On a China-built train from Mombasa to Nairobi

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Having spent the last five weeks in East Africa after a long hiatus, I sensed that Kenyans are more confident than at any time since achieving independence in 1963 of their ability to attract reliable partners as the country moves ahead in its quest for long-term economic growth. In this connection, the development of infrastructure has been a top priority for successive Kenyan governments.

Among Kenya’s potential international development partners are its traditional ones – the United Kingdom, the European Union, and the United States – and/or the newcomers – BRICS members Brazil, China, India, Russia and South Africa, among others.  

In Nairobi and Mombasa, a sense of strategic autonomy is palpable. 

If any of Kenya’s traditional development partners were to offer Nairobi a deal that is economically uncompetitive, vulnerable to extraterritorial sanctions or unacceptable for ideological reasons, or because it would offend the cultural sensibilities of the people, then Kenya would likely get up from the negotiating table and go elsewhere. It has options. 

Across Africa, the picture is much the same.

What’s more, more and more African leaders recognize the predatory, velociraptor-like nature of neoliberal economic theory, which functions as a highly sophisticated wealth transfer mechanism disguised as the false god of perpetual progress and prosperity for all.

Africa’s new strategic autonomy is evidenced not only by the growing number of projects funded by non-Western sources but by increasing calls for more of the same across the continent.  

Africans’ emerging ability to pick and choose their development partners is driving some Western leaders bonkers. Witness this remark uttered this month in Nigeria by UK Foreign Secretary James Cleverly: “We are living through an era when the tectonic plates of world politics are shifting decisively. And a battle of ideas is taking place once again.  This time, its focus is on the nature and the future of the international order.”  

These words are no mere “talking points.” They come from the gut and evince an undertone of something like panic.  

Clean, comfortable and on time

These thoughts about Africa’s emerging strategic autonomy raced through my head as Kenya’s crack, Chinese-built Standard Gauge Railway sent me hurtling from Mombasa, East Africa’s largest port, to the bustling capital Nairobi. Coach class, with ingratiating, uniformed waiters beckoning from their food-laden trollies, surpassed Amtrak’s equivalent from Washington to New York.  

The train was clean, comfortable, air-conditioned and on time.

In Nairobi, I spoke at length with several highly accomplished civil engineers with decades of professional experience in Kenya about the Nairobi-Mombasa express. They unequivocally stated that the China Road and Bridge Corporation, the principal Chinese contractor, had done a “very good job” from an engineering, planning, design, and construction perspective. 

For its part, the Wilson Center recently noted: “The [Kenyan Standard Gauge Railway] has had some important successes. Trains run faster than the former [British-built] railway or road traffic, and its passenger services are popular. The amount of freight carried by the SGR has risen significantly since commercial operations began, and it has helped to decongest port operations, speed freight transportation, and enhance cargo security.”

While there have been concerns about the railway’s cost-effectiveness, it appears to be on the verge of profitability. According to Dhahabu Kenya, as of year-end 2022, its revenues increased 6.4% to 15.3 billion Kenyan shillings (US$116.4 million), which compares to costs of “about 18 billion shillings ($136.98 million) to operate the passenger and cargo trains.” 

If accurate, the SGR has almost broken even, which is remarkable, as many mega-projects across the globe – according to the Cato Institute (“Megaprojects: Over Budget, Over Times, Over and Over”) – are money-losing propositions.

Caesar Mwangi, the dean of Strathmore University Business School in Nairobi, told me: “if London, Paris or Brussels wants to compete successfully against China, or any of the BRICS, in Africa, then Western governments must get serious about public-private partnerships.

“Western governments need to tone down their claims of exceptionality on technical matters, stop blaming others for shoddy work when it’s not, put forth reasonable proposals, and gin up money on acceptable terms with realistic timetables. Otherwise, China, Turkey and India will continue to take the lion’s share of projects.”

This helps explain why The Taipei Times, citing the Center for Global Development’s 2022 study, reported that “China’s development banks provided $23 billion in financing for infrastructure projects in sub-Saharan Africa from 2007 to 2020, more than double the amount lent by such banks in the US, Germany, Japan and France combined.”

Lamentably, the West has failed to advance its strategic interests in Africa because most African countries have had enough of Western specialists and academics spouting off about “best practices,” “human rights,” “future prosperity” and “equity.” 

