The Week in Asia – September 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 27 September 2019 

This week, the US and Japan sign a partial trade deal, Alibaba unveils its first self-developed AI chip, while Iraq embraces the Belt and Road Initiative.

1. US and Japan sign partial trade deal

US President Trump and Japanese Prime Minister Abe have signed a negotiated trade deal on the sidelines of the UN General Assembly this week. This initial and partial deal removes and lowers more than 90 per cent of Japanese duties on agricultural goods, such as frozen beef and pork. Conversely, the US will remove and lower duties on some US$40 million of agricultural imports, such as green tea and soy sauce. Nothing in the deal mentioned the US’s controversial automotive tariffs, though Prime Minister Abe has stated he has received reassurances from President Trump that no additional tariffs will be added. Both sides hope that this will be the first step towards a more comprehensive free trade deal, in which the US seeks to reduce the US$67.6 billion trade deficit it has with Japan.

2. Alibaba develops AI chip as China pushes semiconductor sector

Alibaba Group Holding Ltd has unveiled its first self-developed chip which can be used for Artificial Intelligence (AI) processes. The company hopes the Hanguang 800 will upgrade its computing capability in their e-commerce business. This is part of China’s wider bid to develop a homegrown computer chip industry, with semiconductors a huge focus of China’s ‘Made in China 2025’ strategy. Within the context of the trade war, China aims to reduce reliance on US chip producers. China has a huge need for externally produced chips, amounting to an overall deficit in the product of US$227.4 billion in 2018 alone.

 3. Iraq announces its participation in China’s Belt and Road Initiative

Iraqi Prime Minister Adel Abdul-Mahdi has announced that his country will join the Belt and Road Initiative, praising China’s ‘valuable support’ in the country’s reconstruction. With the announcement coming at the end of his visit to Beijing, the Prime Minister affirmed that Iraq ‘belongs to Asia and… want(s) to be part of its rise’. The development underlines the good relations between the two countries. China is Iraq’s largest trade partner, and bilateral trade in 2018 was worth more than US$30 billion. Iraq is China’s second-largest overseas supplier of crude oil. While the relationship has been limited to oil and manufactured goods in the past, it will now extend to infrastructure projects spanning electricity and the construction of schools and hospitals.

4. Saudi Arabia launches new visa regime to attract tourists for first time

Saudi Arabia has launched a new visa regime, which would allow tourists from 49 countries into the Kingdom for the first time. Previously, most foreign visitors to the Kingdom were there for business, work or as part of the annual Hajj pilgrimage, with the latter almost exclusively making up the tourism contribution to the economy. This move is part Saudi Arabia’s showpiece Vision 2030 strategy, which aims to diversify the economy away from energy reliance. The tourism element of Vision 2030 will boost the sector’s contribution to GDP from three to 10 per cent by 2030 – equating to around US$100 billion. There is also a target to have 100 million visitors per year, up from the current 40 million the Kingdom receives annually. Saudi Arabia is broadening its appeal to foreign investors to meet these targets, with tourism chief Ahmad Al-Khateeb predicting that around US$67 billion will be needed to build the necessary infrastructure.

5. Japan pledges US$10 billion into global LNG infrastructure projects

Japan’s new Minister for Economy, Trade and Industry, Isshu Sugawara, has announced that the country will pump US$10 billion into global liquified natural gas (LNG) infrastructure. The funding is to derive from both public and private sources, and doubles the commitment that Japan made two years ago to fund energy supply chains. The previous commitment was dedicated to upstream initiatives in Russia, Canada and Mozambique, but the new initiative will cover all stages of LNG production and transportation, focusing on Asia. Japan is the world’s top buyer of LNG, importing 89 million tons a year. LNG accounts for 40 per cent of Japan’s electricity generation, and its use has increased since the Fukushima nuclear disaster in 2011. Investment in global LNG infrastructure is especially prescient after the recent Saudi Aramco attacks, and is part of a move to reduce both Japanese and world dependence on Middle Eastern oil.

 NEXT WEEK IN ASIA

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

China to celebrate 70^th National Day: China will celebrate the 70^th anniversary of the foundation of the People’s Republic of China on Tuesday, in what is expected to be large scale celebrations across the country. While there will be a large parade in Beijing to commemorate the occasion, celebrations in Hong Kong are likely to be muted amid protests that have rocked the city.

Afghanistan Presidential Elections: The first round of presidential elections will take place in Afghanistan on Saturday, having been twice postponed. Against a background of failed peace talks with the Taliban, there are concerns that attacks and fraud allegations could mire the elections, as they did in the previous presidential vote in 2014.

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Friday 20 September 2019 

This week, Aramco aims to recover and stick to IPO plan after attack, US-China trade negotiations restart in Washington and WeWork decides to delay its IPO.

