The Week in Asia – June 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 28 June 2019

This week all eyes are on President Trump, President Xi and the G20 in Japan, while other nations pursue free trade agreements to combat rising protectionism.  

1. US–China trade truce ahead of Trump-Xi G20 meeting 

The US and China have agreed to a tentative trade truce ahead of the meeting between US President Trump and Chinese President Xi Jinping on Saturday morning on the side-lines of the G20 summit in Japan. This truce removes the immediate threat of another round of US tariffs imposed on a further US$300 billion worth of Chinese goods. The truce was reportedly a condition set by Xi before agreeing to meet Trump. The US President has warned that, although a deal this weekend is possible, he is willing to impose tariffs on virtually all remaining tariff-free Chinese goods and gradually do less and less business with China. Trump has a number of bilateral meetings coming up at the G20, including with Australian Prime Minister Scott Morrison, Japanese Prime Minister Shinzo Abe, Indian Prime Minister Narendra Modi and Brazilian President Jair Bolsonaro.  

2. Australia leads secret multilateral trade negotiations  

Australia hosted the 10 ASEAN member states and China, Japan, South Korea, New Zealand and India for trade negotiations over the pan-Asian Regional Comprehensive Economic Partnership (RCEP). The highly secretive negotiations could lead to one of the most significant trade deals in the world, covering approximately 30 per cent of global GDP and 3.5 billion people. It would eclipse the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and could side-line the US. Australian Prime Minister Scott Morrison is attempting to position Australia as a mediator between China and the US, as the Australian economy is projected to lose 0.5 per cent of GDP if the trade tensions continue and up to 3.5 per cent economic growth over the next decade if the tensions escalate.  

3. EU ministers approve trade deal with Vietnam 

On Tuesday, Ministers representing European Union (EU) countries approved a free trade agreement with Vietnam. The deal is set to reduce tariffs on 99 per cent of goods over a decade. It is estimated the deal will boost Vietnamese exports to the EU by 18 per cent, and EU exports to Vietnam by 29 per cent. Vietnam already enjoys preferential access to EU markets under the bloc’s developing country scheme, however the deal will secure quotas for farm products, including sugar, garlic and rice. For the EU it reduces high Vietnamese import tariffs, such as 50 per cent on wine and 78 per cent on cars. The deal still needs to pass the European Parliament, but is set to be signed in Hanoi on Sunday and come into force later this year.  

4. Singapore plans 10,000 new tech jobs over three years 

As part of aims to become a global technology hub, Singapore will create 10,000 jobs in the technology sector in the next three years. Digital Industry Singapore – a new government office – will lead efforts by promoting international investment, supporting local tech firms and influencing the direction of public policy. This is part of the city-state’s strategy to combat slowing GDP growth rates, as it faces a challenging economic environment. Although Singapore has invested heavily in the technology sector and issued lucrative grants and incentives, the country only has one local unicorn – ride-hailing app Grab – although neighbouring Indonesia has four and regional leader China has more than 100. 

5. Delivery drone capabilities being tested in Indonesia  

Chinese online retailer JD.com – a rival to Alibaba – has begun testing delivery drones in Indonesia, in its first international trial of the technology. Although the potential for e-commerce in Indonesia is huge, logistics remains an intractable challenge due to the nation’s many islands, rough terrain and incomplete transport links. Accenture has estimated that Indonesia’s e-commerce market could grow from US$27 billion in 2018 to US$300 billion by 2025 if the digital ecosystem is improved. Indonesian airline Garuda is also testing larger Chinese made drones to transport cargo around the archipelago, with plans to begin operating commercial routes from the Maluku Islands to Makassar early next year.  

NEXT WEEK IN ASIA 

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

India post-election budget released. India’s new Finance Minister Nirmala Sitharaman will release the new budget next week, as India faces its biggest economic slowdown of the past five years. The aim will likely be to keep the budget deficit at 3.4 per cent of GDP, however this will be difficult with expected fiscal stimulus, possible income tax exemptions, boosts to the housing sector and recapitalisation of public sector banks. Unemployment is another major challenge for India, with the June 2019 rate of 8.1 per cent a 45-year high. Post-elections expectations will be high after the BJP’s emphatic win, but Sitharaman has a lot of difficult considerations to balance.  

Data indicates trade war effects. New data across Asia will give further insight into the ongoing effects of the US-China trade war. Manufacturing and service sector data from China will become available, as will Korea’s trade figures. There are predictions of a double-digit trade contraction for Korea from last year, as it deals with the both the trade war and the tech industry slump. Consumer price inflation from Korea, Indonesia, the Philippines, Taiwan and Thailand could show the creeping effect of the trade war into domestic consumption. A US-China deal coming out of the G20 tomorrow would, however, go a long way to improving sentiment throughout the region.  

