Monthly Archives: June 2020

Oil Spills of Sudan, Humanity for Africa, and East African Court of Justice

The East African Court of Justice delivered in June 2020 a temporary injunction order to the country’s Minister for Justice, the Greater Pioneer Operating Company (GPOC), and the Dar Petroleum Operating Company. The Court approved the application by Hope for Humanity Africa (H4HA), a non-governmental organization (NGO), which sought to highlight the environmental damage caused by oil spills… The NGO contends that: “Over 47,249 of the local population in Upper Nile State and 60,000 in Unity State are at risk of being exposed to the oil pollution this is because the local population depends on the wild foods for survival, the contaminated swamps, streams and rivers waters for cooking, drinking, washing, bathing and fishing.”…

The H4HA is looking for an injunction to stop multiple companies from exporting oil from the region, including CNPC of China, Petronas of Malaysia, and Oil & Natural Gas Corp. of India (ONGC) 

Excerpts South Sudan Suspended by African Union, Barred From Exporting Oil by East African Court, https://www.youngbhartiya.com, June 24, 2020

Leave No Oil Under-Ground: OPEC against US Frackers

In 2014-16, the OPEC waged a failed price war to wipe out American frackers. Since then the cartel and its partners, led by Russia, have propped up oil prices enough to sustain shale, but not enough to support many members’ domestic budgets. In March 2020 Saudi Arabia urged Russia to slash output; Russia refused, loth to let Americans free-ride on OPEC-supported prices. The ensuing price war was spectacularly ill-timed, as it coincided with the biggest drop in oil demand on record.  The desire to chasten American frackers remains, though. OPEC controls about 70% of the world’s oil reserves, more than its 40% market share would suggest… If the world’s appetite for oil shrinks due to changing habits, cleaner technology or greener regulations, countries with vast reserves risk having to leave oil below ground. 

Excerpts from Crude Oil: After the Fall, Economist, June, 13, 2020

Praying for Renewable Energy

In the wake of the Fukushima nuclear disaster in 2011, Fukushima prefecture itself pledged to get all its power from renewable sources by 2040.  The hoped-for transformation, however, has been “slow and almost invisible.”…Renewable generation has grown from 10% of the power supply in 2010 to 17% in 2018, almost half of which comes from old hydropower schemes. Most nuclear plants, which provided more than a quarter of the country’s power before the 2011 disaster, have been shut down… But for the most part they have been replaced not by wind turbines and solar panels but by power stations that burn coal and natural gas. The current government wants nuclear plants to provide at least 20% of electricity by 2030. It also wants coal’s share of generation to grow, and has approved plans to build 22 new coal-fired plants over the next five years. The target for renewables, by contrast, is 22-24%, below the current global average, and far lower than in many European countries.

Geography and geology provide part of the answer. Japan is densely populated and mountainous. That makes solar and onshore wind farms costlier to build than in places with lots of flat, empty land. The sea floor drops away more steeply off Japan’s coasts than it does in places where offshore wind has boomed, such as the North Sea. And although geothermal power holds promise, the most suitable sites tend to be in national parks or near privately owned hot springs.

Government policies also help stifle the growth of renewable energy. Since the end of the second world war, privately owned, vertically integrated regional utilities have dominated the electricity market. These ten behemoths provide stable power within their regions, but do little to co-ordinate supply and demand across their borders…The limited transmission between regions makes it even harder than usual to cope with intermittent generation from wind turbines and solar panels. It also reduces competition, which suits the incumbent utilities just fine…Recent reforms have attempted to promote renewables both directly and indirectly…The “feed-in tariff”, obliging utilities to pay a generous fixed price for certain forms of renewable energy—a policy that has prompted investors to pile into solar and wind in other countries. In 2016, the government fully liberalised the retail electricity market. It has also set up new regulatory bodies to promote transmission between regions and to police energy markets. In April 2020 a law came into force that requires utilities to run their generation, transmission and distribution units as separate businesses. These reforms constitute a policy of “radical incrementalism”.

Critics say the steps have been too incremental and not radical enough. Utilities continue to make it time-consuming and costly for new entrants to get access to the grid, imposing rules that are “not fair for newcomers”, according to Takahashi Hiroshi of Tsuru University. Existing power plants are favoured over new facilities, and the share of renewables is limited, on the ground that their intermittency threatens the grid’s stability.