1. Aramco IPO plan still in pipeline after attack, as governments race to meet oil demand

The highly-anticipated Saudi Aramco IPO won’t be affected by last week’s attacks on oil facilities in Abqaiq and Khurais, Saudi Arabia’s Energy Minister, Prince Abdulaziz bin Salman, stressed this week. Five per cent of the world’s oil supply, as well as 50 per cent of total Saudi production, were affected as a result of the attacks. Oil prices jumped 19 per cent on Monday, before dropping and stabilising as President Trump suggested strategic reserves would be used to weather the decrease in supply. The attacks also saw China’s Unipec accelerate crude oil purchases from the US, and India’s oil minister explored the option of buying oil from Russia’s state oil company, Rosneft. Prince Abdulaziz bin Salman said he expects oil production to return to normal by the end of the month, which would bode well for the projected IPO release in 2020.

2. US-China trade negotiations restart in Washington

Chinese officials have arrived in Washington to restart stalled negotiations aimed at resolving the US-China trade war. The delegation is being led by China’s vice-minister for finance, Liao Min, and the aim is to prepare for high-level talks that are due to take place in October. Sources close to the Chinese government suggest that an interim trade deal may be reached next month, with China agreeing to buy more American farm products in return for the US postponing tariffs and easing restrictions on Huawei – which has been heavily impacted by the ongoing tensions and had to launch their latest smartphone, the Mate 30, this week without key Google apps. US Trade Representative, Robert Lighthizer, has spoken of his “determination” to land a “real agreement” with China, which would take substantive issues regarding intellectual property and technology transfer into account.

 3. WeWork delays US$20bn IPO

The We Company, the parent of multibillion-dollar tech unicorn WeWork, has decided to delay this month’s WeWork IPO release, due to a lacklustre response from investors.  The delay of the IPO, which was expected to be worth US$20 billion, comes amid operating losses and corporate governance issues at the company. The move represents a blow to Japan’s SoftBank and its Vision Fund, which has a US$10.65 billion investment in the company. WeWork now faces a quandary, as an IPO by year’s end is needed in its agreement with lenders for a US$6 billion credit line, which is critical for its expansion plans. WeWork hopes to review the situation in October, but sources say that SoftBank would prefer an even longer delay.

4. Solomon Islands and Kiribati shift recognition from Taiwan to China

The Pacific Island nations of the Solomon Islands and Kiribati have decided to shift their diplomatic recognition from Taiwan to China, in a move likely to provoke regional and international tensions. China had offered the Solomon Islands a reported US$500 million in financial aid for its change in recognition, leading to criticisms from Taiwan’s foreign minister of China’s ‘dollar diplomacy’. The Solomon Islands and Kiribati, as well as other islands across the South Pacific, have huge significance in the battle for regional supremacy between China and the US and its allies, despite their small populations. Australian Prime Minister, Scott Morrison, had announced US$250 million worth of grants to the Solomon Islands in June in an effort to guard against Chinese influence. US Vice President Mike Pence has cancelled a meeting with Solomons Prime Minister Manasseh Sogavareto discuss proposed development partnerships as a result of the switch.

5. E-cigarettes banned in India

India has announced it will be placing a ban on e-cigarettes this week, with its finance minister saying the measure was in response to “the impact that e-cigarettes have on the youth of today”. The executive order covers the production, import, sale, distribution and advertising of e-cigarettes, and could give jail terms of up to three years to offenders. With more than 100 million smokers, the Indian market offered a lucrative opportunity for e-cigarette producers such as Juul and Philip Morris. India joins a number of nations across Asia to have completely banned e-cigarettes over youth and health concerns, including Indonesia, Malaysia and Thailand – or who have restricted their use – including Hong Kong and Japan.

 NEXT WEEK IN ASIA

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

Hong Kong discussions between Carrie Lam and public to start. Hong Kong Chief Executive, Carrie Lam, will participate in dialogue sessions with members of the Hong Kong community next Thursday in order to find a way to end the protests. Lam will meet 150 randomly selected citizens, and topics such as land shortage, housing and other issues affecting young people are expected to be discussed.

Details emerge as Modi to meet Trump twice next week. Indian Prime Minister Narendra Modi is due to meet US President Donald Trump twice next week to discuss moves toward increased partnership between the two countries. PM Modi will join President Trump at an Indian-American rally in Houston, before meeting in New York. Strong efforts are being made on trying to reduce trade frictions, as well as improving bilateral defence ties.

Rugby World Cup in Japan kicks off. The ninth Rugby World Cup kicks off in Japan this weekend; the first time the tournament will be held in Asia. Half a million fans are due to descend on matches during the tournament. The estimated economic effect of the tournament stands at US$4 billion and it represents a good chance to embed the rugby industry in new Asian markets.

