The Week in Asia – October 2019

In The Week in Asia, Asia House Advisory takes a look at the top five developments in Asia this week affecting trade, investment and public policy.

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Friday 25 October 2019

This week, Indonesia’s new cabinet was announced, China’s unicorn count topped the US for the first time and SoftBank saved WeWork with a US$9.5 billion cash injection.

Indonesian President Joko Widodo’s new cabinet announced

Indonesian President Joko Widodo’s (Jokowi) second term started off this week with his inauguration and the much-anticipated announcement of his new cabinet. Of major note was the appointment of presidential election rival Prabowo Subianto to the cabinet as Minister of Defence, as well as unicorn Go-jek’s CEO and Co-founder Nadiem Makarim as Minister of Education and Culture. Proven technocrats are in the cabinet, such as former World Bank Managing Director Sri Mulyani Indrawati keeping her job as Minister of Finance. However, there is a sense that this cabinet has been one of compromise among the political parties. Bambang Brodjonegoro has moved to Research and Technology, while United Development Party Chairman Suharso Monoarfa has taken over the Development Planning portfolio. Other important movements include Golkar stalwart Airlangga Hartarto being moved to Economic Affairs, and Jokowi’s right-hand man Luhut Binsar Pandjaitan being given responsibility over Investment and Maritime Affairs.

China has more unicorns than the US for the first time

In the latest marker of China’s increased prowess on tech innovation, China now has more unicorns (privately-held start-ups valued at over US$1 billion) than the US for the first time. Out of a global total of 494 unicorns, 206 are Chinese, whilst 203 are American. Together China and the US host 80 per cent of the world’s unicorns, which have become a big part of the global economy, with their total worth reaching US$1.7 trillion. The top three most-valued unicorns are all Chinese, with Ant Financial topping the list (US$150 billion), followed by Tik-Tok creator Bytedance (US$75 billion), and ride hailing service Didi Chuxing (US$55 billion). China also boasts 18 of the world’s 20 ‘spin-off unicorns’, which are units of larger companies being split-off and becoming unicorns, such as Ant Financial having spun out of Alibaba.

SoftBank injects WeWork with an extra US$9.5 billion after IPO troubles

After WeWork’s IPO being pulled last month, SoftBank are injecting an extra US$9.5 billion into the firm, giving them an 80 per cent share in the company. It may mark the end of an extremely turbulent period for the company, who went from raising money from a US$47 billion valuation in January to now being valued at less than US$8 billion in the bailout. As part of the turnaround plan, WeWork is planning to axe as many as 4,000 jobs, just under 30 per cent of its global workforce of around 14,000 people. They will also prioritise the US, European and Japanese markets, and pull back from China, India and Latin America.

China’s US$2.4 billion WTO gambit to be leveraged in trade war negotiations

Despite progress in US-China trade talks last week, China is now seeking US$2.4 billion in sanctions against the US for not complying with a WTO ruling on Obama-era sanctions in July. The dispute dates back to 2012, when US anti-subsidy tariffs were put in place against China on US$7.3 billion goods such as solar panels and steel cylinders. US Trade Representative Robert Lighthizer said that the WTO ruling had proved that China used state-owned companies to distort the economy. However, the ruling also stated that the US had to accept Chinese prices to measure subsidies. Experts have said that this pursuit of the US$2.4 billion may be used as bargaining chips in trade negotiations with the US, due to them being classified as ‘legitimate’ as it pursues its case through the WTO, unlike the unilateral tariffs deployed since the trade war began last year.

Protests in Lebanon have led to promises for fiscal reforms

Over the last one week, protestors in Lebanon have been gathering in key locations across Beirut to protest against the government and those they regard as having profited from Lebanon’s economic troubles. Lebanon’s Prime Minister, Saad al-Hariri, has responded by offering a package of economic reforms in a bid to reduce public anger. These include cutting politicians’ salaries, imposing a tax on banks and extra support for the poor. With regards to the new budget, he promised no new taxes, but aims to reduce the deficit to nearly zero through cutting ‘waste and corruption’. In addition, the Prime Minister has accused colleagues in the government of blocking economic reforms that he claims would unlock US$11 billion of inflows from foreign donors and has given them a 72-hour ultimatum to reach an agreement. Experts say that without austerity, Lebanese debt restructuring may soon become inevitable, as large repayments are due in the next year.

NEXT WEEK IN ASIA

Looking ahead to next week, here are a couple of events to watch out for:

Saudi Arabia’s Future Investment Forum: Saudi Arabia’s landmark investment forum, nicknamed the ‘Davos in the Desert’, kicks off next week for its third year. Hosted by Saudi’s sovereign wealth fund, the Public Investment Fund, the event will bring together high-level delegations from across the world and will prepare the stage for Saudi Arabia hosting the G20 next year.

