The Week in Asia – August 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 30 August 2019

This week, the US and Japan agree a trade deal in principle, Indonesia confirms its new capital location and there are mixed developments in the US-China trade war.

1. US and Japan agree core elements of future trade deal
On the sidelines of the G7 meeting in Biarritz, US President Donald Trump and Japanese Prime Minister Shinzo Abe agreed in principle to key parts of a trade deal between the two countries. The agreement covers agriculture, industrial tariffs and digital trade, including US beef, pork and wheat; a ‘gold standard’ of rules on digital trade; and industrial and agricultural access to the US market from Japan, though crucially not including automobiles. The provisions of a partial trade agreement are due to be signed on the sidelines of the UN General Assembly meeting next month, at which stage a broader trade agreement will begin to be negotiated. After the withdrawal of the US from the Trans-Pacific Partnership, this deal is being presented as a ‘win’ for President Trump, who insists American farmers will be able to export produce to Japan in lieu of disrupted trade with China caused by the ongoing trade war.

2. Indonesia confirms capital move to East Kalimantan
Indonesian President Joko “Jokowi” Widodo confirmed this week that he will shift Indonesia’s capital from Jakarta to the state of East Kalimantan on the island of Borneo. It is estimated that the planned move will cost approximately US$32.7 billion, of which 19 per cent will be provided by the government with Public-Private Partnerships and private investment making up the rest. The new capital will incorporate new technologies, including smart city and digital infrastructure, and the government claims the capital move will create 500,000 new jobs. The Indonesian government is insistent that this will not mean that Jakarta will be abandoned, with an injection of US$40 billion promised in the next decade to fund the modernisation and improvement of the city’s infrastructure.

3. Global firms make moves amid US-China uncertainty
It has been a typically volatile week for US-China trade relations. Despite optimistic talk of face-to-face negotiations and a mutual willingness to strike a trade deal, Beijing’s imposition of tariffs on US$75 billion worth of American products, followed by Washington imposing tariff increases of 10 to 15 per cent on US$300 billion of Chinese-made goods, have soured relations. The uncertainty is reflected in Asian markets, which have seen fluctuations throughout the week. Growing tariff barriers and ongoing uncertainty are continuing to drive businesses to shift production away from China, with Google aggressively relocating production of its Pixel smartphone from China to Vietnam. In reaction to this growing trend, the Indian government is alleged to be targeting foreign firms, including Apple, as companies look to relocate production to escape rising tariffs.

4. South Korea ramps up spending in new budget
South Korea’s Finance Ministry said it would propose a budget bill of US$423.5 billion for next year, an increase of 9.3 per cent on this year’s original budget, or eight per cent if the budget increase approved at the beginning of August is included. It is the most aggressive spending increase by the South Korean government since the 2008 financial crisis. August’s budget increase was aimed at mitigating Japan’s new export controls against South Korea, which came into effect on Wednesday, so the proposal for increases in the new budget indicate that perceived economic threats are likely to continue mounting. The new budget would be targeted at welfare, jobs, small businesses and research and development projects. The news comes as the Bank of Korea cut its growth forecast from 2.5 to 2.2 per cent in July, putting it among the worst spells of growth since the Second World War. Hong Kong and Thailand have also implemented measures to stimulate their economies amid trade turbulence in the region.

5. Trump ready to meet Iran’s Rouhani for new nuclear deal
French President Emmanuel Macron has offered to broker a meeting between US President Donald Trump and Iranian President Hassan Rouhani in the hope of de-escalating tensions in the Gulf and replacing the 2015 Iran nuclear agreement, which Trump withdrew from last year. Although this appears to be a positive step, with both the US and Iran stating they would be open to a meeting, both have put very strict conditions on the other before this meeting can take place. President Trump has stated he is looking for “no nuclear weapons, no ballistic missiles and a longer period of time [than the current agreement expiring in 2026]” while President Rouhani responded by stating that unless the US lifted sanctions and reversed the measures taken against Iran, there would be no development in the relationship. Iran will soon sign a preferential trade agreement with India as it increasingly looks to Asia for investment and trade opportunities.

