Monday, 17 October 2016

Despite new tax Chinese interest in Canada remains strong


Despite a new 15% tax on foreign property buyers in Vancouver, Canada will continue to attract Chinese investment, especially in agribusiness and tourism.

On August 2nd, the provincial government of British Columbia introduced a 15% property transfer tax on foreign buyers in an effort to quell the red-hot housing market. The levy only applies to Metro Vancouver, which sees 75% of the province’s foreign investment. The majority of said investment comes from China, with foreign money overheating the sector and causing instability. Opponents of the new tax say it contravenes NAFTA agreements, as well as deals with China and 27 other nations. The BC government in turn maintains that it is within its rights to correct an overvalued sector that threatens local sustainability.

Vancouver’s home prices have increased by 172% in fifteen years, while incomes have only increased by 10%. Indeed, prices have increased by 38% in the past twelve months alone, with average house prices rising to CAD $946,945. Local realtors, are unsurprisingly, hostile to the new tax, claiming that at least 427 deals worth around $404 million are likely to collapse as a result of the new levy.

The dilemma facing Canada is how to prevent the housing bubble from bursting, while continuing to encourage foreign investment. The housing sector is presently one of the main drivers (for better or for worse) of the Canadian economy. At 165%, Canada has the highest debt-to-income ratio in the G7 (80% of which are mortgages). The U.S at the height of the 2008 housing crisis only had 147%.

China is aware of this risk, and while it acknowledges the role Chinese investment is playing, it is also beginning to warn investors of the risk in the Canadian housing market. Coming just a few days after the implementation of the 15% tax, warnings in the Chinese media are no coincidence.

Local and national reservations regarding Chinese influence and investment have spurred the implementation of this new tax, yet Sino-Canadian relations remain strong and will be unaffected by these developments. Indeed, 19% of Vancouver’s population is of Chinese descent, many of whom expressed their support for the new law. Consequently, claims that this measure will torpedo Chinese investment are overblown, as investors will likely seek out other, cheaper housing markets across Canada. Moreover, Chinese demand for all things Canadian remains strong, with new opportunities in agribusiness and tourism.

Canadian product profiles continue to rise in China

Food safety and pollution scandals, combined with China’s growing middle and upper classes, has led Chinese consumers to value foreign foodstuffs. Canada’s ecological record and transparency benefit it when doing business in China. The fact that many Chinese associate blue skies, verdant forests, and clean water with Canada, gives Ottawa considerable soft power with which to promote its products.

Alongside Canadian staples like maple syrup and whiskey, China is developing a taste for Canadian ice wine, beef, and seafood. Canada controls 90% of the global ice wine market, and China accounts for 48% of global consumption. Demand from China has established Canadian ice wine as a sought after luxury, propelling Canadian wine exports from virtually zero to eight figure levels in a few short years. The wine is so popular that producers regularly run out of stock, and are having to contend with Chinese counterfeits as demand continues to rise.

Similarly, Chinese consumers are turning to Canadian fisheries, and lobster in particular; giving a boost to economically depressed Atlantic provinces. Peter Hall, chief economist at Export Development Canada notes that “the Chinese middle class is growing by the Canadian population every year. There is an exponential increase in demand for lobster in China.”

For instance, the province of Nova Scotia saw a 16% increase in the value of fish and farm products in Q1 2016, largely due to Chinese demand. Overall, sector growth is slated for 9% for 2016 and 5% in 2017. Hall goes on to note Nova Scotia’s rapid industry growth: “raw fishing products exported to China have gone from almost nothing ten years ago to a CAD $100 million business. When you add processing that’s another CAD $100 million.”

That said, not everything is smooth sailing for Canadian exports to China, as Beijing recently announced that it would be increasing inspection standards for canola. As the world’s largest canola producer, $1.5 billion worth of Canadian exports to China are at risk. Recent talks to resolve the issue have failed to produce any results, yet are slated to continue as Prime Minister Trudeau is expected to visit before the September G20 meeting. Trudeau has pledged to increase trade with China, a move aimed to repair the fraught relations seen during the previous China-skeptical Harper administration. 

Tourism is Canada’s brightest spot

Despite cool relations with the previous Canadian government, Beijing has boosted the Canadian tourism industry, a trend which has picked up steam in the last couple years. Canadian hospitality, combined with its natural beauty are key draws for Chinese tourists. Canada’s multicultural makeup also facilitates greater tourism from China, as Chinese Canadians constituted 4.53% of the population (2011 Census) – compared to 1.2% for the U.S. This simplifies language and cultural issues, builds on existing connections, decreases prejudice, and facilitates a greater understanding of the spending habits of Chinese tourists.

Canada even has – despite being farther away – a higher proportion of Chinese residents than Australia (4%) – a testament to Canadian openness and cosmopolitanism. This number will be markedly higher for the 2016 census, and these ethno-cultural links, combined with a low Canadian dollar, provide many opportunities to strengthen tourism links.

