BEIJING: China’s financial regulator is beefing up capital rules for banks to combat financial risks, the National Financial Regulatory Administration said in a statement on Wednesday (Nov 1). The move, which will come into effect on Jan 1, aims to help banks improve risk management and better serve the economy,Continue Reading
SINGAPORE: The Monetary Authority of Singapore (MAS) has barred DBS from any new business acquisitions for six months, in response to the bank’s multiple service disruptions this year.
DBS, Singapore’s largest lender, is also required to pause non-essential IT changes for six months.
“This is to ensure that the bank dedicates the needed resources and attention to strengthen its technology risk management systems and controls,” MAS announced in a media release on Wednesday (Nov 1).
The bank will not be allowed to reduce the size of its branch and ATM networks in Singapore for now.
“This is to ensure there are adequate alternative channels for its customers in the event of further disruptions while the bank works to enhance the operational resilience of its digital channels,” said MAS.
“This direction will be in force until MAS is satisfied with the progress of DBS Bank’s remediation plan.”
DBS and Citibank’s digital banking and payment services were disrupted for hours on Oct 14 due to a technical issue with the cooling system at a data centre operated by Equinix.
DBS automated teller machines (ATMs) were also affected, prompting Singapore’s largest lender to reopen branches on a Saturday afternoon to assist customers.
MAS had ordered DBS and Citibank to conduct “a thorough investigation”, noting that the banks were not able to fully recover their systems within the required timeframe.
Any unscheduled downtime for a critical service affecting a bank’s operations or service to customers must not exceed four hours within any 12-month period.
Banks are required to have backup data centres and systems in place, MAS noted on Oct 19 in response to the outage.
The Oct 14 outage was among several DBS service disruptions this year.
In March, a day-long service outage hit online banking and payment platforms such as PayLah!, prompting MAS to issue a strongly-worded statement saying the bank had “fallen short” of expectations due to the “unacceptable” disruption.
In May, digital banking services and ATMs were down due to “human error in coding the programme that was used for system maintenance”.
In the wake of the two successive service disruptions in the space of just over a month, MAS imposed additional capital requirements on DBS.
Following the March incident, MAS had also directed DBS Bank to engage an independent third party to conduct a comprehensive review of the effectiveness and adequacy of the people, processes and technology supporting its digital banking services.
MAS noted on Wednesday that shortcomings were identified in system resilience, incident management, change management, as well as technology risk governance and oversight.
Following the independent review, DBS had set out a roadmap to address the shortcomings.
“The roadmap is being implemented in phases, with the changes affecting its system architecture design taking more time to complete,” MAS said on Wednesday.
“MAS has reviewed DBS Bank’s remediation plan under the roadmap and is satisfied with its scope and the planned measures to improve system resilience,” it added.
“In line with MAS’ expectations, DBS Bank will hold senior management accountable for the lapses and the board will enhance its governance approach to oversee the implementation of the roadmap.”
MAS said it will review the progress made by DBS on its remediation efforts at the end of six months.
“MAS may extend the duration of the measures, vary the additional capital requirement currently imposed, or take further actions at that point,” it added.
“In the meantime, MAS will retain the multiplier of 1.8 times to DBS Bank’s risk-weighted assets for operational risk, which was imposed after the March and May 2023 incidents.”
The regulator said DBS will take up to 24 months to put in place the planned structural changes to improve the resilience of its digital banking services.
“In the meantime, it is possible that disruptions may still occur. In such situations, MAS expects DBS Bank to promptly recover its services and communicate to its customers in a clear and timely manner,” it added.
MAS previously hit the bank with capital requirements after its digital banking services were disrupted for two days in November 2021. At the time, MAS also ordered the bank to appoint an independent expert to conduct a “comprehensive review” of the incident.
TOKYO – The Bank of Japan bowed to financial realpolitik Tuesday (October 31) by allowing bond yields to top 1%. But Governor Kazuo Ueda remains tethered to a level of policy unreality sure to keep the yen under strong downward pressure.
Ueda’s step was the tiniest the BOJ could have gotten away with without shoulder-checking global markets. It means far less than currency traders may think in terms of when and how Japan might exit a 23-year-old quantitative easing (QE) experiment.
The BOJ meeting “ended up somewhat confusingly but largely dovish leaving the yen still vulnerable to a further sell-off versus the dollar,” says Gary Dugan, chief investment officer at Dalma Capital.
In fact, the events of the last month might have ensured that Ueda’s team remains stuck in the QE quicksand longer than markets appreciate.
Since taking the helm in April, Ueda has been testing markets’ readiness for BOJ “tapering.” It hasn’t gone well so far. A move in late July, for example, to let 10-year bond yields rise from 0.5% to 1% sent the yen higher than Tokyo expected.
In the weeks that followed, the BOJ executed countless large and unscheduled bond purchases. That signaled to traders that the July tweak was inevitable given the surge in US yields to 17-year highs and that overall BOJ rate policies hadn’t changed. It was similar to the one-step-forward-two-steps-back maneuver the BOJ pulled off in December.
