Not-so-nice figures: Moon has seen his popularity slide amid criticism that he’s hurting employment by
aggressively increasing the minimum wage. — AP
Unemployment and jobs growth in South Korea haven’t looked so bad since the wake of the global financial crisis, undermining President Moon Jae-in’s economic agenda.
Data released Wednesday show the unemployment rate jumping to 4.2 percent, the highest since early 2010, and much greater than any economists forecast. Jobs growth slumped to just 3,000 last month, also the worst figure in more than eight years.
Moon, who came into office pledging to create jobs and raise incomes for regular workers, has seen his popularity slide amid criticism that he’s hurting employment by aggressively increasing the minimum wage.
While pay hikes planned for this year and 2019 are here to stay, Finance Minister Kim Dong-yeon said the government would consider adjusting some policies.
He conceded that the jobs market wouldn’t improve much anytime soon.
Source: Statistics Korea
Moon’s administration points to the fallout from corporate restructuring and the shrinking working-age population as the source of the problems in the labour market. Businesses counter that hiking the minimum wage 16% this year, with another bump of almost 11% to come next year, has made job layoffs inevitable.
Small business owners in particular, from convenience stores to fast-food franchises, have shed workers.
Adding to the economic unease in South Korea is the risk that US President Donald Trump may hit car exporters with auto tariffs, even after Seoul agreed to renegotiate its trade deal with the US.
South Korean bonds climbed and the won fell after jobs figures, which appeared to squash any near-term prospect of the central bank raising interest rates.
The finance minister said economic policies that are geared toward wage-based growth are moving in the “right direction”. Yet the government also acknowledged the need for more communication and market analysis in order to gain trust from companies and the people, he said.
The presidential office described the recent increase in unemployment as inevitable pain that accompanies a change in the structure of the economy, Yonhap News reported.
Like many other countries, South Korea is experiencing a widening gap between the rich and the poor. It’s confounding policy makers and exacerbating political divisions. — Bloomberg
|Prepare Now for the Next Financial Crisis|
“It would not be profitable to build the Focus Active in the U.S. given an expected annual sales volume of fewer than 50,000 units,” automaker Ford Motor Company said in a statement on Sunday.
US President Donald Trump tweeted earlier on Sunday that “‘Ford has abruptly killed a plan to sell a Chinese-made small vehicle in the US because of the prospect of higher US Tariffs.’ CNBC. This is just the beginning. This car can now be built in the USA and Ford will pay no tariffs!” Ford quickly clarified the facts, evidently rebuffing Trump’s tweet.
Likewise, tech giant Apple Inc. wrote a letter to US Trade Representative Robert Lighthizer, saying that a proposed 25 percent tariff on $200 billion of Chinese imports would cover a “wide range of Apple products.”
In another tweet, Trump told Apple to make their products in the US instead of China. Apple hasn’t responded.
According to the US media, the price of iPhone may increase to $2,000 if the company does as told.
The multinational companies that produce automobile and mobile phones have different manufacturing and sales layouts. Car manufacturers tend to produce their products where they are sold, while mobile phone manufacturers optimize their production chain costs worldwide. That’s the natural law of economic globalization which can’t be easily changed by a country’s government.
The White House lacks understanding of the global production and value chains. “Make your products in the United States instead of China” seems naive. Instead of coercing companies to follow demands, imposing tariffs will only scare them off.
Simply making US companies produce in the US can’t deal with the complicated global industry today. We have also learnt from history that neither side will gain in a trade war.
China is the world’s largest automobile and mobile phone market. Setting tariff barriers between Beijing and Washington won’t make US companies give up on China for the sake of their own country. As long as China doesn’t make things hard for US companies, it’s unavoidable that they will place production operations in China. The Chinese market can help them make money, but the White House can’t.
Most American high-tech companies will face difficulties if they leave China. The larger the market is, the higher return the companies will get from their research and development. High-tech companies, if they can’t grow to be giant, don’t usually survive for long, and it would be fatal for many of them to lose the Chinese market.
There hasn’t been a previous US government that dares to instruct multinational companies in production layouts, and the current administration has overestimated its executive power. The global industrial chain today is formed by market rules established over decades and can’t be easily changed by one government.
It would be the White House’s dream to expect that the US is not only the world’s technology and financial center, but also the world’s factory that sells its products globally. If the US doesn’t want to wake up from this dream, then the outside world has to step in and rouse Washington.