China granted Canada approved destination status in 2010, and China is on track to overtake France as Canada’s third largest tourist source country, (after the U.S and UK). Canada already has ten visa offices in China, and on August 10th Canada expressed its interest to increase this number, with new offices in Nanjing, Chengdu, Wuhan, Jinan, and Shenyang.

Canada’s immigration minister John McCallum has also expressed Ottawa’s wish to increase immigration from China; citing Canada’s interest in skilled workers, as well as more international students.
Since it gained approved destination status, Canada has seen a sharp increase in the number of multiple entry visas issued: from 27,709 in 2010 to 390,290 in 2015. 2015 also saw a record 594,897 temporary resident visa applications from China, an indication of Chinese interest in Canada, as well as a 95% increase in Chinese international students in Canada between 2010 and 2015.

With regards to general tourism, the numbers are also pointing to encouraging trends, something especially important in an otherwise sluggish economy. The latest tourism numbers (Jan – May) show 169,774 visitors from China, 26,261 from Taiwan, and 47,333 from Hong Kong. While the year-on-year rate for Hong Kong is essentially flat at -0.5%, Chinese and Taiwanese tourists numbers have increased 16.2% and 27.9% respectively.

Overall, 2014 saw 661,759 tourists from the three sources listed above, while 2015 saw a substantial increase to 716,279. Growing tourist numbers from China have helped propel the Canadian tourism sector to 1.94% of GDP, surpassing more traditional industries such as mining, agriculture, forestry, telecom, and motor vehicle / parts manufacturing.

Canada has the demographic, economic, cultural, and environmental assets to become a leading destination for Chinese investment and tourism. The relationship has come full circle as China is now enlisting Canadian help in its own efforts to welcome the world for the 2022 Winter Games. Beijing has called on Canadian expertise to provide it with rinks and equipment, as well as training for China’s nascent hockey scene.

China’s men’s hockey team is currently ranked 37th, and Beijing is seeking help from the homeland of hockey to improve its chances. Indeed, several Chinese youngsters are on their way to play in Canadian junior leagues: Canada’s first tourism campaign in China in 2011 was called “Say hello to Canada” – a greeting that garnered an enthusiastic reply.

Originally written for Global Risk Insights

Monday, 25 January 2016

The Politics Behind China’s Anti-Corruption Drive


The number one motivation behind China’s anti-corruption efforts is domestic stability. Whenever corruption has seeped into a dynasty, be it the Han (220 AD) – as vividly detailed in the Romance of the Three Kingdoms – or the Qing (1911) with its scheming mandarins, the ruling regime lost the mandate of heaven and fell. This not merely a colourful aside: historical memory deeply informs the thinking of the Chinese Communist Party (CCP).

Targeting corrupt actors falls perfectly in line with previous CCP rhetoric regarding the need to root out land owners, saboteurs, hoarders of rice, and other leeches on national productivity. These sentiments were in turn informed by the harsh attitudes against extortionate land lords and officials, as well as bandits; the twin plagues of internal discord during imperial China. Thus anti-corruption efforts and language find ample precedence in Chinese history and national memory. 

Maintaining public support is paramount for the CCP, especially as it has shed it ideological trappings, and is in certain ways looking for new meaning. Moreover, the CCP needs to stave off the doubts of the Chinese public which question the CCP’s relevance in the 21st century. Consequently, the CCP has to bill itself as the most effective public administrator. If the CCP can instill confidence in the public, then they can dissuade them from considering untested alternative governing options.

The way the CCP maintains this legitimacy is by demonstrating the economic bounty that its stewardship has bestowed upon the people. By placating the population’s materialistic needs, the CCP has in the decades since Mao’s death diverted public attention and energy into economic, and away from political matters. Following Deng Xiaoping’s mantra that “[t]o get rich is glorious” and more recently Xi Jinping’s “Chinese Dream”, the CCP has focused on improving quality of life. Having lifted hundreds of millions out of subsistence level poverty, Beijing has directed the population’s efforts into national building.

Guilty vs. Guilty by Association

There are two broad categories of corruption in China: a) corruption directly related to CCP policies and party organs, and b) corruption which comes about in due course in countries which experience rapid growth and demonstrate insufficient civil society and public accountability.

With regards to the first category, as long as Chinese citizens are experiencing on-going improvements in their lives, they are willing to tolerate Beijing’s heavy handed social and political policies. Yet with slowing growth, both Beijing and the populace are seeking scapegoats. Admittedly, there is widespread corruption in China, especially surrounding government programs such as the one-child policy, urban-rural residency permits, underground churches, and black market medical care. 