NEXT WEEK IN ASIA

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

Fifth Eastern Economic Forum in Vladivostok: Russia’s showpiece Eastern Economic Forum will be held from 4-6 September in Vladivostok, attracting leaders from all over the world. While ostensibly focused on the economic development of Russia’s Far East region, the forum will be attended by India’s Prime Minister Modi, Japan’s Prime Minister Abe and Malaysia’s Prime Minister Mahathir, all of whom are expected to meet with President Putin.

China-Arab States Expo: The fourth China-Arab States Expo will be held in Ningxia, northwest China, from 5-8 September. It will host business delegations from countries such as Oman, Tunisia and Lebanon. Trade between China and the Arab states was reportedly worth US$244.3 billion last year, up 28 per cent on 2017.

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Friday 23 August 2019

1. US puts pressure on Huawei while extending trade license
Washington has announced a 90-day extension of the ‘temporary general license’ granted to Huawei Technologies to give “consumers the necessary time to transition away from Huawei equipment,” the Commerce Department said. The temporary license allows the Chinese tech giant to continue buying components from US companies. At the same time, 46 Huawei affiliates were added to the US ‘Entity List’ – preventing them from trading with US companies. The additions to the list include more than 20 per cent of Huawei Technologies’ global R&D and innovation centres. President Trump has recently stated that Huawei may not be a company that the US “does business with at all”, while Huawei founder, Ren Zhengfei, has rejected offers of relief from US sanctions if it means China makes concessions in the trade war.

2. State Council outlines special freedoms to boost Shenzhen amid Hong Kong tensions
China’s State Council has urged a boost in the development of Shenzhen in order to transform it into a world class city by 2025 – a move intended to establish Shenzhen as a global benchmark for competitiveness, innovation and influence. Under this new approach, Shenzhen will be afforded special policy freedoms in the fields of science, technology and the internationalisation of the yuan, challenging Hong Kong’s traditional role as the centre for finance and technology in the region. The move feeds into the objective of increased Greater Bay Area integration, with improved cultural and economic links to be encouraged with Macau and Hong Kong. The announcement comes in a challenging week for business in Hong Kong, as a US$2.4 billion support package by the Hong Kong government is introduced amid falling GDP growth forecasts and Alibaba delaying its US$15 billion listing on the Hong Kong stock exchange due to the current unrest.

3. Thailand unveils US$10bn stimulus in response to trade war slump
The Thai government has unveiled a US$10.2 billion stimulus package following the announcement of its worst GDP growth figures in five years. In the second quarter of 2019, the Thai economy grew by 2.3 per cent year-on-year, compared to 2.8 per cent in the first. Growth has been affected by the US-China trade war as well as concerns over a strong baht and weak domestic demand. The stimulus package – amounting to 1.9 per cent of Thailand’s GDP – includes measures to leverage subsidies and soft loans for farmers, boost domestic tourism, improve funding access for SMEs, and support lower-income earners. It is hoped that these measures will improve the foundations of Thailand’s growth, which should be aided by the Bank of Thailand’s recent 0.25 per cent rate cut.

4. Mahathir outlines UK trade deal, while Gojek make Malaysian inroads
Malaysian Prime Minister, Mahathir Mohamad, has offered the UK ‘better trade’ with Southeast Asia post-Brexit should it break with current EU policies towards palm oil. The PM has threatened to take the EU to the International Court of Justice over the matter, adding that, while he understood EU concerns regarding sustainability and deforestation, the solution should not be to ‘single out one commodity and ban it’. Elsewhere in Malaysia, the government agreed in principle for Gojek – the Indonesian ride-hailing unicorn valued at US$10 billion – to begin operating in the country. This is part of the unicorn’s expansion plans across Southeast Asia following successful launches in Vietnam, Thailand and Singapore. Myanmar and Cambodia are next in Gojek’s sights, as it seeks to challenge Singapore-based competitor Grab across the region.