Tuesday’s tweak is more of the same. As US rates continue drifting upward, causing extreme tensions between dollar and yen rates, the BOJ has no choice but to adjust. After all, it remains to be seen how many more US tightening moves are in store for global markets. News that US gross domestic product (GDP) rose at a 4.9% annualized pace in the third quarter upped the odds the Federal Reserve will keep hiking rates.
Yet Ueda’s challenge grew markedly bigger this month for other reasons, too. One is the sudden explosion of violence in the Middle East. The Hamas-Israel war threatens to accelerate increases in oil prices, adding to inflation risks caused by Russia’s 2022 Ukraine invasion. Japanese inflation is running the hottest in three decades at close to 3% year on year.
Significantly, the BOJ raised its inflation forecast to 2.8% from 2.5% for fiscal 2023. For 2024, price expectations have been raised to 2.8% as well.
But even as commodity price surges warrant tighter policies, China’s economic downshift is pulling BOJ priorities in the other direction. In October, mainland factory activity slid back into contraction, while the services sector slowed more than expected.
The manufacturing purchasing managers index dropped to 49.5 from 50.2 in September. Non-manufacturing activity fell to 50.6 from 51.7.
“China’s economic activity fell to an extent, and the foundation for a continued recovery still needs to be further solidified,” says Zhao Qinghe, senior statistician at China’s National Bureau of Statistics. Economist Raymond Yeung at Australia & New Zealand Bank adds this “downside surprise” means Beijing “will still need to deliver growth-supportive policy.”
As Japan’s top trading partner stumbles, exporters are bracing for a rough 2024. That’s dimming hopes that Japan Inc might boost wages, kicking off a virtuous cycle of income and consumption gains.
As headwinds mount, Prime Minister Fumio Kishida’s government is rushing to roll out fresh stimulus. They include proposals for tax cuts for the middle class, reduced corporate levies and cash handouts to households facing higher inflation.
The large and growing price tag for fiscal initiatives could increase pressure on the BOJ to add more, not less, liquidity. Otherwise, government bond yields might surge, adding to financial pressures on banks and households.
Yet Kishida’s latest proposals complicate Ueda’s options in another way. By shoveling fiscal money to fill economic holes, the ruling Liberal Democratic Party is treating the symptoms of Japan’s troubles, not the underlying ailments.
As inflation spikes higher, Kishida’s approval ratings are plummeting, currently around 29%, to the lowest of his two years in power. Hence the rush to ramp up fiscal stimulus efforts.
Missing, though, are proposals to raise Japan’s political game. When he took power in October 2021, Kishida pledged to implement a “new capitalism” plan to spread more equitably the benefits of economic growth.
Part of the strategy was addressing the unfinished business from the “Abenomics” era, reference to Shinzo Abe’s 2012-2020 premiership, the longest in Japan’s history.
Abe promised a supply-side revolution the likes of which modern Japan had never seen. It included moves to loosen labor markets, reduce bureaucracy, boost innovation and productivity, empower women and restore Tokyo’s place as Asia’s premier financial center for multinational companies and stock listings.
Mostly, Abe leaned on the BOJ to supersize QE. In March 2013, he hired Haruhiko Kuroda as governor to turbocharge an experiment that the BOJ pioneered in 2000 and 2001.
Within five years, Kuroda’s binging on bonds and stocks pushed the BOJ’s balance sheet above $4.9 trillion, topping Japan’s annual GDP. A resulting plunge in the yen boosted exports, juicing the stock market and generating record corporate profits.
Yet Abe’s team put very few reform wins on the scoreboard. Other than steps to strengthen corporate governance, the Abe era failed at nearly every turn to recalibrate growth engines, level playing fields and give chieftains confidence to fatten paychecks.
One big concern is that Tokyo’s same-old-same-old policy approach has lost potency over time. Economist Sayuri Shirai at Keio University notes that, this time a falling yen isn’t altering Japan’s export and trade deficit dynamics like in the past. Industrial production and corporate investment also “remain sluggish,” says Shirai, a former BOJ policy board member.
“While the government’s revenue is increasing due to inflation-induced income and consumption taxes, this is essentially a tax hike,” she explains. “Wage growth has not caught up with the rate of inflation. Given rising government and corporate debt, a rapid interest rate hike is likely to cause significant stress to the economy.”
But weak exchange rates leave Japan uniquely vulnerable to surging energy and food prices. This dynamic is colliding with a domestic economy that might not be ready for a shift away from ultraloose monetary policy. One big worry: the risk of a Silicon Valley Bank-like blowup amongst Japan’s 100-plus regional lenders.
Worries about another SVB abound in the US, too. As Fed Chairman Jerome Powell’s team mulls another rate hike — perhaps as soon as November 1 – investors are scouring the financial landscape for the next bank that might buckle under the pressure of rising US yields.
A relentlessly strong dollar is also raising default risks in Asia, particularly in China. It’s making offshore debt harder to manage.
