The Week in Asia – January 2020

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

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FRIDAY 31 JANUARY 2020

Huawei given limited go-ahead for involvement in UK 5G infrastructure

The UK government this week approved a limited role for Chinese technology firm Huawei in building the UK’s 5G telecoms network. The government has designated the company a ‘high risk vendor’ and has imposed a 35 per cent market share cap on its work in ‘non-sensitive’ parts of the network, thereby excluding Huawei from sensitive geographic locations such as military bases. Huawei’s role in developing 5G networks has been hugely controversial amid US fears that it could compromise national security. The decision to cap Huawei’s involvement is at the lower end of what was expected by analysts, though perhaps better than expected for Huawei. It will mean that British companies involved in the project may have to adjust planned investments in the network – local telecoms companies such as BT, Vodafone, and Three, could end up paying as much as 20 per cent more for equipment if they have to buy equipment from Huawei rivals in order to comply with the new rules on Huawei’s involvement.

Indian government launches fresh bid to sell national airline

Prime Minister Narendra Modi’s government has launched a fresh bid to privatise Air India, the country’s national airline. Air India has been struggling with debt, and a previous attempt to privatise the airline two years ago was unsuccessful due to the conditions of the sale. This time around, the government is selling 100 per cent of the carrier, as well as its stake in low-cost unit Air India Express and airport services company AISATS. However, any buyer will also have to take on around US$ 3.3billion in debt, and Indian regulation states that control must stay within India – a foreign airline may only purchase 49 per cent of a local carrier. Such conditions will make a sale more difficult, given the large price tag (and debt), and international investors will be wary of the ownership stipulation. The sale is part of Modi’s larger privatisation plan, in which the government is aiming to sell stakes in five state-owned companies to raise funds and attract further investment.

Coronavirus fears affecting global markets

The intensification of the coronavirus epidemic is having an impact on global markets. The virus, which has spread to 18 countries already and led to the temporary closure of international businesses across China, is expected to further affect stocks. Shares in Chinese companies listed in Hong Kong and New York have been battered in recent days over concerns with the spread of the virus and the pressure it will put on China’s already-slowing growth. The situation could also prompt a 10 per cent correction in global equities, amid growing concerns around the impact to the economy from curbs to consumer spending, business operations, and travel. Analysts are expecting a sharp sell-off in mainland Chinese stocks when trading resumes next week.

Dovish economist nominated to Bank of Japan board

The Japanese government has nominated Seiji Adachi, a ‘dovish’ economist, to the Bank of Japan’s board. Adachi, who will be replacing Yutaka Harada, is noted for his reflationist policies. The appointment is a clear signal that Prime Minister Shinzo Abe is committed to his programme of massive monetary easing and stimulus, and shows that the Abe administration is comfortable with the current balance of the board at the bank – with a minority of reflationists and most acting as neutral policymakers. Adachi is a former economist at Deutsche Bank and was head of economic research at Marusan Securities.

IMF outlines US$1.3bn package for Jordan

The International Monetary Fund (IMF) announced a US$1.3 billion aid programme for Jordan this week, aimed at creating jobs and stimulating growth. Jordan will receive nine instalments of between US$140million and US$150million over four years, with the first instalment of US$140million expected by the end of March, subject to final approval by the IMF board. The package will support the government’s efforts to cut public debt while supporting economic growth as the country hosts an influx of Syrian refugees, the IMF said in a statement on Thursday. Jordan is currently pursuing an economic reform programme which includes measures to improve the investment environment, crack down on tax evasion, and encourage more women into the economy.

NEXT WEEK IN ASIA

Looking ahead to next week, here are some developments to watch out for:

India releases annual budget: Finance Minister Nirmala Sitharaman will present the national budget on 1 February, for the fiscal year starting 1 April. The budget comes as the government is looking to put economic growth back on track and create enough jobs for its workforce. The plan is expected to outline strategies to revive consumption and give struggling sectors a boost.

Indonesian president Joko Widodo to visit Australia: President Widodo and Foreign Minister Retno Marsudi will travel to Australia next week on a state visit amid growing cooperation on a free trade deal between the two countries. Marsudi is hoping to have the Indonesia-Australia Comprehensive Economic Partnership Agreement ratified by the Indonesian parliament before the visit.