But even if the government is timid, investors can still make a difference…. Several of Japan’s big multinationals have pledged to switch to clean power on a scale and schedule that put the government’s targets to shame. Environmental activism has made banks and businesses wary of investments in coal. Even big utilities have come to see business opportunities in renewables, especially in the government’s imminent auction of sites for offshore wind plants. Two of them, Tohoku Electric Power and Tokyo Electric Power (TEPCO), have announced plans this year to issue “green bonds” to finance renewables projects. In March 2020, TEPCO established a joint venture with Orsted, a Danish oil firm that has become a pioneer in offshore wind. 

Exceprts from Renewable Energy in Japan: No Mill Will, Economist, June 13, 2020

Amazon Rainforest: Source of Food for Vegans, Meat-Lovers

In the first four months of 2020 an estimated 1,202 square km (464 square miles) were cleared in the Brazilian Amazon, 55% more than during the same period in 2019, which was the worst year in a decade…Less attention has been paid to the role of big firms like JBS and Cargill, global intermediaries for beef and soya, the commodities that drive deforestation.  The companies do not chop down trees themselves. Rather, they are middlemen in complex supply chains that deal in soya and beef produced on deforested land. The process begins when speculators, who tend to operate outside the law, buy or seize land, sell the timber, graze cattle on it for several years and then sell it to a soya farmer. Land in the Amazon is five to ten times more valuable once it is deforested, says Daniel Nepstad, an ecologist. Not chopping down trees would have a large opportunity cost. In 2009 Mr Nepstad estimated that cost (in terms of forgone beef and soy output) would be $275bn over 30 years, about 16% of that year’s GDP.

Under pressure from public opinion, the big firms have made attempts to control the problem. In 2009, a damning report from Greenpeace led JBS, Marfrig and Minerva, meat giants which together handle two-thirds of Brazil’s exports, to pledge to stop buying from suppliers that deforest illegally. (The forest code allows owners to clear 20% of their land.) JBS, which sources from an area in the Amazon larger than Germany, says it has blocked 9,000 suppliers, using satellites to detect clearing.

The problem is especially acute in ranching, which accounts for roughly 80% of deforestation in the Amazon, nearly all of it illegal. “Cows move around,” explains Paulo Pianez of Marfrig. Every fattening farm the big meatpackers buy from has, on average, 23 of its own suppliers. Current monitoring doesn’t cover ranchers who breed and graze cattle, so it misses 85-90% of deforestation. Rogue fattening farms can also “launder” cattle by moving them to lawful farms—perhaps their own—right before selling them. A new Greenpeace report alleges that through this mechanism JBS, Marfrig and Minerva ended up selling beef from farms that deforested a protected Amazon reserve on the border between Brazil and Bolivia. They said they had not known about any illegality.

One reason that soya giants seem more serious than meat producers about reducing deforestation a network of investors concerned about sustainability, is that most soya is exported. The EU is the second-top destination after China. But companies struggle to get people to pay more for a “hidden commodity”… But few people will pay extra for chicken made with sustainable soya, which explains why just 2-3% is certified deforestation-free. ….Four-fifths of Brazilian beef, by contrast, is eaten in Brazil. Exports go mostly to China, Russia and the Middle East, where feeding people is a higher priority than saving trees. Investors, for their part, see beef firms as unsexy businesses with thin margins

According to soya growers, multinational firms failed to raise $250m to launch a fund for compensating farmers who retain woodland. “They demand, demand, demand, but don’t offer anything in return,” complains Ricardo Arioli….

Reducing deforestation will require consensus on tricky issues like the fate of tens of thousands of poor settlers on public lands in the Amazon, where half of deforestation takes place….

Excerpts from The AmazonL Of Chainshaws and Supply Chains, Economist, JUne 13, 2020

China’s Nuclear Secrecy

Since testing its first nuclear bomb 56 years ago, China has never revealed even a ballpark figure for the size of its arsenal. …America…would like it if China were to make its intentions so clear. It wants the country to end its obsessive secrecy and join America and Russia in setting limits to the size of their nuclear arsenals. The DF-41s, a new kind of intercontinental missile capable of hitting anywhere in America, first displayed in public in October 2019 at a National Day parade in Beijing are one reason why America is growing ever more keen to get China talking. They are China’s first missiles with such a range that can go on roads, making them more difficult for American weapons to knock out than ones fired from silos or fixed launchers. They can probably carry multiple warheads, making it even harder to protect America from their devastation.