“The greenback continues to draw smaller benefits from strong US data and high rate advantage than it should, likely due to its overbought status, but upside risks remain predominant,” says Francesco Pesole, an analyst at ING Bank.
Analyst Adam Button at ForexLive says the constant threat that Japan’s Ministry of Finance might intervene to support the yen is capping the dollar’s gains – at least for now. But the dollar, Button notes, “should be stronger than it is this week, and I think it’s just a matter of time until it materializes.”
In general, though, traders need to figure out where both US and Japanese rates are heading to know where risks lie. “Additional positioning doesn’t really make sense until those two key risk events are out of the way,” says Bipan Rai, currency strategy at CIBC Capital Markets.
The fragility of Japan’s sprawling regional bank network remains a clear and present danger to Asia’s second-biggest economy. Many of these lenders service rapidly aging communities in already sparsely populated areas of the country. That squeezed profits well before the banking shocks of the last 15 years, including fallout from the 2008 “Lehman shock.”
That crisis, fast-aging customer bases and an accelerating exodus of companies to Tokyo had regional banks these last 15 years hoarding government and corporate bonds instead of lending the credit the BOJ has been churning out. It was a similar practice that blew up SVB and New York-based Signature Bank.
Earlier this month, Japan’s Financial Services Agency telegraphed efforts to stress-test at least 20 banks to surface any SVB-like landmines across the nation. Part of the worry is the specter of similar social-media-fueled bank runs.
No developed economy prizes stability and financial market decorum more than Japan. And few, if any, face greater concerns about hidden cracks than Japan with scores of fragile regional banks in harm’s way.
At the start of 2023, SMBC Nikko Securities estimated that regional leaders were sitting on about $10.5 billion of unrealized losses on foreign bonds and other securities. That has Ueda’s team wondering how big losses might become if government bond yields rose to 2% or even higher.
The comparisons between midsize banks in the US and Japan are limited, of course. SMBC Nikko analyst Masahiko Sato argues that the average threat to capital ratios is only about 2%. Therefore, Sato does “not think potential losses are on a scale with systemic implications.”
At the same time, many of Japan’s regional lenders, like SVB, tend to prioritize bonds that can be sold rather than holding debt to maturity. But BOJ tapering or even a rate hike or two could change this calculus, and fast.
If regional banks face profit pressures with rates at zero, the fallout from a big rate pivot by Ueda could be extreme. This could explain in part why “markets are seemingly underpricing the risks of an early normalization,” says Charu Chanana, a senior market strategist at Saxo Capital Markets.
Stefan Angrick, senior economist at Moody’s Analytics, says “this doesn’t rule out the BOJ dropping negative rates at some point — we speculate this may happen in April 2024, after the spring wage negotiations that year.”
But, he concluded, “it suggests that the way forward is towards zero interest rate policy with some form of quantitative easing, rather than a sharp lift-off on the short end.”
Follow William Pesek on X at @WilliamPesek
TOKYO: The Bank of Japan announced a minor tweak to its unconventional policy of controlling government bond yields on Tuesday (Oct 31), stopping short of expectations and sending the yen lower. While most other major central banks have hiked interest rates in a bid to tame prices, the BoJ hasContinue Reading
SINGAPORE: Teenagers lured by the opportunity to earn “fast cash” are among nine people who will be charged on Tuesday (Oct 31) with disclosing their Singpass or bank account details, which were later used to launder crime proceeds.
The nine of them, of whom five are teenagers, are suspected to be involved in money laundering activities linked to banking-related phishing scams.
In one case in July, a 16-year-old boy responded to an advertisement on Telegram that offered him “fast cash”, the police said in a media release on Monday.
He later opened a bank account and disclosed the internet banking credentials to an unknown person. The bank account was then used to launder proceeds of crime.
This was similar to a case in August when a 19-year-old also responded to an advertisement on Telegram offering “fast cash”.
After he opened a bank account and handed over his internet banking credentials, three new accounts were set up without his knowledge, and they were used to launder crime proceeds.
The following month, an 18-year-old girl disclosed her Singpass credentials to an unknown person on Telegram after responding to an online advertisement on cryptocurrency investment.
She later received several SMS notifications from the banks and three new accounts were opened. These accounts were also used by criminals, said the police.
In the same month, a 17-year-old girl handed over her internet banking details and ATM card to an unknown person who offered her cash to use her bank account.
Police also arrested a 19-year-old who gave away her Singpass credentials to a friend on Instagram, who asked for the information to open an investment account. Five new bank accounts were opened without her knowledge and used to launder proceeds of crime.
The other four arrested were aged between 22 and 30 – two cases involved people responding to online advertisements offering “fast cash”.
The offence of disclosing Singpass credentials carries a jail term of up to three years, a fine of up to S$10,000 (US$7,300), or both, for a first-time offender.
If convicted of conspiring to cheat a bank into opening an account, a person may be jailed for up to three years, fined or both.