5. Increase in Indian businesses expanding to Dubai
In the first six months of 2019, more than 2,000 Indian companies joined the Dubai Chamber of Commerce and Industry (an 18 per cent increase on 2018). Across the same period, the Chamber held over one hundred meetings in Mumbai with companies wishing to enter the Dubai market. These details were announced by the Chamber of Commerce ahead of President Modi’s third visit to the UAE, signifying the ever-strengthening relationship between the two countries. Although India is currently the UAE’s second-largest trading partner, with AED 116 billion (US$31.6 billion) worth of bilateral non-oil trade, the Chamber highlighted that there are still areas where exports to the UAE can be boosted.

NEXT WEEK IN ASIA

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

India’s PM Modi to visit UAE and Bahrain: Prime Minister Narendra Modi will visit the UAE and Bahrain this weekend, where discussions will address bilateral relationships as well as a range of regional and international issues of mutual interest. Modi is expected to sign MoUs with both the UAE and Bahrain which will facilitate the rolling out of India’s ‘RuPay’ cards in both countries. RuPay is an Indian government payment scheme – a rival to Visa and Mastercard – and is being introduced as part of an effort to strengthen India’s regional relationships in digital payments, trade and tourism.

Philippine President Rodrigo Duterte to meet China’s President Xi: President Rodrigo Duterte will visit China from 28 August to 2 September amid increasing pressure at home to confront China over claims in the South China Sea. In his meeting with President Xi Jinping, President Duterte has committed to pressing Xi regarding overlapping claims with Southeast Asian neighbours, as well as Chinese investment progress and issues relating to cross-border online gambling.

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Friday 16 August 2019

This week, the US delays implementation of recently-announced China tariffs, South Korea retaliates to Japan’s trade measures and Saudi Aramco agrees a multi-billion dollar deal with an Indian petrochemical giant.

1. South Korea to drop Japan from preferential trade list
South Korea’s Ministry of Trade, Industry and Energy announced that the country will remove Japan from its ‘whitelist’ of trusted trade partners, in a move widely seen as retaliation to Tokyo’s decision to drop South Korea from its own whitelist two weeks ago. The whitelist allows for fast-track trade with trusted partners on 1,700 strategic products and materials. Despite taking this measure, South Korea’s President, Moon Jae-in, has left the door open for future dialogue with Japan’s Prime Minister Shinzo Abe on the issue. The trade spat between the two countries is having an impact, with the latest figures showing a 13.8 per cent drop in Japanese imports to South Korea in July.

2. US to delay 10 per cent tariffs on some Chinese imports 
The US is to delay the implementation of 10 per cent tariffs on US$300 billion of Chinese goods which were previously announced on 1 August. President Trump said the delay was “for the Christmas season, just in case some of the tariffs would have an impact on US consumers” – a rare recognition that the trade war is having a domestic impact. The delay has prompted welcome relief from some technology investors, with certain stock indexes increasing in response to the news. However, Beijing said on Thursday that it is still planning countermeasures in response to the new tariffs. The US-China tensions also took a new turn this week when President Trump explicitly linked the protests in Hong Kong with ongoing trade deal negotiations.

3. Saudi Aramco agrees to buy US$15 billion stake in India’s Reliance Industries
Saudi Aramco has signed a deal worth US$15 billion to buy a 20 per cent stake in the petrochemical division of India’s Reliance Industries. The deal covers all refining and petrochemical operations, including the biggest refinery in the world at Jamnagar, thus creating a tie-up with the world’s largest oil producer. This deal also gives Saudi Aramco increased leverage to expand in one of the world’s fastest-growing oil markets, which increased in size by 4.1 per cent over the course of 2018. The announcement comes as Saudi Aramco experienced a 12 per cent drop in their first-half year profits to US$46.9 billion.