China’s Communist Party Central Committee to meet:The Chinese Communist Party’s powerful Central Committee will hold its fourth plenum next week to discuss ‘modernising the country’s governance system’. This is the first full meeting since February 2018, and often hosts big policy decisions; in the past, they have decided on issues such as approving the scrapping of presidential term limits and reforming state institutions.

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Friday 18 October 2019

This week, the US and China agree a ‘phase one’ deal to stop trade war escalation, Russia’s President Putin signs billions in deals during visit to Saudi Arabia and the UAE, while the US House of Representatives passes a bipartisan bill to review Hong Kong’s special trade status.

US and China agree ‘phase one deal’

A limited ‘phase one’ deal has been agreed between the US and China following talks in Washington. The deal will see the US halt tariff increases in exchange for Chinese concessions. The concessions are primarily based on existing pledges, and mostly relate to Chinese purchases of US agricultural products such as soy beans and pork, which will rise to a value of between US$40bn and US$50bn – more than double pre-trade war levels. Washington’s reluctance to ease restrictions on Huawei or reverse previous tariff hikes, however, mean there was limited progress across intellectual property, currency issues and financial services – key areas of tension between the two parties. Negotiators are currently hammering out how the deal can be implemented and enforced, with hopes that President Xi and President Trump will sign it off on the sidelines of the APEC Leaders’ Meeting next month.

Russian President Putin signs US$3 billion in deals with Saudi Arabia and the UAE

Russia’s President Vladimir Putin signed US$3.3 billion worth of deals with Saudi Arabia and the UAE during his whistle-stop tour of the Middle East this week. Signalling increasing Russian clout in the region, the deals covered a range of areas, from prized energy and defence contracts to advanced technology and healthcare sectors. US$2billion worth of deals were signed in Saudi Arabia, including a 30 per cent acquisition of Russian oil equipment supplier Novomet by Aramco, and a US$600 million Saudi investment in the Russian aircraft leasing sector. In the UAE, a total of US$1.3 billion in deals were signed, including shared investments between Russia’s sovereign wealth fund and Emirati Mubadala, and a five per cent stake of the Emirati Ghasha gas concession to a subsidiary of Russia’s Lukoil.

Bipartisan bill to review Hong Kong’s special trade status passes US House

The US House of Representatives passed the Hong Kong Human Rights and Democracy Act on Tuesday. If passed through the Senate and signed into law by President Trump, the US executive branch will have to conduct annual reviews to determine if Hong Kong should continue to be treated as an autonomous jurisdiction from China in matters of trade, maritime affairs and aviation, among others. China has as a result threatened unspecified countermeasures, with Foreign Ministry Spokesman Geng Shuang stating that “China must take strong countermeasures to firmly safeguard its sovereignty, security, and developmental interests.” Though the bill is in support of the pro-democracy movement in Hong Kong, it is widely considered a symbolic move. President Trump is unlikely to risk jeopardising progress on trade talks, especially ahead of an election year.

China to scrap business curbs on foreign banks and brokerages

Chinese Premier Li Keqiang has announced that the government will remove business restrictions on foreign banks, brokerages and fund management firms fully from April next year. China relaxed management rules for foreign investors and banks on Tuesday in a step towards implementing the policy. The cabinet also announced that they will support initiatives by local governments to attract FDI and foreign companies by giving them greater flexibility in decision-making. Citigroup has been the first to react to the news; it is in the process of unwinding its 33 per cent joint venture with Orient Securities and is submitting an application next year for a fully owned business in China. While seen as a positive move to open up the sector, there are concerns that the market will continue to be dominated by state-owned rivals such as Bank of China and Industrial and Commercial Bank of China.

Malaysia offers tax breaks to cash in on trade war

Malaysia’s 2020 budget was announced this week and contained measures to entice more multinationals and unicorns to invest in the country. Finance Minister Lim Guan Eng announced that annual investment packages worth US$239 million will be introduced for a period of five years, noting that, “the ongoing trade war has created a unique opportunity for Malaysia to return as the preferred investment destination for value-added investments.” Companies would need to invest at least US$1.2 billion into the Malaysian economy to qualify for the measures. For those in the electronics sector, the budget proposes a 10-year income tax exemption in selected ‘knowledge-based services’, while the budget indicates a ‘special channel’ will be established to attract investment from China. In addition, Malaysia’s second yen-denominated ‘samurai’ bond is due to be issued early next year.

NEXT WEEK IN ASIA

Looking ahead to next week, here are a couple of events to watch out for:

Indonesian president Joko Widodo to be inaugurated for second term: After his election win in April, Indonesian President Joko Widodo will be officially inaugurated for his second term on Sunday. Much attention will be placed on the composition of the new cabinet, as well as the reorganisation of ministries, with particular interest surrounding the head of the new Ministry of Investment.