By most estimates, China has less than 1,000 warheads—about 300 is widely considered to be a reasonable guess. By contrast, America and Russia have around 4,000 apiece. But whereas those two countries, over the decades, have signed pacts to prune their arsenals, China has sat out arms-control. Its nuclear forces have been growing in size and sophistication, in part to ensure that they could survive a surprise strike from America’s increasingly accurate weapons….

In 2019 America pulled out of a treaty with Russia banning medium-range missiles fired from land. It did so ostensibly because of Russian cheating, but the Pentagon made no secret of its desire to match China’s unchecked build-up of such weapons. Now China casts a shadow over the one nuclear pact that still binds America and Russia, the New start treaty. Signed in 2010, it caps “strategic” (ie, long-range) weapons and allows each side to inspect the other’s 18 times a year. It expires in February 2021, but could be renewed if both agree.  Vladimir Putin, Russia’s president, says he is game. But Donald Trump and many of his advisers want China to sign up first. “The administration’s goal is to keep China’s stockpile from growing,” says Tim Morrison of the Hudson Institute…But China’s tradition of military secrecy is “deeply rooted”. Opening up will require trust. What little there is between China and America is being threatened by the pandemic. 

Excerpts from Arms Control: Be Afraid America, Economist, May 23, 2020

The Big Trash Burners: Does it Make Sense to Incinerate Waste?

Global waste is expected to hit 3.4 billion tons by 2050 from 2.01 billion tons in 2016, according to the World Bank. As recycling programs encounter challenges and landfills in the U.S. and Europe reach capacity or face regulations making them more expensive, incinerators are becoming the most viable option for many municipalities to deal with much of their garbage. England now burns more municipal waste than it recycles or landfills. China—already the world’s biggest trash burner—is building more incinerators. And incineration companies say, for the first time in years, expansion projects are on the table in the U.S., although the industry faces significant legal and community challenges. Overall, incinerator-plant capacity is forecast to rise 43% globally between 2018 and 2028, according to Ecoprog, a consulting firm…..

Another growth driver is a European Union target for member states to cap the amount of municipal trash they send to landfill at 10% by 2030. Local communities and environmental groups have launched strong opposition to expansion of incineration plans, citing environmental and public-health concerns. Incinerator plants are also called waste-to-energy plants since the heat from burning trash is used to generate electricity, and many governments classify that electricity as renewable energy, a characterization opponents dispute…..But advocates for clean energy…say that while some energy is recovered by burning, recycling or composting garbage would save far greater amounts of energy.

Critics also say cities that own their incinerator plants have little incentive to pursue waste-reduction efforts because the plants are designed to run at full capacity. “Many countries are over-investing in incineration to cut down on landfilling, which will eventually lock them into burning,” said Janek Vähk, development and policy coordinator for Zero Waste Europe.

Excerpts from Saabira Chaudhuri, Trash Burning Ignites as World’s Waste Swells, WSJ, June 10, 2020

The Nuclear Option: Chopping off Hong Kong from the Dollar System

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….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 28, 2020 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

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. 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….. 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…Italso means another big push to boost the global role of the yuan and reduce China’s dependence on the dollar…

Excerpts from Hong Kong: Conduit’s End, Economist, June 6, 2020

Selling War Services: the Mercenaries

Despite a UN treaty banning mercenaries, their day is far from over. Some analysts think there are now more of them in Africa than ever. But can they ever be a force for good?  ….In the years after most African countries gained independence, mercenaries were notorious for supporting secessionist movements and mounting coups. 

Western governments have in the past winked at mercenary activity that served their commercial interests. But nowadays Russia is seen as the leading country egging on mercenaries to help it wield influence. It does so mainly through Wagner, ***whose founder, Yevgeny Prigozhin, is close to President Vladimir Putin.