Some African leaders may buy into the West’s ideological agenda out of conviction or because they are simply corrupt, but the majority will not sign up for overpriced projects with unrealistic timelines and unacceptable conditions no matter how slick the PR presentation.

Deeper problem afflicts Western interests in Africa

Over the past 20 years, neoliberal economic theory – the belief that financial markets are (and should be) the driving force in socio-economic decision-making, and that they will, at some undisclosed point in the future, bring about equitable development – has devastated the poor and much of the middle class across the globe.

Neoliberalism has helped undermine societal cohesion and pitted one community against another, wiping out traditions, degrading the environment, and ruining cultural identities in the process.   

Mwangi emphasizes that “neoliberalism as an economic model has not served the common good of societies across Africa. Rather, it has delivered greater inequality and social insecurity. Its claim of reducing poverty is not supported by the evidence.”

In the case of Kenya, The Daily Nation reported in June that “nationally, about 30% of [Kenyans] are unable to meet their food needs, with more rural than urban dwellers living in hunger.” In 2016, 16.8 million Kenyans were living in a state of poverty versus 19.2 million in 2022, an increase of more than 14%.

Other African states have experienced a similar deterioration of living standards over the same period, and the blame cannot be pinned strictly on Covid. 

The United States also has geopolitical headaches of its own making.

Many of the businessmen I met in East Africa (though certainly not all) expressed deep frustration with US diplomatic outreach over the past several years. One described it as “little more than a sales pitch delivered by a failing commercial enterprise selling third-rate products and overpriced ideas that smack of a disguised form of neocolonialism.”

What’s more, Africans increasingly understand that just as the June 2021 US-led “Build Back Better World” (B3W) infrastructure initiative turned out to be a flop, so, in all likelihood, will the Partnership for Global Infrastructure and Investment as codified in the G7 Hiroshima Leaders’ Communiqué (May 20, 2023). The failure of the domestic version of B3W in the United States is well known in Africa.

For this and other reasons, the West’s claim to be Africa’s development partner of choice has worn thin. Across Africa, leaders are increasingly holding Britain and France at arm’s length. Pretoria, Algiers and Bamako, for example, are in no mood to be lectured by their former colonial overlords.

The countries of the Sahel have all but booted the French out.

At the 15th BRICS Summit in South Africa (August 22-24), heads of state are discussing new membership criteria, new funding mechanisms, new infrastructure projects and a new currency – as the West looks on in horror as multipolarity gains momentum.

More than 20 countries have formally applied to join BRICS, including Argentina, Egypt, Ethiopia, Indonesia, Iran, Saudi Arabia and United Arab Emirates. Many more have expressed an interest. 

The Nairobi-Mombasa express and other infrastructure projects across the continent show that Africans have options. They are no longer dependent on their former colonial patrons for technical or financial support because they are increasingly able to look elsewhere. 

If the West wants to remain relevant in Africa, it must compete for African business and find new ways to peddle its influence in a world growing rapidly more multipolar. It must deal with Africans as equals, ditch any lingering colonial attitudes of superiority, and delink programming for economic development from dogmas and doctrines of an ideological nature.

The countries assembling at the 15th BRICS Summit in Africa this month are not bluffing about gaining strategic autonomy in international relations. When in East Africa, I recommend taking the Nairobi-Mombasa express to understand that Kenya’s self-confidence in development matters is real. 

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BRICS: more economics, fewer politics

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In late 2001, Goldman Sachs published one of the hundreds of papers and reports churned out by global investment banks every month.

Often forgotten within days and read by only a handful of people, this paper was different. “Building Better Global Economic BRICs,” authored by Goldman’s then-chief economist Jim O’Neill, remains one of the most influential investment bank papers in recent memory.

The four “BRICs” identified in the report – Brazil, Russia, India, and China – were on the verge of a decade of robust growth and high foreign direct investment (FDI) inflows. Brazil and Russia were leveraging their natural resources and riding the tide of rapidly increasing demand for their goods, notably from China.

India was emerging as a major global hub for information technology, and China was deep in a historic geo-economic transformation that, as the author Evan Osnos has argued, was moving “one hundred times the scale and 10 times the speed of the Industrial Revolution.”

