The new year 2013 will continue with the trends of of the passing year


Snake Yr 2013The new year will start with two economic crisis events in the United States but otherwise, we can expect 2013 to continue with the trends of the passing year

IF 2012 is the year that did not bring about the end of the world, then 2013 should be the beginning of a new era, according to the Mayan prophecy.

But it is unlikely the new year will herald a brand new age for the world as a whole.

More probably, it will continue the trends in the old year but in more pronounced and deeply felt ways.

The year 2013 starts with the United States falling off the “fiscal cliff” or else escaping from that at the last moment.

If the fiscal cliff takes effect fully, up to four percentage points of GNP are expected to be sucked out of the US economy due to tax increases and government spending cuts combined, thus resulting in a new recession.

Another problem will soon reach crisis point.

The US government debt will reach its mandated limit around now, and President Barack Obama and Congress will have one to two months to negotiate an increase in that limit before the administration runs out of money to pay for its operations or service its debts.

Thus, we can expect the first two months of 2013 to be preoccupied with the drama of the US politics on debt, taxes and government spending.

It seems that the President-Congress and Democrat-Repub­li­can bitter battles of the last few years will return at the start of Obama’s second term.

If so, the United States’ political paralysis will be reflected in economic policy deadlocks.

The economic crises in the United States, and how they play out, will have a big impact on 2013 worldwide, especially since Europe is already in the midst of a recession.

With the uncertainties in the major developed economies, and the softening of the economies of China, India, Brazil, most developing countries will face economic difficulties this year but the extent of this is to be seen.

On the political front, the ongoing economic turmoil will lead to political changes in many European countries, and the future of the European Union and the Eurozone will themselves come under significant strains.

The next chapter of the Middle East drama is quite unpredictable. Israel, with its right-ward tilt, is expected to become even more aggressive, as its recent plan for more settlements in Jerusalem shows, and this may increase its isolation further.

But whether the Palestinian parties can unite and take advantage of its strong resistance in Gaza, its new UN-adopted status as a state, and the decline in Israel’s international support, is to be seen.

The Iran nuclear issue will continue to occupy news attention, with the Western countries having to decide whether to negotiate with Iran or intensify the sanctions (or both) or prepare for a military attack (thankfully, this does not seem likely).

The Syrian civil war will still dominate the TV channels as it enters another phase and perhaps an end-game, while the continued struggle for Egypt’s future political and social system will also have major effects on the region and the world.

In Asia, the world will watch closely whether the final stage of China’s leadership change-over to the new President Xi Jinping and Prime Minister Li Keqiang in March will begin a new era or continue the policies of the past decade.

Malaysia will have its place in the global spotlight with the general election, which will most likely take place in March.

Whatever the results, this closely contested election will be a watershed in the political life of the nation.

India, too, is in a state of significant political and economic flux, and 2013 will be used by the political parties and forces to prepare for the climax of the general election in 2014 and it is anybody’s guess who will come up on top.

Even as politics and economics continue to occupy the most attention, 2013 will remind us with greater force that Nature forms the bedrock of our societies and our civilisation.

The passing year brought its share of natural disasters to rival those of the previous recent years, and 2013 could even see worse extreme weather events around the world.

Global greenhouse gas emissions continue to increase despite greater awareness about the dangers of climate change.

Last week’s big floods in Malaysia’s east coast states could be a harbringer of worse to come in the country and the region.

The Philippines, having suffered a typhoon in its southern region in early December, had to cope with another big storm in its central region last week.

These are reminders that each country should improve its natural disaster preparedness as well as finalise its national strategy to address climate change.

And there are many other environmental issues to give high priority to, including water scarcity and quality, deforestation, biodiversity conservation, toxic chemicals and wastes and pollution of all types.

It will be an interesting year ahead.

Happy New Year to all readers of Global Trends!

Global Trends By MARTIN KHOR

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China’s leadership changes


China’s new Politburo standing committee, from left, Xi Jinping, Li Keqiang, Zhang Dejiang, Yu Zhengsheng, Liu Yunshan, Wang Qishan and Zhang Gaoli. Photo: Reuters

Ruling Communist Party unveils new seven-member Politburo Standing Committee that will govern nation for next decade.

State media says Xi Jinping is to take the reins of China’s all-powerful Communist Party in a leadership transition that will put him in charge of the world’s number-two economy for the next decade.

Xi, the current vice president and successor to President Hu Jintao, assumes power at an uncertain time with the party facing urgent calls to clean its ranks of corruption and overhaul its economic model as growth stutters.

His long-expected ascension as head of the ruling party took place at 0400 GMT along with the unveiling of a new Politburo Standing Committee, the nation’s top decision-making body.

According to tradition, the members marched out before the media in a pecking order agreed after years of factional bargaining, a process which intensified in the months leading up to the five-yearly reshuffle.

China Spotlight
In-depth coverage of China’s Communist Party congress

Xi will consolidate his position at the apex of national politics by being named China’s president by the rubber-stamp legislature next March, for a tenure expected to last through two five-year terms.

The standing committee, which had nine members under Hu has been slimmed to seven and includes Vice Premier Li Keqiang, which would set him on the path to be be appointed premier from next March.

