The Week in Asia – April 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 26 April 2019

This week, China dominates the headlines as it continues to navigate its place in the global economy, whilst South Korea pays a price for the trade war.  

1. China seeks to allay fears, but confirms push on Belt and Road 

China’s second Belt and Road forum kicked off on Thursday, with the Chinese leadership promoting its aims to make the Belt and Road Initiative (BRI) sustainable and prevent debt risks. The Chinese Ministry of Finance says it plans to work with its counterparts in other countries to achieve high-quality financing for BRI projects. According to China’s Central Bank Governor Yi Gang, it will focus on leveraging private sector capital and follow market principles.President Xi Jinping also said that China will not devalue the Yuan, but keep the currency stable. Some 37 heads of state attended the summit, but there is markedly less international interest than the first summit two years ago, as nations are concerned over the debt risks and China’s underlying motivation in rolling out the BRI.   

2. South Korea feels the effects of the trade war 

South Korea has experienced its worst quarterly contraction in economic growth since the global financial crisis, falling 0.3 per cent in Q1. The slide can be seen as a knock-on effect from the US-China trade tensions, slowing Chinese economic growth and a cooling electronics sector. President Moon is now under pressure to boost growth and improve unemployment, which is at a nine-year high. Following other companies in re-routing international supply chains in the face of changing global trade conditions, South Korean based LG Electronics will move smartphone production to Vietnam, which is becoming a manufacturing hub due to low labour and production costs. 

3. Chinese bid for Portuguese EDP collapses 

State-owned Chinese company China Three Gorges’ (CTG) €9 billion bid for Energias de Portugal (EDP), the Portuguese utility company, was voted down by shareholders. The deal would have been one of China’s largest takeovers in Europe. The bid has come to be seen as a litmus test for attitudes towards Chinese investment in critical infrastructure in Europe, amid the ongoing trade tensions and push by the US to have China’s Huawei banned from international 5G networks. Although technically voted down on the opposition to the scrapping of a voting rights cap for shareholders, the vote indicates continued reluctance for Chinese control over these critical infrastructure resources.  

4. Huawei sees wins in Asia and UK 

Malaysian Prime Minister Mohamad Mahathir visited Huawei in Beijing on Thursday, after other South East Asian nations – including the Philippines and Cambodia – agreed to increase collaboration with the technology provider. Although there were no deals done, the high-level visit was seen as a show of support for the Chinese company. Meanwhile in the UK, the National Security Council has – according to leaks – given the green light for Huawei to provide equipment for the contentious 5G networks, although not for the core of any operator’s network. These moves are politically significant, given the ongoing tensions between the US and China, and highlights the differing positions around the world over Chinese involvement in national infrastructure and the need to balance relationships between the world’s two largest economies.    

5. Hydrocarbon opportunities boom in Oman 

Investment in Oman’s Oil and Gas sector could reach US$40 billion in the next few years, according to Oman Oil & Orpic Group. This presents opportunities for international companies to become involved in upstream, midstream and downstream projects as Oman seeks to maximise the value creation from its natural gas and hydrocarbon resources. Most of the recently announced strategic infrastructure is linked to a huge integrated gas development in the Greater Barik area, which already involves international companies including Shell and Total.  

NEXT WEEK IN ASIA

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

Critical Phase IV in Indian election. Phase IV in the Indian Lok Sabha (lower house) election will take place on Monday 29 April, and will include the key states of Uttar Pradesh, Rajasthan and Maharashtra. Uttar Pradesh in particular is significant in Modi’s quest for re-election. The rest of the votes are scheduled to finish by 19 May, with counting completed on May 23. Asia House has partnered with the University of Nottingham’s Asia Research Institute to bring you ongoing analysis of the elections. Read the update here.

US sanction waivers to expire. The US will no longer exempt countries from sanctions against Iranian oil, meaning sanction waivers given to China, India, Turkey, Japan and South Korea will expire next week. Whether sanctions will be imposed immediately on these countries that trade in Iranian oil is unclear. The waivers were originally in place to prevent a spike in oil prices and are, according to the US, no longer needed due to a greater oil supply. Prices, however, jumped to a 6-month high on Monday and the end of the waivers may cause them to continue rising, increasing the cost of doing business around the world.  