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Friday 13 September 2019 

This week, Jack Ma steps down from Alibaba, Saudi Aramco selects the banks that will help prepare its IPO listing, and South Korea files a WTO complaint over Japan export curbs.

1.  Hong Kong’s credit rating downgraded

Global credit rating agency Fitch downgraded Hong Kong’s rating from AA+ to AA, following months of protests and unrest in the territory. This is the first time it has received a rating downgrade from the agency since 1995. Fitch have also warned that a future downgrade may be in the pipeline if protests continue. Describing its reasoning behind the downgrade, Fitch said the protests in Hong Kong threatened ‘the stability and dynamism of its business environment,’ and are ‘testing the perimeters and pliability of ‘one country, two systems,’ – but added that the current governance arrangement is likely to remain intact. The move has been decried in Chinese media as being ‘politically motivated’, while Carrie Lam, Hong Kong Chief Executive, has disagreed with Fitch’s view. Other fallout from the protests include statistics showing that tourism in Hong Kong has taken a hit, with visitor numbers 40 per cent down compared to the same time last year.

2. Jack Ma hands over the reins of Alibaba 

Alibaba Group’s Co-Founder and Executive Chairman, Jack Ma, has stepped down from his role as the company’s head, naming CEO Daniel Zhang as his replacement. He leaves behind one of the world’s most valuable companies, with a market cap of almost half a trillion dollars. Ma announced his retirement last September. Share prices have increased by 10 per cent over the last year, and April-June quarterly revenue was US$16.15 billion – an increase of 42 per cent from a year earlier. However, Alibaba are facing increasing challenges in a race to get new users, such the competition between Alipay and Tencent’s WeChat Pay. Nevertheless, the recent US$2 billion acquisition of Chinese cross-border e-tailer Kaola, which gives Alibaba more than half of the market share in Chinese cross-border e-commerce, shows Alibaba has no intention of slowing down as the leadership changes.

 3. Saudi Aramco taps banks in preparation for IPO listing

Saudi Aramco has selected nine banks to take part in its planned IPO, in what could be the world’s largest stock market offering. They include international players such as J.P. Morgan, Morgan Stanley and HSBC, as well as Saudi Arabia’s own Samba. The other banks named are Goldman Sachs, Bank of America Merrill Lynch, Credit Suisse, Citi and National Commercial Bank. Aramco’s CEO announced that a foreign float would be done alongside the main domestic listing and is planned for 2020-21, though may take place sooner. The news was enough to almost wipe out this year’s gains in the Tadawul stock market – the Arab World’s biggest – as investors realise that after many delays, the IPO is likely to go ahead soon. Three years in the making, the government of Saudi Arabia hopes to raise US$100 billion by offering five per cent of the company, though whether Aramco is worth US$2 trillion is a matter of heated debate.

4. South Korea to file WTO complaint against Japan over export curbs

South Korea’s trade minister has announced that the country plans to take Japan to the WTO over its tighter export controls, claiming they were ‘politically motivated’ and ‘discriminatory’. Of particular impact has been the tighter export controls on materials needed for the production of smartphone chips and displays. As part of the process, South Korea will request consultations with Japan to push for the withdrawal of export curbs, and if this does not solve the issue, it will be decided by a WTO panel. However, Japan won a separate WTO case this week regarding South Korea’s tariffs on Japanese pneumatic valves in 2015. South Korea now faces a deadline by which to come into compliance or face retaliatory action, thus deepening the gulf in relations between the two countries.

5. Issues between China and India holding up RCEP

Negotiations on the Regional Comprehensive Economic Partnership (RCEP) are being held up, reportedly due to disagreements between India and China. India’s foreign minister has criticised China for what he described as one-sided trade policies, decrying ‘unfair’ market access which has created a trade deficit of US$53.6 billion in China’s favour. Other issues dragging negotiations include a reluctance from countries in Southeast Asia to receive large numbers of Indian workers in return for greater market access. Negotiators hope that the RCEP deal, which would encompass 16 countries and one third of global trade, will be concluded by the end of November. This would clear the way for signing in 2020, but this latest spat may delay progress and provoke a debate on whether to proceed with or without India.

 NEXT WEEK IN ASIA

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

New UN General Assembly session begins: The world’s diplomatic showpiece conference, the UN General Assembly meeting, starts next week. There is a prospect of a US-Japan trade deal being completed and signed on the side lines of the Assembly, as well as other bilateral discussions, including talks between Indian Prime Minister Narendra Modi and US President Donald Trump.

China’s People’s Bank tipped to start incremental rate cuts next week: The People’s Bank of China is predicted to start an extended cycle of rate cuts from as early as next week, through its new Loan Prime Rate system (LPR). LPR uses an average of the rates from 18 designated banks for their best clients to form a benchmark rate. It would follow a global monetary easing cycle, as well as the People’s Bank’s decision to pump US$126 billion into the banking system to boost lending.