Other members include Zhang Dejiang, Yu Zhengsheng, Liu Yunshan, Wang Qishan and Zhang Gaoli.

They will be tasked with addressing a rare deceleration of economic growth that threatens the party’s key claim to legitimacy – continually improving the livelihoods of the country’s 1.3 billion people.

China also bubbles with localised unrest often sparked by public rage at corruption, government abuses, and the myriad manifestations of anger among the millions left out of the country’s economic boom.

The communists have a monopoly on political power in China and state appointments are decided within the party.

The process began with behind-the-scenes horse-trading and political deals.

It was essentially finalised on Wednesday when the party ended a week-long congress by announcing a new Central Committee of 205 people.

On Thursday, the Central Committee approved the higher leadership bodies, including the elite Politburo Standing Committee.

Factional politics

Observers believe two main factions have been jockeying for power, one centred largely on proteges of former president Jiang Zemin and another linked to allies of Hu.

Xi is considered a consensus figure who leans toward Jiang, while Li has long been seen as a Hu protege.

Analysts say that despite rivalries between the two camps which are largely divided on patronage lines, they broadly agree China must realign its economy away from a dependence on exports, while maintaining a firm hand on dissent.

The government has ramped up security in Beijing and on the nation’s popular social media sites to prevent any criticism during the gathering.

The run-up to this year’s congress was unsettled by events surrounding Bo Xilai, a political star seen as a candidate for a top post until a scandal in which his wife was convicted of murdering a British businessman.

The sensational affair torpedoed Bo’s political career, he will face trial for charges of corruption and abuse of power, and added to the intrigue in the run-up to the transition.

Agencies
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China is the main show


Martin Jacques shares his views on the growing clout of the world’s second largest economy.

AUTHOR and academic Dr Martin Jacques released an updated and expanded second edition of his widely acclaimed book, When China Rules The World: The End Of The Western World And The Birth Of A New Global Order, earlier this year.

During a recent visit to Kuala Lumpur when he attended an Asian Centre for Media Studies event, Jacques (pic) spoke to The Star about his book and its approach to the subject. Some excerpts:

How is the second edition different from the first?

Time. Because China is growing so quickly, China time is fast. There’s been a lot of updating throughout the second edition.

When I wrote the first edition, the 2008 (US-centred) financial crisis had just happened. The last chapter is about the crisis, which was little commented on before.

The second edition looks at the beginnings of a Chinese economic world order.

How far is the second edition a response to critics of the first?

I don’t think what I’ve done is a response to the critics. The inaccuracies in the first edition were very few, and I’ve certainly responded to those.

There was a bit of a jump in the argument between the rise of China and its relations with other countries.

Here I look at not just China-US relations, but the rise of developing countries generally, of which China is a part.

I use the phrase “rule the world” as a metaphor. I’ve learned a lot from meetings and discussions.

There was never much in the first edition I wanted to change. The structure of the book is basically the same.

Do you see China’s rise as continuing into the future?

Yes, definitely. Along the lines of the book, without any doubt whatsoever.

How might a new China-centred tributary system emerge in East Asia?

There are echoes of a tributary system. The most obvious return to that is the rise of China.

East Asian economies today are much more China-centric. There’s the fact we’re now moving to a new China-centric system.

China is probably the most important market for countries in the region, for trade and investment, with its high-speed rail links, and so on. Getting on with China will be absolutely crucial for countries in this region.

Can economic dominance translate into clout in other spheres?

If China is economically dominant, that gives it a great deal of influence over other countries.

The draw of China will be that much greater. China will be a huge cultural presence in the region.

Lots of people in this region will study in Chinese universities. Beijing will be a tremendous draw.

You can see that in the flight patterns of Malaysia Airlines, for example. Previously, Malaysians travelled to Britain, not so much to other East Asian countries; it would be interesting to see the changes.

The attraction of Shanghai will be that of a big city like New York. People are attracted to power.

We’ll be much more familiar with Chinese governance and institutions. From being a mystery, they’ll be familiar; we were used to the United States before, but much more with China (in future).

What of Greater China, the mainland, Hong Kong, Macao and Taiwan?

All the ties will get stronger.

Hong Kong will remain very much as now, I don’t expect it to change. It will become increasingly integrated (with the mainland) and Sinicised, and (still) in many senses not very Chinese.

I would expect Taiwan to move ever closer to China. Taipei feels it has nowhere to go except closer to China.

There are already a large number of Taiwanese working in China. There has been growing economic integration.

Over the next 20 years, Taiwan will probably accept Chinese sovereignty. It will come because it is absolutely the logical step.

What of the prospects of China’s collapse, as some predict?

There are gradations on the scale. China isn’t going to sail into the sunset without problems. But what I’m extremely sceptical about are predictions about the problems leading to economic meltdown and Armageddon.

Some day China may see a multi-party system, although unlikely. China may be more open, but it will still be very much Chinese.

A collapse is not impossible, but extremely unlikely.

Can China’s economic power translate into cultural influence?

It will take a long time. China is still a poor country.

Rich countries don’t aspire to be like a poor country; economic power is the basis (of cultural influence).