The decline in trade will affect both China and the US. It is not only China that will bear the consequences.
China should give up the illusion of persuading Australia to stop containing China together with the US. Instead Beijing should let Canberra calm down and rethink.
The Chinese people must cherish what the country has earned them. China has no alternative but to continue to learn how to deal with the world in the 21st century.
The “five-no” and “four-can’t” are truly inspiring. They correct the concepts of rights and point to the justice of the day. President Xi’s points will definitely leave a deep mark on the history of relations between the African continent and China, and the entire world.
The possibility of the West leading the collaboration with the continent again always exists as long as they do not get their heads jammed by a geopolitical mind-set.
The US, South Korea and Japan must clarify what exactly they want on the Korean Peninsula. They cannot have everything, especially things that contradict each other. If the US wishes for denuclearization and peace on the peninsula, it would see the value of China-North Korea ties and support them.
|Illustration: Peter C. Espina/GT|
For now, there is still no end in sight to the brewing trade war between the world’s two economic heavy hitters. Ignoring voices of objection at home, the Donald Trump administration announced that the second tranche of tariffs on $16 billion in Chinese goods will take effect later this month. Though Trump has yet to fulfill his campaign promise to levy a 45-percent tax on Chinese goods, his logic on trade policy refuses to change.
The reason why the US has provoked and intensified the trade war lies in the incapacity of the global system. Specifically, division of labor in the globalized era has led to the exodus of the US manufacturing industry out of the country. Meanwhile, the US claims that China’s “predatory” economy has developed itself into the biggest beneficiary in the system.
That’s why the Trump administration insists on attacking China’s “stealing” practice in the name of “safeguarding US national interests,” regardless of the cost of torpedoing the existing international order.
The robust stock market and economic growth of the US as well as the decline in unemployment have further boosted Trump’s confidence in escalating the trade war. His trade policy has gained more acceptance among Americans. However, the logic behind his trade war can hardly hold water.
The era of globalization has been an inevitable development of human society. As people in the global village are more interconnected, trans-regional flow of finance, technology, information, service and talent has re-optimized global production resources, inspiring the development of countries and regions.
The unprecedented development of productivity and international division of labor has prompted developed countries which boast capital and technology advantages to transfer their low-end industries to other countries where labor and land costs are relatively low. Then a great many multinationals have mushroomed, which has objectively precipitated the growth of developing countries.
Economic liberalism has become a paragon of democracy with which developed nations dwell upon with relish. It’s also an important pillar for the postwar international order. When developed countries sat on the top of the industrial chain to reap benefits, they never complained about the unfairness of the system but instead became its most powerful defender.
Ironically, the US – the founder of the global system – has now become its most proactive opponent. The Trump administration attacks the “unfair” global system and views China as being complicit in bringing about the fall of the US manufacturing industry and loss of jobs. Such rhetoric has led people to believe that the stature of the US has fallen to a third world country’s.
Globalization is not without problem. Apple is a paradigm of a globalized industrial chain, but it’s not a nice story. Developing countries at the low end of the industrial chain can only get disproportionally meager profits while lucrative gains flow to developed nations. In this way, the US deficit is far less than the book figures.
More severely, low-end manufacturing has worsened the environment, putting the health of the public in jeopardy. But the US-led developed world just passed the buck.
Emerging economies like China are resigned to be just a factory of developed countries, so they work hard to develop hi-tech and produce high-value-added products to create a level-playing field with developed countries. This is the law of market economy, which, however, has become a threat to its national security and an enemy of its economy in the view of the US.
The strange logic can hardly justify itself.
Denying others a share of the spoils is not the essence of the era of globalization. If developed countries think there’s something wrong with the global system, they can appeal to international organizations to carry out reform, instead of resorting to short-sighted practices like threatening with tariffs.
Trump’s trade war actually stems from domestic conundrums notably industrial hollowing-out and loss of everyday jobs. The problems are not a result of globalization but of domestic mismanagement. It seems that forcing jobs back home will create jobs, but it can’t last long because it will fail to stimulate the fundamental driving force of industrial development. If Trump can make more efforts at boosting the real economy instead of waging a trade war, he may get closer to “Make America Great Again.”