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Friday 6 September 2019

This week, China takes the US to the WTO over tariffs, a tax and investment overhaul is in the pipeline for Indonesia, and the Philippines slap cement tariffs on Vietnam while defending their online gambling industry.

1. China takes US to WTO over tariffs while new negotiations will begin in October
China has made a formal complaint to the World Trade Organization (WTO) regarding the recent imposition by the US of 15 per cent tariffs on US$110 billion worth of Chinese goods. According to a statement from China’s commerce ministry, the new tariffs ‘violated the consensus reached by the two heads of state in Osaka’. Nevertheless, renewed trade talks are set to begin again in October. This news comes as several countries report feeling the effects of the trade war, with China’s industrial growth slowing since the second half of 2018 and its economic growth hitting a 30-year low. Singapore’s growth forecast for this year was downgraded from 2.1 to 0.6 per cent, with next year’s being cut from 2.4 to 1.6 per cent.

2. Tax overhaul in pipeline for Indonesia as Jokowi tells ministers to be friendlier to foreign investment
Indonesian finance minister, Sri Mulyani Indrawati, announced the preparation of a new tax bill that will have a big impact on international tech firms. One proposal is to make tech firms – such as Google and Amazon which have a ‘permanent establishment’ in Indonesia – liable for VAT, even if they do not have an office in the country. Wider plans include the reduction of the corporate tax rate from 25 per cent to 20 per cent from 2021, as well as a reduction for companies with a public share of at least 40 per cent from 20 to 17 per cent. Meanwhile, President Joko Widodo has demanded the government do more to accommodate foreign investors, as new data reveals that no companies relocating from China due to the trade war have moved to Indonesia, opting instead for other ASEAN members such as Vietnam, Malaysia or Thailand. Reducing the amount of time it takes to have operating permits approved was one measure the President highlighted.

3. Philippines set to protect cement and gambling industries
The Philippine government is introducing tariffs on cement imported from Vietnam, citing a need to protect domestic industry from cheap imports. A US$4.80 duty will be applied on every metric tonne of cement imported, to be implemented in two weeks’ time. The country’s need for cement has increased hugely due to President Duterte’s large-scale ‘Build, Build, Build’ infrastructure scheme. Meanwhile, the President has reaffirmed commitment to the country’s online gambling industry after Chinese President Xi Jinping made an implied request to ban it during their meeting last week in Beijing. There have been accusations from the Chinese side that the industry fuels cross-border money laundering. However, the government is keen to maintain the sector, due to the fact that it employs 350,000 people and is expected to create US$154 million in license fees alone this year.

4. South Korea eyes up Southeast Asia co-operation amid trade tensions with Japan
South Korea has signed a military intelligence-sharing agreement with Thailand, in a move regarded as reacting to the current dispute with Japan. Having already ended its intelligence-sharing agreement with Japan, South Korea’s new move upgrades the alliance with Thailand and may lead to more defence deals in the future. President Moon also agreed to support Thailand’s 4.0 strategy to promote increasing innovation and R&D co-operation. South Korea has also recently positioned itself closer to another ASEAN member state, Myanmar, with President Moon agreeing to double Seoul’s economic development cooperation fund to US$1 billion between 2018 and 2022, having already become the sixth-largest investor in the country. As trade tensions worsen with Japan, it is clear that South Korea hopes to win around ASEAN nations as part of a wider realignment of its foreign relations.

5. Lebanon to declare economic emergency
Lebanese Prime Minister, Saad al-Hariri, has announced he will declare a state of economic emergency in the country. The move is aimed at enabling the government to plan for the acceleration of public finance reforms, especially deficit reduction measures. Lebanon is dealing with one of the world’s heaviest public debt burdens, which currently stands at 150 per cent of GDP. The predictions from the IMF this year are that the deficit will reach 9.75 per cent of GDP, meaning the government’s aim to get it below five per cent by 2022 will be a tall order. The Prime Minister also stated that some of the measures debated include closing government units that are seen as wasteful to the treasury and to hold public offerings for some of their state-owned enterprises. He hopes the reforms will help unlock the US$11 billion pledged last year to finance investment.

NEXT WEEK IN ASIA

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

Japanese Government reshuffle expected: Prime Minister Shinzo Abe announced that a cabinet reshuffle will take place on 11 September. There will be particular interest in where Economic Revitalization Minister Toshimitsu Motegi lands; he was the top negotiator in trade talks with the US and is expected to be promoted to a senior cabinet position.

Merkel visit to China to conclude: German Chancellor Angela Merkel will conclude her visit to China on Saturday. After meeting with Premier Li Keqiang, she will meet with President Xi Jinping at the head of a large business delegation, as well as travelling to Wuhan. Merkel will be hoping that an EU-China investment deal can be agreed soon, but issues surrounding Hong Kong are also likely to be brought up during the talks.

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