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Oil rises 3% on improving economic data

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An aerial view shows pumpjacks in the South Belridge Oil Field on April 24, 2020 near McKittrick, California.

David McNew | Getty Images

Oil prices rose about $1 a barrel on Monday, after bullish data from Asia and Europe, but investors are wary about sharp spikes in new coronavirus infections around the world.

Brent crude rose 74 cents, or 1.8%, to $41.76 a barrel. U.S. crude gained $1.21, or 3.1%, to $39.70 a barrel.

The recovery of economic sentiment in the euro zone intensified in June with improvements across all sectors, European Commission data showed on Monday. Overall sentiment rose to 75.7 points in June from 67.5 in May, though still short of expectations.

In China, profits at industrial firms rose for the first time in six months in May, suggesting the country’s economic recovery is gaining traction.

But fears of a second wave of the pandemic are keeping prices from going higher. The death toll from COVID-19 surpassed half a million people on Sunday, according to a Reuters tally.

Some states in the United States have reimposed restrictions after jumps in cases. California ordered bars to close on Sunday following similar moves in Texas and Florida. Washington state and the city of San Francisco have paused their reopening plans.

“Whilst these localised measures on their own are unlikely to see any major immediate impact on demand, they do highlight the significant risk to gasoline demand,” JBC Energy said.

Brent is set to end June with a third consecutive monthly gain after the Organization of the Petroleum Exporting Countries and allies, known as OPEC+, extended its 9.7 million barrels-per-day (bpd) supply cut agreement into July.

“OPEC+ supply cuts have been helping keep the oil price afloat, and after the stellar nearly 90% compliance in May, in the next few days we will be getting data clues on June compliance,” said Louise Dickson, Rystad Energy’s oil markets analyst.

OPEC has cut oil output in June by 1.25 million bpd from May levels, according to estimates from tanker-tracking company Petro-Logistics.

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Pakistan central bank governor on economic challenges during coronavirus pandemic

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The coronavirus pandemic is a public health crisis and until it’s addressed, there will most likely be economic hardships ahead, Pakistan’s central bank governor told CNBC. 

Pakistan has reported more than 213,000 cases of infection and nearly 4,400 people have died.

“We are very concerned. First and foremost, this is a public health crisis — we have to remind ourselves of that,” Reza Baqir said on CNBC’s “Street Signs Asia” on Wednesday.

“And, only on a secondary basis, then it becomes an economic crisis. Until the public health crisis is addressed, we should continue to expect challenges on the economic front,” he added. 

For countries like Pakistan, the trade-off between lives and livelihood is a very real trade-off.

Reza Baqir

Pakistan’s central bank governor

Prime Minister Imran Khan’s government lifted a two-month-long lockdown in early May, a few weeks before an important festival. 

As millions were struggling with starvation during that time of drastically reduced economic activity, the country’s Covid-19 cases surged once the lockdown was eased, Reuters reported

Lockdowns are a ‘luxury’

At the moment, the government is targeting coronavirus hotspots in the country and locking those areas down. 

Baqir explained that prolonged national lockdowns are a “luxury of the rich.” 

“For countries like Pakistan, the trade-off between lives and livelihood is a very real trade-off,” he said. The country has many day laborers who earn daily wages and lockdown would abruptly cut off their source of income. Without having a savings pool to dip into, many of those people would be looking at starvation, according to Baqir. 

Policemen put barbed wire as an market area is sealed by the authorities in Rawalpindi on July 1, 2020, as COVID-19 coronavirus cases continue to rise.

Farooq Naeem | AFP | Getty Images

Pakistan has limited fiscal policy options to help the economy weather the coronavirus crisis. Considering the country’s relatively large public debt, excessive government spending to boost the economy will be difficult.

On the monetary policy side, Baqir said the central bank injected so far about $7 billion, or 2.5% of GDP, in terms of liquidity support to households and businesses.

The central bank last week slashed its monetary policy rate by 100 basis points to 7% — State Bank of Pakistan has cut interest rates by 625 basis points since March when the coronavirus infection began spreading through the country. Baqir told CNBC the move was in tandem with the fall in inflation, from above 14% in January to around 8% currently. 

“There is no doubt that we face grave challenges,” Baqir said.

He outlined the three considerations in Pakistan’s response to the crisis. 

First, he highlighted that before the virus struck, the country’s economic fundamentals was improving – such as bringing down its current account deficit, which was a core part of its economic problems. Second, its fiscal and monetary policies are “prudent,” and finally, Pakistan is working with international financial organizations like the IMF and World Bank to keep its economy afloat. 

“I think the smart lockdown strategy of locking down hot spots in cities so far is working reasonably well, and we are confident that with the combination of measures – for us on the economic side, we should come out of this crisis largely unscathed,” Baqir said. 