Asian economic data to be released. Key economic data from across Asia is scheduled to be released next week, giving insight into the changing economic conditions as a result of China’s economic slowdown and the US-China trade tensions. China’s Industrial Profits as well as Manufacturing PMI will be released, which will highlight the current and future business activity in the economy with the biggest impact on the region. New South Korean imports and exports data will likely confirm the bad news from this week. PMI results from India, Malaysia, Taiwan, Thailand, South Korea and Singapore will also be released, giving a broad picture of business activity and future prospects across the region.   

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Friday 18 April 2019

This week, 193 million Indonesians voted in the world’s biggest single day election, the Philippines growth target was revised down and the US and Japan began trade talks.   

1. Joko Widodo set to win Indonesian presidential election

Quick count polls suggest incumbent Joko Widodo (known as Jokowi) is set for a comfortable win in the Indonesian presidential election. He is likely to receive between 54.4 per cent and 55.7 per cent of the vote, while Prabowo Subianto, his contender, getting between 43.9 per cent and 45.6 per cent. This would give Jokowi a relatively strong position to implement his policy agenda, continuing with economic reforms and pursuing international funding for infrastructure; however, the makeup of parliament is still unclear. This is good news for markets, which have already responded positively on the news, and for investors, as policy continuity under Jokowi means there is possibility for further opening up of the market. Official results for the Presidential race and parliamentary seats are expected to be released in May.

2. Philippines passes new budget; growth target down 

After months of delays due to squabbling between the upper and lower houses, the Philippines passed its largest ever budget at 4.1 trillion pesos (US$71 billion). A major driver of growth in the new budget is the huge infrastructure push, dubbed ‘Build, Build, Build’ by policymakers. The delay in passing the budget caused the Philippines to cut its growth target from to 6.7 per cent from 7.8 per cent for 2019. The outlook was also affected by uncertainty coming from the US-China trade tensions, which is impacting growth across the region. Last year, the Philippine economy grew the slowest in three years, based on weakening exports, manufacturing and agricultural output.   

3. Japan-US trade talks 

US and Japanese representatives began the first round of much-anticipated trade talks in Washington DC on Tuesday. US Trade Representative Robert Lighthizer welcomed Japanese Economic Revitalisation Minister, Toshimitsu Motegi, with the US saying it wants a temporary deal agreed in two days. Negotiations will target 22 specific areas, such as non-tariff barriers in Japan’s car market and currency, focusing on quick-win areas first. While the Americans are keen on getting tariff cuts for farm goods, the Japanese side will only agree to this if there are US concessions for Japanese industrial goods. Japan-US trade relations have been in the spotlight since President Trump’s push against the US’s large trade deficit with Japan, the world’s third largest economy, which official figures from the US Census Bureau put at US$67.6 billion for 2018. 

4. Singapore exports fall most since 2016 

Singapore’s non-oil exports fell 11.7 per cent in March, its largest slump since October 2016 and a lot worse than analysts’ expectations. The bad results were led by a 26.7 per cent year-on-year drop in electronics exports, following the sector shrinking over the past year – hit by the slowing demand for smartphones in Asia. This comes as economies in the region feel the effects of ongoing trade tensions as well as the slowing Chinese economy. In more bad news, Singapore’s first quarter economic growth of 1.3 per cent was the lowest year-on-year quarterly growth in a decade. The need to spur economic growth amid a challenging global environment will be a key focus for Singapore’s leadership in the run up to a general election, which must be held by April 2021. 

5. Media hype over China posting better Q1 results than expected 

Commentators were excited this week over China’s better-than-expected Q1 results, as it recorded growth of 6.4 per cent instead of the expected 6.3 per cent. However, this is still 0.4 per cent down from the 6.8 per cent growth a year ago. The result is probably due to Beijing’s stimulus packages, which saw industrial production surge by 8.5 per cent in March. These stimulus plans may not, however, be a sustainable way to maintain high growth. The global economic slowdown, US-China trade tensions and China’s economic transition mean China is likely to continue to see a downwards growth trajectory. 

NEXT WEEK IN ASIA

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

Belt and Road forum in Beijing. Around 40 world leaders and delegations from 100 countries will attend China’s second Belt and Road summit in Beijing next week. Attendees are expected to announce a joint declaration at the summit, signalling stronger cooperation and a drive for sustainable economic development. Leaders attending include Russia’s Putin and Thailand’s Prayut Chan-o-cha. UK Chancellor Philip Hammond is set to attend, aiming to discuss China-British economic and financial cooperation post-Brexit.  