The four countries embraced the BRIC acronym and held a summit in 2009, shortly after the global financial crisis. The BRICs were quick to point out that the financial crisis emanated from advanced economies, most notably the United States. Brazil’s Foreign Minister Celso Amorim even showed visitors a giant world map turned upside down.

The message was clear: the international order was shifting, and new powers were rising. A year later, South Africa joined, and the BRICS with a capital “S” was born. 

The second decade of the BRICS wasn’t as soaring as the first. From 2011 to 2021, most of the BRICS economies experienced sluggish growth and decelerating FDI flows. According to a BRICS Investment Report published by the United Nations, only South Africa saw FDI inflows grow robustly in the second BRICS decade. That, too, has since slowed.

Today, the BRICS look nothing like the rising stars they once were. Few investors are declaring that the next decade belongs to these economies (except maybe India). So, if the BRICS are no longer ascendant, what’s their significance?

Chinese President Xi Jinping (left) and Indian Prime Minister Narendra Modi attend the group photo session during the BRICS Summit at the Xiamen International Conference and Exhibition Center in Xiamen, southeastern China's Fujian province on September 4, 2017. File Photo: Reuters / Kenzaburo Fukuhara / Pool
BRICS members China and India don’t really get along outside of the forum. Photo: Asia Times Files / AFP

That question is being debated this week at the BRICS summit in Johannesburg. High on the agenda will be whether to admit new members.

At least nine countries from the Middle East and North Africa have expressed interest in joining, including regional powerhouses like Saudi Arabia, Egypt, the United Arab Emirates, and Iran. All told, some 18 countries are eyeing membership, according to The Economist.

Opening the doors to new members would give the BRICS a much-needed jolt. China is facing a major test as its economy slows, its property sector implodes, and youth unemployment rises. Brazil has seen its growth limp along at less than 1% for a decade.

South Africa remains mired in corruption and mismanagement, while Russia faces a long winter of economic underperformance amid a spider web of sanctions and its own internal mismanagement. Only India’s prospects seem bright.

Adding several new stars from the Middle East, including Saudi Arabia and the UAE, would bring both economic dynamism and investment heft to the group. High-growth Asian economies like Bangladesh and Indonesia would also nudge the group’s growth prospects. 

If there’s any danger for new members, it’s the emerging sense of the BRICS as a forum for anti-West sentiment. Middle powers like the UAE and Saudi Arabia have developed a multi-aligned approach to geopolitics. Were the BRICS to emerge as a geopolitical counterpoint to Western powers, it could put Riyadh, Abu Dhabi, and Cairo in awkward positions.

The BRICS should therefore avoid becoming a geopolitical talk shop or a voice for the developing world. After all, the two largest members of the current formulation – India and China – can hardly agree on anything political. Thus, the group should remain focused on business and trade, investment and development, and leave the politics to other forums. 

In this regard, a larger BRICS grouping can take a page from another newly minted group of four countries gathered around a clever acronym – I2U2 – which includes India, Israel, the US, and the UAE. The I2U2, founded in 2021, has studiously avoided politics and focused only on joint investment and trade.

Welcoming new members to the BRICS is a wise choice. While Brazil and India are reportedly on the fence about the idea, a bigger BRICS grouping would bring new trade and investment opportunities and reinvigorate intra-BRICS investment.

When the acronym was coined, the original four countries accounted for about 8 percent of global GDP. Today, the BRICS clocks in at 26%, and India, China, and Brazil are consequential economies for regional and global trade. 

But for the BRICS to remain relevant, the grouping needs new blood. As O’Neill himself noted in a May 2022 commentary for Syndication Bureau, “many economists, businesspeople and journalists have stopped paying much attention to the BRICS nations’ collective actions.”

The best way to change that is to broaden the club’s membership while narrowing its focus to business, trade, and investment.

Afshin Molavi is a senior fellow at the Foreign Policy Institute of the Johns Hopkins School of Advanced International Studies and editor and founder of the Emerging World newsletter. Twitter: @AfshinMolavi

Republished with the kind permission of Syndication Bureau.

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Property, local debt hurt China corporate earnings

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Chinese stocks have been under pressure recently as investors worry that property and local debt crises have become a double whammy that will hurt corporate earrings. 