For abetting unknown people to secure unauthorised access to a bank’s computer system, a first-time offender can be jailed for up to two years, fined up to S$5,000, or both.
“To avoid being an accomplice in these crimes, members of the public should always reject seemingly attractive money-making opportunities promising fast and easy pay-outs for the use of their Singpass accounts, bank accounts, or allow their personal bank accounts to be used to receive and transfer money for others,” said the Singapore Police Force.
“The police would like to remind members of the public that individuals will be held accountable if they are found to be linked to such crimes.”
SINGAPORE: The founder of oil trading firm Hin Leong Trading took the stand at the opening of his defence’s case on Monday (Oct 30), sharing in halting language about how he came to helm the oil empire and his involvement in the later years, before it collapsed.
Lim Oon Kuin, better known as OK Lim, is on trial for three criminal charges: Two counts of cheating the Hongkong and Shanghai Banking Corporation (HSBC) and one count of instigating a contracts executive of Hin Leong Trading to forge a false record. The charges involve US$111.7 million (S$148.7 million).
The 81-year-old testified slowly in a wheelchair, through a Mandarin interpreter. He stumbled over the words of the oath when he was being led to recite it, and needed to see the words on a document before he could read them aloud.
Before he began testifying, his lawyer, Senior Counsel Davinder Singh, said his team might need to take instructions from Lim from time to time as Lim is also a defendant in two civil cases.
On the first day of his testimony, the defence delved into Lim’s personal background and his role at Hin Leong.
Responding to questions from his other lawyer, Mr Navin Thevar, Lim said he was born in 1942 in Putian village in China’s Fujian province.
He went to a primary school in Singapore for three years and stopped studying after Secondary 2 because of “difficulties at home”. His father, a fisherman who has seven children, did not earn enough to pay for school fees.
Lim spoke Mandarin, Hokkien, a bit of Teochew, some Putian dialect and only very simple English.
He said he had followed his father in his work as a fisherman.
“Our fishing boat, we took the Cambodia and Sarawak route,” said Lim. “We would make two trips to and fro every month. One time there was a storm at sea. Our fishing boat nearly sank. My father then said – you all don’t do this anymore, go look for other jobs.”
He first began working for a supplier who provided oil to his father’s fishing boat, and began taking up jobs in this business.
After working for the oil supplier for two to three years, Lim set up a small company called Hin Leong with his parents and family members.
The company supplied oil to the fishing boats and to the “kampungs” or villages.
“At that time, the power generators, they used diesel. We also supplied to delivery firms and factories,” said Lim.
“We worked hard. We worked day and night to supply oil to them. Because of our good service, they referred other clients to buy oil from us, so our business grew and became better,” he said.
After that, the family set up multiple related companies for various purposes including dealing with oil storage, holding ships or managing and renting them out and supplying bunker to ships.
Explaining the family business, Lim said: “These companies are owned by our families, so it’s like, sometimes if one company needs anything, the other will help. For example, if one company needs funds, the other company will then send the funds over. It is like our left pocket and right pocket. It’s a family business.”
His two children were also shareholders at Hin Leong.
Lim said he stopped being managing director of Hin Leong and all other firms either in March or April 2020, “when something happened at Hin Leong”.
He added that he had already “slowed down” from around 2010 due to age.
“At that time, I was already 70 plus. Physically, I was not like before. Not like when I was young, so I slowed down. I only went to work (in the) afternoon and I gradually handed over the work to the team of people I trusted,” he said.
He also had a spinal problem that stemmed from an injury in his younger days when he carried “heavy things”. As he aged, he had to undergo surgery for the issue.
“Because I continued working after the spine surgery, subsequently, my legs and hips became weak. I could not stand for too long, for example at a buffet. My legs would ache, and I cannot handle slopes,” he said.
On questioning by his lawyer, Lim said did not know how to use a computer, not even how to turn it on or off.
He did not know how to use a phone other than for making calls, and the contacts were usually preloaded into his device by other people.
He also said he did not know how to use emails or photocopy documents. There were always other people who would perform these tasks for him, he said.
As for filling out partially printed forms, he said he could fill in only simple terms such as his name, age and IC number.
Usually, he would make phone calls if he had to communicate with anyone at work, he said.
From 2010 onwards, he said he did more “strategic work” and some new business development for Hin Leong. He would also handle old customers or those who spoke Mandarin, or those who looked for him specifically.
He said there were different departments and teams, such as bunkering, land sales, international trade and contracts, and they each had their own head.
Each department would work with their own team to complete their work and liaise with other departments, and the heads of each department would inform Lim only if there were “some very important matters”.
On his personal assistant Ms Serene Seng, who had testified against him as a prosecution witness, Lim said she had been with Hin Leong for over 20 years.
She initially joined as secretary to his deputy, but when his deputy died suddenly from a brain haemorrhage, she became Lim’s assistant.
He described Ms Seng’s wide-ranging role as his personal assistant, handling all tasks requiring English, interpreting at meals with the senior management of banks, as well as interpreting business negotiations in both English and Mandarin.
