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

Wednesday, 10 June 2015

Capital Market Reforms in China Offer New Investor Opportunities

China’s slowing economy has many investors worried – they shouldn’t be. China’s slew of capital markets reforms offer foreign investors a host of new opportunities.

China’s slowing growth in recent years has many claiming that investment opportunities in the country are drying up as the economy matures. China grew at a year-on-year rate of 7% in Q12015, with annual growth also forecast at around 7%, the lowest rate in decades.

China’s massive growth has also led to massive debts, with total debt (government, corporate, individual) increasing four fold since 2007, reaching $28 trillion.These trends, combined with recent low industrial output and stock market volatility, have led some to predict trying times ahead for investors.
Quite frankly, this is the wrong outlook.

The Chinese government is fully aware of the challenges facing a maturing economy, and has engaged in a vigorous reform program. As labour costs increase and China moves towards a consumer spending rather than export driven economy, fewer chances exist for the types of heady investments seen in the 90s and 00s.
To promote consumer spending, the Chinese government has recently announced a 50% reduction on cosmetics, clothing, and footwear tariffs. Further tax cuts are also planned on a wide range of imported consumer goods to increase consumer spending.

Beijing seeks more private-public partnerships

The government is also looking into easing monetary policy, increasing central government spending, and formulating plans for local governments to sell bonds. Investors looking for new opportunities in China should take heed of these changes.

For instance the central government announced it is seeking to increase the role of the private sector in infrastructure projects. Specifically, the National Development and Reform Commission (the organ in charge of China’s Five Year Plans) recently revealed a list of 1,043 upcoming public-private partnership infrastructure projects, valued at over $300 billion.

Furthermore, last week saw the government announce that a 25% stake in the Chinese National Nuclear Power Corporation will be offered, making this the largest IPO in China since 2010. Currently, the state owned China National Nuclear Group holds a 97% stake; however, in order to fund future reactor projects, the government is selling a quarter of its stake, valued at $2.16 billion. The flotation is scheduled for June.

Capital market reform key focus for Beijing

More significantly, the government is focusing on boosting foreign investment and the country’s capital markets. The State Council announced that its 2015 reform priority would be capital markets.
The council has promised an orderly easing of controls on deposit rates, reforming the IPO system, and the development of a multi-layered capital market. These reforms had previously lagged due to the higher complexity of financial vs. industrial reforms, as well as the time needed to redistribute responsibilities between the central and local governments.

China has been following and continues to implement a cautious approach to these reforms, seeking to prevent the market overheating and thus risking greater economic stability. Over the past year, as China has been slowly deregulating and reforming its capital and stock markets, Chinese stocks prices have risen 140% over the past 12 months.

Recently, the Shanghai Composite hit a seven year high, after the National Development and Reform Commission announced the aforementioned infrastructure projects. Last November, China also implemented the Shanghai-Hong Kong stock connect, which allows Chinese individuals to buy stocks in Hong Kong.
Having said this, it is nevertheless important to note that the People’s Bank of China (PBOC) has voiced concerns over a buoyant stock market powered by looser monetary policy. A specific concern is that these gains are coming at the expense of small businesses, which are suffering from high real interest rates and loan shortages.

Indeed, despite three rates cuts in the past six months, real interest rates in China are still over 3%. This is in stark contrast to the negative borrowing rates in the U.S, EU, and Japan.

Chinese individuals allowed to invest directly overseas

Despite these concerns, Beijing appears strongly committed to reforms. Alongside reforms targeted at institutional and corporate investors, China has announced a new six city (Shanghai, Tianjin, Chongqing, Wuhan, Shenzhen, and Wenzhen) pilot project.

The project, called the Qualified Domestic Individual Investor program, or QDII2 (it is the sequel to an institutional version), allows individuals to directly invest overseas. Individuals with at least one million yuan ($160,000) are eligible to join. This program has the potential to unleash billions of accumulated Chinese savings into the global stock and bond markets.