The Beijing Olympics is an example: China was unable to stage it 10 years before.

Since the rest of the world is not familiar with Chinese culture, the process of feeling comfortable with China culturally and politically will take a long time.

Because Chinese culture is so different from Western culture, it will take a century for the West to be familiar with it. I’m sceptical that it won’t happen.

How is China’s rise regarded by India?

India has a big problem with China, as it has a very strong view of China. India is a long, long way behind (in growth).

Indians are traumatised by China; their relationship with China is erratic, fickle and fearful. Because of the border wars, China looms very large in the Indian imagination.

The issue doesn’t disturb the Chinese, but for Indians it’s an issue. India is so far behind that the thought of overtaking China (economically) is the talk of fantasists in dreamland.

India needs to learn as much as possible from China and pursue a strong relationship with it. It needs a clear strategy in dealing with China.

India should stop this petty rivalry. At the moment there’s not much of that happening.

What of China’s relations with South-East Asia?

In historical terms for this region, 100 years (since the end of China’s dynastic rule in 1912) is not such a long time.

There is a familiarity with China in this region that is not found in other parts of the world.

This marks out relations with China as different here. Countries in this region relate with China in a multifarious process.

Laos, Cambodia, Vietnam, Myanmar are dealing (economically) with China mostly through Chinese provinces closest to them.

It’s a situation most nation states don’t allow in their regions. But Chinese provinces close to these countries will deal more with them in future.

As for relations with the United States?

It will take the US at least 10, maybe 20 years from now to treat China as an equal.

It will happen in a series of baby steps here and there, for example by treating China as a partner in the region, rather than as a problem like now.

But it won’t happen within 10 years. In certain circumstances it may happen quicker, such as a (Western) financial crisis, or it would take longer.

And Europe?

There’s been poor coverage of China in the rest of the world, mainly from ignorance. Coverage tends to be Eurocentric.

Soviet reforms under Gorbachev with glasnost (openness) and perestroika (restructuring) were well received in Western Europe. But the Soviet system could not be reformed.

China’s communist revolution had better historical roots than the Soviet’s.

What remains of the ‘Washington Consensus’ (ie, US-style economic doctrine)?

It’s dead. In the developing world, China is the main show. Why look at America?

China is actively doing (the alternative): there are general lessons in its emphasis on infrastructure, the importance of the state, of political stability, and so on.

Will there be a third edition?

I probably won’t do a third edition. It was hard work with the (second edition), being governed by the framework of the existing book.

I’d probably work on something fresh. More on the lines of “understanding China,” so that people can understand the conceptual thinking.

By BUNN NAGARA The Star/Asia News Network

  Related posts:

When China Rules The World: The End Of The Western World And The Birth Of A New Global Order   

Fearful of China’s rise? Sep 28, 2012
Dawn of a new superpower Jul 08, 2012

When China Rules The World: The End Of The Western World And The Birth Of A New Global Order


Book review: China is still ascendant

Author: Marc Jacques
Publisher: Penguin, 848 pages

SKEWED as they may be, reactionary Orientalist perspectives of East Asian realities remain the norm in Western punditry and news reports. The problem has become prevalent in both conservative and liberal circles.

The problem for the West itself is that such a persistent misperception of modern China may undermine Western interests further. Martin Jacques’ When China Rules The World: The End Of The Western World And The Birth Of A New Global Order is intended largely as a corrective, looking at the historic phenomenon of China’s grand return to the global stage in China’s own terms.

My review of the first edition of Jacques’ book appeared earlier in China awakens (Star Bizweek, Oct 3, 2009). The present consideration is of the second edition published by Penguin earlier this year.

The first edition was subtitled The Rise Of The Middle Kingdom And The End Of The Western World. The second edition, suggesting an evolution, is subtitled The End Of The Western World And The Birth Of A New World Order.

Jacques and Penguin are just as grandiose now as before. The titling remains as presumptuous and alarmist, at least to Western conservatives, and no apologies are tendered in that regard.

The title itself can be a problem for those who judge a book by its cover. Jacques does not believe that China or any other country can “rule” the world today, only that China and things Chinese would predominate globally.

The second edition contains new data and a new section in the Afterword. For Jacques, international developments in the three years between the two editions only confirm and strengthen his central themes.

His chief arguments remain intact: that China will be dominant economically and culturally, it will not essentially be Westernised, and China will be ascendant despite multiple challenges.

This rise, mainly economic but also in other spheres later, is of epochal proportions. China’s ascendancy would result from both its own efforts and the decline of the West simultaneously.

The 2008 recession in the United States, followed by economic doldrums there and the European sovereign debt crisis underline the situation impeccably. In contrast, China’s GDP growth continues, affected only minimally.

Like many others, Jacques believes that China’s current growth model based on cheap labour and global raw materials is unsustainable. For example, China would need to stimulate more domestic demand to compensate for a slackening of overseas markets.

The latest data show that more and more countries have now made China their main trading partner. And as with trade, increasingly so with investment.

Thus, China’s economic gravitational “pull” is becoming unerring and compelling. Not only has China swiftly replaced Japan as the world’s second-largest economy, its relationship with the United States has replaced Japan’s as the most important bilateral relationship across the Pacific and in the world.