Wagner has been hired to prop up a number of shaky African regimes. In Sudan it tried to sustain the blood-drenched dictatorship of Omar al-Bashir. He was ousted last year after big protests. In 2018 hundreds of Wagner men arrived in the Central African Republic to guard diamond mines, train the army and provide bodyguards for an embattled president, Faustin-Archange Touadéra. In Guinea, where Rusal, a Russian aluminium giant, has a big stake, Wagner has cosied up to President Alpha Condé, who has bloodily faced down protests against a new constitution that lets him have a third term in office. In Libya, despite a un arms embargo, Wagner is reported to have deployed 800-1,200 operatives in support of a rebel general, Khalifar Haftar, who has been trying to defeat the UN-recognised government….

Mercenaries have three main advantages over regular armies. First, they give plausible deniability. Using them, a government such as Russia’s can sponsor military action abroad while pretending not to. Second, they tend to be efficient, experienced, nimble and flexible. Third, they are cheaper than regular armies. Whereas soldiers receive lifelong contracts and pensions, mercenaries are often paid by the job..

***Other firms include Dyke Advisory Group (DAG) , OAM Middle East

See also The UN Working Group on the Use of Mercenaries

Excerpts from Soldiers of misfortune: Why African governments still hire mercenaries, Economist, May 30, 2020

Your Death, My Life: Ericsson versus Huawei

The Trump administration’s increasingly aggressive effort to cripple China’s Huawei has presented Ericsson the opportunity to lead the rollout of 5G technology around the world.  The Swedish company is emerging as the steadiest player in the $80-billion-a-year cellular-equipment industry, telecommunications executives and analysts say, because it makes a technically advanced product that one rival, Nokia,was late to develop and that Huawei may not be able to make in the future because of recent U.S. measures.

The Trump administration last month stepped up efforts to hamper Huawei by imposing export restrictions that make it harder for the company to buy computer chips that are produced using U.S.-designed equipment —a move that could prevent it from manufacturing advanced 5G hardware. The U.S. has also sought to boost Huawei’s rivals by providing loans to wireless carriers in developing countries so they can buy equipment from non-Chinese suppliers, among other moves.

U.S. Attorney General William Barr in February suggested that the U.S. government take a financial stake in Ericsson or Nokia, or both, to “make it a more formidable competitor and eliminate concerns over its staying power.”

The White House quickly backed away from the idea….Ericsson provides equipment for all three major U.S. carriers: AT&T Inc., Verizon Communications Inc. and T-Mobile US Inc….

Ericsson struggled in the cellular-equipment industry against China’s Huawei and ZTE Corp., which sold comparable products, often at lower prices. Among Ericsson’s key innovations are cellular antennas. Ericsson’s use a new technology, called massive multiple-input multiple-output, or massive MIMO, that sends wireless signals in strong jets to different devices. Typical cellular antennas, which sit on steel towers or rooftops, send wireless signals in a wide cone, similar to the way a garden hose sprays water.

Wireless carriers want Ericsson’s concentrated wireless technology because it enables fast connections and allows them to serve more customers using existing cellular towers. Building new towers is unattractive because it is a bureaucratic process that can cost tens of thousands of dollars….Ericsson notched a victory the spring of 2020 when it joined Huawei in winning 5G contracts to supply all three major wireless carriers in China, the world’s second-biggest telecom-equipment market

The big question for wireless carriers and equipment makers is whether Huawei can continue making massive MIMO 5G equipment with the quality that wireless carriers have come to expect. The technology requires supplies from the world’s top semiconductor companies, but the Trump administration’s recent actions may mean even foreign chip suppliers must seek Washington’s approval to sell to Huawei. For now, Ericsson is assuming China has advanced its own semiconductor industry enough to continue supplying Huawei.

Excerpts from Stu Woo, Ericsson Emerges as 5G Leader After U.S. Bruises Huawei, WSJ,  June 2, 2020

Japan’s Nuclear Bombs

On May 13, Japan’s Nuclear Regulation Authority announced that the nuclear fuel reprocessing plant in Rokkasho, Aomori Prefecture, had met new safety standards created after the March 11, 2011, earthquake and tsunami….The Rokkasho plant is a 3.8 million square meter facility designed to reprocess spent nuclear fuel from the nation’s nuclear reactors.  Construction began in 1993. Once in operation, the plant’s maximum daily reprocessing capacity will be a cumulative total of 800 tons per year.  During reprocessing, uranium and plutonium are extracted, and the Rokkasho plant is expected to generate up to eight tons of plutonium annually.