Credit: By Zhang Tengjun Source:Global Times Published: 2018/8/15
The author is an assistant research fellow at the China Institute of International Studies. email@example.com
ON May 31, when Finance Minister Lim Guan Eng announced that the new government would be able to meet the budget deficit of 2.8% for this year, the sum of RM19.4bil that is to be refunded to companies since the goods and services tax (GST) was discontinued, never came into the equation.
Now, since that money is not in a trust account that was specifically set up to meet the refund obligations, does the government need to borrow more to ensure it meets the refunds? In doing so, would it incur a bigger budget deficit than had been envisaged?
There are wider implications on the shortfall of the RM19.4bil, assuming the refunds are to be done this year.
The biggest challenge for Lim is to cover the shortfall to maintain the budget deficit for 2018 at 2.8%.
The hallmark of the Pakatan Harapan government’s first 100 days of rule is to bring down the cost of living and cost of doing business. Towards this end, it has subsidised the price of petrol and diesel and removed the GST.
The cost of keeping up with the Bantuan Sara Hidup and subsidy for petrol and diesel is estimated to be about RM6.2bil between June and December.
Revenue loss due to discontinuing the GST from June 1 onwards is estimated at RM21bil.
The shortfall is made up of cutting down government expenditure by RM10bil, increasing dividends from government agencies such as Khazanah Nasional Bhd and Petroliam Nasional Bhd, a higher petroleum income tax of RM5.4bil and proceeds from the implementation of the sales and service tax from September onwards.
Nowhere was the RM19.4bil figure that is to be paid back to companies under the GST that was discontinued mentioned.
Lim has said that the money was supposed to be in the trust account, but is not there and has gone “missing”.
Former Finance Ministry secretary-general Tan Sri Mohd Irwan Siregar Abdullah has said that all proceeds from the GST went into the consolidated fund of the federal government. The amount to be refunded is allocated to the trust account monthly based on the requirements of the Customs Department and the financial position of the government.
Customs director-general Datuk Seri Subromaniam Tholasy has revealed that since the GST was implemented on April 1, 2015, the total refunds amounted to RM82.9bil and the amount allocated to the trust account from the federal government consolidated fund was only RM63.5bil – representing a shortfall of RM19.4bil.
Generally, refunds for the GST are to be done within 14 days. But the amount allocated is less because not all refunds are paid within the two-week period.
At times, refunds are held back up to one year, pending investigations. Hence, the cash allocated to the trust account maintained by the Customs and the Inland Revenue Board (IRB) is less than the total amount due for refunds.
For instance, in 2017, the amount allocated to the IRB trust account for refunds was RM7bil when the total amount to be refunded was more than that.
In the case of the Customs, the outstanding refunds for 2017 was RM15bil, but the amount allocated was less.
Under the previous government, the GST provided a steady flow of cash every month. The thinking was that the money for refunds should be allocated when it comes due to best manage the cash-flow position of the government.
However, the view of Lim is that money meant for refunds should have been put into the trust account, irrespective of whether there is a need to pay immediately or otherwise.
Hence, the issue is not really the question of the RM19.4bil meant for refunds going “missing”.
It is whether the money is still in the consolidated accounts or whether it has been utilised. If it was utilised, did the government have the right to use it for other purposes in the name of cash-flow management?
The bigger implication for the Pakatan government is how it is going to cover this RM19.4bil shortfall.
One of the ways the government can cover the RM19.4bil hole without increasing the deficit is to cut more of the excesses.
On this score, the Pakatan government has so far handled public funds in a more judicious manner compared to the previous government. It has cut down the budget for inflated infrastructure projects and stopped unnecessary spending.
The light rail transit 3 and East Coast Rail Link projects are only some examples. It has stopped prestigious projects such as the KL-Singapore high-speed rail and the less glamorous mass rapid transit line 3 project. The government of today has earned full marks for being transparent and diligent in handling public finances.
Despite declaring that the federal government debt is at RM1.07 trillion, business sentiment is at a seven-year high, while consumer sentiment is at a 21-year high.
The stock market is looking good so far, much better than the likes of China and Hong Kong, although the improved sentiments are likely to be temporary.
As for the ringgit against the US dollar, its performance is better against many of the Asian and emerging-market currencies. The tumbling of the Turksih lira and Russian rouble is testimony that the ringgit is not that bad after all.
The government can probe, produce a White Paper or do anything else to look into the RM19.4bil shortfall, but the bottom line is that Lim and Prime Minister Tun Dr Mahathir Mohamad will have to face the reality of making up for a RM19.4bil shortfall in government finances for this year.