Analysts impressed with China’s economic growth once expected it to surpass the US economy in a couple of decades. But that timeframe has shrunk.

In 2009 Jacques cited the Goldman Sachs prediction that China’s economy would overtake the US’ by 2027. Sceptics scoffed.

In this second edition, he cites The Economist’s projection that the Chinese economy will become the world’s biggest by 2018. Now the International Monetary Fund predicts the year will be 2016.

But even when that happens, China will still be a developing country with vast human resources yet to reach peak productivity. That means when China’s standard of living approaches that of the US, with a comparable GDP per capita, its economy will be two to four times that of the US today.

Unlike many China pundits, particularly critics, Jacques believes China will not succumb to the weight of its own promise. He does not accept that China has to Westernise or democratise before it can fully develop and prosper.

Jacques also rejects the alarmist Western notion that today’s China is re-arming aggressively. He finds Chinese defence expenditure as a proportion of GDP falling between the 1970s and 1990s, and since then only keeping pace with GDP growth.

As expected, the very people he seeks to inform are often those who spurn his information. Jacques attributes this Western stubbornness to a mixture of unfamiliarity, ignorance, prejudice, denial, stereotyping, racism and Cold War ideology against a non-Western country that is communist, at least in name.

With such unwieldy baggage, the nuances and subtleties about China are naturally lost on the bigots. For Jacques, China is a continent-sized civilisational state whose history has seen upheavals and expansion on its Asiatic land mass, but not military adventurism in a littoral and archipelagic East Asia.

In response to critics of an increasingly powerful China, Jacques does not see China as a global superpower. He finds China historically absorbed in its own internal governance as it is a very difficult country to govern, its trajectory will continue to be tempestuous, but it is still a complex and sophisticated state and the home of statecraft, so it cannot simply be dismissed with an epithet like “authoritarian”.

For example, while critics fret over the People’s Liberation Army and the PLA Navy, it is China’s Coast Guard rather than the military that is a key player in the disputed island claims. Jacques finds no less than seven uncoordinated Chinese agencies involved over these claims.

A key question in the book is whether the United States will allow China the space to be a major player in Beijing’s own regional backyard. Jacques finds that unlikely, while also convinced that US efforts, such as its “pivot” to contain China, will ultimately fail.

This book still has major gaps that need filling. A central theme is that China’s coming predominance will be different from that of Western colonialism, but how different and in what ways?

Jacques also envisages an updated revival of the tributary system in East Asia, in which all the smaller countries acknowledge their junior status with regard to China. But what form will a revised tributary system take?

Another key point is China essentially being a civilisational state rather than just a nation state like other countries. But what can this mean in practical policy terms, particularly in China’s relations with other countries?

Such answers are essential to an intelligent understanding of a rising modern China. But we may have to wait for a new book by the author for further illumination, because any answers are unlikely to be accommodated by the structure of the present work, notwithstanding its already intriguing insights.

The first edition was already a vast interdisciplinary work of far-reaching implications, and the second version even more so. Few analysts as authors have achieved what Jacques has: combining the depth and rigour of academia with the readability and vigour of journalism in a single volume on a subject of great topicality.

The result is a serious and interesting textbook which, despite its 800+ pages, has sold a quarter of a million copies (and counting) in a dozen languages in its first edition alone. His critics have yet to match that kind of appeal in whatever they have to say.

Review by BUNN NAGARA
star2@thestar.com.my

> Bunn Nagara is an associate editor at The Star.

 

Related posts:
Fearful of China’s rise? Sep 28, 2012
Dawn of a new superpower Jul 08, 2012

Taman Manggis land issue in Penang, a ‘Robin Hood story’ or soap opera?


The twists and turns in the Taman Manggis land issue in Penang is starting to resemble a soap opera but it has also raised the question of whether the legal procedures are observed in the sale of state land.

THE showdown over a plot of land known as Taman Manggis or “mangosteen garden” in the heart of George Town is about to erupt in another slanging match on Nov 3.

Dubbed by some as the “Robin Hood story”, the Taman Manggis land has become one of the most controversial issues in Penang.

It has also become a rather entertaining saga of gamesmanship between Chief Minister Lim Guan Eng and his political secretary Ng Wei Aik on one side and the state Barisan Nasional Youth on the other.

The 0.4ha of land had been designated for affordable housing but before the project could take place, Barisan was toppled.

Lim’s administration has since reportedly sold the land for RM11mil to a Kuala Lumpur company that is planning to build a health tourism facility that includes a private dental hospital and hotel on the site.

That was how the Robin Hood thing came about, but with a twist where Barisan is accusing the Pakatan Rakyat government of being a distorted version of Robin Hood by taking land meant for the poor to give to the rich.

When Barisan accused the state government of selling the land at below market rate, Lim challenged it to buy the land for RM22.4mil. Lim probably thought Barisan would not take up the dare. After all, RM22.4mil is not small change.

But Barisan agreed and announced that it had set up a special purpose company to buy and develop affordable homes on the land.

Caught on one foot, the state government was forced to respond and Ng issued an offer letter to Barisan. And that was when the soap opera began.

