The Week in Asia – July 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.

Join our mailing list and get The Week in Asia direct to your inbox 

Friday 26 July 2019

This week Malaysia’s Belt and Road project relaunches, there is a frenzy around Shanghai’s new ‘Star Market’, and nations across the region continue the push for transport infrastructure.

1. Malaysia relaunches Belt and Road East Coast Rail link

Malaysia relaunched construction on the Chinese-funded East Coast Rail Link after it was suspended for a year following Prime Minister Mahathir Mohamad’s election. Mahathir had called the deal ‘unfair’ and was the first regional leader to publicly push back against a Chinese Belt and Road funded infrastructure deal. Since then, the two nations have renegotiated the deal in a rare agreement which cut costs by nearly a third to around US$11 billion. China Communications Construction is still the lead contractor, but 70 per cent of the workforce will be local and domestic contractors will receive 40 per cent of the civil works. The decision to resume the rail project has boosted investor confidence in Malaysia.

2. Shanghai Stock Exchange debuts new market

There are already three new billionaires this week after Shanghai’s new Nasdaq-style Star Market began trading on Monday. There were 25 companies trading at the opening, as a buying frenzy ensured high share prices. Star Market was created as a way to bolster China’s technology companies amid the ongoing US-China trade war. It is aimed at fundraising for Chinese companies involved in technology fields such as chip making and biotechnology. The new market also hopes to harness local wealth and entice Chinese giants Alibaba and Tencent back from the stock markets in New York and Hong Kong.

3. Saudi Arabia to build futuristic hyperloop

Virgin Hyperloop One has signed a deal with the Saudi Arabian government to build a test track for its hyperloop concept – an innovative transport system in which passengers and cargo are propelled through a tube in a pressurised pod. The system could move cargo 10 times faster than existing rail systems. The project includes a 35km test track and is set to have a profound impact on the Saudi economy. It will build local expertise and lead to the development of localised hyperloop supply chains. It will also accelerate the growth of innovation clusters across the Kingdom. All of this will foster job creation and possibly propel Saudi Arabia towards becoming a global transport leader.

4. Jakarta to invest US$40 billion in infrastructure

Jakarta – which experiences some of the world’s worst traffic problems – will invest more than US$40 billion to upgrade its transport and related infrastructure over the next ten years. Municipally owned PT MRT Jakarta will borrow money from lenders including Japan International Cooperation Agency, Asian Development Bank and China-backed Asian Infrastructure Investment Bank in order to extend the MRT to cover 38 km. The government is also seeking funding from the private sector, but is facing the perennial obstacles of proving profitability and ensuring a good business environment.

5. Alibaba to allow US sellers on its platform

Alibaba will permit US firms to sell products on its business-to-business platform Alibaba.com. This will allow American companies to access new customers in China and in the 190 countries and regions that the Chinese e-commerce giant serves. It will also allow Alibaba to compete with other e-commerce giants, especially US leader Amazon. Founder Jack Ma had originally agreed with President Trump two years ago to increase Alibaba’s presence in the US, however reneged on these plans citing the US-China trade war. The decision announced this week comes at a good time as trade talks are set to restart. Alibaba’s move could create as many as one million new jobs in the US by increasing its business activity in China.

NEXT WEEK IN ASIA 

US-China trade talks set to resume. The first face to face talks between the US and China since May will take place on 30-31 July in Shanghai, with more talks due to take place in Washington at a later date. The talks were restarted after US President Donald Trump and Chinese President Xi Jinping met on the side-lines at the G20 summit last month. The talks will be a broad discussion of many outstanding issues such as intellectual property, the trade deficit and agriculture.  The US will be represented by Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer. China’s Commerce Minister Zhong Shan, considered relatively hard-line, will be joining Vice Premier Liu He who will be leading the negotiations. Both sides remain far apart on the terms of any deals, with the US wanting China to correct “unfair and illegal” trading practices. China, meanwhile, insists that both sides need to compromise.

ASEAN Foreign Ministers’ Meeting. The 52^nd ASEAN Foreign Ministers’ Meeting will be held in Bangkok from 29 July-3 August. These meetings are a key forum for ASEAN to assess the bloc’s response to global and regional challenges. The topics being covered include connectivity, sustainability, the environment and financial inclusion. The region’s relationships with its neighbours will also be discussed. China is pushing for closer cooperation with ASEAN as it seeks to strengthen ties around its Belt and Road Initiative.

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

Want to get The Week in Asia direct to your inbox? Sign up to our mailing list and keep up to speed with Asian trade, investment and policy developments.