Economists are predicting that the federal government budget deficit would be higher than the 2.8% estimated on May 31 this year on the assumptions are made this year. Some are looking at the budget deficit to be as high as 4%
Would there be an impact on Malaysia’s credit rating and the ringgit?
Yes, a spike in the budget deficit would have an impact for the short term.
However, the government of the day will score brownie points in its drive to bring about reforms and governance in the management of public funds. Rating agencies would appreciate any government that promotes transparency and improves on its finances purely by spending within its means.
So far, the government has done away with the GST and taken measures to put more cash into the hands of the people and business to improve domestic spending. The stabilisation of petrol prices and threemonth (June to September) tax-free period between the implementation of the GST and SST has put RM20bil into the hands of the people and businesses. This should help improve the domestic economy for a few months.
However, for the longer term, investors and rating agencies will be looking at how the RM19.4bil hole in the federal government finances will be covered. What are the government assets that will be sold?
Certainly, we are not looking at an expansionary budget come November this year.
KUALA LUMPUR: The previous government has not been able to refund companies their tax credit that came about following the implementation of the Goods and Services Tax (GST) because 93% of the money was not placed in the correct account, Finance Minister Lim Guan Eng revealed.
He said some RM18bil of the RM19.4bil input tax credit under the GST system since 2015 was “robbed” by the previous administration.
“I was very shocked when informed that this happened because the previous government had failed to enter the GST collection in the trust account specifically meant for the repaying of GST claims.
“Instead, the Barisan Nasional government pilfered the trust account and entered cash GST collection directly into the consolidated fund as revenue to be spent freely,” he said when tabling the GST (Repeal) Bill 2018 during its second reading in Parliament yesterday.
He said that as of May 31, the outstanding GST refund stood at RM19.397bil whereas there was only a balance of RM1.486bil in the repayment fund.
Lim said from the total input tax credit, RM9.2bil or 47% was recorded between Jan 1 and May 31 this year, RM6.8bil or 35% in 2017, RM2.8bil (15%) in 2016, and RM600mil (3%) in 2015 (from April 1 to Dec 31, 2015).
Under GST, the input tax credit allowed businesses to reclaim credit for taxes paid on purchases, subject to filing of input tax documents.
In his winding-up reply, Lim said a comprehensive investigation would be carried out to determine the cause of the missing funds.
When debating the Bill, Lim also said he had asked for documents to show how the input tax had ended up in the consolidated fund.
“I asked the Chief Secretary to the Government for the Cabinet papers on the matter.
“However, he told me he could not remember anything of such,” he added.
Lim said former Bank Negara Governor Tan Sri Dr Zeti Akhtar Aziz, when told of the missing funds, said it was imperative that the money was returned to the claimants as it was fiscally moral to do so.
Later, at the Parliament lobby, Lim said a former Treasury secretary-general may have been aware of the missing RM18bil.
The previous government, he said, had committed wrongdoing over the missing funds.
“I would assume the previous KSP (ketua setiausaha perbendaharaan/Treasury secretary-general) would have known about this.
“We want something definite because we want to look at the circle of decision-makers,” he said.
By martin carvalho, hemananthani sivanandam, rahimy rahim, and loshana k shagar The Star
|Negative rates: Pedestrians walking past the Bank of Japan (BoJ) headquarters in Tokyo. BoJ’s goal remains
at keeping real interest rates as negative as possible, as long as the economy performs. — Bloomberg
IT’S mid-term review time as the US yield curve begins to flatten.
This curve tracks the relationship between interest rates of US government debt obligations. Normally the yield curve is rising, with long-term bonds having yields higher than short-term obligations.
But occasionally the curve inverts, with long bonds yielding less than short Treasury bills – a historical predictor of future recessions and bear markets in stocks. Recently, the curve has become noticeably flatter, with short rates rising and longer yields remaining stagnant. This has led many analysts to think that the yield curve will soon invert.
But that does not mean a recession is imminent. Just returned from an extended visit back to Harvard. Touched base with my mentors and professors at both extremes of the economic spectrum. They are all split on what this flattening really means. In the event it does invert (the gap today being below 0.3%), recession has almost always (over the past 50 years) followed within a year or so. But few see a recession soon on the horizon.
The first half has come and gone. The ongoing transition to more normal conditions continue in the context of a robust US economy; continued progress in the orderly normalisation of US monetary policy; and re-awakened sensitivities to geopolitical and protectionist risks.