The Barisan side led by its State Barisan Youth chief Oh Tong Keong proceeded to pay 1% earnest money as is called for in such transactions.

The next step, as anyone would know, is for the lawyers from both sides to draw up a sales and purchase (S&P) agreement.

Once that is signed, the buyer would pay the balance of the requisite 10% and depending on the terms and condition, the full amount is usually paid within three months or more.

This is to enable the buyer to raise funds or secure a loan from the bank.

However, following the 1% payment, Lim demanded that the Barisan pay up the rest of the amount within a month.

The outlandish demand saw a few jaws drop on the Barisan side. First, it is not possible for Barisan to cough up that kind of money in so short a time.

Another was the audacity of the demand.

“There is no S&P agreement in sight and the seller is demanding the full amount. Do they understand the laws of transaction? Without an S&P agreement, no one would want to pay RM22.4mil,” said architect Khoo Boo Soon.

Khoo, who was the former building director of the Penang Island Municipal Council (MPPP), is quite appalled at the frivolous way that state property is being treated.

He is incredulous that state land is being sold based on an offer letter by a political secretary on the instruction of the Chief Minister.

“I have been a government servant for more than 17 years. As far as I know, land transactions have to be discussed and decided by the state exco, the state legal adviser has to be consulted, the state secretary has to be involved. It cannot be a one-man decision, both parties need to sign an S&P agreement,” said Khoo.

The Barisan side was more direct. “This is government land, it belongs to the people. The land does not belong to the Chief Minister’s grandfather. We are not buying a bicycle or a car, this is about public land costing millions of ringgit,” said Oh.

The Barisan side had on Oct 3 written to the state government requesting for an S&P agreement before they proceed to pay up the rest of the money.

On Oct 8, the state secretary wrote back asking them to refer to the offer letter and to pay up within a month.

To compound this half-past-six state of affairs, rumours abound that the land has actually been sold to the Kuala Lumpur company.

No one can tell for sure because the state government has been tight-lipped about the issue.

Requests for information on the actual status of the land has run up against a stone wall.

On top of all that, the house that Lim is renting in Penang reportedly belongs to the wife of the major stakeholder of the Kuala Lumpur company.

The lady is also the cousin of state exco member Phee Boon Poh. The implication of all this is unclear but it does add spice to the story.

Many people following this soap opera are quite confused but that is what makes soap operas so addictive – there are lots of twists and turns.

The more discerning think Lim has no intention of selling the land to Barisan, hence the conditions and obstacles put in the way.

Some suspect the delay tactics are aimed at making Barisan give up.

But it would be a blow to Lim’s administration if the Barisan people actually purchased it and proceeded to build low-cost housing.

Lim would lose face, particularly given that his administration has failed to build any affordable housing since coming into power.

To make matters worse, this is happening amid an inflated property market on the island and where house prices have soared beyond the reach of 80% of wage earners.

Lim should be transparent about the issue. If the land has been sold, he should admit it.

If it is still in the state’s hands, then he should do the decent thing and use it for its original purpose.

Instead he is angry at being criticised and is punishing those who want to build affordable homes by doubling the price of the land.

A Penang lawyer said he is not surprised about the “Robin Hood issue”.

“What shocks me is the silence on the part of the Penang NGOs. They used to be so vocal on issues affecting public interest,” said the lawyer.

In the meantime, the countdown to Nov 3 has begun.

ANALYSIS BY JOCELINE TAN The Star/Asia News Network

 

P/S:  Landlady of CM’s residence is not wife of company stakeholder

Regarding the Taman Manggis land, the Star and State exco member Phee Boon Poh clarified yesterday that the woman in question is his cousin, she is not married nor is she the wife of the company stakeholder. “My cousin and the stakeholder are just business partners,” he said.

The Taman Manggis land which had been designated for low-cost housing by the former Barisan Nasional government, became an issue when the Lim administration decided to sell it to a Kuala Lumpur company to develop a health tourism facility that includes a private dental hospital, hotel and multi-storey car park.

Related post:

Land sold for a song? Aug 11, 2012

Malaysia taps into the growing importance of the redback: Yuan


The Society for Worldwide Interbank Financial Telecommunication says yuan usage worldwide grew 15.6% between July and August this year.

MALAYSIA’S love affair with the yuan or renminbi is growing, and it is easy to see why.

For one thing, China’s economic clout is rising. It is now the second largest economy in the world, and with ongoing financial reforms by the Chinese government, the yuan is expected to eventually rise to match the country’s economic stature.

For another – and more importantly – China has, in recent years, been growing to be an increasingly significant trading partner to many economies in the world, especially in Asia, including Malaysia.

Bilateral trade between Malaysia and China, for instance, is now seven times higher than it was 20 years ago.
And China has emerged as Malaysia’s largest global trading partner since 2009.

Last year, Malaysia’s total trade with China was valued at RM167bil, up 14% from the preceding year, and accounting for 14% of the country’s total trade.

The Government expects the value of Malaysia’s total trade with China to double in the next five years.

China’s rising prominence, in Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz’s words, presents “a new operating environment” that requires “dynamic response”.