All these sources of corruption, with which the public are forced to deal with on a daily basis, stem from government policies. Reluctance to criticize the regime in economic boom times is a common phenomenon, yet as growth slows and discontent increases, this reluctance disappears. While China does not broadcast the fact to the greater world, or even to its own citizens, there are tens of thousands of protests in China every year. These protests overwhelmingly concern corruption and pollution. 

China’s massive party apparatus and state-supported economic development put not just the government, but the CCP itself in the firing line. In the two areas mentioned previously, the CCP is having to deal with decades of unaddressed dissatisfaction stemming from China’s ‘growth over everything’ policies. Reforming the policies which cause this systemic corruption takes time, and while Beijing is pragmatic and willing, it cannot openly admit fault: enter anti-corruption scapegoatism. By publicly announcing its anti-corruption efforts, the CCP distances itself from the issue as well as engages in a witch-hunt of lower and mid-tier party officials.

This tactic often does expose real sources of corruption, thus allowing Beijing to blame ‘a few bad apples‘ for local or provincial corruption; while ignoring the national lack of accountability and civil society under CCP rule, which created said systemic corruption in the first place. Highly public anti-corruption efforts and trials also allow the government to implement reforms as remedies against corrupt officials, as opposed as solutions to past CCP failures, thus saving face.

Xi Jinping’s recent anti-corruption drive embodies many of these elements, although it does represent a concerted, and I believe genuine, effort to stamp out corruption. While there are show-trial elements inherent in the program, Xi recognizes that championing this cause boosts his domestic image and support, as well as solidifies his control over government. Would-be opponents may think twice, as corruption within their departments or mandates may see their heads on the block in the name of accountability.

With regards to the second type of corruption mentioned above, here the CCP is – in the eyes of the public – in many cases guilty by association. Given the widespread integration of party organs in various social organizations, as well as the predominance of state-run institutions and companies, corruption in these areas indirectly tarnishes the government’s image. The public is aware of the connections these entities have to the government, so any failure by stamp out corruption ultimately directs discontent back at the regime.

Given that growth has absolute priority, the government has been more proactive in its anti-corruption efforts here. This is largely due to the fact that foreign firms, investors, and governments come into contact with the above mentioned CCP-linked entities. If China’s economic actors, and by extension the government is seen as corrupt and unwilling to tackle those who wrong foreign actors, business confidence will sink. Beijing cannot allow this to occur, and this fear drives its anti-corruption efforts. Lower business confidence mean less investment and trade which means lower growth, and hence greater discontent.

Anti-Corruption Efforts in China Going Forward

As for an anti-corruption time line, I would argue that China will continue apace with its efforts. Since China’s opening in the 1980s its main focus has been stamping out corruption in the economy, specifically the elements that deal with foreign economic activity. This area will continue to be China’s main immediate focus. This will be trickier as more economic activity is conducted by non-state corporations. Consequently, China will need to increase efforts to enshrine a culture of corporate responsibility as well create efficient regulatory mechanisms.

With regards to the first category of corruption, this ties into China’s larger domestic stability efforts. Any egregious sources of public discontent will be dealt with post-haste, while the government will continue to slowly implement systemic reforms to even longstanding policies, as seen with its recent alterations to the one-child policy, itself a major source of corruption.

The government walks a fine line in that it seeks to increase accountability and transparency in select areas, while attempting to prevent public curiosity and calls for openness penetrating where Beijing benefits from obfuscation. Ideally, Beijing looks to states such as Singapore which enjoy ultra-low levels of corruption, high transparency, and efficiency ratings, yet still maintain social and political control via a firm hand on the reins of government.

Originally written for Freedom Observatory

Thursday, 5 November 2015

Turkey's Tariff War & Global Competition with China


Anti-Chinese tariffs and sentiments are increasing in Turkey as Ankara’s dependence on Chinese imports grows. Despite this, Turkish firms are taking on China in Africa and Central Asia.

Two weeks ago, Turkish President Tayyip Erdogan announced that Turkey would again consider an offer by Chinese defense contractor China Precision Machinery Import Export Corp (CPMIEC) for a $3.44 billion air and missile defense system.

Speaking on the matter, Erdogan stated that “China made an appropriate bid. We would certainly welcome a proposal that would ‘enrich’ the offer.” Several years ago, CPMIEC originally received the contract in a major coup which saw CPMIEC beat offers from EU and US companies to supply a NATO member with advanced weaponry. Despite this, the deal was, until recently, dead in the water due to opposition from other NATO members and disputes over technology transfers.

Turkey as China’s Western gateway

Turkey’s initial acceptance of and suggestion of a “second chance” for CPMIEC’s offer appears to indicate strong bilateral relations between Ankara and Beijing. Indeed, China’s first joint military exercise with a NATO member was at the invitation of Turkey to the 2010 Anatolian Eagle exercise.