There will be higher interest rates, some inflation concerns and trade tariffs coming-on in the context of markets more readily accepting two to three more rate hikes by the Fed in 2018. The prospect of a global trade war makes everyone very cautious.
Once we start down the road of tariff increases and threats of more to come, the dangers of retaliatory miscalculations are real and very scary. Still even an inverted yield curve should not be on top of our worry list under today’s accommodative monetary conditions.
The world economy benefitted from four drivers of higher growth: the healing process in Europe, re-bound from slowdowns in Brazil, India and Russia; soft landing in China; and pro-growth measures in US.
To persist, Europe needs to do much more. Also, there is hope that recent tariff tensions would eventually lead to fairer and still-free trade which recognises the inter-dependent nature of global supply chains, and show greater willingness to protect intellectual property rights, modernize trade arrangements and reduce non-tariff barriers. Yes, more rate hikes from the Fed are still on the cards. But the same by the European Central Bank (ECB) and Bank of Japan (BOJ) demand trickier manoeuvring.
This is an area that warrants close monitoring since volatility will likely persist. At least for now, fears of Japan-like deflation in US and Europe are effectively gone. But OECD is worried global growth is not yet self-sustaining. It’s strength in 2018 is largely due to monetary and fiscal policy support – and lacking in rising productivity gains and sweeping structural reforms. In Europe, the “clock is ticking”; without reforms, more populist uprisings will appear as the upswing ages and then fades. US inflation is not only returning to the Fed’s 2% target, but also likely to exceed it. In Europe, consumer prices were last still lower than a year ago – below the ECB’s target of just below 2%. Fear of the spectre of deflation has led BOJ to remain cautious about tapering its monetary easing program. Will just have to wait and see.
IMF warns that the world’s US$164 trillion debt pile (at 225% of GDP) is bigger than at the height of the financial crisis a decade ago. One-half was accounted for by US, Japan and China. What’s needed is for US fiscal policy to be recalibrated to bring down the government debt to GDP ratio (80%) and for China to deleverage its US$ 2.6 trillion private debt. There is no sign either is being done which runs the risk of triggering yet another financial crisis.
Growth will falter
Growth in US can slow considerably when the boosts from last year’s tax-cuts in US fades in 2019 and 2020. IMF now warns that US will grow at about one-half the 3% annual pace forecast by the White House over the next 5 years, reflecting the effects of growing massive fiscal deficit and continuing trade imbalance. For US, sluggish productivity remains a key determinant. In 2Q18, GDP picked-up to rise 4.1% (2.2% in 1Q18) the fastest pace in nearly four years, reflecting broad-based momentum.
But worker productivity advanced 1.3% from a year earlier, consistent with the sluggish 1.2% average annual rate in 2007-2017, well below the better than 2% annual average since WWII. Spending by consumers, businesses and government as well as surging exports all appeared solid in 2Q18. The expansion enters its 10th year this month, building on what is already the second longest expansion on record. Faster growth which has helped to drive the unemployment rate to its lowest level in 18 years, fueled quick corporate profit growth.
Median estimates place GDP growth at 2.8% in 2018, 2.4% in 2019 and 1.8% over the long run. But everyone has growth slowing next year because of falling business and consumer sentiment, reflecting trade disputes with China and many US allies, and uncertainty whether rising business investment is sustainable.
The big concern is the economy overheating – already, it is bumping up against capacity constraints as labour markets tighten. Still, the consensus is that the next downturn will not arrive until 2020. Most economists expect 3% inflation over the next year. What worries me most is the deteriorating global political and strategic environment.
Not so much the economic outlook directly. The world is changing too much, too fast.
So much so, the geopolitical situation is getting worse – open warfare between Israel and Iran, the disgraceful state of Palestine, and uncertainties surrounding Donald Trump and Vladimir Putin, and lack of leadership in Europe. Trade barriers are causing much anxiety. It is as though what’s put in place since WWII isn’t worth a damn anymore.
