Global Developments and Analysis: Weekly Monitor, 15-21 June, 2020

Economic

Central Banks Cut Dollar Offers in Sign of Market Confidence

“This shows that the dollar squeeze we observed in March and April is no longer there,” said Piet Christiansen, chief strategist at Danske Bank in Copenhagen. “That is also visible in the take-ups of the recent dollar operations, so it’s healthy sign compared to the stress we’ve seen.” This month’s pullback in demand for the dollar swap line program has also helped check the rapid expansion of the Fed’s balance sheet. Assets fell by $74.2 billion in the week to June 17, the first contraction since February. Nevertheless, the Fed’s aggressive asset purchases and liquidity facilities have pushed its balance sheet past $7 trillion. Click here to read.... [2]

U.S. banks are ‘swimming in money’ as deposits increase by $2 trillion amid the coronavirus

A record $2 trillion surge in cash has hit the deposit accounts of U.S. banks since the coronavirus first struck the U.S. in January, according to FDIC data. The wall of money flowing into banks has no precedent in history: in April alone, deposits grew by $865 billion, more than the previous record for an entire year. Deposit gains were concentrated at the very top of the industry: JPMorgan Chase, Bank of America and Citigroup grew much faster than smaller firms in the first quarter, according to company data. One consequence of the boom: Banks will likely lower their already paltry interest rates. Click here to read.... [3]

How the Coronavirus Will Reshape World Trade

When the global economy finally gets beyond the pandemic, expect it to be less globalized than before. In the post-pandemic world, more economic activity will be designated vital to national security, and thus deemed to require self-sufficiency. If governments wall off segments of their economies, costs could rise and growth could slow. Richer economies may grow more slowly while newly industrializing one—winners in recent years—may fall back. “What the pandemic has done is highlight some of the ways that globalization may have gone a bit too far,” said Peter Anderson, vice president of supply chain and manufacturing for Indiana-based engine maker Cummins Inc., which has 125 factories in 27 countries. A decade of disease, natural disasters and trade wars has shown how companies have been “putting a huge amount of risk in global supply chains,” he said.Those disruptions, he said, are prompting Cummins to accelerate plans to make its production systems less global and to concentrate manufacturing closer to where the final goods get sold. Click here to read.... [4]

Global Tax Talks Waver as Pandemic Hits Government Coffers

The global tax project started in 2013 in response to European countries’ concerns that tech companies were profiting from their citizens but booking taxable income elsewhere. That happens because profits are taxed where value is created, not where customers are located. As the global economy becomes more digital, location matters less, and corporations can manipulate rules to minimize tax payments.The coronavirus pandemic is putting more pressure on already-contentious international negotiations over how nations divide up billions in taxes on the profits of multinational corporations.Tech companies including Facebook, Google and Amazon.com Inc. have said they support the OECD process. They want to avoid a patchwork of national taxes and have stability in the location and type of tax they pay. The US opposes plans aimed only at the tech industry, where U.S. firms dominate. More than 130 countries are still aiming for an agreement by October. It would then take months or years to implement any new rules. Click here to read.... [5]

Global foreign direct investments could halve in next two years

Global foreign direct investment (FDI) flows could fall by as much as 40% this year, as companies reeling from the economic downturn caused by the coronavirus pandemic postpone their investment plans. The dramatic drop would push global FDI below $1 trillion (€880 billion) for the first time since 2005, UNCTAD's World Investment Report 2020 said. The report which assumes that the outbreak would continue well into 2021 expects FDI flows to decrease by a further 5-10% next year. "The impact, although severe everywhere varies by region. Developing economies are expected to see the biggest fall in FDI because they rely more on investment in GVC [Global Value Chains]-intensive and extractive industries, which have been severely hit, and because they are not able to put in place the same economic support measures as developed economies," said James Zhan, UNCTAD's director of investment and enterprise and lead author of the World Investment Report. Click here to read.... [6]