Both are then turned into a mixed uranium-plutonium oxide (MOX) fuel at a separate MOX fabrication plant, also located in Rokkasho, for use in commercial reactors. Construction on the MOX facility began in 2010 and it’s expected to be completed in 2022.  Japan had originally envisioned MOX fuel powering between 16 and 18 of the nation’s 54 commercial reactors that were operating before 2011, in place of conventional uranium.  But only four reactors are using it out of the current total of nine officially in operation. MOX fuel is more expensive than conventional uranium fuel, raising questions about how much reprocessed fuel the facilities would need, or want.

The Rokkasho reprocessing plant can store up to 3,000 tons of spent nuclear fuel from the nation’s power plants on-site. It’s nearly full however, with over 2,900 tons of high-level waste already waiting to be reprocessed.

Why has it taken until now for the Rokkasho plant to secure approval from the nuclear watchdog?   Decades of technical problems and the new safety standards for nuclear power that went into effect after the 2011 triple meltdown at the power plant in Fukushima Prefecture have delayed Rokkasho’s completion date 24 times so far. It took six years for the plant to win approval under the post-3/11 safety standards…By the time of the NRA announcement on May 13, 2020, the price tag for work at the Rokkasho plant had reached nearly ¥14 trillion.

Japan is the only non-nuclear weapons state pursuing reprocessing. But as far back as the 1970s, as Japan was debating a nuclear reprocessing program, the United States became concerned about a plant producing plutonium that could be used for a nuclear weapons program.  The issue was raised at a Feb. 1, 1977, meeting between U.S. Vice President Walter Mondale and Prime Minister Takeo Fukuda.  “Reprocessing facilities which could produce weapons grade material are simply bomb factories,” noted a declassified U.S. State Department cable on the meeting. “We want to cooperate (with Japan) to keep the problem under control.”

The U.S. oppose the Rokkasho plant’s construction in 1993, following an agreement in 1988 between the two countries on nuclear cooperation. ..The U.S.-Japan nuclear agreement meant the U.S. would give advance consent for Japan to send spent nuclear fuel to the United Kingdom and France — states with nuclear weapons — for reprocessing until Rokkasho was running at full-scale.

Currently, Japan has nearly 45 tons of plutonium stockpiled, including 9 tons held by domestic utilities. Another 21.2 tons is in the United Kingdom and France is holding 15.5 tons under overseas reprocessing contracts.

Thus, Japan finds itself caught between promises to the international community to reduce its plutonium stockpile through reprocessing at Rokkasho, and questions about whether MOX is still an economically, and politically, viable resource — given the expenses involved and the availability of other fossil fuel and renewable energy resources.

Excerpts from Aomori’s Rokkasho nuclear plant gets green light but hurdles remain, Japan Times, May 31, 2020

Preserving Seeds that Feed the World: the Svalbard Global Seed Vault

Six hundred miles from the North Pole, on an island the size of West Virginia, at the end of a tunnel bored into a mountain, lies a vault filled with more than 1 million samples of seeds harvested from 6,374 species of plants grown in 249 locations around the globe.The collection, the largest of its kind, is intended to safeguard the genetic diversity of the crops that feed the world.  If disaster wipes out a plant, seeds from the vault could be used to restore the species. If pests, disease or climate change imperil a food source, a resistant trait found among the collection could thwart the threat.

While some countries have their own seed banks—Colorado State University houses one for the U.S.—the Svalbard Global Seed Vault serves as a backup. The vault, built in 2008 at a cost of about $9 million, is owned and maintained by Norway, but its contents belong to the countries and places that provide the samples.  “It works like a safe-deposit box at the bank,” said Cary Fowler, an American agriculturalist who helped found the vault. “Norway owns the facility, but not the boxes of the seeds.”

In 2015, after the International Center for Agricultural Research in the Dry Areas was destroyed in the Syrian civil war, scientists who had fled the country withdrew seeds to regenerate the plants in Lebanon and Morocco.  “It had one of the world’s biggest and best collections of wheat, barley, lentils, chickpeas, faba beans and grass pea,” Dr. Fowler said. “It was the chief supplier of a disease-resistant wheat variety for the Middle East.”  In 2017, the group returned copies of its seeds to the vault.