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

FRIDAY 24 JANUARY 2020

Indonesia debates labour and tax reform to boost investment  

Indonesia’s parliament is looking to overhaul several-dozen tax and labour market laws in a bid to boost foreign investment and grow its manufacturing base. President Joko Widodo had promised that an ‘omnibus bill’ addressing these issues and amending 79 laws would be drafted within the first 100 days of his second term. The bill was discussed in parliament this week but has been met with protests in Jakarta amid fears it could harm local businesses and workers’ rights. The bill is likely to include tax and labour market reforms, including a lowering of corporate income tax from 25 per cent to 20 per cent by 2023, and the institution of a digital tax. By reforming laws linked to investment, intellectual property rights, land acquisition, and Indonesia’s labour market, Widodo hopes to create jobs and encourage greater foreign investment.

Moody’s cuts Hong Kong credit rating

Moody’s cut Hong Kong’s credit rating this week, citing the government’s inadequate response to months of protests. The rating was reduced from Aa2 to Aa3 and is the second such rating downgrade from a major agency since political unrest began in Hong Kong last year. Moody’s has attributed the downgrade to two factors: the deep-seated nature of the issues underlying the protests, and the government’s slow and ineffective response to them. The last year has seen Hong Kong’s economy operate under greater strain and its status as one of Asia’s major financial centres come into question.

Asia House explored Hong Kong’s outlook at its recent Future of Trade conference. Read more here

Amazon to create one million jobs in India

Amazon CEO Jeff Bezos was in India this week where he announced that Amazon will create one million more jobs in the country by 2025. Amazon is one of many global technology companies looking to engage with the huge potential stemming from India’s growing economy and large domestic market, particularly as Prime Minister Narendra Modi has emphasised that foreign investment is a key priority for his government. India has moved up the ranking of the World Bank’s ease of doing business index under Modi’s administration. However, Bezos also met with protests and a somewhat lukewarm reception following the launch of a probe from India’s antitrust body. India has historically attracted foreign companies despite a challenging investment climate, but given the current global economic slowdown and a changing international geopolitical environment, Modi’s government will have to consider the best way forward for attracting and retaining foreign investment, particularly in the tech sector.

Indonesian unicorn Tokopedia set for fresh funding round

Tokopedia, Indonesia’s largest e-commerce marketplace, is preparing to fundraise up to US$1.5 billion from investors. The fundraising round, which could come as soon as Q2 2020, could bring in investors such as Temasek, Alibaba, and SoftBank, and would value the company at between US$8billion and US$9billion. The additional capital would allow Tokopedia to effectively cement its place as the country’s largest e-commerce platform. This upcoming funding round has, however, raised concerns of a ‘capital arms race’ in local e-commerce, similar to what was seen among ride-sharing companies in Southeast Asia in 2018 and 2019. Tokopedia, with its first-mover advantage and unique model of connecting buyers and sellers directly, is likely to be at an advantage in any such competition among platforms.

Surge in foreign companies setting up in Saudi Arabia

A total of 1,131 new international companies set up operations in the Kingdom of Saudi Arabia in 2019, according to a report released this week by the Saudi Arabia General Investment Authority. This represents a 54 per cent increase on 2018. Leading growth sectors include construction, manufacturing and ICT, as demand in these industries increases alongside infrastructural development and the progress of the Kingdom’s giga projects. The Kingdom’s growing foreign investment landscape is being underpinned by sweeping economic and social reforms made throughout 2019, aimed at improving Saudi Arabia’s business climate and attracting new international companies.

These trends will be explored at The Asia House Middle East Trade Dialogue in Riyadh, Saudi Arabia, on 25 February. Lubna Olayan, Chair of Saudi British Bank and Chair of the Executive Committee and Deputy Chairman, Olayan Financing Company, will give the keynote speech. REGISTER

NEXT WEEK IN ASIA

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

Markets in China closed next week. Markets in China will be closed next week for New Year celebrations, although the usual month-end economic data releases will be published. The outbreak of coronavirus is also likely to weigh on markets, with shares in mainland China and Hong Kong already falling in the wake of the quarantine of Wuhan.