Calls rise in China for US tariff removals

There are rising calls in China for US to further remove higher tariffs on Chinese products, as part of efforts to create better conditions for both sides to implement the phase one trade agreement. US officials have reportedly rejected requests from US businesses for tariff exemptions on Chinese supplies. In what appears to be an implicit message to the US government, Chinese Vice-Premier Liu He, who heads the Chinese side in trade negotiations with the US, hinted in remarks to an influential financial forum in Shanghai on June 18 that both sides should do more to carry out the deal. "Conditions and an environment should be created, and disturbances should be eliminated to jointly implement the China-US phase one trade agreement," Liu said, which mostly focused on domestic policies and reform and opening-up plans. In Washington, US Trade Representative (USTR) Robert Lighthizer defended the phase one deal on June 17, saying that China was still carrying out the trade agreement despite the COVID-19 pandemic. Click here to read.... [7]

China's bullet trains barrel ahead despite $770bn debt load

"Transportation infrastructure propels economic growth and builds the foundation of a more comfortable society," Transport Minister Li Xiaopeng said in May. But such ambitions have not made economic sense. While revenue reached 1.13 trillion yuan ($159 billion) in 2019, net profit came to about 2.5 billion yuan, for a paltry net margin of 0.2%. With travel restrictions to stop the novel coronavirus, China State Railway incurred a net loss of 61.3 billion yuan for the first quarter of 2020. Liabilities neared 5.49 trillion yuan, or $773 billion, at the end of 2019. Except for service in such major cities as Shanghai, many of China State Railway's high-speed lines are bleeding red ink, with finances particularly weak in such economically struggling regions as Liaoning, China's northernmost province of Heilongjiang, and Inner Mongolia. Among its 18 operating units across the country, 11 posted net losses for the first half of 2019. Click here to read.... [8]

China steps up competitionby proposing a joint East Asian cryptocurrency

Global competition for supremacy in digital currencies has entered a new phase with China's creation of an East Asia cryptocurrency scheme. The proposal envisions establishing a cross-border payment network in which businesses will make deals with each other using digital wallets. The network will help expand international trade as it will lessen the risk of foreign exchange volatility and allow smooth transaction, advocates say.The network would be positioned to support a free trade agreement being negotiated by Japan, China, and South Korea. It is also, therefore, a new attempt to create a trade zone combining digital currencies and trade policies, analysts said.China may also be trying to maintain ties with Japan and South Korea at a time when the U.S. is pressing for a decoupling from China. Click here to read.... [9]

Oil tops $42 as OPEC+ ‘laggards’ promise to step up compliance

Oil rose to above $42 a barrel on June 19, adding to gains in the previous session, after OPEC producers and allies promised to meet supply cuts and signs of demand, hit by the coronavirus crisis, recovering.Iraq and Kazakhstan, during a meeting of an OPEC+ panel on June 18, pledged to comply better with oil cuts, sources said. This means curbs by the Organization of Petroleum Exporting Countries and allies, known as OPEC+, could deepen in July.“There is enthusiasm in the market that oil supply is still under control,” said Paola Rodriguez Masiu, analyst at Rystad Energy. “A positive OPEC+ meeting does that and yesterday’s session helped renew confidence.” Click here to read.... [10]

Syrian war strangles regional economic growth says World Bank

A decade of conflict in Syria has strangled economic growth among its neighbours and driven poverty higher in Iraq, Jordan and Lebanon, the World Bank said on June 18. The war has also led to higher debt burdens, deteriorating labour markets, especially for youth and women, and more restricted access to public services such as health care and electricity, the lender said in a new report.It estimates the conflict has been responsible for annual reductions in economic growth of 1.2 percentage points in Iraq, 1.6 percentage points in Jordan, and 1.7 percentage points in Lebanon in the last decade. Poverty rates have also increased across all three countries over the same period, led by Lebanon where economic conditions have deteriorated further in recent weeks amid a currency crisis. Click here to read.... [11]