She later became Hin Leong’s head of contracts and corporate affairs manager.
Asked why, Lim said she needed a title so the clients would know what she does.
Describing her work as his personal assistant, Lim said: “She is very responsible, diligent and intelligent. And there are some things that, what we Chinese call – ‘ju yi fan san’ – she is very flexible. She knows how to handle the situation.”
The trial continues.
India’s demographic dividend began in the early 1980s and will end by 2040. In contrast, China’s dividend ended in the mid-2010s, but it took full advantage of its 9–10% annual growth rate for three decades.
Both countries had similar gross national incomes (GNI) per capita in 1980, but in 2022, China’s GNI per capita in terms of purchasing power parities was around Int$20,300, while India’s was Int$8,200. Until its demographic dividend ends, India needs to ensure a consistent annual GDP growth of at least 8% to generate sufficient non-farm jobs for its young population.
India achieved 7.9% growth on average over 2004–14, despite the 2008 global financial crisis. Over this period, the population grew on average 1.4% per annum and GNI per capita grew on average 5.5% per annum.
Between 2004–5 and 2011–12, the economy created on average 7.5 million new non-farm jobs every year. This kept youth and total unemployment low and pulled workers out of agriculture at an unprecedented scale — a characteristic of the structural transformation undergone by China and other industrialized countries.
Rapid growth was accompanied by a hastening of structural change in employment. Manufacturing’s share of employment rose from 10.5 to 12.8% of total employment over 2004–11. The share of workers in agriculture had been falling since 1973–74, but the absolute numbers had always increased until 2004–05 after which it began falling.
Like China, most low-skill agricultural workers were absorbed into the construction sector where employment increased from 26 million in 2004 to 51 million in 2012. Public and private investment in infrastructure drove this growth, as well as growth in the services and manufacturing industries.
But this achievement has reversed under Prime Minister Narendra Modi as annual GDP growth fell to 5.7% over 2015–22. The number of new non-farm jobs fell from 7.5 million per annum to just 2.9 million in 2019. Total manufacturing jobs have also fallen since 2015. The contribution of manufacturing to GDP, which was a constant 17% in 1992–2015, fell to 13% before returning to 17% in 2022–23.
The structural factors at play during 2004–14 included corporate overborrowing that became problematic when the post-global financial crisis fiscal stimulus was rolled back from 2012. Many corporations stopped repaying loans, especially those from public banks. Banks subsequently reduced lending due to growing non-performing assets.
Slowed GDP growth was exacerbated by poor economic policies. Exports fell from 25% of GDP in 2013 to 22% in 2022 as the real effective exchange rate was allowed to appreciate. Then came Modi’s snap demonetization in 2016 covering 86% of India’s currency notes. This sent the majority of cash-dependent micro, small and medium enterprises (MSMEs) into a tailspin — many closed, never to recover.
MSMEs, which generate most non-farm jobs, were dealt another blow six months after demonetization when a national Goods and Services Tax was introduced. Though it subsumed 17 state and indirect taxes, poor planning caused further damage to largely unregistered MSMEs. GDP growth slowed for almost three years and dropped down to 4% before the Covid-19 pandemic broke out.
The government then encouraged public banks to resume lending to the construction sector through non-banking financial companies. Construction was revived temporarily. As slower job growth suppressed consumption, the real estate sector and the new lenders collapsed.
Modi announced a national Covid-19 lockdown in March 2020 when there were only 600 identified cases in India. The world’s strictest lockdown stopped all economic activities, including those of MSMEs. Sixty million city workers returned to agriculture, its share of employment rising from 42 to 46% — a reversal of the earlier structural transformation.
The post-Covid-19 K-shaped recovery meant that the informal sectors shrunk while the formal sector grew. Many new jobs are also in the services sector but require highly skilled workers which, much of the population is not. Realizing the demographic dividend in India means creating non-farm jobs for three population groups. India needs to pull millions out of agriculture to counter the reverse migrations of 2020–21.
The second group is better-educated youth, especially girls, since India achieved a secondary education gross enrolment rate of 80% in 2015. India still has one of the world’s lowest female labour force participation because of constraints on how far they can travel for work as well as a lack of the skills and training required in non-farm jobs.
The final target is the openly unemployed. The current government inherited about 10 million openly unemployed people which grew to 38 million by 2022.
India needs at least 10–12 million new jobs each year to absorb these three groups. For India to restore non-farm jobs and resume high GDP growth, it needs a manufacturing strategy akin to China and East Asia that raises the share of labor-intensive manufacturing in output. A slow global economy may not generate export demand, but boosting domestic demand can create jobs.
A renewed focus on MSMEs is also needed to regenerate jobs. The quality of education then needs more attention, especially one that improves non-farm job prospects for girls. Such policies can help sustain GDP growth and the realization of the demographic dividend.
Santosh Mehrotra is Visiting Professor at the Center for Development Studies, University of Bath.