China’s invitation was secured following Beijing’s condemnation of Israeli actions during the May 2010 flotilla incident during which nine Turkish citizens were killed. Israel pulled out of the 2010 exercise and Beijing was invited instead.

Favorable Sino-Turkish relations extend beyond defense matters, as China secured its first ever foreign high-speed rail contract in 2006, for a 533km Istanbul-Ankara line, which was completed last year. In 2012, both countries pledged to increase bilateral trade to $100 billion by 2020. The same year also saw China aid Turkey’s space ambitions, launching the SkyTurk-2 satellite from its launch facility in Gansu province.
2012 was also declared the ‘Year of Chinese Culture’ by Ankara, launching a year-long series of cultural events and performances. China reciprocated in 2013, launching the ‘Year of Turkish Culture’.

China is also seeking to gain support for its Silk Road ambitions, with Turkey being a vital linkage connecting Central Asia with Europe. To this end, there has been cooperation between both countries in creating regional collaboration, as Turkey and China are two of the largest investors in Central Asia.

Economic dynamics bring tense relationship into focus

Despite the cooperation cited above, Turkey and China remain competitors with a strained relationship. Specifically, whereas foreign affairs issues such as Turkish support of Uyghurs and Chinese support of the Assad regime in Syria put significant dents in bilateral relations, economic competition between Ankara an Beijing must be taken into account.

Despite pledges to increase bilateral trade, China is by far the dominant partner. China is Turkey’s second largest trading partner and is responsible for 10% of Turkish imports, totaling $24 billion. Conversely, Turkey exports less than $3 billion to China, the large majority of which are mineral exports, notably borate and chromium.

China exports a range of commercial and industrial goods to Turkey and has displaced domestic manufacturers in many sectors. Turkey’s flagship textile industry is facing stiff competition from cheap Chinese imports, with 80% of ready-made garments and toys, as well as 100% of leather goods, manufactured under Chinese control.

Steel imports are also undermining Turkish producers, with Chinese imports jumping by 284% during Q1 2015. Turkey also increased tariffs from 12% to 30-40% for boron-added rods – from 3% to 40%, and imported rebar and bars increased from 15% to 30-40%.

In May 2015, Turkey raised the tax rate of furniture imports from 13% to 50%, citing a flood of cheap Chinese products. Moreover, the Turkish Ministry of the Economy has begun anti-dumping investigations against China.

Turkish agricultural products are also threatened by China, for despite the fact that Turkish garlic production (80,000 tons) is enough to cover national demand, Turkey imports 28,830 tons, 92% of which comes from China. In response to pressures from farmers, Turkey instituted a $2 per kilo and $2000 per ton customs duty on Chinese garlic in 2014.

Perhaps the saddest statement on Turkey’s trade imbalance is the fact that “even traditional Turkish carpets are made in China. If we import even sickles used in agricultural production, we are over the line…we need to reverse this trend,” according to Economy Minister Nihat Zeybekci.

Turkish firms take on China in Africa and Central Asia

Contrary to Turkey’s domestic reliance on Chinese goods, Turkish firms are increasingly out competing Chinese firms on the international stage, especially in the infrastructure sector.

Cavit Dagdas, Turkey’s treasury undersecretary stated that “the African region has extensive infrastructure needs. Many Turkish contractors are working in the region. Chinese companies are also active in the region.” Turkish companies such as Yapi Merkezi are capitalizing on religious and cultural links in Africa, as well as their ability to offer an alternative to Chinese quotes to increase market share.

Yapi Merkezi chairman Emre Aykar describes the paradigm shift: “Only five years ago, Chinese companies got all the contracts…nowadays there is more of a level playing field, as the stream of [Chinese] subsidies has stopped.” Yapi Merkezi is proving this point, having won a $1.7 billion contract for a 500km rail line in Ethiopia, as well as another contract to extend Ethiopia’s rail links to ports in Djibouti.

Elsewhere, Turkish construction firm Summa has built the Conakry Congress Hall in Guinea, and the Diamniadio Congress Centre in Senegal. Moreover, Summa recently stole a $300 million contract from Beijing Construction Engineering Group (BCEG) for the Kigali Convention Centre, following delays and overruns by BCEG.

Turkish firms are utilizing their linguistic, cultural, and religious links to win contracts in Central Asia, a region China is seeking to bring into its orbit. Since the fall of the USSR, Turkish firms have garnered $57.2 billion in contracts in Central Asia, and currently some 2000 Turkish firms are operating in the area. In 2010, Sembol Construction built the $400 million Khan Shatyr Entertainment Centre in Astana.

In 2013, Turkmen president Gurbanguly Berdimuhamedow exclaimed that “I am extremely satisfied with the project that Polimeks is undertaking,” referring to Turkish firm Polimeks Construction’s $2.3 billion project to build Ashgabat’s international airport. Turkish companies are also building a $2 billion seaport and container terminal at Turkmenbashi.