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Friday 21 June 2019

This week trade and investment ties across continents increase as the US trade war continues to impact national trade policies and private sector prospects.

1. London-Shanghai stock link opens following delay 

An initiative that links the London and Shanghai stock exchanges officially launched in London on Monday 17 June. Originally due to open in 2018, global investors will now be able to access shares in Chinese companies and Chinese investors will be able to buy London Stock Exchange-listed stocks. This is the first time that any foreign company will be able to be listed in mainland China. However, unresolved administrative issues mean the scheme could have limited impact in the short-term. The scheme was launched at a joint economic summit between Britain and China in London this week, where a package of closer economic ties were also agreed, including deals between British and Chinese companies worth more than US$630 million.

2. Dubai’s Landmark Group and HSBC complete pioneering blockchain transaction

A first-of-its-kind transaction this week connected two independently built blockchain platforms in order to complete a retail transaction. It involved a shipment from Bee Dee Industries in Hong Kong to Babyshop, a Landmark Group retail brand in the UAE. All participants along the supply chain were able to view documents and track progress of the shipment in real-time, which reduced the time to complete the transaction by up to 12 days, equalling a 40 per cent reduction. A letter of credit was issued by HSBC using the Voltron platform and Landmark Group’s ReChainME platform enabled the connectivity with logistics providers along the supply chain. Connecting two blockchain platforms is a significant milestone in the development of this technology and its practical applications to trade.

Asia House’s ‘The Middle East’s Pivot to Asia’ conference next week will explore the regions changing trade dynamics. Find out more and register interest in attending here.

3. India retaliates against the US with trade tariffs

India has implemented tariffs of up to 70 per cent on 28 US products, including apples, almonds, lentils and chemicals. This was in retaliation to the US removal of India from its Generalised System of Preferences earlier this month, which allowed some Indian goods to enter the US tariff free. This is the latest escalation in a series of worldwide trade tensions, as the US attempts to reduce its deficits with trade partners. Although India only has a small trade surplus with the US, the US decision to revoke trade privileges for India was based on opposition to Indian tariffs on a range of American products, such as motorbikes and whiskey.

4. China halts WTO dispute over its claim to be a market economy

China has pulled out of a World Trade Organization (WTO) dispute against the European Union (EU) where it was challenging its status as a non-market economy, which allows the US, EU and other economies to levy anti-dumping tariffs against cheap Chinese exports. China had claimed that under its 2001 WTO membership terms it must be recognised as a ‘market economy’ after 15 years. Other nations point to ongoing state interference in the Chinese economy to justify their position. China asked the WTO to suspend the claim amid reports much of the ruling so far had gone against it. This is a win for the US in the context of ongoing trade tensions, as state interference in the economy is a central issue in the dispute between China and the US.

5. US businesses warn Trump that trade war could cost US$1 trillion

The US Chamber of Commerce claims the US-China trade war could cost the US economy US$1 trillion over the next decade. The Chamber, one of the US’s most powerful business groups, called for a reversal of all tariffs implemented over the last two years and claimed that the proposed tariffs on a further US$300 billion worth of Chinese goods would ‘dramatically expand the harm already done’. This comes after a string of moves by the private sector to warn the Trump Administration of the harmful effects on jobs and the cost of living from his tariff policies. This also comes as Asia’s business confidence is recorded at a 10-year low this week, the lowest since the 2008 global financial crisis.

NEXT WEEK IN ASIA 

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

Indonesia to announce tax break plans. Indonesia’s Finance Minister Sri Mulyani has announced that detailed plans for corporate tax cuts will be released as soon as next week. Several different taxes will be cut as part of a strategy to boost economic growth, which Mulyani said may not reach the government’s target of 5.3 per cent this year. The government has already raised the price threshold at which the luxury sales tax is applied to property, and the income tax rate for infrastructure-related securities will be cut from 15 per cent to five per cent. There are also plans for a deductible tax incentive, which would see businesses being able to deduct taxes at double the amount invested in skills training and triple the amount invested in research and development. Plans to cut the corporate tax rate to 20 per cent from 25 per cent are still under consideration.

Finance Minister Sri Mulyani will be at Asia House next week to brief Corporate Members on the current state of Indonesia’s financial system. Find out more here.