Pakistan Prime Minister to sign agreements with China. Pakistan’s Prime Minister Imran Khan is one of the world leaders visiting China for the Belt and Road forum in Beijing. Pakistan and China are expected to sign several agreements to enhance bilateral cooperation, although the details have not yet been released. China has already agreed around US$60 billion in infrastructure loans for Pakistan, which is a major hub along China’s Belt and Road initiative. This comes amid an economic crisis in Pakistan, despite Islamabad receiving US$10 billion in short term loans from allies including Saudi Arabia and China.  

We’re partnering with the University of Nottingham to bring you the latest analysis on the Indian elections. Read this week’s update here.  

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Friday 12 April 2019

This week the US and China make further progress in trade talks, Modi makes more campaign promises and China attempts to ease European anxieties over economic relations.   

1. US and China overcome major hurdle in trade negotiations 

Both the US and China have agreed to monitoring and enforcement measures in the ongoing trade negotiations. The world’s two biggest economies agreed to establish reciprocal enforcement offices, in a sign that both sides are keen to conclude the negotiations. There is still no indication of the time-frame for a deal, but the trickle of good news coming out of negotiations suggests they are reaching their conclusion.  

2. Modi promises to spend US$1.44 trillion on infrastructure 

As part of his re-election bid, Indian Prime Minister Narendra Modi pledged to spend US$1.44 trillion on infrastructure to boost both the economy and living standards. This comes amid other populist campaign promises from Modi’s Bharatiya Janata Party – which is expected to win big in the elections – such as doubling farmers income and doubling manufacturing exports. The infrastructure investment would present huge opportunities for international companies, however, there are question marks over where the money will come from. Record numbers voted on Thursday 11 April as the national election began its first of seven voting phases. You can read a full weekly briefing on the Indian elections, prepared by experts at the University of Nottingham’s Asia Research Institute, on our website.

3. Li Keqiang tours Europe after a rise in China-EU tensions  

China’s second-highest official, Premier Li Keqiang, visited Europe this week for a five-day tour amid competing visions on the continent for future EU-China relations. At the China-EU Leaders meeting in Brussels, a signed joint statement included key Chinese concessions on curbing subsidies to domestic industries and facilitating market access for foreign companies. In Croatia, the Premier attended the 16+1 meetings between China and Central/Eastern European countries. Despite reports of unease from Poland and Romania over expanding trade deficits with China, the 16+1 meeting advanced trade and investment ties under China’s Belt and Road Initiative. Li is expected to witness an MoU signing between Huawei and Croatia, after saying the two nations are opening “a diamond period” in their relations. 

4. Saudi Aramco bond debut raises $US12 billion 

In one of the most oversubscribed debt offerings in history, Saudi Aramco issued US$12 billion of bonds after it received more than US$100 billion in orders from investors. The yields on the bonds are lower than those of the Saudi Arabian government which owns Aramco. The bonds sank two days in a row after the issue was complete, as oil prices dropped from a five-month high. This highlights a trend that subscriptions to highly anticipated bond deals are usually inflated by investors who are concerned on missing out on an allocation but then immediately sell off smaller allocations. The deal does indicate, however, that investors are willing to back the Kingdom’s economic future.  

5. Australian PM calls federal election 

Australian Prime Minister Scott Morrison has called a federal election for 18 May after his party’s position in the polls increased slightly following a budget release last week. Morrison’s liberal party are trailing behind the Labour party, however there has been a rise in unconventional voting patterns. The election is not likely to affect markets and the business environment in the short term, as it has in Australia’s regional neighbours. However, there could be long-term effects on foreign investment in certain sectors as Australia has been increasingly wary of foreign interference in domestic politics and the economy.  

NEXT WEEK IN ASIA

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

Indonesia goes to the polls. After a long election campaign, over 190 million eligible Indonesian voters will go to the polls in simultaneous elections for the President and members of the People’s Consultative Assembly. Jokowi has a reasonably comfortable lead according to the latest polls, however there are still millions of undecided voters and one public debate to go. Notably, Prabowo’s campaign has gained momentum over the last week. Results will be released progressively from 25 April, with the new President inaugurated in October. Legal challenges to the results are to be expected, especially as Prabowo is already announcing that there will be cheating in the vote counting process.  