Originally written for Global Risk Insights

One-child policy victim of China's anti-corruption drive



The gradual abandonment of the one-child policy allows China to tackle demographic, corruption, security, and economic challenges in one deft swoop; defusing discontent and saving face for Beijing.

Last week's announcement by Beijing that it will be phasing out its longstanding 'one-child policy' created headlines around the world. The one-child policy has been a fixture of China's domestic policy for decades, and became so (in)famous that it remains one of few things about Chinese politics that the general public can recall.

While commentators in the West are heralding the long overdue demise of a draconian and anachronistic policy, this is not how the issue is being perceived by Beijing. The phasing out of the one-child policy is not being billed by Beijing as an about face, but rather a reform, since the original goal of instigating a precipitous decline in population growth has been achieved. Moreover, an outright cancellation would imply that the central government made a mistake in the first place.

Instead the one-child policy has become the latest target of Xi Jinping's anti-corruption drive. Fortunately for Beijing, the policy also touches on economic and stability concerns, making its reform a multifaceted boon for Beijing.

Population growth and political graft

China's fertility rate has plummeted from more than 6.16 live births per woman in the mid-1960s to just 1.66 births per woman in 2012; far below the replacement rate of 2.1. This decline was brought about via the strict enforcement of the one-child policy; an undertaking that employs 500,000 officials and led to 336 million legally mandated abortions (not including millions of 'unofficial' ones) as well as 197 million sterilizations.

The policy created an entire shadow economy consisting of black market abortion clinics, forged birth certificates, and fake medical records. Then there are also the illegal sales of contraceptive and abortion pills, underground pregnancy tests, black market human egg rackets, and the infamous fetal gender tests. Add to this all the bribes to officials to look the other way, forged government records and extortion by local authorities, and you have one of the largest sources of corruption in the country.

The one-child policy is a state program with Chinese Communist Party (CCP) members often the loci of corruption. With Xi Jinping's anti-corruption drive, the program is naturally a prime target, as the president has made it clear that he will not spare party organs and institutions from corruption audits.

For decades local officials have rigidly enforced birth quotas, often seizing the property of those found contravening the law, as well as using 'social maintenance fees' to plug holes in municipal and provincial budgets.

Consequently, by tackling the one-child policy and reforming it into a two-child policy, the government is seeking to cut corruption off at the source; particularly when it comes to graft surrounding second children – one of the main causes fueling rampant corruption in the program.

One-child policy spawns demographic security concerns

As result of the one-child policy, it is estimated that there are some 13 million 'ghost citizens' that exist without official documentation due to the bribing of officials. The concept of any undocumented citizens, let alone millions is security risk that Beijing cannot tolerate, as seen with China's strict rural / urban residency permits.

Furthermore, while rural residents have been allowed a second child if the first was a girl, there has long been strict enforcement of the one-child policy in rural areas. Conversely, as China's urban population becomes richer, many (relatively) wealthy urbanites have increasingly been buying their way out of the program. This trend in turn aggravates the already tense rural-urban divide in China. This relationship is one of the major sources of domestic instability, and one which is always top of mind for Beijing.

Another major concern for Beijing is the gender imbalance caused by more than four decades of the one-child policy. The traditional preference for boys – as males look after their parents and receive their wives' dowries – while girls become members of their husband's household, has caused grossly distorted gender ratio.

With a deficit of some 40 million women due to gender based abortions, the government faces a demographic time bomb as millions of young Chinese men will be unable to find a spouse. Millions of sexually frustrated, lonely, young men is a recipe for unrest. If said men recognize that their plight is due to government policies and become politicized, Beijing faces an existential crisis. After-all the government can only do so much – such as boosting military and para-military recruitment – to re-direct all that errant testosterone to serve, rather than threaten Beijing.

Policy reform ticks all the boxes for Beijing

By reforming the one-child policy, the central government can address widespread discontent with the program by framing reform in anti-corruption and economic terms; perspectives that both strengthen the legitimacy of the CCP. Firstly by framing reform in an anti-corruption light, the government can ease restrictions while diverting discontent away from the central planning that created institutional corruption in the first place. Instead corrupt local and provincial officials will be culled to satisfy public discontent and demonstrate that any excesses were due to 'bad apples'.

Successive relaxation in policy will also not result in a return to pre-policy birth rates as the dampening effects of economic development will continue to ensure small families. This combined with the fact that one child families have become a social norm, will allow Beijing to remove the source of discontent without having to worry about demographic upticks necessitating back-tracking further down the road: a perfect face-saving plan for the CCP.

Furthermore, by relaxing the policy the government can demonstrate how it has prudently guided a changing China through its successive socio-economic phases. The post-Mao CCP has demonstrated to the populace that it is nothing if not pragmatic, willing to tailor policy to serve growth above all else.