Greater Bay Area move guarantees city will continue to play key financial role

The economic integration of Hong Kong and Macau with the rest of the country is proceeding apace. The latest is a sweeping plan to allow people in both Special Administrative Regions and Guangdong to make use of financial services and buy wealth management products from each other. The so-called Greater Bay Area (GBA) development is being put back on track after the gradual reopening of the mainland economy from the coronavirus pandemic. The mainland middle class has long suffered from a dearth of investment products and opportunities. Mom and pop investors are often forced to put money in risky financial vehicles they hardly understand, such as the recent Bank of China crude oil futures investment disaster. Click here to read.... [12]

EU Moves to Shrink Chinese, U.S. Influence in Its Economy

The European Commission, the EU’s executive body and top antitrust enforcer, on June 17 outlined options to redress what it described as market distortions stemming from state-subsidized foreign firms. The proposals aim to prevent foreign companies that have received significant grants, loans, tax credits or other forms of state aid from acquiring European companies or competing with them for certain contracts inside the EU. The commission on June 15 also took the unprecedented step of slapping punitive tariffs on Chinese exporters based outside mainland China. EU officials insist that the new tools don’t target one country or one single type of subsidy. China’s subsidies to its own companies will be scrutinized in the same way as the financial aid—such as loan guarantees— that U.S. companies benefit from, the bloc’s officials said. Click here to read.... [13]

MBAs rebound as prospective students flee worsening economy

Demand for places at business school has rebounded, as prospective students flee a labour market battered by the coronavirus. Data gathered by the Financial Times from 13 of the top 20 schools on its ranking list found that all had attracted more applications for the MBA classes starting later this year than for the same period in 2019. The jump in MBA applications also ended four years of declining appetite among the top business schools that responded in the US, by far the largest MBA market. Demand for MBA courses tends to be countercyclical because when the economy is strong the temptation for potential applicants is to seek promotion from their current roles. When recession looms, as is now the case, the opportunity cost of taking a career break to update skills and build a professional network at business school reduces greatly. Click here to read.... [14]

Strategic

G7 Foreign Ministers’ Statement on Hong Kong

The text of the following statement was released by the Governments of the United States of America, Canada, France, Germany, Italy, Japan, the United Kingdom, and the High Representative of the European Union. Click here to read.... [15]

China adds military might to coast guard in maritime push

China will further advance its coast guard's integration with the military by allowing joint drills and merged operations at wartime, fortifying the country's aggressive maritime activity in the East and South China seas. The Standing Committee of the National People's Congress on June 20 approved the changes by revising the law governing the People's Armed Police Force, the Xinhua News Agency reported. This marks the first revisions to the law in 11 years. Through the integration, President Xi Jinping's leadership seeks to build a defense network that can seamlessly handle everything from sea patrols to military operations. The aim is to expand its military clout in the region with eye on rivalry with the U.S. for maritime supremacy. Click here to read.... [16]

Pompeo, Top Chinese Envoy Meet Amid Heightened Tensions

Secretary of State Mike Pompeo met with his Chinese counterpart in Hawaii, part of an effort by Washington and Beijing to manage a relationship that has badly deteriorated over issues ranging from the status of Hong Kong and Taiwan to the coronavirus pandemic. The talks began when Mr. Pompeo met over dinner on the night of June 16 with China’s top diplomat, Yang Jiechi, and resumed in the morning of June 17 at Joint Base Pearl Harbor-Hickam. Statements by each side after the talks ended laid bare their deep differences although the Chinese asserted the talks were constructive. The two diplomats didn’t say when they might meet again. The two sides didn’t even agree on who had proposed the talks in the first place. U.S. officials have said in recent days that it was China that sought the meeting, but a Chinese account said that it had taken place at the invitation of the U.S. Click here to read.... [17]