Europe and Japan
Latest indications from the Brookings-FT Index for Global Economic Recovery (Tiger) show global growth has peaked and momentum has started to fade. Indeed, financial markets are already reflecting mounting vulnerabilities. With weak economic data in 1H’18, Europe and Japan have since cooled. In late 2017, eurozone was still growing at 3.5%: Germany at 4%, France 3%, Italy 2% and Spain 3.5%. But activity slackened to only 1.2% in early April; even Germany recorded a sharp dip – down to only 1%, reflecting waning monetary easing effects and supply-side constraints. The outlook is for a strong above trend upswing for the rest of the year. OECD now expects GDP growth in 2018 to be 2.2% (2.6% in 2017) and in 2019, 2.1%.
For eurozone, the window for reforms is closing – ranging from the implementation of dual currencies for its members to putting European Parliament in charge of economic policy, including the euro-budget. Japanese GDP shrank 0.1% in 1Q18 despite a rise in capital investment. Household spending unexpectedly fell. Still, recovery is expected to be driven by a weak yen brought about by monetary stimulus (BoJ has been buying assets at US$740 billion a year to drive down long-term interest rates). But underlying inflation is stuck at 0.5%. BoJ’s goal remains at keeping real interest rates (after inflation) as negative as possible, as long as the economy performs. OECD forecasts growth in Japan to be 1.2% in 2018 (1.7% in 2017); the same in 2019.
China and BRICS
Many emerging markets (EMs) are still enjoying momentum from 2017, but there is growing concern about rising debt and vulnerabilities to capital flight as interest rates in US rise. For those recently emerged from recession, viz. Russia, Brazil and South Africa, their urge to return to strong levels of activity remains sluggish.
China and India have fewer concerns for their immediate outlook. Still, they need to reform their economies to help raise living standards to catch up. The main challenges will be to execute particular reforms – not just to the financial system but also to SOEs and local governments, including getting rid of corruption.
China’s GDP rose 6.7% in 2Q’18, the slowest pace since 2016. Retail sales held up rather well as did exports. Still, measures to curb rampant borrowing are biting – investments in infrastructure and manufacturing by SOEs and local governments have since slackened. These efforts, in the midst of headwinds from abroad (especially protectionist tariffs), have led to downgrades in growth for the rest of the year. IMF now forecasts GDP growth in China to average 6.5% in 2018 (6.8% in 2017) and about the same in 2019.
Recent depreciation of China’s currency, the yuan, exposes crucial vulnerabilities within the world’s second-largest economy as it faces escalating trade tensions with the US. The currency posted its biggest ever monthly fall against US$ in June (3.4%) and has since lost more ground. This slide marks a departure for the currency often regarded as an anchor of stability for Asia and other EMs.
As Beijing assesses the options, it finds itself between a rock and a hard place because (i) People’s Bank of China (PBoC) intervention means selling its US dollar stash of reserves – which stood at US$3.11 trillion in June; (ii) it could instead raise domestic interest rates, thereby making the currency more attractive which might help to shore up the yuan. But it also risks weakening an already slowing Chinese economy just as the trans-Pacific trade war starts to bite; and (iii) it could impose stricter controls on China’s capital account which will likely spook overseas funds that have rushed into China’s domestic bond and equity markets this year at an unprecedented rate.
However, to internationalise the yuan, China has to keep fund flows relatively unencumbered. The PBoC has sensibly pledged to keep the RMB “generally stable.” In July, China implemented a mix of tax cuts and greater infrastructure spending citing growing uncertainties, as it ramps up efforts to stimulate demand to counteract a weakening economy.
As for India, I wrote extensively on what’s happening there (my July 2018 column: “India: Chugging Along but Needs More Firepower” refers).
What then are we to do
As I see it, China and China-India centred Asia is now the heart of the world economy. Their steady growth has been a source of stability in an otherwise unsteady world.
Of late, developments in China received more scrutiny than usual because of the context: Chinese stock market has since fallen into bear territory, and a growing trade dispute with the world’s largest economy, US. Despite China’s astonishingly sustained expansion, the economy is widely considered vulnerable because growth in output has been underwritten by an even faster increase in debt.
The nation’s gross debt – both public and private – is now estimated at over 250% of GDP. The worry is not just the volume of debt but its quality. China’s domestic policies encourage high savings.
Those savings, held in banks, have been funneled to companies, especially SOEs. The credit quality of the loans is hard to assess but is likely to be uneven. China has since begun to slowly tighten the credit taps, with even tighter rules on shadow banking and more scrutiny for both local government financing and public-private investment projects.
At the same time, a sharp increase in the number of defaults by corporate issuers has revived anxieties about Chinese debt. In my view, it is the tighter credit conditions and defaults, rather than worries about a trade war, that best explain the recent 22% decline in the Shanghai Composite index from its January highs.
