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BLACKWATER USA | DAILY BRIEF


COVID-19

  • Coronavirus cases are rising again in many countries and U.S. states that reopened after lockdowns. Stock markets are down over concerns of further disruptions to the economy.

Sahel

  • Boko Haram killed at least 81 people in a village in Borno, northeast Nigeria, after the villagers killed a few fighters to prevent them from stealing cattle.

  • In a separate incident in Katsina, attackers on motorcycles killed around 20 people (who were reportedly trying to resist the attackers’ looting). No group claimed this one.

Libya

  • The UN Support Mission in Libya (unfortunate acronym: UNSMIL) said the main two warring sides—the Tripoli-based GNA and Khalifa Haftar’s LNA—have held “productive talks” starting June 3rd and continuing yesterday. They still haven’t quite agreed to a ceasefire: the GNA says it will only talk about a ceasefire after it controls Sirte, and the LNA is desperately trying to keep control of Sirte (Russia even deployed its MiGs over Sirte yesterday).

  • Pres. Trump unexpectedly joined the chorus calling for a ceasefire in Libya—but reportedly only after a phone call with Egyptian president Abdel Fatah Al Sisi in which Trump learned Egypt was willing to send ground troops in to bolster Haftar’s side.

  • Separately, a Greek helicopter and frigate almost caused an incident when they tried to intercept a Turkish cargo ship bound for Libya. Turkish navy boats showed up to support the cargo ship, and the Italian commander of Operation Irini (the EU’s operation to enforce an arms embargo on Libya) ordered the Greek ship to back off. [Greece and Turkey are at odds over Cyprus and drilling rights in the Mediterranean, so the EU doesn’t view Greece as a neutral party.]

China

  • I liked The Economist’s op-ed on Hong Kong’s awkward position between Eastern and Western financial systems—and whether it can stay in the middle. Article pasted below.

Russia

  • Moscow’s mayor lifted some social distancing restrictions, though that seems premature because cases continue to rise. Perhaps the mayor is trying to get residents comfortable with the idea of going outside ahead of Pres. Putin’s July 1 referendum so they’ll turn out to approve Putin’s bid to stay in power until 2036.

Iran

  • Iran is one of the other areas that clearly reopened too early, and it’s now facing a strong second wave of coronavirus cases.

  • The Trump administration wants to extend the arms embargo on Iran, which would otherwise expire in October. Pres. Rouhani called on the European signatories of the nuclear deal to “stand up” to Trump and deny an extension.

Afghanistan

  • The Taliban attacked checkpoints in Paktika province, killing a district police chief and wounding four other police.

Can Hong Kong remain a conduit between China and the world? (Economist)

Its future as a financial centre depends on nothing less

China and America have begun the fraught business of disentangling their financial systems. Chinese firms with shares listed in New York have rushed to float in Hong Kong, too, after the White House signalled they are not welcome on Wall Street. The latest is NetEase, a Chinese gaming firm that began a $3bn listing this week. But now Hong Kong itself, the world’s third-biggest international financial centre, has become a geopolitical flashpoint. Its unique role as the conduit between global capital markets and China’s inward-looking financial system means that both sides must tread carefully.

On May 28th China said it would enact a new national-security law for Hong Kong, undermining the formulation of “one country, two systems” in place since 1997, under which the territory is supposed to be governed until 2047. In response, America has said it may downgrade the legal privileges it grants Hong Kong, which treat it as autonomous from China. Britain, the former colonial power, has said that freedoms are being curtailed and that it could make it easier for up 3m Hong Kongers to go there to live and work and eventually win citizenship—a welcome, if still sketchy, gesture (see article).

Hong Kong’s place in the world depends on having the rule of law, a trusted reputation and seamless access to Western financial markets. Other Chinese cities have big stock exchanges: shares listed in Shanghai and Shenzhen are together worth a lot more than those in Hong Kong. But neither has fair courts, an independent central bank, free movement of capital or a mix of Western and Chinese firms. These foundations are the basis for $9.7trn of cross-border financial claims, such as loans, that are booked in the territory. Hong Kong is also where mainland Chinese firms and banks go to deal in the dollar, the world’s dominant currency. Some $10trn of dollar transactions flowed through Hong Kong’s bank-to-bank payments system last year.

Until recently, conventional wisdom held that Hong Kong’s position would be assured for 20-30 years, because it would take that long for China either to upgrade its markets to Western standards or to become so powerful that it could impose mainland practices, and the yuan, on the rest of the world. But the trade war, a year of street protests and China’s iron-fisted response to them raise new questions about Hong Kong’s durability (see article). Bullying from Beijing erodes the sense that it is autonomous. And there is an outside chance that America could impose sanctions or other restrictions that would stop some Hong Kong officials, firms or banks from using dollars. China’s actions raise doubts about the sanctity of contracts. America’s might bring into question whether money parked in Hong Kong is still fully fungible with money in the global financial system. If these worries spread, they could destabilise Hong Kong and cause a financial shock in China and well beyond it.

The good news is that so far there is no sign of capital flight. Hong Kong’s vast deposit base has been stable in recent weeks, say its bankers. Investors are reassured by its $440bn or so mountain of foreign reserves and a long record of capable financial management. The rush of Chinese listings will bring in new cash and drum up business in the city.

Nonetheless, for China the prudent policy is to try to speed up the development of the mainland’s financial capabilities so that it is less exposed to potential American punishment. That means attracting more global banks and investment managers into mainland China. Last year it eased rules on licences for Wall Street firms, although many remain sceptical that anything will really change after years of glacial negotiations and backtracking by Chinese officials. It also means another big push to boost the global role of the yuan and reduce China’s dependence on the dollar. China tried, prematurely, to promote the yuan after the global financial crisis with a mix of propaganda and diplomatic strong-arming. It flopped. The next effort will be more sophisticated. It may try to exploit China’s global lead in cutting-edge payments by, for example, expanding cross-border digital-payments systems that bypass much of the existing global plumbing. Or it could promote China’s plan for a digital central-bank currency.

Nonetheless all of this will be hard for China to accomplish and take a long time. Which means that Hong Kong will still matter in global finance. If you have a mutual fund with an allocation to Asian shares, or run a multinational company or bank, you should gauge Hong Kong’s financial health by three measures. One is how China implements the new security law—for example, whether it will be applied by independent judges or by judges congenial to Beijing. The second is whether America targets the dollar-payments system in Hong Kong, which has the potential to cause an immediate scare. And the last is whether the Communist Party attempts not just to suppress protests and to intimidate its critics inside Hong Kong and beyond, but also compromises the territory’s independent institutions—including its courts, the central bank, regulators and the regime for clean accounting.

People have wrongly predicted the demise of Hong Kong for the best part of two centuries. If it fails these tests, its time as a global financial centre really will be up.

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