June 2020

Country Ranking Trends

  • June was one of the occasional months where there were no upgrades or downgrades of countries. Magni completed a review of market integrity based on new information regarding several countries, and the review confirmed existing scores.

China’s Xi Emulates Henry Ford

  • A planned national security law for Hong Kong was announced by China’s National People’s Congress during its annual political convention. The congress’s Standing Committee, China’s top legislative body, passed the new security law at the end of June. The Chinese authorities decided to bypass Hong Kong’s elected local legislature and impose the security law after sometimes violent protests had led the Chief Executive Carrie Lam to withdraw the proposed law last year. The law, and the plan to enact it without any democratic consultation, have been criticized for going against the values and freedoms expected under Hong Kong’s “one country, two systems” governing framework. The legislation defines crimes of separatism, subversion, terrorism, and colluding with foreign powers, but given the vague definition of offenses, the concern is that it will lead to arbitrary arrests that would be used to squelch political opposition. The law also establishes a national security office in Hong Kong, an office accountable to Beijing, to collect intelligence and handle crimes against national security. The United States has threatened to revoke the city’s special trading status if China moves forward with the legislation.
  • Implications: Hong Kong has better governance than China. To the extent that China eliminates Hong Kong’s special status, Hong Kong’s governance score almost certainly will decline. In addition to the Hong Kong-specific issues, the situation must be seen in the context of China’s more aggressive stance regarding what the country considers to be a renegade province called Taiwan. A confrontation over Taiwan may be brewing. More than a century ago, Henry Ford said, “you can choose any color so long as it is black”. Xi appears to be emulating Ford. Hong Kong and Taiwan can do anything they want, so long as it is under the control of the Chinese Communist Party.

Fighting Along Contested Border Between China and India

  • Chinese and Indian forces have been skirmishing along their shared 2,000-mile-long border in the Himalayas. The de facto border, known as the Line of Actual Control (LAC), was established following a brief 1962 war fought between the two countries. The recent clash between the two nuclear powers is said to have killed 20 Indian soldiers and an unknown number from the Chinese side. In accordance with prior agreements the patrols were unarmed, and reports are that the fighting was done with rocks and clubs. China has accused India of building infrastructure in contested areas Beijing claims as its own. India recently completed a 19-year road construction project in the Galwan River valley connecting the region to an airstrip, which will facilitate the movement of Indian forces in the area. India has also renewed its claims on the Chinese-controlled region of Aksai Chin. Following the conflict, representatives for both countries met to try to lower tensions and avoid any escalation. Anti-China sentiment in India has grown and the fighting seems likely to worsen relations between the neighbors.
  • Implications: Neither country wants a war, so the efforts to lower tensions have better than average prospects for success. In some ways, India’s situation is a bit simpler. India’s prime minister, Narendra Modi can move closer to the United States and other Asian countries while he pursues domestic issues. China is facing a wide array of issues. While many see China as undergoing an inexorable rise, the country is making few friends. Should the accumulated issues reach some tipping point, few countries would be unhappy about China being humbled. In recent years China has deemphasized reforms. That is likely to continue. The Chinese equity market may experience unusual volatility.

Trade Standoff During Brexit Negotiations

  • Prime Minister Boris Johnson recently held trade talks with his European Union counterparts for the first time since the UK left the EU at the end of January. The two sides agreed to intensify discussions as there has been little progress so far. The UK formally rejected any extension, meaning that the transition period will end at the end of 2020. The hope is that a deal can be made by October so that there can be time for it to be ratified and put in place by the new year. To mitigate disruptions from a possible no-deal exit, the UK offered to postpone full border controls on goods entering from the EU until at least July 2021. The EU, though, has said if there is no deal it would not reciprocate and that it would begin applying customs and tariff controls starting on January 1. To try and break the stalemate, the UK floated the idea of accepting the EU’s imposition of tariffs if the UK moves away from the EU’s proposed regulatory “level playing field”. However, so far, the EU has been unmoved by this potential compromise.
  • Implications: Both sides have key positions where compromise is difficult, at best. The shape of a possible deal is unclear. As with every step of Brexit, any deal likely will occur at the last minute and under great pressure. The risk of disruption remains high. Brexit remains a distraction for the EU in addressing the structural issues that continue to fray the fabric of the union.

Philippines May Soon Fall Below Russia

  • The CEO and Executive Editor of Rappler, one of the Philippiness’ top news websites, was convicted of cyber libel charges and faces up to six years in prison. Maria Ressa is well known for her critical coverage of President Rodrigo Duterte and his violent war on drugs. In 2018 she was awarded Time Magazine’s person of the year with a group of journalists who have been targeted for their work. The case against Ressa was brought for an article the site published in 2012 linking a prominent business executive to drug smuggling, even though she did not write, edit or supervise the article. It was also published before the cyber libel law had been enacted. However, the case could move forward because a typo in the article was corrected online in 2014, which the court ruled as constituting republication. Critics point to the case as evidence of deteriorating press freedom in the Philippines. Rappler and its staff have faced at least 11 government investigations and court cases. The government also recently shut down the country’s top broadcaster, after allies of Mr. Duterte blocked a renewal of the company’s license.
  • Implications: The Philippines retains a low Magni Country Governance Score. The continued loss of freedom makes the country subject to a future downgrade. Any new downgrade could drop the country’s rank below Russia. Duterte is a clear example of a populist leader who makes governance worse.

Waving Goodbye to Argentina and Turkey?

  • MSCI is considering a downgrade of both Argentina and Turkey from the list of countries in the emerging markets. The stringent capital controls, which where were put in place in Argentina last September, are a major obstacle to international investing, thus the country is not meeting one of the top criteria for inclusion in the countries of the emerging markets. Turkey banned short selling last October and stock lending in February. These actions restrict the ability of institutional investors to express active investment views and hedge portfolio risk.
  • Implications: Magni will follow these events closely and work with clients to adjust portfolios, as applicable.