Thursday, 5 November 2015
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
Wednesday, 10 June 2015
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
Saturday, 11 April 2015
Following his election in 2014, Indonesian President Joko Widodo has sought to fulfill campaign promises to develop the Indonesian economy and tackle the deficit. To this end, Widodo has sought to bolster domestic industries with increased subsidies and tariffs. Widodo's reforms are seen as generating substantial confidence for domestic businesses in the pharmaceutical, tourism, commodities, and tech sectors; however, the efficacy of these measures remains uncertain.
Indonesia Seeks Increased Foreign Investment
Indonesia's 250 million people constitute an emerging market with great promise which has hitherto languished. Indonesia's current leader, Joko Widodo, is seeking to jump-start the economy with a proactive reform package and FDI drive. Recently, Indonesia and Vietnam pledged to double bilateral trade to $10 billion by 2018, as well cooperate on the delineation of exclusive economic zones (EEZs).
Furthermore, Widodo has expressed his support for the Chinese led Asian Infrastructure Investment Bank (AIIB), calling for greater Chinese investment in the country. Consequently, recent negotiations with China have yielded aerospace and high-speed rail deals, as well as an agreement on taxation. Widodo also stated that he hopes for a currency swap deal with China and that bilateral trade will top $150 billion by 2020.
Indonesia also recently announced that its was adding 30 countries to its visa-free travel list. Previously only 15 – mainly southeast Asian – nations had enjoyed visa-free travel to Indonesia. This visa reform is expected to attract one million additional tourists, generating $1 billion for the Indonesian economy. Interestingly, Australia has been left out of the new visa-free travel list. Despite being the third largest (12%) source country for tourists to Indonesia, Australians will still need visas to visit. This is an obvious snub to Canberra, as relations with Australia are at historical lows due to the fallout from the Bali Nine drug smuggling ring.
Jakarta Announces Slew of Audacious Domestic Reforms
While Indonesia is seeking greater foreign investment, Widodo's reform package is at its most audacious in the domestic sphere. Widodo is seeking to reduce the deficit by implementing an import-substitution-industrialization (ISI) program alongside his social reforms. Indonesia's recent implementation of universal health insurance has boosted confidence in the domestic pharmaceutical industry, which expects a 12% rise in annual profits to $6 billion, surpassing industry growth rates of 7.6% for 2014.
Currently, Indonesia imports more than 90% of the raw materials required for pharma production from China and India. Consequently, the Indonesian government is expected to provide support (industry experts argue $1.08 billion is needed) for basic chemical production. The government is also simplifying permits for both domestic and foreign pharma companies, in order boost local production.
|Widodo Faces Challenges|
Indonesia is a major player in the commodities market, and has recently implemented export levies on palm oil ($50 per metric ton for crude, $30 per metric ton on refined palm oil). Moreover, the government will be implementing additional taxes with rates ranging from 7.5 – 22.5% when palm oil prices are over $750 per metric ton. These levies are expected to raise $885 million and will primarily fund the government's bio-diesel program, subsidizing 2.5 million tons at 4000 rupiah ($0.30) per litre.
The government has stated that these levies are design to help reduce oil imports, aid local agriculture, as well as fund replanting and research. To demonstrate its commitment to bio-diesel, Jakarta already raised the bio-fuel subsidy from 1500 rupiah to 4000 rupiah in February; and staring in April, the mandatory blended bio-diesel content limit was raised from 10% to 15%. The government has also stated that it is considering implementing similar export levies in the rubber and coffee industries; with commodity prices rising sharply on this news.
A Smart(phone) Move?
Perhaps the most interesting element of Widodo's economic reform package is Jakarta's intention to create a domestic smart phone industry. In an effort to reduce the country's trade imbalance, Indonesia has implemented minimum local content levels for imported smart phones; imports which cost Jakarta $3 billion a year. Currently, most Indonesian smart phone imports come from China, yet the new 30% local content rules have seen an increase in domestic manufacturing. Specifically, importers must manufacture in Indonesia or have their import licenses revoked by 2016/2017.
|Polytron products shown off in Jakarta|
Image Credit: themalaysianinsider.com
This move has drawn criticism from the U.S, which argues that such quotas breach international trade law and punish American smart phone companies such as Apple. Indeed, Apple and co. have been seeking to break into Indonesia: one of the last large markets without significant smart phone penetration. Another concern for American companies is that the new local content rules also mandate 20% local content in research and development for phones sold in Indonesia. Companies would have to have a design and development centre in the country in order to comply with the new laws; according to Industry Minister Saleh Husin. Interestingly, Minister of Communications Rudiantra has stated that “local content” could also potentially encompass design via intellectual property laws.
|Industry Minister Saleh Husin|
Image Credit: sp.beritasatu.com
Until last year there was no smart phone manufacturing industry in Indonesia. Since then 15 companies have submitted plans to the Industry Ministry for smart phone production – including Samsung which has opened a factory outside Jakarta. Indonesian local content rules themselves are not new, but the concentrated focus on boosting domestic industry is. Polytron, the first Indonesian company to produce 4G phones relocated from China in 2012 in order comply with local content rules. This initially caused concern for Polytron as manufacturing costs where up to 50% higher in Indonesia than China.
However, Jakarta has sought to support Polytron and similar companies by tailoring legislation to their favour. Despite being a smaller player in the smart phone market, Polytron already has 35% local content in their devices, putting them at an advantage over larger foreign players. The Indonesian government has also informed Polytron that if the company reaches 40% local content, Jakarta could up the minimum requirement to 40%; further benefiting Polytron.
Jakarta's ambitious program to cut the current account and trade deficits has boosted confidence in many domestic industries, while eliciting complaints from American smart phone companies and the Australian tourism industry. It remains unclear if these reforms have poised Indonesia for economic dynamism, or if Jakarta has just dynamited its chances, losing competitiveness to other emerging markets in the region.
Originally written for Global Risk Insights