China’s Belt and Road Initiative, which now includes 44 African countries, got under way 10 years ago. President Xi Jinping launched it in 2013 with a first speech in Kazakhstan and a second one in Indonesia. The initiative is something of a trial-by-doing development policy enigma: it keeps China watchers chasing Xi’s next move to help define just what it is.
The two speeches, however, give some lasting guidance. The Kazakhstan speech outlined five elements of the “Belt”:
In Indonesia, the five points were more abstract and diplomacy-oriented. They were framed as pursuing win-win cooperation, mutual assistance and affinity and remaining open and inclusive.
So, what’s happened since then? As an economist with a keen interest in the political economy of China-Africa relations, I have studied the Belt and Road Initiative since its inception.
Among the more tangible achievements so far is fostering “road connectivity.” China has helped to finance and construct highways, rail and energy projects in various countries. People, goods and commodities flow more smoothly in many places than before, within and between countries.
But at a cost. Most of these projects have been funded by loans from Chinese banks, including the China Export-Import Bank and China Development Bank.
Marking the 10th anniversary at a forum in October, Xi outlined the progress of the initiative. He also made a commitment to raise the quality of development cooperation, and provided more details on people-to-people ties and on areas of policy dialogue especially.
Much is made of a fall in spending on the Belt and Road Initiative. But if these promises take shape, the early big spending years may come to reflect a down payment. That down payment was made in times of low interest rates and kick-started some important and highly visible infrastructural projects.
Xi’s announcement at this year’s forum offered old and new news for the Belt and Road Initiative and its signatories. For African signatories (and their regional organizations and development banks) to make the most of what China is now offering, they need to understand the origins of the Belt and Road Initiative and also what has and has not changed since.
In addition, Xi’s announcement comes at a time when China’s relationship with the African continent is changing, as I outlined in a recent article.
The change sees the China-Africa relationship move beyond a focus on oil, extractive commodities and large infrastructure projects. It shifts attention to industrial production, job creation and investments that lead to African exports, and productivity-enhancing agricultural and digital technology opportunities.
This model, called the “Hunan model”, is named after the province in southern China that is leading the push. This also helps to explain why China’s lending is moving from bilateral development finance to include more commercial and trade finance lending.
Xi made eight major commitments at the October 2023 forum. More than half of these draw directly from the policy focus areas announced a decade ago.
Where extending sovereign lending may present a challenge at the moment while the legacy of debt sustainability issues is addressed, Chinese policy banks are continuing to lend to institutions of the Global South.
For example, in the lead up to the forum the China Development Bank agreed on a US$400mn loan to Afreximbank to support small and medium enterprise trade efforts, with an eye on the goal of “unimpeded trade” and Africa’s own regional integration efforts under the African Continental Free Trade Area.
Beyond the promises made in Xi’s speech to this year’s forum, elevated funding for China’s policy banks was announced. Further, agreements made between participants also signal commitment to the original principles of the Belt and Road Initiative.
For example, Xi’s speech in Kazakhstan in 2013 called for elevated currency circulation. China has not only developed its mobile payments ecosystem, but is now testing its emerging central bank digital currency, the eCNY, at home and abroad.
There are three new policy promises added to those of a decade ago.
These new areas are of increasing economic importance to China, amid rapid population aging especially, and competition with high-income countries.
Where the twin launch speeches of the Belt and Road Initiative had very broad agendas, Xi’s speech at the 10-year anniversary revealed progress on earlier themes and a push to elevate the quality of development. There was more detail especially on people-to-people ties and on areas of policy dialogue to be fostered.
He added some new areas such as artificial intelligence governance, green development, e-commerce, and greater emphasis on scientific and tech cooperation. These new areas are becoming more economically important to China.
Comparing the new policy signals with the earlier ones suggests that the initiative is by design adaptable.
Further, since the Covid pandemic, some countries that had benefited from China’s new level of Belt and Road lending have run into debt problems and interest rates have risen. This signals China’s increased interest in lending to regional and locally present multilateral development and commercial banks that are relatively well-positioned to target local entrepreneurs and development.
In Africa, this offers a new chance to evolve strategies that can sustainably tap Chinese resources towards fostering the independent advance of the African Continental Free Trade Agreement and local socioeconomic development.
Lauren Johnston is an associate professor at the China Studies Center, University of Sydney, and an affiliate researcher at the South African Institute of International Affairs.
This article is republished from The Conversation under a Creative Commons license. Read the original article.
A potent combination of factors, including a stronger US dollar, a weaker Chinese economy, and rising oil prices, is creating a dangerous cocktail that threatens to disrupt the stability of Southeast Asian economies.
A strong dollar makes servicing dollar-denominated debt more expensive, increasing the burden on countries with substantial external debt.
Additionally, it could lead to capital outflows as investors seek higher returns in the US, putting downward pressure on currencies of the members of the Association of Southeast Asian Nations. As a result, import costs rise, contributing to inflationary pressures.