Pakistan slashes budget for Belt and Road Initiative projects

Pakistan has chopped a third of its contribution to the China-Pakistan Economic Corridor (CPEC), a high-profile component of China's massive Belt and Road Initiative. The annual CPEC allocation has been reduced from $241 million last year to $159 million in the budget running to June 2021. Three infrastructure projects in the north worth a total of $1.14 billion have been dropped and two minor projects costing $12 million added. The total value of CPEC projects is estimated to be around $50 billion. The government has only been able to allocate $36 million for the coming year to the $7.2 billion Main Line (ML-1) railway, the biggest CPEC project, which will connect Karachi, the country's largest city, with Peshawar in the far north. Although ML-1 does not have a firm finishing date, the latest allocation is so low that the project will take 200 years to complete if it continues. CPEC is scheduled to conclude in 2030. Click here to read.... [18]

Australia says it's under massive nation-state cyberattack (& hints at China). Lazarus Group may be prepping COVID-19 phishing.

Australia’s Prime Minister Morrison says that Australia is under massive and sustained cyberattack. “We know it is a sophisticated state-based cyber actor because of the scale and nature of the targeting and the tradecraft used,” the Wall Street Journal quotes the Prime Minister as saying. He added that all levels of government and most economic sectors are among the targets. To judge from yesterday’s Australian Signals Directorate advisory, the attacks for the most part hit known vulnerabilities with “copy-and-paste” open-source exploit code. When that approach fails, the attackers resort to familiar spear phishing. North Korea’s Lazarus Group may be preparing a large-scale phishing campaign against targets in South Korea, Singapore, Japan, India, the United Kingdom, and the United States. The countries all have put large COVID-19 economic relief programs in place. ZDNet reports that Pyongyang’s COVID-19 phish bait is expected to serve financial fraud. ZDNet credits Cyfirma with the relevant threat research. Sing CERT today posted a warning for Singapore businesses. Click here to read.... [19]

Germany, France, UK press Iran to provide atomic site access

The board of the United Nations' atomic watchdog agency on June 19 adopted a resolution calling for Iran to provide inspectors access to sites where the country is thought to have stored or used undeclared nuclear material, the Russian representative said.Mikhail Ulyanov, Russia's ambassador to international organizations in Vienna, tweeted that his country and China had voted against the resolution that Germany, France and Britain proposed at a meeting of the International Atomic Energy Agency board.Earlier this week, IAEA Director General Rafael Grossi reiterated concerns that for more than four months Iran had denied his inspectors access to two locations " to clarify our questions related to possible undeclared nuclear material and nuclear-related activities." Click here to read.... [20]

Indonesia says completion of S. China Sea rules may be delayed

Indonesia said on June 18 that the completion of a so-called code of conduct being mapped out by Southeast Asian countries and China to avert clashes in the South China Sea may be delayed due to the coronavirus pandemic. "Negotiations on the code of conduct cannot be held virtually, so we will wait until conditions get better to resume them," Jose Tavares, a senior Foreign Ministry official in charge of cooperation among the 10-member Association of Southeast Asian Nations, told a press conference. Click here to read.... [21]

EU Leaders Aim to Strike Coronavirus Rescue Deal by End of July

European Union leaders are aiming to agree on a coronavirus-crisis recovery plan worth hundreds of billions of euros by the end of July, they said on June 19 after a videoconference, but strong differences remain over how to craft the package. The bloc’s leaders had their first serious discussion of the economic recovery plan and the multiyear budget proposed by the European Commission last month. The plan would see the Commission, the EU’s executive body, take the unprecedented step of borrowing hundreds of billions of euros from the markets to hand out to the worst-affected member states.The €750 billion ($840.3 billion) recovery plan and €1.1 trillion proposed budget package would kick in from next year but would allow hard-hit countries in the EU’s south to step up spending now, knowing they won’t be saddled with huge new debts. Click here to read.... [22]

AP Analysis: North Korea gambling with latest standoff

Only two years ago the leaders of North and South Korea shared drinks, laughs and vows for peace during three highly orchestrated summits that lowered fears of war that had risen as Pyongyang pursued an arsenal of nuclear missiles. While North Korea's actions may appear abrupt and reckless, the leadership in Pyongyang may be executing a carefully measured plan aimed at winning outside concessions while showing its people a strong face in dealing with its rival. It's a pattern that has repeated over the decades. When Washington doesn't give the North what it wants, Pyongyang dials up pressure on the South. Click here to read.... [23]