US-China high-level trade conversations: US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin will have a high-level phone call next week with Chinese Vice Premier Liu He in order to finalise implementation arrangements for the recently agreed deal.

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Friday 11 October 2019

This week, the US blacklists Chinese tech firms as trade talks resume, tensions in Iran see China walk away from a US$5bn energy investment deal, and Singapore tops the WEF’s global competitiveness rankings.

1. US blacklists Chinese tech and government agencies

The US Department of Commerce has added 28 companies to a trade ‘blacklist’ of firms banned from doing business in the US. All the entities implicated are, according to the commerce department, part of “China’s campaign of repression, mass arbitrary detention, and high-technology surveillance”. China’s foreign ministry denied the claims it abused human rights and urged the US “to immediately correct its mistake, withdraw the relevant decision and stop interfering in China’s internal affairs.” The blacklisted companies include Hikvision, the world’s largest video surveillance company; Sensetime, an AI unicorn worth US$7.5 billion, and Megvii, a facial recognition unicorn worth US$3.5 billion. The move has dampened the likelihood of a breakthrough in trade talks this week, although China has signalled its willingness to agree on a partial deal – including purchasing more agricultural products from the US – as long as no new tariffs are implemented by President Trump.

2. Iran tensions cause China to abandon US$5bn deal

The Chinese state-owned enterprise China National Petroleum Corporation (CNPC) has pulled out of a US$5 billion deal to develop part of Iran’s South Pars natural gas field. This comes as tensions between Saudi Arabia, the West and Iran have heightened in recent weeks after the attack on Saudi Aramco’s oil facilities. Iran’s foreign minister has complained that investment in the country is being disrupted “because of the US maximum pressure policy”. Much of CNPC’s stake in the field came from the acquisition of French energy giant Total’s stake, before it pulled out due to US sanctions. Despite the perceived setback in Tehran-Beijing relations, there is hope on the Iranian side that China will remain Iran’s biggest trade partner.

3. Singapore tops WEF competitiveness rankings, but ASEAN outlook takes a hit

Singapore has topped the competitiveness ranking of the World Economic Forum (WEF) this year, knocking the US – which has seen a decline in trade openness due to imposing tariffs on several economic partners – off the top spot. Singapore’s fundamentals have remained strong and trade regulations remain open. There was less positive news for the wider ASEAN region this week, however, with a survey by the Japan Center for Economic Research and Nikkei downgrading growth in the region by 0.2 per cent, to 4.1 per cent for the year. Export-oriented Thailand has taken a hit, downgraded 0.4 per cent, due to volume decline and investors keeping away.

4. Chinese firms shy away from NBA over HK protest row

The feud that began this week when the general manager of the Houston Rockets NBA team tweeted support for the Hong Kong protests has led to all of the NBA’s official Chinese partners suspending ties with the organisation. The commissioner of the NBA, Adam Silver, has been adamant that it would “not put itself in a position of regulating what players, employees, and team owners say or will not say”. As a result, CCTV and Tencent have announced they will be suspending broadcasts of all NBA preseason matches. Despite apologies from some of the players who also tweeted support for the protestors, the spat could see the NBA cut from the Chinese market, which it has cultivated for decades. According to oft-cited figures, about 500 million Chinese people watched at least one NBA game last season.

5. Hong Kong Stock Exchange drops LSE bid

Hong Kong Stock Exchange (HKEX) has dropped its US$39.4 billion bid for the London Stock Exchange Group (LSEG). Under UK takeover rules, HKEX had until 9 October to make a formal offer but chose not to proceed. Commentators have cited British reluctance to merge with another national exchange and concerns over the role a powerful Chinese-backed finance institution could play in the context of global trade and diplomatic tensions.

NEXT WEEK IN ASIA

Looking ahead to next week, here are a couple of events to watch out for:

Putin to visit Saudi Arabia: Russia’s President Vladimir Putin will visit Saudi Arabia next week, in a move that will see the two oil giants discuss energy and investment policies. Russia’s sovereign wealth fund has opened up an office in Riyadh in preparation for the visit, with projects under consideration with Aramco that could be worth US$1bn. Up to 30 agreements could be signed during the visit, according to Russia’s energy ministry.

Thailand to host 9th RCEP ministerial meeting: Thailand will host a ministerial meeting for the Regional Comprehensive Economic Partnership (RCEP) on Saturday to try and get the deal signed by the end of the year. Negotiations are underway to prepare for the meeting, with India – which has been cited as a blocker in completing RCEP over rivalries with China – pressing ahead despite domestic pressure against the deal.

Asia House Advisory helps organisations understand new operating environments and meet business-critical challenges. Find out more.