A slowing Chinese economy translates into reduced demand for ASEAN exports, particularly raw materials and intermediate goods. This has a direct impact on growth and could lead to reduced foreign investment as China’s economic health influences investor sentiment.
Meanwhile, higher energy costs contribute to inflation, which may prompt central banks to raise interest rates to combat rising prices. This, in turn, slows economic growth and impacts business and consumer sentiment.
The combined impact of a stronger dollar and higher oil prices can exacerbate current-account deficits in some ASEAN countries. These deficits lead to currency depreciation, making it challenging to attract foreign investment and service external debt.
Currency depreciation, driven by these factors, increases the cost of repaying foreign-denominated debt. This could prompt greater financial instability, especially for companies that have borrowed in foreign currencies, which may have trouble servicing their debt. As such, investors in these companies face heightened default risks.
Another issue is that the volatile mix of a strong dollar, a weaker Chinese economy, and higher oil prices can trigger stock market corrections, resulting in capital flight. Investors may reduce their exposure to ASEAN equities, leading to bearish market sentiment.
In addition, with slowing economic growth and currency volatility, foreign direct investment (FDI) into the region could slow. International investors may divert their capital to safer havens or more promising emerging markets, diminishing the flow of foreign funds.
Governments in ASEAN countries will need to implement sound economic policies and structural reforms to counteract these challenges. For example, diversifying trade partners and reducing reliance on China will help mitigate the risk of a weaker Chinese economy.
They should also consider targeted fiscal and monetary policies to stimulate domestic demand and investment.
Global investors should closely monitor the economic and financial conditions in ASEAN nations.
Diversifying their portfolios and incorporating risk management strategies with an independent financial adviser will be crucial in navigating these turbulent waters.
In the midst of these challenges, opportunities may also emerge for those investors who carefully assess risks and seize them as they arise.
Nigel Green is founder and CEO of deVere Group. Follow him on Twitter @nigeljgreen.
This is the last of three parts. Read part 1 and part 2.
Successful development like China’s leads to a crucial international transition. When countries are poor and weak, they receive special forbearance to encourage their development. All successful developing countries, including the US, stole intellectual property, denied foreigners access to their markets, and heavily subsidized their companies.
Rich countries reluctantly tolerate this and celebrate successful growth in poorer countries. For instance, the US and Europe complained about but took minimal action against Japan, South Korea, Taiwan and Singapore during the early and middle levels of their development. There is still substantial tolerance for extensive trademark theft by Malaysia, Thailand and India.
In my youth, I bought most of my books as knockoffs at Caves bookstore in Taipei and most of my CDs and video disks as knockoffs in Singapore, and later I bought clothes for my family at the Silk Market in Beijing.
But success brings huge scale that begins to distort global markets and create intolerable damage. That threshold occurred in the 1980s for Japan and later for South Korea, Taiwan and Singapore. Japan’s subsidized and protected cars and consumer electronics threatened to destroy all competitors through unfair competition. The US and EU reacted strongly with tariffs, quotas and other measures.
After a difficult decade, Japan (mostly) accepted the rules of fair competition. Since then, Toyota has often been the world’s biggest car company, but Americans and Europeans welcome Toyotas because Toyota’s victories are achieved by building better cars, not by theft and subsidies.
China’s success has reached that transition point. Take just one of many examples: When the Chinese fishing industry was small and poor, subsidies were acceptable. Now the coasts of North Korea, Africa and India have very extensive communities that have been impoverished by China’s huge, government-supported fishing fleet.
China’s formerly impoverished fishermen are now depleting fishing stocks and creating hunger along the coasts of South Asia, Africa and Latin America.
Likewise, when China was poor, copying American CDs brought a noisy but in practice minimal response. But now the costs to the US of intellectual property theft are estimated at hundreds of billions of dollars annually, and even small venture firms report over 100,000 computer intrusions per day from China.
When CATL and Huawei threaten to destroy all European competitors because they have access to all world markets while the Europeans are constrained in China, the damaaged parties react. Chinese spokesmen often characterize these reactions as attempts to keep China down. No, they are demands that China accept the responsibilities of success.
In the view of an exceptional range of neighbors, as well as their friends and allies in the US and EU, China has evolved from a victim to a predator – because policies that were acceptable or tolerable when China was weak cause serious damage to neighbors and global markets now that China has become a great power.
China, a country nearing the World Bank’s “high income” status, now demands all the special privileges of a weak, impoverished country while simultaneously asserting itself as a powerful global leader that will reshape the world into a community of common interest as interpreted by China. This contradiction is unsustainable.
China’s international contradiction reflects a domestic contradiction. In space exploration, in military technology and in many aspects of manufacturing industry, China is a modern superpower. Shanghai, especially Pudong, is a world-leading 21st century city. China’s trains, ports, airports, telecommunications and universal wi-fi access make the United States look backward by comparison.
Simultaneously, however, China’s rural healthcare systems, its systems to care for the aged, its pension systems, its insurance systems and its rural financial systems are those of a developing country rather than a modern superpower. China’s poverty reduction has been one of the greatest triumphs of human history, but the standard of living for several hundred million people remains very low.