Motorcycles-for-hire illegal from next week in the Philippines: The Philippines’ Land Transportation Franchising and Regulatory Board (LTFRB) is seeking to regulate motorcycle taxis in the country, and has recommended the termination of a pilot study on the safety of motorcycle taxis as public transport. The body will declare motorcycles-for-hire ‘illegal’ from next week, with any found to be impounded. The LTFRB will be speaking before the Senate to discuss further regulation on motorcycles-for-hire.

FRIDAY 17 JANUARY 2020

US and China sign ‘Phase One’ trade deal

US President Donald Trump and Chinese Vice Premier Liu He signed the much-discussed ‘Phase 1’ trade deal in Washington DC. Under the agreement, the US has promised to halve the existing 15 per cent tariff to 7.5 per cent on US$120 billion of Chinese imports from food to technology, and to not proceed with planned tariffs on US$160 billion of Chinese products. This is in return for Chinese pledges on currency, intellectual property and the purchase of US$200 billion in US agricultural, manufacturing and energy products and services above 2017 levels over the next two years. The majority of the US tariffs on China will, however, remain in place, with a reduction in tariffs subject to successful implementation of the deal. While the agreement is a welcome de-escalation in the 18-month-long trade war, and likely to boost investor confidence, ultimately it only addresses a minimal set of issues. The more controversial elements of the tensions – namely Chinese industrial subsidies and rivalry over new technologies – have been left for the second round of negotiations.

READ analysis on the deal from Asia House Advisory

Taiwanese presidential incumbent wins landslide in blow to Beijing

Taiwanese presidential incumbent Tsai Ing-wen won a landslide victory in Sunday’s presidential election. As leader of the pro-independence Democratic Progressive Party, Tsai’s victory was a blow to China’s efforts to play a greater role in Taiwanese politics. Tsai has traditionally been unpopular with Beijing due to her emphasis on Taiwan’s sovereignty and democracy as the central feature of her platform. Sunday’s election reflected voters’ reactions to China’s response to Hong Kong’s recent protests, with many now believing that Hong Kong’s ‘one country, two systems’ model is unfeasible. Just a year ago, Tsai was in political trouble, with low approval ratings and little chance of re-election – but recent political unrest in Hong Kong and Taiwan have increased support for Tsai’s pro-independence campaign platform.

US, Japan, and EU issue joint statement calling for stronger global trade rules

The US, Japan, and the EU issued a joint statement on Tuesday pushing for more stringent global trading rules and tougher World Trade Organization (WTO) curbs on government subsidies. The proposed rule changes include a wider WTO ban on types of state support and for governments to prove that aid to companies does not distort trade. The joint statement in effect represents a joint call for further pressure on Beijing’s model of state-sponsored capitalism. The US and other allies have argued that there are loopholes in WTO rules and regulations that have been exploited.

Indonesia unveils steering group for new capital city

The Indonesian government has launched a high-level steering group in a bid to bolster investor confidence in plans for Indonesia’s proposed new capital city in Kalimantan. The steering group includes former UK Prime Minister Tony Blair, SoftBank head Masayoshi Son, Abu Dhabi crown prince Mohammed bin Zayed al-Nahyan, and Indonesian coordinating minister for maritime affairs and investment Luhut Pandjaitan. Foreign direct investment has been a key priority during Indonesian president Joko Widodo’s second term in office, critical for financing Indonesia’s current account deficit and US$400 billion infrastructure programme. External financing will be critical for Indonesia’s infrastructure push and capital city project, given that the state budget will cover less than 20 per cent of the costs.

New Sultan of Oman sworn in  

Oman’s longest-serving ruler, Sultan Qaboos bin Said Al Said, has been succeeded by his cousin Haitham bin Tariq Al Said, who was sworn in this week. Qaboos was widely respected for setting Oman on a path of development and leading the country to modernity, focusing on infrastructure and building diplomatic relations with neighbours. He also developed a reputation for maintaining Oman’s independence in a conflict-heavy region. Haitham has pledged to continue Oman’s policies of open diplomatic relations and plans for continued modernisation of the country, meaning business and economic reform of the country are likely to continue under the new Sultan.

NEXT WEEK IN ASIA

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

Three Asian central banks meeting next week: Bank of Japan, Bank Indonesia, and Bank Negara Malaysia are all set to meet next week. Dramatic policy moves by any of the three central banks are unlikely, although modest shifts are expected as they try to promote further economic growth amid a global slowdown.