The one-child policy was instituted to prevent too much surplus labour and the attendant unrest it produces. Now as China moves towards a consumption based economic model, it needs a stable growth rate to ensure adequate numbers of consumers to fuel its next growth model.

Consequently, reforming the one-child policy is in many ways a one-size fits all salve for a host of China's systemic challenges.

Originally written for Global Risk Insights

Singapore's Start-up Drive



As Singapore seek new growth sources, the micro-nation is positioning itself to become Asia's start-up hub. By promoting outside the box thinking in the economy, Singapore could see political spillover as the government looses control over the new commanding heights of the 21st century information economy.

Lee Kuan Yew's (LKY) passing in March signaled both the (belated) death of Singapore's 20th century political and economic paradigms. The government, now run by LKY's son, may in the future still maintain a firm hand; however, Singapore's highly educated, mobile, and technologically savvy youth are pushing for a more open society. 2015 has been an auspicious year for the Asian micro-nation as it also celebrates its 50th anniversary.

With LKY notably absent, Singaporeans are understandably nostalgic, but also enticed by the future. While the government is “listening, hearing criticisms, receiving feedback and improving itself” according to Burhan Gafoor, high commissioner to Australia, political change will be spurred by the changing nature of Singapore's economy.

Singapore needs a new growth formula

Singapore's government long fostered growth by controlling the commanding heights of the economy and focusing on specific sectors such as shipping, shipbuilding and the financial sector. Large formalized institutions and their attendant hierarchies allowed the government to keep close tabs on the economy, while garnering legitimacy from their sound economic stewardship. The problem now facing Singapore is that as a mature economy it can no longer rely on these sectors alone to ensure growth.

From 2004 to 2014 Singapore's annual GDP growth declined from 9.5% to 2.9%, largely due to a maturing economy. Companies in the aforementioned sectors have also seen their stock performance decrease, with some being cut from the benchmark Strait Times Index. This is a major issue as shipping, ship building, and commodities have long been behind the lion's share of Singapore's market capitalization. Specifically, the average daily trading volume for these sectors has dropped from $1.24 billion in 2010 to $816 million in 2014.

Hozefa Tapiwalla, head of research for Southeast Asia at Morgan Stanley sums up the paradigm shift that Singapore is undertaking.

"Historically [the Singapore government was] focused on industries and what they wanted and what they don't want. What they are doing right now, as a strategy and philosophy clearly, is saying we clearly don't know what's going to work," he said. "Hence, it's facilitation now, rather than directing which sectors and what's going to work."

In order to maintain economic vitality and public confidence, the long-ruling People's Action Party (PAP) government needs to foster growth in emerging sectors, notably information technology, e-commerce etc. LKY encouraged wise investments and Singapore boasts a robust sovereign investment fund.

Singapore pursues foreign entrepreneurs

Singapore can capitalize on its ethnic and linguistic links with many parts of Asia to help foster the creation of an Asian investment and entrepreneur hub. This strategy is proving successful, as witnessed by Alibaba's decision to base its overseas business headquarters in Singapore. Alibaba also announced that Aliyun, its nascent cloud computing branch will also be headquartered in Singapore. In explaining the decision to be based in Singapore, Ethan Yu, VP at Aliyun stated that “many Chinese enterprises we serve have stepped out of China and come to Singapore.”

Singapore has been proactive in attracting foreign tech firms, launching the EntrePass program, a streamlined visa for foreign entrepreneurs seeking to found and run businesses in Singapore. Unlike similar programs in other countries, EntrePass allows applicants to have raised start-up capital from any source, not just Singaporean investors. Applicants can also apply for permanent residency in two years – or after only one renewal of the one year visa. Similarly, as part of its National Framework for Research, Innovation and Enterprise launched in 2008, Singapore touts the Global Entrepreneur Executives initiative; an investment scheme designed to convince high growth / high tech firms to relocate to Singapore.

Creating a domestic start-up ecosystem

Alongside attracting foreign firms, Singapore is seeking to promote its domestic start-up scene. Singapore's current leaders can take inspiration from LKY's statement that “the quality of a nation’s manpower resources is the single most important factor determining competitiveness.” To this end Singapore is harnessing the creative energies of its population in order to drive innovation. The aforementioned National Framework also include programs for 1:1 funding matching plans for early-stage ventures.

There is also the Technology Incubation Scheme which comprises diverse incentives including offering to provide 85% of start-up capital when investors contribute the remaining 15%. The Infocomm Development Authority of Singapore (IDA), which was created at the turn of the millennium, is fostering local start-ups. Through IDA's investment subsidiary, Infocomm Investments Pte, IDA is promoting its accelerator program which seeks to grow and build high-growth tech start-ups at the seed and early-stage levels.