At a recent seminar entitled “Renminbi Trade Settlement and Investment”, Zeti said one of the changes that would shape the international financial system in the years to come was the wider role of the yuan in trade and finance.

As it is, such trend is already taking shape, with yuan usage across the world increasing progressively.

Wider yuan usage 

According to Society for Worldwide Interbank Financial Telecommunication (SWIFT), yuan usage worldwide grew 15.6% between July and August this year, compared with an average decrease of 0.9% across all other currencies. SWIFT further noted the yuan has moved up one position to be the 14th mostly used world currency, with a market share of 0.53%, up from 0.45% in July 2012.

Standard Chartered plc’s report supports claims that the global use of yuan is on the rise, for trade settlement, in particular.

The international bank notes that Asian and European firms, led by those from Singapore and London, are increasingly open to using yuan.

“We see many European and Asian clients shifting away from settlement in US dollars,” Standard Chartered’s Hong Kong-based foreign exchange analyst Eddie Cheung wrote in his report.

Reports by foreign media suggest that yuan trade settlement could run between US$350bil and US$450bil this year, up from US$300bil last year.

It is understood that China is also quietly working on developing new yuan financial centres around the world to expand the international use of the currency.

At present, Singapore and London are the only cities outside Hong Kong that have been allowed to serve as yuan trading centre. China is reportedly planning for the next regional hubs for settling trade deals in yuan to be set up in Latin America and the Middle East.

As part of an initiative to encourage a wider use of its currency and to manage volatility in uncertain economic times, China has been actively seeking to establish ilateral swap agreements with foreign central banks since the onslaught of the global financial crisis in 2008.

To date, China has managed to set up 20 bilateral local currency swap agreements, worth a total of 1.6 trillion yuan (RM780bil), with central banks of countries within and outside of Asia.

This list includes Malaysia, South Korea, Iceland, Argentina, Pakistan, the United Arab Emirates, Turkey and Australia.

China’s bilateral swap agreement with Malaysia is worth 180 billion yuan.

Zeti notes that Malaysia’s trade settlement in yuan is still at a paltry 1% of the country’s bilateral trade with China. “There is, therefore, a significant potential for this to increase,” she says.

Bank Negara is currently on a mission to promote a wider use of yuan for trade settlement and investment among Malaysian corporations as a way to generate cost savings and minimise exchange rate risks.

“A wider use of yuan is only a natural progression, led by China’s rapidly expanding trade volume and its increasing role as the driver of global economic growth,” explains RAM Holdings Bhd group chief economist Dr Yeah Kim Leng.

“For Malaysian businesses with yuan obligations, the shift to the use of yuan will provide a natural hedge and help them reduce risk and lower cost,” he adds.

According to Zeti, Malaysia’s interest in yuan is also notable in the investment option, with yuan deposits in the country’s banking system having tripled within the first seven months of this year.

Focus on Dim Sum bonds

Meanwhile, there is also an ambition to promote Malaysia as the next hub for yuan-denominated debt (or popularly known as “Dim Sum bonds”) in Asean after Singapore. This is led by the growing interest in raising financing in yuan to meet funding requirements.

“Malaysia is well-positioned to realise this growth potential in yuan-denominated bond and sukuk, given our market size and supporting infrastructure,” Zeti argues.

She, however, says the number and timing of yuan-denominated bond and sukuk issuances will depend on the approvals of Bank Negara and the Securities Commission.

To date, there are only two issuances of offshore yuan-denominated sukuk out of Malaysia and a yuan-denominated bond issuance by Malaysian corporations.

“Ultimately, the potential of Malaysia of becoming a regional yuan debt hub will have to be led by natural market forces, that is, supply and demand,” Yeah points out.

At present, Europe, led by Luxembourg, outstrips Asia (excluding Hong Kong) in terms of both the number of issues and the number of issuance locations.

Analysts, however, believe Asia (excluding Hong Kong) will soon catch up.

Anchor currency

According to the Asian Development Bank (ADB), the yuan will eventually become the “anchor currency” for Asia.

This destiny is cemented by the growing use of the currency in the region’s trade and financial markets.

This, however, does not necessarily mean that the yuan will become part of the foreign exchange reserves of Asian countries, most of which still hold US dollar, euro and the Japanese yen, says ADB. Rather, it means that countries that use yuan widely will manage their currencies according to the yuan’s movement.

The consensus view is that there is still some way to go before the yuan can become a reserve currency. That will involve further openness of China’s own financial markets.

At present, the yuan has yet to qualify as a reserve currency due to its lacks of full convertibility as defined by the International Monetary Fund.

Nevertheless, many central banks have already started to diversify their reserves into the yuan. One of these is Bank Negara, which became the first central bank in the world to announce the inclusion of yuan in its foreign reserves in 2010.

It has been five years since China embarked on a plan to internationalise its currency.

Analysts argue that the process of internationalising the yuan is already progressing smoothly, but gradually in a managed way.

In their working paper entitled “Will the renminbi rule?” authors Eswar Prasad and Lei Ye argue that although China still has extensive capital controls in place, they are being “selectively and cautiously dismantled”.

