Showing posts with label Most Recent. Show all posts
Showing posts with label Most Recent. Show all posts

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

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

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