Trump to meet Xi at G20 Summit in Japan. On 28 June, the leaders of the world’s most powerful countries will convene in Osaka for the 14th meeting of the G20. With the authority of not just the G20, but also the multilateral global order under threat, the upcoming meeting in Japan’s second city Osaka will not only serve as an opportunity to raise and address key issues in the global economy, but will also function as a litmus test for multilateralism. Hosts Japan have set out an ambitious agenda that will see G20 leaders discuss trade and investment, innovation, the environment, women’s empowerment and data governance. A sideline bilateral meeting between President Trump and President Xi will be closely watched as businesses on both sides hope trade negotiations can get back on track.

His Excellency Liu Xiaoming, China’s Ambassador to the UK, will be in conversation with Lord Green, Chairman of Asia House on Monday 24 June 2019. Find out more and register interest in attending here.

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

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Friday 14 June 2019

This week, the UK secures its first post-Brexit Asian trade agreement, Southeast Asia sees benefits from the trade war and tech investment continues to soar. 

1. UK agrees trade deal with South Korea 

As part of its efforts to shore up global trade relationships post-Brexit, the UK has signed a stop-gap two-year trade agreement with South Korea. The UK is attempting to provide continuity in its trading relationships, and has so far signed interim deals that account for 63 per cent of trade with the world currently covered by EU agreements. This week’s deal – the UK’s first trade agreement with an Asian nation since the Brexit referendum – will calm nerves for British firms that would have been forced to close offices in South Korea after the UK’s scheduled departure from the EU on 31 October.  

2. Softbank plans second US$100bn technology investment fund 

Japanese conglomerate Softbank is working with Goldman Sachs Group to raise money for its second US$100 billion technology investment fund. Named the Vision Fund, the first iteration was the biggest ever of its kind. Softbank received criticism that the fund would drive up start-up valuations and hurt returns. However, founder Masayoshi Son was determined to raise capital for a second Vision Fund, citing returns of 62 per cent on 71 investments from the first. Preliminary talks have been held with sovereign wealth funds from Singapore, Saudi Arabia, Abu Dhabi, Kazakhstan and Oman who are all interested in contributing. Saudi dominated the first Vision Fund with a US$45 billon contribution, but it will be unlikely to contribute such a large portion of the fund this time, considering Softbank’s intention to diversify the investor base.

3. China increases Southeast Asian investment to avoid US tariffs 

New figures confirm Chinese investment in Southeast Asia is rising rapidly. Chinese investment in Vietnam has increased six-fold, as spending reached US$1.56 billion from January to May this year, already surpassing the 2018 total.  Thailand has seen a three-fold increase in Chinese companies applying to relocate their supply chains there. Indonesia and Singapore have also seen significant increases in FDI from China. This comes as a result of increasing regulation and costs in China that force companies to relocate supply chains, but also as companies respond to the ongoing trade tensions and seek to avoid current and future tariffs. High-valued start-ups in Indonesia and Singapore have also seen increased investment from China.  

4. Alibaba files for Hong Kong listing; aims for US$20 billion  

Alibaba Group Holding Ltd has filed for a Hong Kong listing, after the group initially floated five years ago in New York for US$25 billion. The Hong Kong listing could raise up to US$20 billion as soon as Q3 this year. This would allow the Chinese giant to increase its investment in technology, a current priority for both Alibaba’s and China’s economic growth. It would also represent the biggest follow-on share sale globally in seven years. This is a win for Hong Kong, which lost out when the city’s previous listing rules led to Alibaba opting for the New York stock exchange. Hong Kong Exchanges & Clearing has since changed its listing rules with an eye to attracting Chinese tech groups.   

5. DBS and Go-Jek expand payment options in Southeast Asia 

Go-Jek is expanding payment options by teaming up with DBS PayLah!. The partnership is starting in Singapore and adds another digital payment option to customers of the decacorn – a start up with a valuation of over US$10 billion. This will allow users who may not own a debit or credit card to adopt digital payments, and is significant as Go-Jek expands this payment service to Indonesia where debit and credit card usage is very low. On a drive to become the go-to Super App for Indonesians, Go-Jek has also been acquiring Indian start-ups to access their talent and R&D capabilities.    

NEXT WEEK IN ASIA 

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

US interest rate decision. The US Federal Reserve will announce its interest rate decision after a meeting on Wednesday next week. Asian nations will be taking note as rising US interest rates heavily impacted emerging markets during the past year, especially Indonesia which had to battle to maintain the value of its Rupiah. Although there has been weak inflation in the US, rates are likely to be kept on hold as decision makers wait to see what happens during the next month in the US–China trade negotiations. There are also interest rate decisions in Indonesia, the Philippines, Japan and Taiwan that could be influenced by US moves. 