Friday 19 July 2019

This week, Southeast Asia’s economy continues to face uncertainty, the WTO rules against the US and Japan’s SoftBank leads in tech investment.

1. Singapore’s economy slows along with regional slump in trade

Singapore’s non-oil domestic exports contracted 17.3 per cent in June, the biggest fall in six years and sharply below analysts’ expectations. The slump was largely due to the electronics sector which declined by 31.9 per cent due to the knock-on effects of the US-China trade war and the current trade impasse between South Korea and Japan. Combined with weaker than expected Q2 economic growth, which was only at 0.1 per cent, this prompted the International Monetary Fund (IMF) to cut its growth forecast for Singapore from 2.3 per cent to two per cent. In an indication of the region’s wider malaise, and citing weaker external conditions, the IMF has also cut Vietnam’s annual growth forecast from 7.1 per cent to 6.5 per cent.

2. WTO rules in favour of China against the US

The World Trade Organization (WTO) has ruled in favour of China against the US in a tariff dispute that predates the current trade war. The ruling outlined that some US tariffs on Chinese goods do not comply with WTO rules. Although the WTO appellate body accepted the US argument that Chinese state groups subsidise the cost of materials, it said the US must accept the Chinese pricing when calculating tariffs. This deals a blow to US efforts to force Chinese reform over what Washington views as unfair state support for goods manufacturing. The decision opens the door to retaliatory actions from Beijing if the US does not revise tariffs in line with Chinese pricing.

3. SoftBank leads record number of mega-funding rounds in Q2

The number of funding rounds by private companies, totalling US$100 million hit a record number in Q2 of this year. Funding was led by Japanese conglomerate SoftBank, which participated in four of the five largest deals globally. This included a US$1.15 billion investment in US driverless car company Cruise Automation and a US$1 billion investment in Colombian delivery company Rappi. The infusion of private capital into start-ups allows them to continue operations without oversight by public investors and delays their arrival onto public markets.

4. Jokowi outlines second term vision

At a rally attended by thousands of supporters, Indonesia’s re-elected President Jokowi announced his vision for his second term. The already announced infrastructure drive – approximately US$450 billion to be spent over the next five years – featured alongside improving human resources, opening up investment opportunities to foreign capital and increasing employment opportunities. Indonesia’s economic growth rate has stagnated at around five per cent in recent years, hampered by soft commodity prices. In an attempt to raise economic growth, Indonesia’s central bank cut its benchmark interest rate for the first time in two years, ahead of an anticipated US Federal Reserve cut later this month which is likely to impact emerging markets’ capital flows.

5. China’s debt rises to 15 per cent of global total

China’s debt has risen to US$40 trillion, equalling 300 per cent of its own GDP and approximately 15 per cent of total global debt. China’s high levels of debt are a financial vulnerability and pose a risk to long term economic stability. However, China has eased its deleveraging campaign which it initiated two years ago with the aim of reducing debt and reining in risky lending practices. This is in response to its slowing economy and the impact of the trade war, which Premier Li Keqiang said is putting downward pressure on the Chinese economy.

NEXT WEEK IN ASIA

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

Japan’s upper house elections. On Sunday 21 July, Japan goes to the polls to vote on 124 seats in its upper house, the House of Councillors. A low turnout is expected in the elections in which the ruling Liberal Democratic Party (LDP) hope to maintain or extend their two-thirds super majority. While a victory for the LDP and their coalition partners, the Komeito, is widely expected, opposition parties hope to reduce the majority of the leading coalition, scuppering leader Shinzo Abe’s ambitious plans to revise Japan’s pacifist constitution.

Japan to announce South Korea’s trade status. Next week Japan is due to announce whether it will be removing South Korea from its list of preferred trading partners. If removed, this would mean that Japanese firms will be required to obtain additional export verifications on hundreds of products sold to South Korea. This comes as a trade dispute between the two countries – which began when Japan placed restrictions on certain exports to South Korea on 1 July – has no end in sight.

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

Want to get The Week in Asia direct to your inbox? Sign up to our mailing list and keep up to speed with Asian trade, investment and policy developments.

Friday 12 July 2019

This week stalled US-China trade talks tentatively re-start, India’s new budget fails to impress and there is rising interest in Southeast Asia’s tech sector.

