China and Russia will increasingly go through underground channels.” The underground channels include cryptocurrency, generally banned in China.

China’s regime is playing Americans for fools. It is time for Washington to sanction all Chinese banks, all other Chinese financial institutions, and all Chinese corporates, treating them as one single organization. It is time for American officials to stop playing what has become sanctions whack-a-mole.

The Communist Party of China, which should also be sanctioned, runs a unitary state and demands absolute obedience from all parties in society. Banks and other enterprises operate in separate corporate shells and may have separate owners, but they are not separate.

In short, Chinese society is not organized the same way as America’s.

“Speed is everything,” Agathe Demarais, author of Backfire: How Sanctions Reshape the World Against U.S. Interests, said to NPR, on how to make sanctions work. “Sanctions tend to work fast or never,” she noted. “They provoke a shock within the targeted economy.”

Washington, by patiently going after one sanctions-busting entity after another, gives China plenty of time to adjust and make American sanctions ineffective. Sanctions will work, applying Demarais’s logic, if they are immediately applied against all Chinese entities to produce maximum shock.

There is no point in imposing sanctions that never have a chance of stopping offending behavior.

Gordon G. Chang is the author of The Coming Collapse of China and China Is Going to War, a Gatestone Institute distinguished senior fellow, and a member of its Advisory Board.