World Economic Forum Annual Meeting in Davos: World leaders will gather for the World Economic Forum’s Annual Meeting in Davos next week, focusing this year on ‘stakeholders for a cohesive and sustainable world.’ With more than 3,000 delegates from around the world expected to attend, key discussions will centre around climate change and sustainability, digital disruption, and trade governance.

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FRIDAY 10 JANUARY 2020

India cuts growth forecast to slowest pace in 11 years

India’s government has forecast the economy to grow at five per cent this year, its slowest pace in 11 years. Key contributors to the downgrade include falling consumption, slowing industrial activity and stagnant investment. Though Minister of Finance Nirmala Sitharaman last week announced a major infrastructure push of US$1.4 trillion over the next five years, reforms implemented over the last year to combat crises in the financial sector have tightened conditions and lowered growth rates. There are also concerns that Prime Minister Narendra Modi’s government is more focused on pursuing its Hindutva agenda during its second term than on reinvigorating national economic growth. Tensions from recent legislation such as the Citizenship Amendment Act appear to have shifted the government’s attention from policymaking to the progress of its social agenda.

Jakarta bans single-use plastic from mid-2020

Following Bali’s example, Jakarta governor Anies Baswedan has introduced regulation banning single-use plastic bags in the city from the middle of this year. Indonesia is listed as the world’s second-worst offender for polluting the world’s oceans with plastic. The new regulation stipulates that shopkeepers and other producers should provide environmentally-friendly carrier bags, with penalties for not following such directives ranging from fines to suspension and termination of trading permits. Though many producers and suppliers have argued that a six-month implementation period is too short, the Indonesian government is increasingly aware of the impact that environmentally unsustainable policies are having on the country – including this month’s major flooding in Jakarta and the overuse of landfills.

South Korea announces US$51 billion infrastructure push ahead of elections

President Moon Jae-in has announced a US$51 billion public infrastructure drive ahead of elections in April. The government is struggling to boost economic growth despite low interest rates and a record fiscal stimulus, and South Korea is expected to record its weakest annual growth in a decade. Moon is under pressure to revitalise the economy and, having ruled out an artificial boost using the property market, has directed efforts into increasing spending at state-run institutions by 12 per cent. The bulk of spending has been earmarked for infrastructure building and housing construction.

More Chinese tech start-ups go bust amid ‘capital winter’

Hundreds of Chinese technology start-ups, including several unicorns, failed in 2019, new data reveals. In the face of strengthening financial headwinds, 336 start-ups in China were forced to shut down in 2019 costing investors US$2.5 billion. The country’s tech sector is struggling with a funding shortage as investors grapple with a slowing economy and the perceived end of a venture capital boom, thus limiting the flow of start-up investments. These challenges, combined with the risky strategies that start-ups in China are forced to employ to build scale and scope quickly, means further failures are likely in 2020.

Oil prices spike amid US-Iran tensions

Oil prices spiked to over US$70 a barrel this week following the killing of Iranian general Qasem Soleimani in a US air strike. Brent crude, the international oil benchmark, rose 3.5 per cent in the immediate aftermath of the strike. Increased tensions in the Middle East overwhelmingly impact the price of oil and related stocks, and though certain oil producers may benefit from higher prices, others, such as cyclical stocks, could be negatively impacted. Market reactions have however been more muted than expected, with investors tending towards moderation while waiting to see how tensions de-escalate over the coming days.

NEXT WEEK IN ASIA

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

China and the US to sign interim trade agreement next week: Chinese Vice Premier Liu He, who has acted as chief negotiator in the US-China trade talks, will visit Washington DC next week to sign a ‘Phase 1’ deal, which is likely to cut tariffs and increase Chinese imports of American agricultural, manufacturing, and energy products and services. The deal signals a truce in the 18-month long trade war between the two countries, but analysts do not expect it to resolve the fundamental issues of tech rivalry and structural conditions that are driving the tensions.

Japanese Prime Minister Shinzo Abe heads to the Middle East: Prime Minister Shinzo Abe will visit Saudi Arabia, Oman, and the UAE from January 12 to15 as regional tensions continue to spike. Abe has widely spoken about his concern over the tensions in the region, and has aimed to carve out a role for himself as a mediator between the US and Iran, both of whom Japan has long-standing ties with.