This program is interesting because unlike the Shanghai-Hong Kong stock connect program, QDII2 allows Chinese individuals greater freedom of choice. The Shanghai-Hong Kong program seeks to channel Chinese investors to stocks related to China, thus allowing for little risk diversification while keeping a tight grip on capital flight.

The QDII2 is an interesting development as Beijing allows individuals to invest in projects of their choice. This increases risk diversification for these investments, while the government can avoid exposure to said risk, as losses would be confined to personal bankruptcy cases.

Huge potential for foreign investors in wake of reforms

So far this year, the central bank has allowed an additional 32 foreign institutional investors to trade in China’s $6.1 trillion inter-bank bond market. This is a significant increase in approved traders, with only 34 having been approved in 2014.

Overseas fund managers now hold $115 billion in domestic Chinese bonds, a 78% increase since December 2013. China is seeking to increase foreign bond ownership so as to pump excess cash into the bond market, thus providing greater stability in the market in the case of a crisis.

This sudden uptick in approved inter-bank traders is also an attempt to offset the capital flow leaving China – which in Q12015 reached a record high of $209 billion – as speculators withdraw and companies become cautious about holding yuan.

To this end in April the State Administration of Foreign Exchange amended its rules, making it easier for companies to convert and freely use yuan. The State Administration has also begun adopting IMF standards for calculating balance of payments and international investment positions.

This is part of China’s largest efforts to convince the IMF to include the yuan as a new reserve currency in the organization Special Drawing Rights in October. This is the name for the IMF’s international currency basket which includes the dollar, euro, pound, and yen.

If the yuan is included in the Special Drawing Rights, it is predicted that by 2020, foreigners could hold as much as $1.1 trillion onshore bonds. This would be a major development, since according to Q42014 data, foreigners only hold 2.4% of China’s domestic bonds.

China’s capital market reforms have significant potential for investors: taking a second look at China seems like a capital idea.

Originally written for Global Risk Insights

Monday, 1 June 2015

U.S Seeks to Hedge Against China in South China Sea

The unresolved status of various islands, shoals and atolls combined with tantalizing hints of immense hydrocarbon and fisheries wealth has prompted a “Scramble for Africa-esque” race among countries bordering the South China Sea. A web of overlapping territorial claims, has resulted in increased tensions and defense spending in the region.

Six nations (China, Philippines, Vietnam, Brunei, Indonesia, and Malaysia) have various overlapping claims in the region, and all are at odds with China. China claims virtually the entirety of the South China Sea, and these claims – collectively known as the Nine Dash Line – have sparked the interest of the United States. Seeking to balance against the rise of Chinese naval power, the U.S had begun strengthening ties with middle and smaller powers concerned about Beijing’s assertiveness in the region.

Recently, U.S Secretary of Defense Ash Carter stated that the United States is considering stationing naval vessels close to Chinese claimed atolls. On many of these small outcroppings, (which are often below the waterline at high-tide), China has built artificial islands in order to boost its claims. Carter mentioned that one option under consideration would be to place U.S. ships at least 12 miles (19.3 km) from these artificial islands. This number is important, because territorial waters constitute an important part of sovereignty. Specifically, states have the ability to extend law enforcement measures into these waters, although they must allow for ‘innocent passage’ of foreign military and commercial vessels.

In response to Carter’s statements, Chinese Foreign Ministry spokeswoman Hua Chunying stated that while China respects freedom of navigation, the positioning of military vessels within its territorial waters was unacceptable. Reactions from other South China Sea nations, such as the Philippines were more favourable; with Manila stating that America had a legitimate interest in the region and that China’s Nine Dash Line was unlawful.

South China Sea Claims
Image Credit: The Washington Post

While the United States has not officially sided with any of the claimants in the South China Sea dispute, Washington takes an active interest in the region. The U.S has military ties with the Philippines and such as been engaged in capacity building efforts with Manila. Moreover, Washington is seeking to boost relations with Vietnam, as Hanoi is concerned about Chinese hegemony, and views the U.S as a suitable balance to China.