Goldman Sachs cut its full-year earnings-per-share growth estimate for the MSCI China Index to 11% from 14% and also reduced the 12-month index target to 67 from 70. The new target implies a 13% increase from the closing level on August 18.

The investment bank said in a research note on Monday that “the ailing housing market and its potential contagion to the real and financial economies are the widely-cited reasons for the correction.” It said economic growth pressures in China have resulted in renewed downgrades in Chinese firms’ profit expectations.

The Hang Seng Index, benchmark of Hong Kong’s markets, on Monday fell 327 points, or 1.82%, to 17,623, the lowest level since last November. The Shanghai Composite Index dropped 38.98 points, or 1.24%, to close at 3,092.

Shares of the heavily-indebted Country Garden decreased 2.6% to 74 HK cents (9.43 US cents). Shares of Longfor Group, dubbed as the most financially-healthy Chinese property firm, plunged 3.39% to HK$15.98 after CLSA lowered its forecasts for the company’s earnings by 13.3%, 23.5% and 24.2% for 2023, 2024 and 2025, respectively.

Chinese banking stocks continued their falling trend on Monday. Agricultural Bank of China dropped 1.57% while Industrial and Commercial Bank of China was down 1.47%.

The People’s Bank of China (PBoC) said Sunday that it had held a virtual meeting with the National Administration of Financial Regulation (NAFR) and the China Securities Regulatory Commission (CSRC) on August 18 and urged major Chinese financial institutions to increase their support for the real economy, as well as to help prevent and lower local government debt risks.

“The country’s economic recovery has been a wave-like development and a tortuous process,” the meeting said. “Financial support for the real economy should be strong in intensity, steady in pace, sound in structure and sustainable in prices.”

It said financial regulators should enrich the tools and means to prevent and resolve debt risks, strengthen risk monitoring, assessment and prevention and control mechanisms, promote risk disposal in key areas, and “firmly hold the bottom line of having no systemic risk.”

Two separate crises

Many property developers in China are suffering from a liquidity crunch as they saw a decline in their contracted sales and net profits in the first half of this year. Separately, Chinese banks are urged by the central government to sacrifice their margins by extending loans for local government financing vehicles amid a local debt crisis.

The property and local debt crises are both caused by a drop in property demand in China. And they, in return, are dragging down the Chinese economy and domestic consumption.

As of last Friday, about 80 listed property developers had announced their results for the first six months of this year, of which 60% reported net losses. The combined losses amounted to at least 100 billion yuan (US$13.8 billion), according to a calculation made by the China Real Estate Weekly. 

Yuzhou Group said it might have lost 6 to 7 billion yuan while Sunac China Holdings expected a first-half net loss of 15 to 16 billion yuan. Country Garden said it had lost about 45 to 55 billion yuan in the first half.

An unnamed executive of Country Garden told Yicai.com on Sunday that the company has enough financial resources to complete 400,000 apartments by the end of this year and 400,000 more in 2024 but for the moment it may not have enough cash to pay its domestic creditors fully. 

China Times reported that Country Garden will hold meetings with its domestic creditors between Wednesday and Friday. It said the company will seek to extend by three years the payment of a 3.9 billion yuan bond, which otherwise will default if it is unpaid on September 2.

“Affected by multiple unfavorable factors, some property firms have faced difficulties in their operations this year,” said Bai Wenxi, chief economist at IPG China.“The weakening demand is one of the main factors restricting the recovery of the real estate market.”

Bai said risks in the property market are growing as many supportive measures have not yet been implemented.

“The profitability of property developers depends on the stability of their long-term operations. However, the current market sentiment is affected by various factors, including homebuyers’ expectation for a drop in income,” said Liu Shui, head of business research at the China Index Academy.

Liu said that whether or not the property market situation improves in the second half of this year will depend on the strength of the government’s supportive measures.

Supportive measures

The CSRC announced on August 18 that it had established a special working group, devised a dedicated work plan, and formulated a package of policies and measures. It said it would unveil new measures that can increase sources of funds, reduce transaction costs and improve convenience in trading in both the A-share and Hong Kong stock markets.