Tightening credit policy is also a compelling explanation for the weak macro-economics. Credit growth fell, and growth in fixed investment followed. This appears to be having some effect on consumer sentiment as well.
No doubt, Trump’s tariffs on US$50bil of Chinese imports (and threatens US$200bil more) will have a direct (but unlikely to be catastrophic) impact on growth. But China is now an investment-led rather than an export-led economy.
Still, it is the knock-on effects that are most feared. If the escalation of hostilities leads to a reduction in foreign direct investment in China, the long-term impact could be significant. True, China may be facing a delicate moment economically.
But given China’s deepening role in the world economy, any pain that the US manages to inflict on it would be quickly shared with the US and the broader world – at a moment when Europe’s economy is slowing, and many EMs looking unstable.
On the whole, China’s economy will remain strong and resilient. Whatever happens, I think this won’t change the Chinese situation much.
Former banker Tan Sri Lin See-Yan is the author of The Global Economy in Turbulent Times (Wiley, 2015) and Turbulence in Trying Times (Pearson, 2017). Feedback is most welcome.
PRIME Minister Tun Dr Mahathir Mohamad (pic) has announced that Malaysia is renewing, or to be more precise, upgrading the Look East policy he adopted as a foreign policy 30 years ago.
It was unveiled after he came to power in 1981 and now, as the premier for the second time, he has picked up the pieces of his past and repackaged it.
His inclination to Japan then was understandable since the country was the rising star of Asia.
Although Look East included South Korea and Taiwan, it basically meant Japan.
There were sound reasons to why Dr Mahathir wanted Malaysia to emulate some of the East Asian characteristics, both economically and ethically.
I think any Malaysian who has visited Japan can vouch for the people’s work ethic, honesty, orderliness, politeness, punctuality, cleanliness, precision, dedication to excellence, innovation and good manners.
Malaysians in Japan feel safe – they rarely get cheated despite being tourists, which is more than can be said for many countries.
Personally, Japan remains my No. 1 holiday destination. Like Dr Mahathir, I have the highest admiration for the Japanese. They are certainly exemplary, and that is indisputable.
Dr Mahathir has continued to have high regard for the Japanese and history seems to be repeating itself.
His Look East Policy shocked and confused the Malaysian foreign ministry, with many officials viewing it as undefined and vague.
The Ministry being left in the dark about the Prime Minister’s move led to it being unaware of how to implement the policy.
Fast forward to 2018. It’s likely that his new batch of ministers were also caught off guard with the revival of the Look East policy, more so when the Foreign Minister has yet to be installed.
Without doubt, Japan is an important partner to Malaysia because we have more than six decades’ ties with the country.
In 2016, Japan ranked Malaysia as its fourth-largest trading partner with bilateral trade standing at RM120bil.The strong trade and investment relations between the nations are also underpinned by the Malaysia-Japan Economic Partnership Agreement.
The latest Malaysia-Japan collaboration includes the Bukit Bintang City Centre project, which has managed to attract the leading real estate group in the Land of the Rising Sun, Mitsui Fudisan Co Ltd, to invest in what will be the mega project’s RM1.6bil retail mall.
But Dr Mahathir’s choice of his first foreign visit to Japan as PM has raised many eyebrows. Perhaps it was just the coincidental timing of the annual Nikkei Conference, which he attends without fail.
I was told that his office had informed the Chinese Embassy here, as a matter of courtesy, to avoid reading into the matter, given the long, bitter rivalry between the two nations.
Dr Mahathir was also visiting Japan after a series of announcements, calling for the review, if not cancellation or postponement, of several mega Chinese-driven projects in Malaysia.
The method of repayments with China, involving huge amounts of money, has, of course, been called into question and condemned. One critic even described the terms as “strange.”
It’s apparent the situation is delicate now, and we need to tread carefully because we are dealing with a global leader.
The PM admitted that his government was “dealing with a very powerful country. As such, matters affecting both parties will require friendly discussions”.
Former finance minister Tun Daim Zainuddin also said that Malaysia will carefully handle business contracts with China made by the previous administration.
In an interview with The Star, Daim admitted that the economic superpower is a friend to Malaysia.
“China is very important to us,” the Council of Eminent Persons spokesman said.