The United States Navy is currently the most powerful in the world, and America’s force projection extends deep into the Asia-Pacific region and beyond. Washington’s global reach allows for increased international maritime security, thus creating a Pax Americana, or a global maritime peace that facilitates shipping. This is especially apparent in the South China Sea, which is home to major sea lines of communication (SLOC), facilitating some $5 trillion in trade per year. 

All nations, including China, benefit from American naval involvement in protecting global trade, and as such do not directly challenge this facet of American power. Consequently, China must balance military agitation in the region with its more pressing economic interests, thus dampening potential conflict.

Originally written for Youth Independent

China Claims Ethnic Discrimination in U.S Espionage Case

As Sino-American economic ties have increased, there have, in recent years, been repeated claims that China is engaging in systematic economic espionage. In response to the indictment of six Chinese nationals on charges of economic espionage, Chinese media sources have claimed that the U.S. is guilty of ethnic persecution. Specifically, the focus on potential Chinese spies has led Global Times, a news organ of the Chinese Communist Party (CCP), to state that:
The U.S. has a history of indulging in persecution of certain groups of immigrants by using the Espionage Act. We hope Chinese-Americans won’t suffer from this because of China’s rise [sic].
Whereas the official Chinese government statement was less harsh, it is clear that Beijing considers this issue a serious problem. The CCP often expresses the full scope of its displeasure by allowing state-affiliated news outlets to publish provocative statements on contentious foreign affairs issues. This allows the Chinese government to issue a comparatively moderate statement, thus appearing measured and collected, while avoiding blame over the statements of outlets such as Global Times.

While the actual degree (if any) of ethnic profiling in economic espionage investigations is debatable, there has indeed been a significant uptick in allegations of economic spying in the U.S. Specifically, the FBI has reported a five-fold increase in economic espionage indictments since 2008. Among those Chinese nationals involved in this latest case, three are in academia, with another three individuals working for American tech firms.

With regards to the academic suspects, they consist of two professors from Tianjin University, as well as an electrical engineer, all of whom were graduate students attending the University of Southern California. All three individuals have been accused of stealing designs for micro-electric devices which have both commercial and military applications. The remaining suspects were working for Avago Technologies and Skyworks Solutions: both companies are involved in creating components for various sophisticated mobile devices.

Of the six individuals in question, only one – Tianjin University professor Zhang Hao – is likely to be arrested, as the remaining five persons are in China. Since Beijing does not have an extradition treaty with the United States, Zhang Hao is likely the only one to be tried. Zhang was taken into custody at Los Angeles International Airport, having arrived in the U.S. to attend a conference. The circumstances surrounding Zhang’s arrest have led some Chinese media outlets to accuse the U.S. of entrapping Zhang by inviting him to the aforementioned conference.

Moreover, this latest economic espionage case involving Chinese nationals is likely to sour an upcoming U.S. visit by Chinese President Xi Jinping in the fall. Economic spying generates significant anti-Chinese feelings within the American political establishment, and among the general public, who blame underhanded Chinese tactics for lost American jobs and competitiveness. This in turn bolsters China hawks who pressure Obama to take harder stance on China.

Originally written for Youth Independent

1600 Migrants Found Off Indonesian Coast

Human trafficking has long been an endemic problem in Southeast Asia, as witnessed by the recent discovery of over 1600 Rohingya and Bangladeshis packed into boats off the Indonesian coast. These migrants were seeking to escape their native countries in the pursuit of better lives in Thailand and Indonesia. Having been enticed by human traffickers with promises of passage to these countries, thousands of migrants undertake the expensive and dangerous journey, often with deadly consequences.

Human trafficking in the region is often orchestrated from Thailand – infamous as a hub for illegal migrants. Recent discoveries of migrant mass graves in the jungle has prompted a sweeping raid on local traffickers and officials in Thailand. Until recently, migrants who made it to Thailand would be held in open pens in jungle camps. Migrants would then be ransomed for $2000, with smugglers extorting families and relatives. Those who managed to pay would be allowed to continue on their journey, while those unable to muster the funds were beaten, and either intentionally killed or left to die.