“We believe the policy tailwind could give a boost to securities firms’ fundamentals and, subsequently, earnings expectations could see improvement and average return-on-equity could trend up over the medium to long term,” the CICC, a Chinese investment bank, said in a research note on Monday. “Meanwhile, efforts to boost the activity of A-share and Hong Kong stock markets should also benefit the Stock Exchange of Hong Kong (HKEx).”

The PBoC on August 15 cut the rate on one-year medium-term lending facility (MLF) loans by 15bp to 2.5%. On Monday, it lowered the one-year loan prime rate (LPR) by 10 basis points to 3.45% from 3.55% earlier, while the five-year LPR was left at 4.20%. Analysts had previously expected that both the one-year and five year LPRs would be cut by 15 basis points.

Some analysts said the recent downward pressure on the Chinese currency means Beijing has limited room for rate cuts, which will widen China’s yield gap with other major economies.

Meanwhile, Cailian Press reported on Monday that the central government will allow 12 local governments, including those in Tianjin, Chongqing, Yunnan and Shaanxi, to issue 1.5 trillion yuan of special bonds to refinance their local debts in the second half of this year. 

Caixin.com said local governments that can issue special bonds will have to cut their expenses. But it added that proceeds from the special bonds won’t be enough to resolve all the problems as local governments borrowed 35 trillion yuan of official debts, plus more than 40 to 50 trillion yuan of hidden loans.

A Zhejiang-based financial writer says it will take a very long time for local governments to resolve their debt problems as the process will involve a structural change in the Chinese economy.

He says local governments will cut the number of civil servants, and demand for fewer construction workers for their city renewal projects. He says as people now realise that there are no more “iron rice bowls,” or jobs for life, they will become more cautious in home purchases while this trend will continue to suppress property prices.

Read: Evergrande’s debt case hits China’s stock markets

Follow Jeff Pao on Twitter at @jeffpao3

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DLT raises B7bn in vehicle tax

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PUBLISHED : 22 Aug 2023 at 04:00

More than 7 billion baht’s worth of annual vehicle tax has been collected in the first 10 months of this fiscal year on the back of easier tax payment “from anywhere”, according to the Department of Land Transport (DLT).

The owners of 5.5 million vehicles paid their vehicle tax from October last year to July, generating 7.64 billion baht. The fiscal year begins in October.

The tax is understood to be payment for annual vehicle registration renewals and for registration of new vehicles.

DLT spokesman Seksom Akkrapan said vehicle tax can be paid through a variety of channels, with those made available online fast gaining popularity.

Payments can be made via the DLT’s webpage, the DLT Vehicle Tax application, a counter service at convenience stores, the mPay application and the TrueMoney wallet system.

More people were using the online services to renew their vehicle registrations and pay the vehicle tax to avoid queues at DLT offices. The DLT’s “from anywhere” payment scheme has reduced the long queues at its offices.

Of the total annual payments, 113,906 vehicle owners paid their tax via the DLT Vehicle Tax application, 687,452 paid via the department’s website, 145,766 used the counter service and 8,977 via mPay and TrueMoney.

The DLT’s five offices in Bangkok recorded 3.7 million owners who made the annual tax payment during the first 10 months of the fiscal year. Of them, 746,190 paid through the Drive Thru for Tax service, 6,375 through post offices, 17,003 through tax kiosks installed at the offices and eight through commercial banks.

For those who pay via the DLT Vehicle Tax application, after they have completed the payment procedures, they can have the renewed vehicle registration sticker and receipt mailed to them, or they can go to a DLT office and print the sticker out at a tax kiosk there.

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Climate change making debt more expensive everywhere

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Earth is overheating due to the greenhouse gas emissions from burning fossil fuels. This is “the biggest market failure the world has seen” according to economist Nicholas Stern.

The rational behavior of companies that pollute by making profitable commodities, and consequences of most people’s desire to drive everywhere are creating irrational outcomes for everyone: an increase in the average global temperature which threatens to make the planet uninhabitable.

But our recent research indicates that this pollution will have a direct financial cost. We used artificial intelligence to combine Standard and Poor’s (S&P) credit ratings formula (which captures the ability of those who borrow money to pay it back) with climate-economic models to simulate the effects of climate change on sovereign ratings for 109 countries over the next ten, 30 and 50 years, and by the end of the century.