4. Singapore downgrades growth forecast amid regional slowdown
Singapore’s Ministry of Trade and Industry said that economic growth this year is projected to be between zero and one per cent – a significant cut from its previous projection of between 1.5 to 2.5 per cent. The Ministry attributed the revision to worsening “growth prospects of key emerging markets and developing economies such as in Southeast Asia and China, partly due to the escalation in the US-China trade conflict in recent months.” It also said the fallout from the dispute between South Korea and Japan was a factor in the downgrade. Meanwhile, recent data released by China suggests the economy is struggling on multiple fronts. Industrial production in July grew by a lower than expected 4.8 per cent compared to a year ago – the slowest rate since February 2002. Retail sales growth was also lower than expected, growing by 7.6 per cent in July and down from the 9.8 per cent observed in June.

5. EU announces duties on Indonesian biofuel as BKPM hints at easing foreign ownership caps
The European Commission has revealed that duties of eight to 18 per cent will be slapped on biofuels from Indonesia. The announcement comes after an EU investigation found that Indonesian biofuel producers benefit from grants, tax benefits and access to raw materials below market prices. The anti-subsidy duties will initially last for four months but could be extended to up to five years. In response, Indonesian Trade Minister Enggartiasto Lukita recommended a 20 to 25 per cent tariff be imposed on dairy products from the EU. Meanwhile, Thomas Lembong, head of Indonesia’s Investment Coordinating Board (BKPM), reported that the government is looking to ease restrictions on foreign ownerships by the end of the year in sectors that can support Indonesia’s digital economy.

NEXT WEEK IN ASIA

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

G7 Leaders meeting The leaders of the G7 will meet at the 45^th summit hosted in Biarritz, France, from 24-26 August. Discussions are expected on inclusive and sustainable economic growth, trade, technology and on the future Managing Director of the International Monetary Fund. This comes after last year’s fractious G7 meeting, following which President Trump pulled the US out of its assent to the previously agreed summit communique.

US-Japan trade talks to continue Japan and the US will be holding official level trade talks in Washington on 21 and 22 August, with the possibility that such talks could be upgraded to ministerial level. Both sides have accelerated negotiations on a possible reduction of agricultural and industrial tariffs, aiming to reach a broad agreement by late September. Washington has pushed for greater American access to the Japanese agriculture market while Tokyo has demanded that the US reduce tariffs on industrial products.

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Friday 9 August 2019

This week, trade tensions between the US and China escalate, Japan tentatively resumes exports to South Korea, and Pakistan seeks to apply pressure on India.

1. US labels China a “currency manipulator” as RMB falls
In a largely symbolic gesture, the US Treasury officially labelled China a “currency manipulator” after the Chinese central bank allowed the renminbi to fall below the key threshold of 7 per US dollar for the first time in 11 years. The People’s Bank of China responded in a statement saying that the yuan’s weakness was due to the fallout from the trade war and that it would not seek to change its currency policy. Furthermore, China’s Ministry of Commerce declared that it is also halting purchases of US agricultural products and would “temporarily not rule out the possibility of levying additional tariffs on imported US farm produce”. All in all, this suggests that the trade war is intensifying – with the US now having more political motivation to ramp-up tariffs and China signaling its willingness to engage in a currency war.

2. Japan allows exports to South Korea but issues warning over future shipments
Japan’s Ministry of Economy, Trade and Industry revealed that the government will allow exports of key semiconductor manufacturing materials to South Korea. This is the first such approval since restrictions were imposed in early July. Tokyo warned that it could still broaden shipment restrictions to its neighbour in future. South Korean President Moon Jae-in again denounced Japan’s export restrictions and called for a diplomatic solution to resolve the crisis, while hinting that further measures against Japan’s export restrictions could be announced soon. Meanwhile, Marc Knapper, US Deputy Assistant Secretary for Korea and Japan, pledged to continue engaging both countries, with the US willing to “facilitate dialogue”.