The Rohingya people of Myanmar (Burma) have been fleeing the country en mass for years, as the Burmese government has implemented a series of discriminatory laws, such as the revocation of ID cards and attendant rights. Moreover, there exists widespread anti-Rohingya sentiments among the general Burmese population. Specifically, the Muslim Rohingya are viewed as foreigners – allegedly from Bangladesh – by Buddhist majority Burmese society: religio-cultural tensions alongside government indifference, has only stoked systemic discrimination.

Thai coastguard drops food supplies to Rohingya migrants
Image Credit: CNN

Many thousands of Rohingya already live in refugee camps in Thailand, yet many seek to avoid these camps, opting to chance a journey to farther afield to Muslim majority Malaysia or Indonesia. Whereas the Thai government has been more accommodating of Rohingya and other migrant groups, problems still exist. A key factor that pushes these migrants to journey to more distant countries is that, like Myanmar, Thailand is a majority Buddhist nation. Consequently, there are significant pressures on migrants from religious and ethnic-based xenophobia in their host countries.

Similarly, many Bangladeshis are desperately trying to escape poverty and hardship in Bangladesh. Consequently, both groups often occupy the same migrant boats, and both wish to find refuge in Muslim majority countries. Malaysia and Indonesia are seen as favourable destinations for migrants because of their (relatively) higher levels of state cohesion, accountability, and economic development.

This regional trafficking problem is likely to continue so long as socio-economic and political turmoil in Myanmar and Bangladesh remains unaddressed. Whereas Bangladesh is nominally a democracy, it remains bogged down by corruption and a lack of economic development. As for Myanmar, the country is officially a dictatorship run by a military junta; however, many in the international community are hoping that the reform and opening process begun in 2011 will bear fruit.

Originally written for Youth Independent

Tuesday, 26 May 2015

China Seeks Blue Water Navy

China's first military white paper in two years has caused headlines as it announces Beijing's intention to field its navy in the open ocean. This oceanic, or blue water capability is seen as vital if a nation wishes to have long range power projection capabilities. Currently, China has a green water navy, or one that can operate well in regional bodies of waters such as the South China Sea and Sea of Japan. China's declaration of blue water aspirations, is a response to the United States' "Pivot to Asia" under President Obama, which has seen America's military focus shift away from Europe (the legacy of the Cold War face-off on the continent with the USSR) to the Asia-Pacific.

China has the second largest economy in the world, and second highest military budget. Beijing's defence strategy is one that is focused on mainland defence via control of green water areas in East / Southeast Asia. To this end, China's navy - the Peoples' Liberation Army Navy (PLAN) has seen massive investments in recent years. China recently launched its first aircraft carrier, a heavily refurbished ex-Ukrainain vessel. China is also seeking to construct two to four additional, domestically produced, carriers. These carriers are essential for power projection and a blue water navy.

China's Liaoning Aircraft Carrier
Image Credit:

Carrier task forces form the mainstay of American global power projection, with Washington using its ten carrier strike groups as impressive manifestations of Pax Americana - the global maritime peace underwritten by the U.S. Navy. China seeks to create its own carrier groups in order to extend its defence buffer zone deep into the Pacific. Moreover, China is not only concerned about the American presence in the Asia-Pacific, but also that of America's various regional allies.

Specifically, China has long been concerned that Washington is establishing a system of alliances and defence agreements that effectively encircle China. The U.S. has alliances with Japan - itself the owner of a powerful navy -  and South Korea. Washington also has defence and military agreements with the Philippines, Australia, New Zealand, Thailand, Singapore and Taiwan. These nations either border China itself, or are adjacent to key areas of interest for China, notably the South China Sea. China in turn feels that it must hedge against not only the United States but also many of these other states - notably Japan, which China considers its second largest regional rival.

Originally written for Youth Independent

American Spy Planes in South China Sea Anger Beijing

The ongoing series of territorial disputes in the South China Sea continues to make headlines, as today the Chinese government spoke out against American spy plane flights in the area. Specifically, the Chinese Foreign Ministry spokesperson, Hua Chunying stated that “[The Chinese government] urge[s] the U.S. to correct its error, remain rational and stop all irresponsible words and deeds.”