These various programs have spurred a start-up wave in Singapore, with new firm creation rising from 54,000 in 2010 to 77,000 in 2014. Moreover, Temasek – Singapore's sovereign investment fund – has sought to diversify its portfolio by backing various start-ups; with unlisted private investments now comprising 30% of Temasek's portfolio – up 10% from 2004.

As a result, venture capital investment in the tech sector has risen from less than $30 million in 2011 to more than $1 billion by 2013. Singaporean millennials are also increasing becoming interested in the start-up ecosystem, with investment clubs springing up at Singapore's universities. These clubs accept members from all faculties and are training the next generation of entrepreneurs, with the National University of Singapore (NSU) Investment Society holding a public symposium at the Singapore Stock Exchange. These programs are disseminating into wider society, as 9% of Singapore's workforce are currently employed in start-ups.

Political spillover

As the government encourages people to think outside the box and explore new ideas, it risks more people questioning other elements of Singaporean society. By fostering public input and energy in shaping Singapore's economic trajectory, PAP looses the monopoly on economic leadership which has underwritten its legitimacy. Having said that, by promoting start-up creation via state incentive and investment schemes, the government may well seek to shape the nascent start-up ecosystem so as to be dependent on and comfortable with a government directed capital pool. This would allow the government – in some sense – to continue to exercise a top-down approach. Such a plan is however fraught with danger, and is likely unfeasible given the fluid and fast-paced nature of venture capitalism.

Kenneth Tan, vice dean of the Lee Kuan Yew School of Public Policy, commenting on LKY passing, made a pertinent point about Singapore's situation in stating that he expects

“the opposition to make inroads now, and in part this is to be expected in a more mature society. I hope that they do become a stronger opposition […] so we can go back to being the kind of place that experiments with alternative ideas.”
As Singapore encourages experiments with alternative ideas in the economy, it may well be sowing the seeds of diversification in the political sphere as well.

Originally written for Global Risk Insights

Saturday, 8 August 2015

Vietnam's Defence Boom Entices Foreign Firms




Concerns over China have prompted a massive defence procurement campaign in Vietnam. Hanoi is entering a multitude of contracts and agreements with foreign nations, which has created opportunities for defence firms, as well as a means for Vietnam to engage internationally.

In the wake of increased Chinese assertiveness in the South China Sea, Vietnam is undergoing a massive defence-spending boom, as Hanoi seeks to prevent Chinese regional domination. Hanoi’s defence spending has increased 128% since 2005, and 9.6% in 2014 alone, reaching a total of $4.3 billion.
This increased spending is supported by the fact that Vietnam has witnessed sustained, robust growth rates averaging 6.15% since 2000, reaching 6.44% in Q2 2015.

While Vietnam’s expenditure is dwarfed by China’s, Hanoi has undertaken an aggressive procurement strategy with a focus on maritime surveillance and interdiction. These measures are designed to counter Chinese activities in the South China Sea, many of which occur in waters claimed by Vietnam.
Last year’s oil rig crisis brought Sino-Vietnamese relations to a new low. Tensions have continued to simmer this year as Beijing’s aggressive island-building program in the South China Sea has incited strong condemnations from Vietnam and other ASEAN nations.

It is important to note that Vietnam is not simply purchasing equipment, but is making a concerted effort to diversify its defence ties to realize its geo-strategic goals. This stance is a marked departure from Vietnam’s long-standing ‘Three No’s’ (no military alliances, no foreign bases in Vietnam, and no reliance on others when fighting other countries) policy. This new approach offers new opportunities for defence contractors, as Vietnam represents an enticing emerging market.

Washington Seeks Market Share

Vietnam’s procurement drive promises lucrative deals, with Vu Tu Thanh, chief Vietnam representative of the U.S.-ASEAN Business Council noting that “there is a surge of interest among American defence contractors.” Slower domestic defence spending has led U.S. firms to eye emerging Asian markets.
Specifically, American firms are hoping to capitalize on regional anti-Chinese sentiment to boost sales. Such a trend also aligns perfectly with American foreign policy interests as Washington seeks to strengthen relations with smaller Asian nations on China’s periphery.

To this end, on April 22nd the U.S. embassy organized a meeting between the Vietnamese military and American contractors, allowing U.S. firms to pitch products to Hanoi. Sources present at the meeting noted the palpable excitement of American companies present, with one company’s representative requesting details about Vietnam’s defence budget, only to be politely rebuffed by Vietnamese military officials.
This private sector enthusiasm is mirrored by Washington’s recent donation of six patrol boats to Vietnam. Indeed, Senator (and war veteran) John McCain’s call for the U.S. to increase weapon sales to Vietnam perfectly highlights the purely pragmatic nature of entire affair.

Vietnam is particularly interested in buying spare parts for its fleet of American UH-1 helicopters, which it acquired in the wake of the American withdrawal in 1973. Historically, Vietnam’s rival has always been China, which has over the millennia invaded its smaller neighbour dozens of times. Consequently, Vietnam is interested in purchasing sophisticated U.S maritime surveillance systems to aid its interdiction of Chinese vessels.

