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