China and the United States have been engaged in a battle for influence in the South China Sea; which Beijing claims almost in its entirety. Conversely, many nations bordering the South China Sea, such as the Philippines, Vietnam, and Malaysia dispute Chinese claims (the so called Nine Dash Line), arguing that Beijing is infringing on their sovereignty. This has led to a series of bilateral territorial disputes with China, as well as smaller nations courting the United States in efforts to balance against China.

One of the hot-spots in the region are the Spratly Islands. This is the same area American spy planes flew over today, and where China is engaged in island building activities. These activities consist of Chinese ships dredging the area around atolls and small outcroppings, to create larger islands, upon which Beijing seeks to construct airfields and ports. While China does not dispute freedom of navigation in the region, it is engaged in a skirmish with the United States over so called Air Defence Identification Zones.

Chinese Island Building in the South China Sea

These zones are the airspace over and near sovereign territory, and are administered by each country. Aircraft flying through these zones must identify themselves to the relevant authorities on the grounds, in order to screen for hostile intent and manage air traffic. China is attempting to set up an Air Defence Identification Zone over the South China Sea, a move that the United States does not recognize. Consequently, American planes have not been acquiescing to Chinese identification requests upon entering the zone.

This in turn has resulted in China scrambling aircraft to escort American planes in the area: a common tactic, used by America as well in its dealings with long-range Russian ‘Bear’ bombers. The dispute over air defense identification zones is merely another facet in the complex regional power game for control of the various islands in the South China Sea.

Originally written for Youth Independent

Wednesday, 13 May 2015

Despite Uber raid, Chinese e-commerce remains friendly

The raid on Uber offices in China does not herald a clampdown on e-commerce in China, rather demonstrates the importance of knowledge of China's internal stability concerns. Meanwhile foreign firms continue to profit, and Chinese firms seek new opportunities.

On May 1st the offices of ride sharing app Uber in Guangzhou were raided by Chinese authorities. Officials seized equipment, with Uber's office in Shenzhen also being visited for “routine inspections.” While this is not Uber's first international set-back, as the company has faced serious opposition and bans from various nations, some worry that this event signals a digital clampdown by Beijing.

Initially, these fears seem justified, following the government's decision to accuse Uber of operating without a license. Specifically, the Guangzhou Transport Commission described Uber as an“illegal [business] that disrupt[s] the market and we will not be soft on these activities in the future [sic]” The furor in China surrounds the use of privately-owned vehicles as taxi service providers. In China utilizing private vehicles to such ends is (since January 2015) illegal, with taxi operators having to first acquire a license permitting them to rent vehicles from vetted rental agencies.

Uber Upsets the Balance, Pays the Price

It is important to note that this rule is not merely a vestige of a planned economy, but rather one of China's many sector specific regulations which primarily seek to maintain societal stability. As demand for taxi services has rapidly increased in China, demand has far outstretched supply. This is because in most cases, the government has not issued any new taxi licenses since the early 1990s.

A Popular Convenience: Taxi Stand in China

While initially adequate, this relatively low number of licenses has caused prices to skyrocket, with a license in Shanghai fetching as much as ¥500,000 ($80,745). Moreover, car rental prices have also jumped as taxi firms drive up demand by seeking to maximize their fleet numbers to offset the lisence price. This has led to rental fee prices in places such as Nanjing rises to as much as ¥9000 ($1450) per month. (8)

Recently taxi drivers have gone on strike in various Chinese cities to protest for a reduction in rental fees. It is precisely here where Uber undercuts the established system by utilizing privately-owned vehicles. Consequently, in order to prevent unrest and economic losses, the Chinese government has gone after Uber, arguing it does more harm than good. Moreover, since Uber is a foreign firm, this lessens any fallout for the government, as it does not have to anger Chinese service providers.