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Wall Street is under pressure over its lack of diversity

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Protestors and police officers clash for the second morning in a row on July 1, 2020 in New York City following a budget vote. (Photo by David Dee Delgado/Getty Images)

David Dee Delgado | Getty Images

A global corporate reckoning that began in the United States after the killing of George Floyd has prompted industries long dominated by White males, such as the financial sector, to rethink diversity.

George Floyd was killed by a Minneapolis police officer on May 25, who knelt on Floyd’s neck for 8 minutes and 46 seconds. Floyd was arrested on suspicion of using a counterfeit $20 bill. His death ignited worldwide protests aimed at addressing racial injustice and inequality.  

Wall Street has long been an industry dominated by White males. At Goldman Sachs, just 2.7 percent of executives, senior officials and managers are Black. At Citi, 2 percent of executives and senior managers are Black.

Closing the racial wealth gap

While companies and banks cannot single-handedly solve the systemic and historic racism that has existed in the United States since its founding, an effort is being made to try and give Black Americans a better chance at economic equality.

In addition to the obvious benefit closing the racial wealth gap would mean for affected communities, a 2019 McKinsey report projected doing so could net the U.S. economy between $1.1 trillion and $1.5 trillion by 2028.

“Public companies and private companies have to focus on ‘how can you show your corporate purpose,’ not just to your employees and your clients, but in every society you work,” BlackRock CEO Larry Fink told CNBC’s Hadley Gamble in a World Government Summit panel last week. He added that “purposeful” companies are going to have better long term profitability.

BlackRock has promised 30 percent more Black employees at the firm by 2024. As CEO of the world’s largest asset manager, Fink oversees more than $6 trillion and hires 16,000 people across the globe, only 5 percent of which are Black. Global Infrastructure Partners Chairman Adebayo Ogunlesi told CNBC’s Hadley Gamble that thanks to “prodding” from CEOs like Fink, business is recognizing that it has a leadership role to play in society in areas like economic and racial injustice.

Wall Street wakes up

Under pressure, banks have taken steps to do more to fight racism. Many CEOs released statements and spoke out about the killing of George Floyd, recognizing the deep divisions America faces when it comes to race.

JPMorgan CEO Jamie Dimon released a statement recognizing the “reality” of police brutality, and “coupled with the COVID crisis, highlights the inequities black and other diverse communities have and continue to face every day,” vowing to do more as a firm.

Wells Fargo pledged to double Black leadership over the next 5 years at the bank. According to a memo, only 6 percent of the San Francisco-based bank’s senior leaders are Black.

Bank of America announced a $1 billion, four-year commitment of additional support to help local communities address economic and racial inequality accelerated by Covid-19.

The gender gap

Wall Street doesn’t struggle only with racial diversity. Women are significantly underrepresented in the financial services industry.

Francesca McDonagh, the CEO of the Bank of Ireland, told CNBC the banking sector is “notoriously non-representative” of women.

“There are very few female CEOs of systemically important banks,” she said. “When I look around at opportunities to promote women, I always look hard and fast, but there is a shortage at the senior level.”

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What it means for Hong Kong as a global financial center

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Hong Kong’s status as one of the world’s most prominent financial hubs appears to be under threat. 

Beijing has unanimously passed a new national security law for the territory, which some experts warn has the potential to erode the very structures that grant the region major privileges on the international stage. 

The legislation bans sedition, secession and treason against China, crimes that can mean life in prison.

“China constantly uses national security as a reason for saying, ‘I don’t have to abide by any rules. I can arrest you without any need for explanation,'” said Robert Koepp, founder and principal at  Geoeconomix. 

China’s premier says the law is designed to protect the long-term prosperity of the city, which has been gripped by protests since 2019, but critics worry that China’s move to tighten its hold jeopardizes the freedoms that China guaranteed to Hong Kong for 50 years when the U.K. handed it over in 1997.

“We didn’t expect this full-scale frontal attack,” said Hong Kong legislator Claudia Mo. “Beijing obviously thinks this is going to be a knockout blow for the Hong Kong democracy movement. … This is the end of Hong Kong as we know it.”

Why now?

With the West largely distracted by the global coronavirus pandemic — and superpowers like the U.S. already retrenching under increasingly isolationist policies — experts say the timing of the national security law actually makes a lot of sense for China.

Also at play? A need to shore up support at home. China’s handling of the outbreak in Wuhan drew the wrath not just of the international community but also of some mainland Chinese citizens.

In addition, China’s economy is in bad shape. It took a big hit from Covid-19, but even before that, growth was slowing. 2020 marked the first time in decades the Communist Party opted not to set a growth target for the economy.

Some analysts say Beijing needed a quick fix to repair its image at home. Getting Hong Kong to fall in line is a hugely popular mission among the general population — one that could help distract from other problems. 

Perhaps the biggest factor at play is that China just doesn’t need Hong Kong nearly as much as it used to.

In the 1990s, Hong Kong accounted for 27% of the Chinese economy. Now, it represents less than 3%.

China’s megacities like Shenzhen, Beijing, Shanghai, Chongqing and Guangzhou have seen explosive growth since the ’90s. Instead of having one hub city attracting foreign investment and workers, China now has several, and without the red tape that comes with Hong Kong’s special status.