Friday 4 October 2019

This week, there were IPOs in Hong Kong despite the continuing crisis, Fitch downgraded Saudi Arabia’s credit rating, and the Japanese government raised consumption tax in a bid to balance the budget.

1. China feels the pressure as trade war rumbles on

There were more indications this week that the trade war with the US is disrupting Chinese business and investment. Samsung announced that it has ended mobile telephone production in China, joining Sony which is closing its Beijing plant and will now only manufacture smartphones in Thailand. Chinese companies are also coming under intense pressure in the US, where the Nasdaq has been cracking down on IPOs of small Chinese companies by tightening regulations and slowing down approvals. The White House is retaliating against Beijing’s strict capital control policy by restricting US capital flows into China, as well as reportedly mulling over a delisting of all Chinese companies in the US. There appears much to be resolved going in to next week’s US-China trade talks in Washington.

2. Fitch downgrades rating for Saudi Arabia

Fitch Ratings has downgraded Saudi Arabia’s credit rating from A+ to A this week, following attacks on the country’s oil processing facilities in September. The credit agency cited “rising geopolitical and military tensions in the Gulf region” in its new assessment, as well as the “vulnerability of Saudi Arabia’s economic infrastructure to regional military threats”. In response, the Saudi government expressed its “disappointment” and pointed to the quick restoration of oil output as evidence of its resilience. Saudi Arabia’s significant and continuous fiscal deficits since 2014 – amounting to US$300 billion in total – was also a contributing factor to the downgrade. Moody’s has also cut its economic growth forecast of the country from 1.5 to 0.3 per cent this year, citing a reduction in oil production.

3. Japanese government raises sales tax

The Japanese government has hiked sales tax from eight to 10 per cent as it seeks to balance the budget. It hopes the move will generate US$41.1 billion to offset rising government expenditure in recent years, driven by an ageing population placing strain on public services. Government revenue reached a record US$586.8 billion for 2019, but expenditure stood at US$953.0 billion. The last time Japan implemented a sales tax hike, in 2014, the economy shrunk by seven per cent. The latest increase is predicted to reduce economic output by 2.7 per cent this quarter. Japan’s Prime Minister Shinzo Abe has said fiscal stimulus measures are ready should the tax rise hinder growth.

4. Budweiser and Topsports enjoy IPO success in Hong Kong despite unrest

Budweiser Brewing Company APAC has raised US$5 billion since it launched in Hong Kong on Monday – the biggest IPO in the city so far this year. Meanwhile, China’s major sportswear group, Topsports International, raised US$1.01 billion from their IPO, and is expected to be listed on Hong Kong’s Stock Exchange’s (HKEX) main board on 10 October. These successes come despite the continuing crisis in the Special Administrative Region, where consumer sales are down 23 per cent year-on-year and HKEX’s own benchmark Hang Seng Index has fallen 8.6 per cent in Q3.

5. Russia launches Asian charm offensive

In twin developments this week, Russia is increasing its cooperation with Asia through agreements with Mongolia and Singapore. In a move to reinvigorate a previously strong friendship with Mongolia, and to ply them away from increasing Chinese influence, Russia announced a US$1.5 billion investment fund for infrastructure projects in the country. There is also interest among Russian gas suppliers to build their new pipeline to China through Mongolia, which would make it easier and cheaper to build than the planned route through eastern Siberia. Meanwhile, the Russia-dominated Eurasian Economic Union (EAEU) has concluded a Free Trade Agreement (FTA) with Singapore, which is hoped to improve the modest US$6.5 billion worth of bilateral trade. Singaporean Prime Minister Lee Hsien Loong hopes this move will be the first step towards an EAEU-ASEAN FTA, which would incorporate 800 million people.

NEXT WEEK IN ASIA  

Looking ahead to next week, here are a couple of events to watch out for:

US restarts talks with China on trade and North Korea on nuclear weapons: US negotiators will restart stalled trade and nuclear talks with both China and North Korea respectively next week. The senior-level trade talks with China will take place in Washington on 10 October, right before the deadline for the US imposing new tariffs. The Chinese delegation will be led by Vice Premier Liu He, while the US party is expected to include Treasury Secretary Steven Mnuchin and US Trade Representative Robert Lighthizer. Talks between the US and North Korea will also take place, with hopes of breaking the deadlock experienced at the Hanoi summit in February.

Indian and Chinese leaders to meet: Leaders of the two Asian giants, China and India, will meet next week at an informal bilateral summit in Tamil Nadu State from 10-12 October. The summit will build on the good rapport that President Xi and Prime Minister Modi shared in Wuhan last year, and is expected to cover border and defence issues, the situation in Kashmir, and trade against the backdrop of India’s reluctance to sign off on the Regional Comprehensive Economic Partnership.

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