1. President Trump relaxes Huawei trade ban

In an apparent concession to China in order to get stalled trade talks back on track, the US administration has relaxed the ban on US companies selling to Chinese telecom giant Huawei. Although Huawei is still on the restricted entity list, suppliers will now be allowed to sell to Huawei if they are granted a license based on the fact that there is no threat to national security. Following last week’s truce in the US-China trade war, high-level talks between the two countries restarted this week over the phone, but there are currently no further negotiations scheduled. This move may unlock billions of dollars in revenue for US suppliers, however Huawei continues to be a bargaining chip in the trade negotiations, meaning long-term policy over the company is uncertain.

2. India’s new budget lacks stimulus

India’s new budget has been judged as cautious, despite expectations of a stimulus to counter the country’s difficult economic environment. India is facing slow growth, debt-burdened banks and of course trade tensions with the US. Weak monsoon rains are also having an impact. The government kept its borrowing target at the same level as last budget, but the fiscal deficit target was cut to 3.3 per cent of GDP. Presenting the budget, Finance Minister Nirmala Sitharaman also suggested allowing foreign investors to have a bigger role in India’s insurance and aviation sectors as a way to boost slowing investment flows, although no detailed plans were announced. Pressure may now be on the central bank to cut interest rates in order to stimulate economic growth, which was at a five-year low in March at 6.8 per cent.

3. Venture capitalists home in on Southeast Asia tech

Total venture capitalist investment into Southeast Asian tech companies reached US$3.4 billion in the first half of 2019, a 300 per cent increase on the same period last year. Out of the US$3.4 billion, US$667 million was from Chinese firms, up from US$148 million last year. In comparison, venture capitalist investment into China fell 60 per cent in the first half of 2019, to US$9 billion. This trend comes as investors recognise the growing potential of Southeast Asia as a consumer hub. It has 350 million online users, with both the middle class and internet penetration on the rise. The internet economy of the region could exceed US$240 billion by 2025 and as a collective market Southeast Asia could become the world’s fourth largest economy by 2030.

4. Thailand’s new cabinet finally confirmed

Thailand’s new cabinet, under Prime Minister Prayut Chan-o-cha, has been officially endorsed by the Thai King. Prayut – former general and junta leader – also took the position of Defence Minister in a cabinet filled with military loyalists and coalition partners. Uttama Savanayana is the new Finance Minister and Prawit Wongsuwan, Somkid Jatusripitak and Wissanu Krea-ngam remain as deputy prime ministers. The commerce and agriculture portfolios were given to the Democrat Party whilst the health, transport and tourism portfolios were given to the Bhumjaithai Party. The mix seems to be aimed at balancing political interests, an issue that may continue to impede policy development and implementation in the 19-party coalition.

5. World’s biggest IPO back on the table

Preparations have re-started for the initial public offering of state-owned Saudi Arabian oil company Saudi Aramco. The IPO is part of Crown Prince Mohammad bin Salman’s (MBS) Vision 2030 plan to modernise the Saudi economy, but was put on hold last year. MBS is hoping to achieve a US$2 trillion valuation for the company and therefore raise US$100 billion from selling a five per cent stake. Aramco is the world’s most profitable company and this would be the biggest IPO in history. Challenges to the IPO remain, including the ability to achieve the US$2 trillion valuation, oil prices continuing to affect the share prices and the growing concern over investing in climate-damaging energy resources.

NEXT WEEK IN ASIA

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

China GDP growth rates to be announced. China’s Q2 year-on-year GDP growth rate will be released on Monday. The consensus forecast is for the lowest growth in nearly three decades at 6.2 per cent. This downwards growth trajectory – although expected – will temper investor sentiment in the market, although it is still within the Government’s target range of 6-6.5 per cent growth for 2019. Beijing has increased stimulus in the economy this year, but it has not been able to offset the effects of the US-China trade war, slowing export demand and the results of China’s ongoing structural economic transition.

Results from US-India trade talks. US-India trade talks are set to resume today, after Indian Prime Minister Modi and US President Trump met on the side-lines of the G20 summit in Japan. India is under pressure from the US to reduce import tariffs on a number of US products, with Trump tweeting during the week that they were ‘No longer acceptable!’. Aside from tariffs, the talks are expected to cover restrictions on foreign companies operating in India and data localisation laws mandating foreign companies to store their data in India. The US team is led by Assistant US Trade Representative for South and Central Asia, Christopher Wilson, who will meet Indian Commerce Minister Piyush Goyal.

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

Want to get The Week in Asia direct to your inbox? Sign up to our mailing list and keep up to speed with Asian trade, investment and policy developments.

Friday 5 July 2019

This week China promises once again to open up its economy, trade tensions spread in Asia and Indonesia pursues its ambitious infrastructure plans.