3. Pakistan suspends trade with India over change in Kashmir status
Following Delhi’s decision to strip its portion of Kashmir of its special status, Pakistan said it will review all bilateral agreements with India and suspend bilateral trade. Pakistan is also set to close a corridor of its airspace to Indian aircraft, the second time it has done so this year. It remains unclear as to when Pakistan will begin to enforce these retaliatory measures. Suspending trade is unlikely to have a large impact given the low levels of existing trade between the two countries. Indian Home Affairs Minister Amit Shah, who proposed the bill removing Indian Kashmir’s semi-autonomous status, argued that the move is “purely administrative” and designed to encourage peace and increase investment in the region.

4. China announces special tax policy in Shanghai Free Trade Zone
China’s State Council has announced that it will implement a special tax policy in the newly-expanded Shanghai Free Trade Zone in a bid to promote free trade. While no specific details have been provided, it has hinted that foreign companies will not be charged customs duties for goods transiting or stored in the zone. Additionally, China will grant crude oil import licenses to qualified companies and provide preferential tax policies for artificial intelligence, civil aviation, semiconductor and biopharmaceutical sectors. These new policies are part of a series of measures undertaken over the past year to improve China’s market access and its reputation among foreign companies.

5. Asian central banks follow US in cutting rates
Following the US Federal Reserve’s decision to cut its benchmark rate last week, several Asian central banks have followed suit. India’s Monetary Policy Committee brought their repo rate down by 35 basis points to 5.4 per cent, the lowest level in nine years. This rate cut was bigger than anticipated and aims to shield the country from currency depreciation. The Bank of Thailand and Reserve Bank of New Zealand also surprised markets with their rate cut, with the latter lowering its official cash rate to a record low of one per cent. Finally, the Philippines central bank (BSP) also cut their rate in line with projections, with the Governor highlighting that there is “room for further reduction in the policy rate as a preemptive move against the risks associated with weakening global growth”.

NEXT WEEK IN ASIA

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

Asian foreign trade and Malaysian GDP data – Trade data for several export reliant economies such as Singapore and Indonesia, alongside Malaysia’s second quarter GDP figures, will be released next week, offering an indication of the impact of ongoing trade tensions. Singapore’s exports have fared poorly over recent months as the trade war intensified and any further double digit decline is likely to prompt a change of policy by the Monetary Authority of Singapore when it meets later in the year. The GDP forecast for Malaysia is expected to lie within the Bank Negara Malaysia growth projection range of 4.3 per cent to 4.8 per cent.

Hong Kong Q2 GDP figures – Revised second quarter GDP figures for Hong Kong will be announced next week. They will give a more precise measure of the extent of recent political unrest on Hong Kong’s economic performance. Initial figures showed that Hong Kong’s economy only grew 0.6 per cent, largely due to a significant fall in investment and exports. Should the revised figures reveal a further fall, an increasingly weak global environment will make it even harder for the economy to bounce back in the second half of the year.

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Friday 2 August 2019 

This week, trade tensions have ramped up between the US and China, as well as South Korea and Japan, while the UAE and SoftBank make big investments in Asia.

1.  President Trump announces US$300bn worth of new China tariffs

President Trump has announced new tariffs on US$300 billion of Chinese imports after the latest round of trade talks in Shanghai concluded without a deal. This additional ten per cent levy on imports will be implemented on 1 September ending the pause in tariff increases agreed between President Trump and President Xi at the Osaka summit in June. The talks themselves yielded little concrete announcements aside from China agreeing to buy more agricultural goods from the US, while the US would “create favourable conditions” for imports. The announcement of new tariffs comes as new data shows that US-China cross-border investments hit a five-year low, dropping 18 per cent to US$13bn in the first six months of the year. Both sides did agree to meet again in early September, but it is unclear whether President Trump’s latest announcement will affect theses plans.