That means the Chinese government has fewer and fewer incentives to keep Hong Kong happy and economically independent. 

Why Hong Kong still matters

China has been relying less and less on Hong Kong for years now. Shanghai has become a major business hub, attracting multinationals from around the globe. And Shenzhen, a metropolis to the north of Hong Kong, has grown into a massively productive, manufacturing powerhouse that helped turn China into the world’s biggest exporter.

But Hong Kong’s status as one of Asia’s most prominent financial hubs will be hard to shake. The city’s seamless interface with the West, not to mention its massive port, make it a very easy place to do business with global investors. 

For much of its history, Hong Kong has functioned as a key East-West conduit for global finance and trade, thanks in large part to its independent judiciary and regulators that guarantee an ironclad rule of law. 

Although multinational companies now run out of mainland China and Hong Kong, international businesses and investors trust Hong Kong’s legal system. Operating out of mainland China is a trickier proposition with its authoritarian legal system and strict capital controls. 

So, even though Hong Kong doesn’t contribute nearly as much to China’s annual GDP as it once did, it remains China’s lifeline to cash from the West.

Most of the foreign direct investment flowing into and out of China goes through Hong Kong.

Chinese companies also prefer Hong Kong when it comes to raising and borrowing money. Take a look at this chart comparing the amount of cash raised by mainland businesses going public across the major stock exchanges. The Hong Kong exchange dominates. 

The city is just as popular when it comes to helping mainland businesses borrow cash through bonds or loans.

Hong Kong is also home to private banking, fintech and derivatives trading. But perhaps the biggest difference between Beijing and Hong Kong is access to the global currency market. 

China has used Hong Kong’s financial institutions to help prop up its national currency. In June, Chief Executive Carrie Lam unveiled a new proposal to transform the city into a more prominent offshore center for the Chinese yuan, one part of a larger initiative to further integrate the city with the financial markets of mainland China.

Some experts say the city’s greatest advantage is its position as a major offshore funding center for U.S. dollars. 

The Hong Kong dollar has been pegged to the greenback since 1983, which has been key to ensuring financial stability. Investors typically feel safe leaving their cash in Hong Kong and dealing in Hong Kong’s local currency, because it’s easily convertible to U.S. dollars

This is a big part of what propelled Hong Kong to become the premiere financial hub that it is today. And it is, according to analysts, one of its most important contributions to China. 

“What’s changed for Hong Kong over the years is that it is a much smaller part of China’s GDP today than it was 20 years ago,” said Ravi Agrawal, managing editor of Foreign Policy. “But even so, it is still a vital component, in that it provides dollar financing for much of China’s big companies that use Hong Kong for that very fact. So any pressure from the United States could hurt.”

Some China watchers say that American threats to upend Hong Kong’s special privileges might include limiting the city’s access to U.S. dollars — a move that could set off a domino effect, beginning with capital flight and culminating in a currency collapse and huge losses to investors. 

But this outcome is part of the “nuclear scenario” — one that analysts think is highly unlikely.

A financial hub in jeopardy 

Hong Kong’s economic stability was in question even before the announcement of the new national security law.

Hong Kong had already dropped from third to sixth place from September 2019 to March 2020 in a twice-yearly ranking of the world’s global financial centers, overtaken by Tokyo, Shanghai and Singapore — and with Beijing trailing just behind at number seven. 

2019’s pro-democracy protests effectively shut down commerce. No one was going out, shops and restaurants closed early, and tourism took a massive hit. That, paired with an atmosphere of eroding freedom, sent the territory’s economy into a recession in 2019. 

The new legislation, which bars subversion of state power, terrorism activities and foreign interference, has only served to further foment unrest across the territory.

More than 1,300 American businesses operate in Hong Kong, and more than 80% of the U.S. companies in the territory surveyed by the American Chamber of Commerce said they’re concerned about China’s move to enact the new national security law, citing fears over the potential impact on “basic civil liberties.” 

Also at stake are major privileges long afforded to Hong Kong under the 1992 U.S.-Hong Kong Policy Act. Trade between the United States and Hong Kong was about $66 billion in 2019.

The National Australia Bank said in a note on May 28 that the U.S. has opened “the door for possible tariffs on imports from Hong Kong, visa restrictions or asset freezes for top officials.”

The Trump administration has already begun to take action. Secretary of State Mike Pompeo announced Friday new visa restrictions on Chinese officials responsible for restricting freedoms in Hong Kong.

However, the U.S. has the greatest potential to inflict pain if it decides to restrict imports of sensitive technology to Hong Kong-based firms. 

“Hong Kong will become just like another Chinese city,” said Koepp. “For those companies that have interests where data is very important, say finance, say anything related to medicine or business information, business intelligence. Well, a lot of those operations might end up going to a place like Singapore, which is seen as untainted by the threat of Chinese national security laws.”

 

 

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