Targeting the corps : the incidence of humanitarian sanctions on firm performance in China

Do international sanctions effectively impose economic costs on targeted entities? We consider various U.S. sanctions imposed on the Xinjiang Production and Construction Corps (XPCC) from July 2020 onward. We find that exactly when sanctions are imposed, stock market returns of XPCC-connected companies are 1 to 2 percent lower than those of non-sanctioned companies. We explore the potential channels for this drop in market value using quarterly firm-level accounting data. Results indicate that inventories increased, but there is no evidence that sanctions impacted profitability, size, or liquidity. Furthermore, we find evidence that targeted companies were shielded through lower borrowing costs, lower taxes and higher subsidies, which might explain the relatively small losses in market value. These findings suggest that targeted sanctions can generate economic costs, but also that governments can shield targeted entities from bearing the full cost.