China in Localization Push

Uber paradigm shifting businesses practices makes in an ideal (and not wholly unjustifiable) candidate to blame. This scapegoatism becomes more evident when one discovers that despite Uber's $40 billion valuation, it remains a marginal player in the taxi market in China. Currently Kuaidi Dache (Speedy Taxi) and Didi Dache (Honk Honk Taxi) control over 90% of the market. Prior to their $6 billion merger in February, these two firms were backed by top-tier Chinese internet giants. The former was partnered with Alibaba, benefitting from access to hundreds of millions of customers via Alibaba's social platforms; Honk Honk Taxi was backed by Tencent, another internet giant.

Following suit, Uber which debuted in China in February 2014, decided to partner with Baidu in December of the same year, thus gaining access to the leading Chinese search engine's mapping and mobile technology. Partnering with Baidu was an effort to integrate Chinese know-how into Uber's operations; however, following recent events, Uber will have to go further to accommodate Chinese regulations by ensuring vehicles are sourced from rental agencies.

Interestingly, the Guangzhou government agreed that traditional taxis we no longer sufficient to meet demand; with the regional government even announcing that it is considering launching a government run e-booking taxi service. This can be seen as part of wider Chinese efforts in recent months to promote or require domestic product / service use in important projects.

Huawei CEO Eric Xu

In particular, the Central government has pushed for localization over fears of foreign cyberspying, highlighting concerns about national information security. In a rare instance of a top CEO breaking rank with government policy; Eric Xu, CEO of Huawei, recently advocated in favour of maintaining open access in the market. Xu candidly admitted that even though Huawei could gain more contracts if constraints were placed on foreign firms, he would still oppose such constraints. Xu maintains that China's information security can only be guaranteed by attracting the best tech, whether foreign or domestic, to the country.

Xu went on to state that Chinese products could fill the gaps if foreign firms were restricted from various contracts, but that the overall quality would suffer.

China's E-Commerce Biosphere Remains Friendly

While China may seek to increase domestic content in important projects, Beijing is hardly alone in doing so. All nations seek to promote their local industries, with even adamant free-trade advocates such as the U.S. often preferring to utilize domestic firms over comparable foreign ones. In any case, the Chinese government is not going to undertake measures which drastically shake investor confidence, nor risk capital flight on rumors of punitive localization campaigns.

Fears over an impending clampdown on the e-commerce and mobile markets in China are unfounded. Indeed, Uber's plight appears an outlier, the result of having brushed up against the stability apparatus that underpins much of China's economic policies. Foreign firms continue to report stellar growth in China, with TripAdvisor announcing that China is set to become its largest market: Chinese tourists spent $500 billion in 2014. TripAdvisor launched, its Chinese site in 2009, and had capitalized on high mobile usage among Chinese travelers. Surveys by the company indicated stronger than expected willingness by Chinese customers to plan trips via mobile.

Similarly, China surpassed Europe in Q12015 to become Apple's second largest market, with the company posting $16.8 billion in profits. According to David Garrity of GVA Research, “we are seeing a move away from large, form factor phones [running on] Android operating systems to Apple.”

While there is not yet a Chinese equivalent of Apple, mainland firms are taking heed of Xu's words. Instead of pushing for government legislation to promote high-end Chinese alternatives to Apple et al, Chinese companies are seeking new opportunities.

China's key to continued growth is the creation of new markets. This is the mentality of Alibaba, China's e-commerce giant. Alibaba has recently partnered with state-backed China Telecom to sell budget smart-phones in China's smaller cities and rural areas. The partnership gives Alibaba access to China Telecom's 186 million customers. Alibaba is also promoting its own OS with these devices, in a bid to steal share from current market leader, Android.

Ranging in price from ¥299 to ¥699 ($85-113), the devices come with four months of free 2G service. Alibaba has also pre-installed it's Taobao consumer marketplace app; a program which has coined the term “Taobao villages” - highlighting the vital role the service plays in many local economies. The phones will be available via T-mall, another e-commerce site run by Alibaba as it seeks to increase its share of China's e-commerce market, set to expand to $76 billion by 2016.

Originally written for Global Risk Insights