Vietnam’s Defence Market Diversifies

While the U.S. is keen to increase market penetration in Vietnam – having partially lifted its weapons bans in October 2014 – it remains a minor player. Vietnam has already signed a deal with long-standing arms supplier Russia for six Kilo-class submarines, as well as two Tarantul-class missile corvettes.

Similarly, Vietnam has signed a military-technical cooperation agreement with Belarus on July 9th. This agreement will facilitate scientific and technological sharing, personnel training, and joint production of certain weapon systems.

Belarus is an obvious partner given its shared familiarity with Russian equipment, a tradition that benefits Minsk’s recent efforts to woo Southeast Asian nations. This agreement with Belarus comes just months after Vietnam signed a free trade agreement with the Russian-led Eurasian Economic Union (EEU).

Importantly, Vietnam has also been fostering the creation of a world-class ship building industry, becoming the fifth largest shipbuilding nation by orders in 2010. The government has made the sector a key priority, seeking to capitalize on Vietnam’s cheap work force and proximity to expanding markets.

As a result Vietnam is also increasingly seeking to procure domestically produced naval vessels. The Hong Ha Shipbuilding Company has already built five TT400 class vessels for the Vietnamese navy. These ships are designed for maritime border patrol, foreign vessel interdiction and anti-smuggling/piracy operations.

Hanoi Courts the Globe

Vietnam’s pragmatism is again highlighted by agreements with former colonial powers such as France and Japan. In 2007 Hanoi signed an MoU on Modernizing Technical Equipment with France. This was followed by the initiation in 2010 of annual Vietnam-France Joint Committee on Defence Cooperation meetings.
Furthermore, last year Japan donated six naval vessels to Vietnam, a move that coincided with Tokyo’s loosening of its long-standing arms export ban. This donation boosts pro-Japanese sentiment in Vietnam, as well as encourages Hanoi to purchase Japanese products such as a Kawasaki P-1 maritime surveillance aircraft in the future.

Hanoi’s expansive defence agreement campaign has also prompted the 2015 India-Vietnam joint statement expressing wishes to increase joint training and defence industry cooperation. Last week, Vietnam also concluded talks with Israel to establish an Israeli defence attaché office in Hanoi, with both governments already agreeing to their first joint defence working group meeting in November.

Similarly, this year has already seen a meeting between Vietnamese and South Korean defence ministers, itself the result of deputy level meetings in 2012 and a memorandum of understanding on defence in 2010.
By adopting a pragmatic approach and capitalizing on its growing economic strength, Vietnam is seeking to position itself as a strong regional player to balance against potential local Chinese hegemony. Hanoi’s growing international connections demonstrates that Vietnam’s Communist Party has paid close attention to its modernizing Chinese counter-part.


Originally written for Global Risk Insights

Saturday, 20 June 2015

Hong Kong’s Pro-Democracy Legislators Veto Beijing Electoral Plan

Pro-democracy legislators in Hong Kong
Image Credit K. Y. Cheng (SCMP)

Hong Kong’s legislature has vetoed a Beijing-backed electoral reform package that claimed to address concerns for elections in the territory. Pro-democracy lawmakers voted against the package, claiming that it was a “fake” democratic model. At the centre of this debate is the upcoming 2017 election in Hong Kong, during which many residents want to be able to elect their own leader. This vote also comes on the heals of the pro-democracy demonstrations: the so called Umbrella Movement, or #OccupyCentral, in Hong Kong, that brought the territory to a standstill last year.

Beijing has been attempting to circumvent democratic sentiments in the territory by having a direct say in who is elected leader of Hong Kong. The recently rejected proposal was an attempt by Beijing to give Hong Kongers a choice of sorts: they would be able to vote for candidates, but only from a pool that had been pre-approved by Beijing.

The current pro-Beijing leadership of Hong Kong has criticized this opposition to the central government’s plans, seeking to portray dissenters as self-interested and acting against the wishes of Hong Kong’s citizens.
Hong Kong was long an outpost of the British Empire, and the 1997 transfer to China was seen by many as the final end of that empire. Many Hong Kongers were worried that they would be swallowed up by China following the transfer, with many leaving the territory prior to the handover. 

Due to these concerns, the UK and China agreed to the creation of the “one country, two systems” model, in which Hong Kong would be formally part of China, yet would remain regional autonomy in certain areas, including its own government.

China promised universal suffrage for Hong Kong as part of the 1997 agreement, and pro-democracy advocates are seeking to hold China to its past promises. The central government is far more confident now than it was in 1997, and is unwilling to provide the kinds of concessions to its own people that it offered to the UK to remove the last foreign presence in China.

Originally written for Youth Independent