2.  Japan takes South Korea off preferential treatment trade list

The Japanese cabinet has decided to remove South Korea from the country’s preferential treatment list, effective from 28 August. The preferential treatment ‘whitelist’ allows countries to freely import goods from Japan that the government regard as sensitive, so South Korea’s removal would slow down imports of tools and products essential for their technology industry. Last minute talks between the two foreign ministers on the sidelines of the ASEAN summit in Thailand aimed at averting the measure broke down. The move comes amid heightened tensions between Japan and South Korea, following Tokyo’s decision to impose tighter export controls on certain materials used for microchips in early July, citing security concerns. The South Korean Assembly has passed a supplementary budget bill worth US$5.9 billion, which includes funding for industries affected by Japan’s export restrictions.

3. UAE signs US$20 billion worth of deals in China and Indonesia

The Crown Prince of Abu Dhabi, Mohammed bin Zayed Al Nahyan, has led a high-level UAE delegation to China and Indonesia, resulting in more than US$20 billion worth of deals in the two countries. The delegation signed US$9.7 billion worth of deals in Indonesia, including a US$2.5bn deal on oil and gas collaboration with Pertamina and a US$1.2bn deal for a new container terminal and industrial park involving DP World. In China, a deal worth US$11 billion will develop residential and leisure facilities at Beijing Daxing International Airport. In addition to the deals, other agreements were signed, including one with Didi Chuxing, which will set-up a joint venture headquarters in Abu Dhabi, and the China Everbright Group, which will help develop a joint platform for financial investments.

4. SoftBank to invest more than US$2 billion in Indonesia

Japanese investor SoftBank will invest US$2 billion in Indonesia through ride hailing giant Grab over the next five years. The investment will go towards creating a “next generation transportation network for cities and transform how critical services are delivered.” SoftBank founder Masayoshi Son met with Indonesian President Joko ‘Jokowi’ Widodo on Monday, where they discussed artificial intelligence and the development of an electric vehicle ecosystem. In addition, Son announced that the company would invest more in unicorns – startups valued at over US$1 billion – and help create more startups in the country. This deal represents a further boost for Jokowi, as figures released this week indicate that incoming FDI increased to 9.6 per cent year-on-year in Q2, standing at US$7.48bn.

5. Fed makes first rate cut in ten years

The US Federal Reserve lowered its benchmark interest rate by 0.25 percentage points from 2.5 per cent to 2.25 per cent – the first rate cut in more than 10 years – due to worries of a global slowdown and trade tensions. There is likely to be a domino effect in Asia as other countries follow the Fed’s lead, with emerging economies such as Indonesia, Malaysia and South Korea cutting rates again. While the Bank of Japan kept its monetary policy on hold at the July meeting, the Governor indicated that “if the momentum towards price stability is at risk”, the bank will not hesitate to take measures for further monetary easing. In the Middle East, countries have also followed suit, with the United Arab Emirates, Saudi Arabia and Bahrain all cutting their benchmark rates.

NEXT WEEK IN ASIA

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

China foreign trade and Asian GDP stats  – New statistics will be released on China’s foreign trade and the GDPs of key Asian countries next week, which will show the impacts of the trade war in the region. These include GDP statistics from Indonesia, the Philippines and Japan. It is expected that there will be signs of a slowdown in Indonesia, as consumption has stalled, while Japan’s cut in growth forecast this week are an indication of weakening exports to China.

Indian and Thai Central Banks decide Fed easing response – After the signal sent by Fed rate cuts this week the Indian and Thai Central banks will hold meetings next week to decide on how to respond. Predictions are that India will give another 0.25 per cent cut to interest rates, which will add on top of the 0.75 per cent already cut over the course of this year, while the Bank of Thailand will have to decide whether to keep monetary policy steady in the face of concerns over a strong baht.

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