Its fiscal system, which places most social burdens on local governments while retaining most revenues for the central government, has worked because local governments were allowed to be extremely creative, rule-breaking, financially risky and corrupt. Now, the effort to impose strict rules and financial accountability and to eliminate corruption is mak- ing the skewed distribution of responsibilities and revenues an untenable contradiction.
These contradictions arise because China has chosen in the 21st century to emphasize urban modernity and geopolitical glory over universal well-being for its citizens.
If China refocuses on its domestic social challenges, it will have a solid foundation for global economic and geopolitical competition. If China accepts responsibility for international stability, its fishing boats will be as acceptable globally as France’s. CATL and Huawei could enjoy accepted global preeminence, as Toyota does.
The US overreacts to the damage from these transitions, and it reacts fearfully to a challenge to its global primacy. Its unwillingness to accept massive intellectual property theft and destructive unfair competition is rational and reasonable. But, faced with a rival, America’s status insecurity becomes a triumph of passion over calculation.
US political elites often think and talk as if US global leadership, US global dominance, were some kind of moral right. The prospect that some other system might outperform US-style democracy is perceived as a mortal threat.
Faced with a rival, the US consistently exaggerates the capability and potential – and hence the “threat” – of the rival, which led to the extreme overestimates during the Cold War of the size and capabilities and prospects of the Soviet economy and also, in the late 1970s and 1980s, to extreme fear in important quarters of what was seen as Japan’s imminent superiority.
With Japan four decades ago and with China now, much of the Congressional reaction is populist, emotional, ideological and disproportionately fearful.
Faced with a serious competitor, the US is abandoning its strengths. During the Cold War, the US triumphed by creating a coalition of mutual prosperity, based on the Bretton Woods institutions, which triumphed over a Soviet Union that was autarkic and squeezed its citizens and its allies in the service of an overwhelming priority for the military.
In the competition with China, the US has crippled the expansion and modernization of the Bretton Woods institutions because expansion and reform would greatly enhance China’s role. Ironically, this has created a vacuum into which China’s Belt and Road Initiative, its development banks, its industrial standards and its currency swap system have moved. Every attempt by the US to pretend that China is not a big and equal player has backfired.
The US has undermined its own institutional system, refusing to join the UN Convention on the Law of the Sea and the International Criminal Court, preventing the appointment of judges to the World Trade Organization dispute system and abusing WTO rules by falsely arguing that tariffs on things like steel and aluminum are vital matters of national defense.
By abusing the rules-enforcing systems and ignoring the rules, the US undercuts its own core argument for a rules-based system.
By turning inward when the rest of the world is developing the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the Regional Comprehensive Economic Partnership (RCEP), a more consolidated EU, a Comprehensive Agreement on Investment (delayed, for the time being) and the all-time most comprehensive open trade agreement in Africa, the US risks being left behind by the rest of the world.
Tariffs on steel, aluminum solar panels and much else damage the US more than China. They exemplify the contradictions at the core of Washington’s China policy.
Even more fundamentally, the US responds to a challenge as if it were primarily a military challenge, whereas the whole experience of twentieth-century geopolitics is that the key to long-run geopolitical success is the economic superiority of oneself and one’s coalition.
Military power of course remains important, but Beijing has seemed to understand better than Washington that the path to global leadership lies primarily through economic preeminence, both domestically and in international relationships. The Belt and Road Initiative embodies that understanding, just as US emphasis on the Bretton Woods system once did.
The two countries’ contrasting strategies in Africa (building infrastructure versus providing anti-terrorist military teams) symbolize that difference. America’s inward turn weakens its own economic performance and increases tensions with allies and partners. Gutting its diplomatic arm, its aid programs and, in 1999, its information service (the United States Information Service) has combined with its meager support for the Bretton Woods institutions to weaken its global leadership role and raise the risk of military conflict.
Ironically, the current administration in Washington justifies all this as “a foreign policy for the middle class,” based on the manufacturing jobs fallacy analyzed at the beginning of this essay.
In another layer of irony, however, China appears to be duplicating this American error as it raises the priority for security relative to economic development.
For three decades, the leaders of China and America wisely created perhaps the greatest generation of peace and development in human history. There were differences, conflicts, tensions and risks, and there always will be. But currently, both sides are magnifying the problems rather than managing them.
Both sides are avoiding difficult domestic dilemmas by blaming problems on the other. Both are pursuing geopolitical aspirations in ways that harm their domestic economies and popular welfare. In both cases, doing this actually weakens their long-term geopolitical prospects.
A reset will require not just diplomatic adjustments, but also fundamental shifts in the management of domestic politics.
William H Overholt ([email protected]) is senior research fellow at the Harvard Kennedy School’s Mossavar-Rahmani Center for Business and Government.
This article, first published in the China International Strategy Review, is slightly abridged and republished under a Creative Commons Attribution 4.0 international license.