“We enjoy very close relations, but unfortunately, under the previous administration, a lot of China contracts are tainted, difficult to understand and the terms are one-sided,” said Daim.
There is plenty at stake here. The world has also changed, and Malaysia needs to be mindful of its diplomatic move. These are sensitive times, and to the Chinese, the issue of “face” is an important one.
Whether we like it or not, the whole world is looking towards China because this is where the fundamental building blocks of a future global digital economic model is being curated and built.
Japan’s economy, on the other hand, has been in regression over the last two decades, and open data is easily available to prove this point. Just google it.
That aside, China is Malaysia’s largest trading partner in Asean, especially after Malaysia-China bilateral transactions rose as much as 28% to RM139.2bil in 2017’s first half.
The Chinese government has been very positive with bilateral relations with Malaysia over the years, and this great foundation is what we must build on. It doesn’t matter who the Malaysian Prime Minister is now.
With Ali Baba and Tencent coming to Malaysia, SMEs – which comprise more than 95% of Malaysian business entities – exporting to China will be a huge foreign trade opportunity.
Of all the Asean nations, Malaysia has the largest pool of businessmen who speak the relevant Chinese dialects and understand the culture. But it’s not just the Malaysian Chinese businessmen who stand to benefit, but other races too.
Let’s not forget that China will be under steady stewardship for the coming decade since Xi Jinping has strengthened his position as the premier. And with Dr Mahathir rightfully announcing that Malaysia will be a neutral country, this will mean a stable foreign policy which is crucial for the rules of engagement.
The same can’t be said of Japan, though, as it has a history of turbulent domestic politics, with frequent changes in leadership.
Truth be told, China has outperformed Japan. The republic has become a model of socio-economic reform that connects, not only the past with the present, but more importantly, can rewrite the history of human development into our common future.
The One Belt, One Road initiative is the future. It was also reported that China has overtaken Japan in global patent applications filed in 2017 and is closing in on the United States, the long-standing leader, the World Intellectual Property Organization said in a report.
With 48,882 filings, up 13.4% from a year earlier, Chinese entities came closer to their American counterparts, which filed 56,624 applications. Japanese applicants ranked third with 48,208 demands for patents, up 6.6% from a year ago, the report, released Wednesday, revealed. According to the Geneva-based institution, China will likely overtake the US as the world’s largest patent applicant within three years.
“This rapid rise in Chinese use of the international patent system shows that innovators there are increasingly looking outward, seeking to spread their original ideas into new markets as the Chinese economy continues its rapid transformation,” WIPO director-general Francis Gurry said.
The overall filings in 2017 were 243,500, up 4.5% from a year earlier.
Data indicates that China and Japan were key drivers of the surge in applications.
“This is part of a larger shift in the geography of innovation, with half of all international patent applications now originating in East Asia,” Gurry reportedly said.
Two Chinese firms topped the list, led by Huawei Technologies Co with 4,024 patent applications and ZTE Corp with 2,965 submissions. Intel Corp of the United States is placed third with 2,637 filings, followed by Mitsubishi Electric Corp with 2,521.
China has also declared its ambition to equal the US in its AI capability by 2020 and to be number one in the world by 2030.
If there is a single country to take a cue from, then it can only be China. Look at its growth since 1957, 1967, 1987, 1997 and 2017, and see the strides it has made in the shortest time. Remember, China was once poor and backwards. Many Malaysian Chinese used to send money back to their families in China, especially in 1950s and 1960s, and even 1970s. But look where the country is now.
Malaysia is in pole position to take advantage since our neighbour Singapore has always been perceived to be too US-centric. It will be a waste if we let politics get in the way, as no one can dispute that China now plays a respected and vital role.
Anyone can tell that China will reshape the new world order. It is the new Middle Kingdom and is the country to look to.
And Dr Mahathir should pick up on this because at the end of his trip to Japan, the press bombarded him with the predictable and nagging question – when will he be visiting China?
By Wong Chun Wai On The Beat
Wong Chun Wai began his career as a journalist in Penang, and has served The Star for over 27 years in various capacities and roles. He is now the group’s managing director/chief executive officer and formerly the group chief editor.
On The Beat made its debut on Feb 23 1997 and Chun Wai has penned the column weekly without a break, except for the occasional press holiday when the paper was not published. In May 2011, a compilation of selected articles of On The Beat was published as a book and launched in conjunction with his 50th birthday. Chun Wai also comments on current issues in The Star.