34th ASEAN Summit. The bi-annual ASEAN Summit will take place in Bangkok from 20–23 June. The agenda includes intra-regional trade negotiations, Regional Comprehensive Economic Partnership (RCEP) trade talks and a leaders’ meeting. The summit also covers a wide range of other issues including security and development. Thailand’s new cabinet is expected to be endorsed and start functioning after the summit is concluded.   

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Friday 7 June 2019

This week Thailand’s junta leader holds onto power and the US continues to reshape its global trading relationships.

1. Junta leader confirmed as Thailand’s Prime Minister

Junta leader Prayut Chan-o-cha was confirmed as Thailand’s Prime Minister on Wednesday following a vote in Parliament. Prayut’s party, Palang Pracharath, won the second highest number of seats in the House of Representatives, after first-placed opposition party Pheu Thai. Palang Pracharath won the vote for Prime Minister, however, with the support of smaller parties and the military-appointed 250-seat senate. Prayut will lead a fragile 19 party coalition with a four-seat majority in the lower house, creating concerns over policy continuity and the passing of legislation and budgets. Prayut also faces the same economic challenges that he did five years ago following the coup – slowing growth and sinking investor confidence.

2. Trump threatens further tariffs on US$300 billion worth of Chinese goods

US President Donald Trump threatened tariffs on a further US$300 billion worth of Chinese goods, if negotiations between the US and China do not progress. Last month the US increased tariffs from 10 per cent to 25 per cent on US$200 billion worth of Chinese goods, in response to perceived Chinese back-tracking in the trade negotiations. Trump said the final decision on extra tariffs would come after this month’s G20 summit, where he and his Chinese counterpart President Xi Jinping are scheduled to meet in the side-lines. The announcement comes as tensions between the two nations seep into other areas, such as the US blacklist of Huawei and China’s US travel warnings.

3. US abruptly revokes India’s preferential trade status

Although the US had previously signalled it would revoke India’s status as a beneficiary developing country under its Generalised System of Preferences (GSP), President Trump shocked India by revoking it abruptly this week. The GSP allows developing nations to import goods to the US tariff free or with concessionary tariffs, with the aim of boosting developing economies and creating cheap imports for the US. Trump said the move came because India did not provide “equitable and reasonable access” to its own market. The two nations are in disagreement over the US aim to sell medical devices and certain dairy products in India. New Delhi is now concerned over job losses resulting from cost pressures, and is mulling retaliation.

4. IMF cuts global and Chinese growth forecasts

In a report by Managing Director Christine Lagarde, the IMF said that recently imposed tariffs would cut global economic growth forecasts by 0.3 per cent for 2020. More than half of the impact would come from negative financial market sentiment and business confidence losses. China’s growth forecast has also been cut, from 6.3 per cent to 6.2 per cent for 2019 and to 6 per cent for 2020. The IMF said China’s stimulus measures were enough to stabilise growth for 2019-2020. However, other signs – such as a drop in new job growth in the US and increased willingness by the US to impose tariffs – represent warning signs for the global economy.

5. Singapore and Australia increase economic co-operation

Australian Prime Minister Scott Morrison met with Singaporean Prime Minister Lee Hsien Loong today as part of the Singapore-Australia Comprehensive Strategic Partnership. The leaders plan to increase cooperation in the digital economy, cyber security and food security. Both nations are aiming to be regional leaders in digital technologies and are aiming to pursue collaboration in e-invoicing, digital identities, e-payments and artificial intelligence, all of which could have transformative effects on the region’s economy.

NEXT WEEK IN ASIA 

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

G20 Finance Ministers meeting. Finance Ministers and Central Bank Governors from the G20 group will meet this weekend in Fukuoka, Japan. This is a key forum for the world’s biggest economies to discuss major international economic issues. The priorities for this year include managing global risks (including global imbalances and ageing population), ensuring growth through quality infrastructure, resilience to natural disasters, strengthening healthcare and ensuring debt sustainability, as well as managing global responses to the changes caused by innovation. US Treasury Secretary Steven Mnuchin will meet Chinese Central Bank Governor Yi Gang at the summit, amid tense relations between the two countries.

ASEAN Customs Directors-General to meet. As part of the rolling ASEAN schedule of cooperation and integration, ASEAN Directors-General of Customs will meet in Lao PDR next week. The ASEAN Free Trade Area (AFTA) has been reasonably successful in removing tariff barriers to trade among member states, however non-tariff barriers remain. The Customs Directors-General work towards increased and smoother intra-regional trade by harmonising and simplifying customs procedures, a necessary pre-requisite to ensure the free flow of goods.

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

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