The 18,540-square-foot seed vault includes three rooms with the capacity to house 4.5 million samples of 500 seeds each—a maximum of 2.25 billion seeds. The environment’s natural temperature remains below freezing year round, but the seeds are stored at a chillier -18 degrees Celsius, or around -0.4 degrees Fahrenheit. They’re expected to last for decades, centuries or perhaps even millennia….

While dwindling diversity might not seem like an imminent threat, four chemical companies now control more than 60% of global proprietary seed sales…That concentration of power, some worry, could lead to less agricultural variety and more genetic uniformity…In the meantime, the seed vault (which doesn’t store genetically modified seeds) will continue to accept deposits in an effort to preserve all of the options it can.

Excerpts from Craven McGinty, Plan to Save World’s Crops Lives in Norwegian Bunker, WSJ,  May 29, 2020

Facebook Mobs and Facebook Profits

A Facebook team had a blunt message for senior executives. The company’s algorithms weren’t bringing people together. They were driving people apart. “Our algorithms exploit the human brain’s attraction to divisiveness,” read a slide from a 2018 presentation. “If left unchecked,” it warned, Facebook would feed users “more and more divisive content in an effort to gain user attention & increase time on the platform.”

That presentation went to the heart of a question dogging Facebook almost since its founding: Does its platform aggravate polarization and tribal behavior?  The answer it found, in some cases, was yes.  Facebook had kicked off an internal effort to understand how its platform shaped user behavior and how the company might address potential harms… 

But in the end, Facebook’s interest was fleeting. Mr. Zuckerberg and other senior executives largely shelved the basic research, according to previously unreported internal documents and people familiar with the effort, and weakened or blocked efforts to apply its conclusions to Facebook products…

An idea [proposed by those who wanted to reduce polarization at Facebook] was to tweak recommendation algorithms to suggest a wider range of Facebook groups than people would ordinarily encounter.  Building these features and combating polarization could have come, though, at the cost of lower engagement and it was “antigrowth” [meaning less profits for Facebook].

Excerpt from Jeff Horwitz and Deepa Seetharaman, Facebook Executives Shut Down Efforts to Make the Site Less Divisive, WSJ, May 26, 2020

Strangling China with Hong Kong: the Politics of Fear

The U.S. determination  that Hong Kong is no longer autonomous from mainland China, under the Hong Kong Policy Act of 1992, will have significant implications for the city’s exporters and businesses.  Sensitive U.S. technologies could no longer be imported into Hong Kong, and the city’s exports might be hit with the same tariffs levied on Chinese trade.

But the act doesn’t cover the far more extensive role Hong Kong plays as China’s main point of access to global finance.  As of 2019, mainland Chinese banks held 8,816 trillion Hong Kong dollars ($1.137 trillion) in assets in the semiautonomous city, an amount that has risen 373% in the last decade…. China’s banks do much of their international business, mostly conducted in U.S. dollars, from Hong Kong. With Shanghai inside China’s walled garden of capital controls, there is no obvious replacement.

While the U.S. doesn’t directly control Hong Kong’s status as a financial center, Washington has demonstrated its extensive reach over the dollar system, with penalties against Korean, French and Lebanese financiers for dealing with sanctioned parties. The U.S. recently threatened Iraq’s access to the New York Federal Reserve, demonstrating a growing willingness to use financial infrastructure as a tool of foreign policy.  Even though the U.S. can’t legislate Hong Kong’s ability to support Chinese banks out of existence, the role of an international funding hub is greatly reduced if your counterparties are too fearful to do business with you.

Putting the ability of Chinese banks to conduct dollar-denominated activities at risk would be deleterious to China’s ability to operate financially overseas, posing a challenge for the largely dollar-denominated Belt and Road global infrastructure initiative. It would also put the more financially fragile parts of the country, like its debt-laden property developers, under strain.  China’s hope to develop yuan into an influential currency also centers on Hong Kong’s remaining a viable global financial center—more than 70% of international trade in the yuan is done in the city.

Excerpts from Mike Bird, How the US Could Really Hurt China, WSJ, May 290, 2020