“China’s capital account is becoming increasingly open in actual terms even though by this measure it remains less open than those of the reserve currency economies – the euro area, Japan, Switzerland, the UK and the United States,” they argue.

According to CIMB Research chief economist Lee Heng Guei, China has taken small yet quite successful steps in its quest for internationalisation of the yuan.

However, he says, full-fledged internationsation of the yuan is a still a distant goal.

“China is clearly more influential than in the past and the internationalisation of the yuan has sped up. But it will take many more years, perhaps another five to ten, for the yuan to be fully global and convertible,” Lee argues.

Undervalued or not?

Now, China’s currency policy has for long been a contentious issue with many western developed nations, especially the United States. There has been growing political pressure on China, led mainly by the United States, to increase the value of the yuan.

The United States has been arguing that the yuan is significantly undervalued, hence giving China’s exporters an unfair price advantage over US manufacturers.

The undervaluation of yuan, which, to some, warrants China being tagged a currency manipulator, has even become an important scoring point in the current US presidential campaign between Republican candidate Mitt Romney and incumbent Barack Obama.

A semi-annual report on the yuan by the US Treasury is due to be released on Monday.

It remains to be seen whether the release of the report will be delayed until after the Nov 6 US presidential election, given the political sensitiveness of the issue.

To be fair, since the yuan’s depeg from the US dollar in July 2005, the Chinese currency has appreciated more than 30% against the greenback.

And reaffirming its policy stance of further exchange rate flexibility, the Chinese government in April widened the trading band from +/-0.5% to +/-1% for the yuan against the US dollar.

Peterson Institute for International Economics estimated the yuan four years ago was undervalued by 31.5% against the US dollar. The latest estimate by the Washington think tank in May indicates that the yuan is now undervalued by only 7.7% against the greenback.

CIMB’s Lee contends that the yuan’s appreciation has to be a gradual and longer-term affair to avoid disrupting China’s economic development.

“The gradual and consistent yuan appreciation can be considered a stabilising factor for the (Chinese) economy, especially its export-oriented sector,” he explains.

According to the Royal Bank of Scotland, the yuan’s value is unlikely to change much in the short term, but further medium-term appreciation on account of productivity catch up remains a possibility.

“If the global economic outlook improves in 2013, the yuan is likely to see further medium-term strengthening, with the pace depending on current account developments,” RBS’ Hong Kong-based analyst Louis Kuijs notes.

By CECILIA KOK
cecilia_kok@thestar.com.my

 

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IMF aid to Europeans stirrings of resentment


Members feel Eurozone countries aren’t willing to swallow the necessary tough medicine

 

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Critical role: Last month, European Central Bank president Mario Draghi (right) gave the International Monetary Fund, headed by Christine Lagarde (left), an important new task: requesting that the Fund keep an eye on the behaviour of countries like Spain if the bank took measures to contain their borrowing costs. – PHOTO: REUTERS

IT IS one of the ironies of the eurozone crisis: the Europeans who have long dominated the International Monetary Fund (IMF) are now the ones borrowing its money and swallowing its advice.

The IMF, traditionally a lender to poor countries, now devotes more than half of its financial resources to the eurozone. Moreover, the fund and its managing director, Christine Lagarde, have emerged as the taskmasters that European leaders seem to need to flog them towards a solution to the crisis.

The Fund’s critical role in Europe has revitalised the organisation’s claim to relevance in world affairs. Last month, Mario Draghi, president of the European Central Bank (ECB), gave the Fund an important new task: requesting that it keep an eye on the behaviour of countries like Spain if the bank took measures to contain their borrowing costs.

“The ECB wants an independent observer,” said Manuela Moschella, an assistant professor at the University of Turin who studies the IMF. ”They want someone who can blow the whistle and say what is going on.”

But there is also resentment among some of the 188 countries that belong to the fund and supply its financial firepower. These discontents are likely to surface in Tokyo when the I.M.F. and the World Bank hold their annual meetings, which were to start Tuesday.

The United States and Canada, among others, have objected to the shift of resources to Europe at the same time that European countries have blocked changes that would give emerging countries a greater voice in making I.M.F. decisions.

Tough pill to swallow

Canadian leaders, in particular, have said that countries whose people live on a few dollars a day should not be asked to help maintain the European welfare state.

”The feeling is that the Europeans don’t want to swallow the tough medicine,” said Bessma Momani, a professor of political science at the University of Waterloo in Ontario. There is, she said, ”a more general sense that European society and way of life are passé.

”Before the beginning of the financial crisis in 2008, the fund provided almost no financial assistance to Europe. Now resources committed to the European Union, including Greece and Portugal, account for 56 percent of the I.M.F. total – (EURO)110 billion, or $143 billion.

The first European countries to seek I.M.F. help in recent years were former Soviet Bloc countries, like Latvia and Hungary in 2008, both of which are members of the European Union. The I.M.F. also played a main role in the Vienna Initiative in 2009, in which the European Union and commercial banks cooperated to prevent the collapse of the financial systems in Eastern Europe.

Management of the I.M.F. has long been dominated by Europeans, leading to accusations that the region is now getting preferential treatment. Since its founding in 1946, all of the fund’s managing directors have been European.