World Bank and IMF annual Spring meetings. Starting today, the annual Spring meeting of the International Monetary Fund (IMF) and World Bank are set to conclude on Sunday 14 April. The annual meeting brings together finance ministers, central bankers, parliamentarians and representatives from business and civil society. Discussion is set to focus on how to overcome issues of global concern, including the worsening world economic outlook and ongoing trade tensions. IMF meetings have been ongoing since Monday 8 April, where the global economic outlook was downgraded, and public seminars on uncertainty, ageing and governance attempted to tackle challenging economic trends.  

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Friday 5 April 2019  

This week the forecast for Asia’s growth is downgraded but prospects for a US-China trade deal are looking up.  

1. Asian Development Bank cuts growth outlook for Asia 

The Asian Development Bank’s (ADB) growth projections for Asia have been reduced in its most recent report, which states that Asia’s growth (excluding the high-income newly industrialised economies of Japan, South Korea and Brunei) is projected to drop from 6.4 per cent in 2018 to 6.2 per cent in 2019 and 6.1 per cent in 2020. Overall risksfor the outlook remain tilted to the downside, as the uncertainty surrounding current trade tensions, US fiscal policy,slowing growth in advanced economies and even a disorderly Brexit could all negatively affect growth in the region. Natural disasters will continue to be one of the biggest threats to economic growth throughout Asia.  

2. Optimism surrounding latest round of US trade talks 

China’s top trade negotiator, Vice Premier Liu He, is in Washington for talks with US Trade representative Robert Lighthizer and Treasury Secretary Steve Mnuchin. Reportedly a draft agreement has been drawn up but some issues remain undecided, most likely the issues of enforcement and removing of tariffs. In a sign that the talks are reaching a conclusion, President Trump met with Liu He on Thursday evening. He said that there are no plans for a summit with President Xi Jinping just yet, however the ‘Grand Daddy’ of deals has a good chance of happening. An IMF report released on Wednesday rebutted the idea that tariffs address trade imbalances, saying instead that countries should seek to address macroeconomic issues within their own economies.  

3. ASEAN finance ministers agree to liberalise services 

As results from the national election remain uncertain, Thailand hosted a meeting of the ASEAN finance ministers this week. The ministers will sign an agreement to liberalise financial services throughout the region, although no clear timeline has been given. Thailand will liberalise its asset-management business, which will allow ASEAN investors to hold majority stakes in asset-management firms. Ministers also agreed to make electronic payments across borders easier, helping to grow an e-commerce market which has huge potential.  

4. Saudi Aramco is world’s most profitable company 

With almost double the profits of Apple and more than JP Moran Chase, Google-parent Alphabet, Facebook and Exxon Mobil combined, Saudi Aramco is revealed as the world’s most profitable company, generating US$111.1 billion in net income in 2018. The opening of its book also revealed, however, the company’s close ties to the price of oil and the Saudi state. The financial data was released in a prospectus as the company prepares to raise $US15 billion through a bond sale to help finance the planned $US69 billion purchase of a state-owned petrochemical company from the Saudi sovereign wealth fund.   

5. Japan business confidence at two-year low 

The Bank of Japan’s quarterly business survey revealed business confidence is at a two-year low, as the effects of the trade tensions and the slowdown in the Chinese economy take their toll. Concerns over rises in crude oil prices and reduced global demand also played a role. This is concerning for Japan which is struggling in the battle against its long period of deflation and faces an uncertain economic outlook. It raises concerns over the Prime Minister’s ‘Abenomics’ policy and may cause delays to planned action on fiscal reform.   

NEXT WEEK IN ASIA

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

India’s election begins. The first of seven phases of voting in India’s general election begins on April 11. The seven phases are spread over five and half weeks, with the last day scheduled for 19 May. Incumbent Prime Minister Modi is battling for re-election along with his Bharatiya Janata Party and its alliance partners. The parties are mainly campaigning over economic issues, with the main opposition, Congress party, promising to raise living standards by focusing on welfare programs and subsidies.  

Final Indonesian election debate. The fifth and final Indonesian election debate will be held on 13 April, and will cover crucial topics, including the economy, social welfare, the financial sector, investment and industry. The fourth debate of the election was held last weekend and saw the two contestants promote their visions for the future of governmental reform, the role of technology, international relations and defence. Jokowi flexed his muscles promoting e-government, whilst Prabowo decried what he sees as the flight of Indonesian wealth through foreign ownership of strategic industries. It is now Jokowi’s election to lose as the latest poll puts Jokowi on 55.4 per cent, while Prabowo is on 37.4 per cent. 

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