Treat China’s border clash with India as a clarion call

First, China’s approach to this latest dispute is yet another sign of the country’s growing assertiveness. Beijing has regarded the decade since the 2008 financial crisis as a period of American decline and Chinese “strategic opportunity”. It has used coercive measures to enforce excessive maritime claims, pursued an expansive global infrastructure development strategy, modernised its armed forces, and executed a multibillion-dollar state-directed campaign to develop (and steal) key emerging technologies. This more aggressive China has forced US foreign policy experts to largely abandon a decades-long consensus that Washington could influence Beijing to become a “responsible stakeholder” in global affairs. Today, the watchword in Washington is “strategic competitor.” Click here to read.... [24]

Japan to revise security strategy with halt to Aegis Ashore system

Japan's decision to withdraw from a U.S.-developed land-based ballistic missile system will herald the first rewriting of its National Security Strategy, according to a high-ranking government source. The new strategy will reflect growing concerns over the novel coronavirus pandemic and include measures for a post-corona world as well as steps to strengthen the nation’s economic security, the source said. Future discussions will also focus on the ballistic missile threat from North Korea, which was the rationale for installing the now-scrapped land-based Aegis Ashore interceptor missile system, as well as China's growing maritime advances in the region. The latest moves stem from Defence Minister Taro Kono’s announcement on June 15 that he was halting plans to deploy the Aegis Ashore system due to spiralling costs and time needed to ensure the safety of local communities that were to host it.The decision to withdraw from the Aegis Ashore system will be made next week by the four relevant Cabinet ministers within the National Security Council (NSC). Click here to read.... [25]

Reports

Comparing Government economic responses to COVID-19: short-time work and size of stimulus package matter most

Having analysed the macroeconomic indicators of 12 countries, those that have been quickest to introduce large stimulus packages and effectively implement employee support measures have been most successful in mitigating the labour market and economic damage caused by COVID-19. Based on the report findings policymakers are advised to consider the following points:

1. Be responsive: countries that have reacted swiftly and put in place an economic stimulus package have fared best
2. Support employment: short-time work and other similar schemes helped keep people in work and avoid mass lay-offs
3. Keep up the economic activity: every week without economic activity exponentially increases the negative impact, reducing the potential for economic recovery
4. Cooperation of decision-makers: countries with a model of social dialogue based on negotiation rather than confrontation, show better results and higher trust in the political process and consumer confidence
5. Focus on driving the financial support to beneficiaries: businesses and workers in many countries are yet to receive the promised support as outlined in the respective stimulus packages.

Click here to read.... [26]

The Industries Most Vulnerable to Cyberattacks—and Why

WSJ Pro Research, which provides data and research as part of The Wall Street Journal’s professional information offerings, surveyed information-security executives across different sectors and company sizes to see how they view the risks they face and the steps they are taking to protect their data.
Some of the key findings:

• Organizations aren’t necessarily prepared for the threats they are most concerned about. Ransomware was highly concerning, for instance, with nearly 80% viewing it as high risk, but just under 70% felt prepared to deal with it.
• Manufacturing, government and retailing were behind other industries in important areas. Fewer than two-thirds of manufacturers and retailers have any cybersecurity program. Retailers were least likely to feel prepared to defend themselves against ransomware attacks. Government departments were also among the least prepared for ransomware attacks and well below average in offering cybersecurity training to their executives, as well as in identifying critical data. By contrast, health care reported surprisingly strong preparedness.
• Small companies tended to lag behind large ones in preparedness. For instance, only 63% of companies with under $50 million in revenue have a cybersecurity program, in contrast to 81% of companies with over $1 billion in revenue. More concerning, 15% of smaller companies have no plan to put a cybersecurity program in place. In addition, the very largest businesses were almost twice as likely to already hold cyber insurance than the very smallest businesses—39% of which had no plans to buy a policy in the next 12 months.

Click here to read.... [27]