”There is at least the suspicion that the European members will get easier terms” for financing, Ms. Moschella said.

”This is really a threat to the credibility of the organization. I think the I.M.F. has behaved correctly, but the suspicion is there.

”European countries continue to contribute more money to I.M.F. coffers than they take back in loans. Germany’s quota, or maximum financial commitment, is $14.6 billion, while France’s is $10.7 billion. The largest contributor is the United States, with a quota of $42.1 billion out of a total for the fund of $238 billion.

Officials at the fund argue that the euro zone crisis has become a threat to the global economy, including poorer countries, and it is in everyone’s interest to fix it. As members of the I.M.F. and financial contributors, European countries have as much right to ask for help as other members.

”When there are systemic crises that affect other countries in the world, it is natural for the fund to be involved,” said Reza Moghadam, director of the fund’s European department.

”The fund has huge depth of expertise in crisis management,” Mr. Moghadam added. ”We have dealt with a lot of crises in the past, and there is huge institutional knowledge.

”Many analysts agree that there is no other organization with the clout, money or expertise to serve as outside arbiter to quarreling euro zone members.

”Expertise and impartiality – that’s what they bring to the table,” said Carl B. Weinberg, chief economist at the research firm High Frequency Economics in Valhalla, New York. ”They know how to walk into a government treasury and look at the books and know what they’re seeing.” Mr. Weinberg, as a banker earlier in his career, worked with the I.M.F. on debt restructuring programs in Mexico and other countries.

Ms. Lagarde has helped Mr. Draghi and U.S. leaders put pressure on European officials to move more aggressively to fight the crisis.

European firewall

During a speech in Washington late last month, Ms. Lagarde beseeched European leaders to ”implement the European firewall – notably the European Stability Mechanism; implement the agreed plan for fiscal union; and, at the country level, implement the programs that are essential for growth, jobs and competitiveness.

”If, as expected, Spanish leaders ask for help from the European Central Bank, the I.M.F. would monitor whether the country kept promises to overhaul the economy and contain government spending. The E.C.B. does not want to take the risk of buying Spanish bonds, a way of lowering the country’s borrowing costs, without such conditions.

The euro zone crisis has also presented the I.M.F. with unprecedented organizational challenges. Instead of dealing with one country, it must deal with the 17 members of the European Union that use the euro. They frequently do not agree, and decision-making is slow. In overseeing lending and restructuring programs in Greece, Ireland and Portugal, the fund has shared authority with the E.C.B. and the European Commission, with the three having come to be known as the troika.

”The fund’s relationship with Europe is more complicated than anything it has ever been involved in,” said Edwin M. Truman, a senior fellow at the Peterson Institute for International Economics in Washington.

While he said the fund had done a ”reasonable job” in Europe, Mr. Truman also called the I.M.F.’s involvement on the Continent a ”political subterfuge” because the euro zone countries were effectively outsourcing responsibilities they should be taking on themselves.Some observers say that European countries made the fund’s task more difficult because they hesitated too long to ask for help, for reasons of pride.

”We should have let the I.M.F. in earlier in Greece,” said Erik Berglof, chief economist at the European Bank for Reconstruction and Development. ”We could have maybe had an earlier solution to the Greek problem and not allow it to grow in magnitude before it was addressed.

”There is a risk that European leaders will repeat the same mistake in Spain, waiting to call in the I.M.F. until the crisis is acute. No national leader likes to take orders from an outside institution, especially in Europe, where countries are not used to being charity cases. The stigma and loss of sovereignty are likely reasons that Prime Minister Mariano Rajoy of Spain has delayed asking for help.The fund has learned from its own mistakes in places like Asia that too much austerity can be counterproductive, but was not always able to apply that experience. In Greece, for example, Germany and other northern countries insisted on a strict austerity program.”The I.M.F. has learned a lot how to design programs and structural reform measures and how to embed them in the local political system,” Mr. Berglof said. ”That experience the European institutions didn’t have from the beginning.

”Though the I.M.F.’s presence in Europe may not please everyone, it is likely to continue growing. No other institution, even the E.C.B., has the political independence or expertise needed to oversee restructuring programs in a country like Spain. Canada and other countries that resent paying for a European bailout are not likely to block one altogether.

Said Mr. Berglof of the E.B.R.D., ”There is a broader constituency that has a very strong stake in the resolution of the economic problems in Europe.

Political uncertainty

”The International Monetary Fund is cutting its global economic forecast yet again, calling the risks of a slowdown ”alarmingly high,” primarily because of policy uncertainty in the United States and Europe, Annie Lowrey reported from Washington.

It foresees global growth of 3.3 percent in 2012 and 3.6 percent in 2013, down from 3.5 percent this year and 3.9 percent next year when it made its previous report in July. New estimates suggest a 15 percent chance of recession in the United States next year, 25 percent in Japan and more than 80 percent in the euro area.

Financial market stress, government spending cuts, stubbornly high unemployment and political uncertainty continue to hamper growth in high-income countries, the fund said. At the same time, the emerging-market countries that fueled much of the recovery from the global recession, like China and India, have continued to cool off, with global trade slowing.

By Jack Ewing, The International Herald Tribune

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