1. Chinese economy to open up faster than planned 

China will open up its financial services sector to foreign-owned companies a year earlier than planned. It will also reduce its negative investment list that restricts foreign investment and open its manufacturing sector, including the auto-industry, telecoms services and transport sectors in 2020. Chinese Premier Li Keqiang made the announcements at the World Economic Forum in Dalian, where his comments were viewed as an attempt to improve China’s global trade relations as well as convince companies to keep their supply chains in China. However, this is not the first time that China has stated its intention to give foreign firms more access to its domestic markets, and the lack of detail offered by Li may leave some businesses sceptical.

2. Japan and South Korea at an impasse over tech exports 

From 4 July, Japanese suppliers looking to export to South Korea’s semiconductor sector will be forced to seek government approval – a process that is expected to take up to three months. With South Korean chip manufacturers estimating reserve stock of the controlled materials to last between one and two months, this new trade spat is set to significantly impact global technology supply chains. Deteriorating trade relations between Tokyo and Seoul are frequently attributed to historical disputes dating back to WWII, however alleged South Korean intellectual property violations may also be behind these new controls. The South Korean government has pledged to respond with ‘appropriate measures’, which will include filing a complaint with the WTO.

3. Indonesia asks China to fund its ambitious infrastructure plans 

On the side-lines of the G20, Indonesian President Jokowi has asked China to create a special fund under its Belt and Road Initiative (BRI) to fund US$91 billion worth of infrastructure projects. Jokowi has recently announced a new infrastructure plan worth more than US$400 billion, however he must seek funds to cover 60 per cent of the plan. So far, Indonesia has not received as much BRI funding as other nations in the region due to Indonesia’s insistence that all funding under the BRI is done on a business-to-business basis. The requested special fund will seek to make up for this, while still ensuring that capital from the fund is channelled to businesses to avoid exposing the government in case of default.

4. Hong Kong insurer continues ASEAN drive with Thailand purchase 

In the biggest ever insurance takeover in Southeast Asia, Hong Kong’s FWD insurance group has acquired the life insurance arm of Thailand’s Siam Commercial Bank for US$3 billion. Recognising the immense potential of the Asian insurance market, FWD has been aggressively taking over competitors throughout the region. Last week FWD confirmed it had agreed to buy MetLife’s Hong Kong business, and through previous deals it has a presence in Malaysia, Singapore, Indonesia, Japan, Vietnam and the Philippines. There are concerns, however, over whether FWD can consolidate its long-term potential and compete with other regional leaders AIA and Prudential.

5. India plans US$330 billion investment in renewables 

India announced it requires US$330 billion in investments over the next decade to fulfil its renewable energy requirements. The plan is to raise renewable energy capacity to cover 40 per cent – up from the current 22 per cent – of India’s total energy capacity by 2030. India is the world’s most important growth market for renewable energies, considering its favourable natural resources and the fact that its energy demand growth will account for more than a quarter of net global energy demand growth in the next decade. India’s population is also set to surpass China’s in the next decade and the nation aims to be a world leader in combatting climate change. Nevertheless, the coal industry will still dominate the country’s electricity generation until at least 2050.

NEXT WEEK IN ASIA 

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

US-China trade talks to resume. US officials have confirmed that high-level talks with China will continue next week between US Trade Representative Robert Lighthizer, US Secretary of the Treasury Steven Mnuchin and Chinese Vice Premier Liu He. President Trump made two commitments at his recent meeting with Chinese President Xi Jinping at the G20, when he agreed not to put tariffs on an additional US$300 billion in Chinese imports and loosened restrictions on trade with Chinese telecoms company Huawei. While China welcomed these decisions, there are several outstanding issues between the two sides, including the removal of existing tariffs and the enforcement of a prospective agreement.

Thailand’s new cabinet finalised. Thailand’s new cabinet may be announced next week, with sources revealing the likely figures to head the new line up. After tense negotiations between internal factions, the list is made up of people closely connected with General Prayut and his deputies. Suriya Jungrungreangkit is pencilled in for the coveted Industry Minister post, Sontirat Sontijirawong as Energy Minister, and Don Pramudwinai as Foreign Affairs Minister. Jurin Laksanavisit will be Deputy Prime Minister and Commerce Minister and Somkid Jatusripitak, Wissanu Krea-ngam and Gen Prawit Wongsuwon will all keep their roles as Deputy Prime Ministers. The difficult negotiations are a pre-cursor for what may be a challenging multi-party coalition to maintain.

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

Want to get The Week in Asia direct to your inbox? Sign up to our mailing list and keep up to speed with Asian trade, investment and policy developments.