We found that by 2030, 59 countries will see a deterioration in their ability to pay back their debts and an increased cost of borrowing as a result of climate change. Our predictions to 2100 entail the number of countries rising to 81.

Financial markets and businesses need credible information on how climate change translates into material risks to be able to factor them into all decisions they make. Although it is important to design economic tools and policies that can mitigate the effects of climate change, the field of economics responsible for doing so is relatively young.

New financial products have emerged to help countries and investors take better account of the climate and environment being degraded as a result of debt markets, but several problems remain.

Credit ratings or environmental, social and governance (ESG) ratings (which assess how well a company manages these kinds of risks) are not based on scientific information, and are often charged with greenwashing. For example, some investment funds branded as green according to these ratings have been linked to fossil fuel companies.

Financial institutions such as banks frequently misunderstand models for predicting the economic costs of climate change and underestimate risks such as temperature rises, according to a recent report by actuaries – people who use mathematics to measure and manage risk and uncertainty.

Their research found “a clear disconnect” between climate scientists, economists, the people building these economic models and the financial institutions using them.

Economic modeling has been slow to respond to the increasingly alarming effects of climate change. Photo: EPA-EFE / Ikonomou Vassilis / The Conversation

In our study, we tried to integrate climate science into financial indicators widely used and understood by investors, such as credit ratings. Without such science-based indicators, financial decision making will reflect risk calculations which are incorrect and misrepresent the economic consequences of climate change.

Debt servicing to rise far and wide

Credit ratings express a country’s ability and willingness to pay back debt and affect the cost of borrowing to nations as well as other entities, such as corporations and banks. Inevitably, these costs are passed on to the public.

When interest rates rise for banks, businesses find it more expensive to fund their operations and so raise prices for consumers. Higher costs to banks also mean higher mortgage interest rates for residential borrowers.

When banks invest savings such as pensions in bonds offered by countries hit by climate disasters, their worth is affected too, meaning that pensions may fall in value.

Our paper has three key findings. First, in contrast to much of the economics literature, we found that climate change could have material effects on economies and credit ratings as early as 2030.

Credit ratings are categorized in a 20-notch ladder scale, with default being the lowest rating, equivalent to one notch, and AAA being the highest rating at 20 notches. The highest rating signifies the lowest risk of an entity not paying back its debts and vice versa.

Under a high-emissions scenario in which recent emissions continue on an upwards trajectory, 59 countries would suffer downgrades of just under a notch by 2030, rising to 81 countries facing an average downgrade of two notches by 2100.

The nations which would be most affected include Canada, Chile, China, India, Malaysia, Mexico, Slovakia and the US. More importantly, our results show that virtually all countries, whether rich or poor, hot or cold, will suffer downgrades if the current trajectory of carbon emissions is maintained.

A global map depicting how much each country's credit rating is expected to fall.
Rating downgrades under a high-emissions scenario (20-notch scale). Author provided / The Conversation

Second, if countries honored the Paris Agreement and limited warming to below 2°C, the impact on ratings would be minimal.

Third, we calculated the additional costs of servicing debt for countries (best interpreted as increases in annual interest payments) to be between US$45–67 billion under a low-emissions scenario, and $135–203 billion under a high-emissions one. These translate to additional annual costs of servicing corporate debt, ranging from $9.9–17.3 billion to $35–61 billion in each case.

As climate change batters national economies, debt will become harder and more expensive to service. By connecting climate science with indicators that are already baked into the financial system, we’ve shown that climate risk can be assessed without compromising the integrity of scientific assessments, the economic validity of the modeling and the timeliness necessary for making effective policies.

Patrycja Klusak, Affiliated Researcher, Bennett Institute of Public Policy, University of Cambridge and Associate Professor in Banking and Finance, University of East Anglia and Matt Burke, WTW Research Fellow, University of Oxford

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Commentary: Is OCBC anti-scam measure a necessary guard rail or heavy-handed overreach?

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On the flip side, there’s also the risk of being too stringent. For instance, in their bid to counter fraudulent activities, some banks employ rigorous transaction verification processes that can sometimes decline legitimate transactions.

Rather than just imposing technological restrictions, perhaps a more holistic approach – combining technology with user education – would be more effective. By fostering a user base that is informed about the dangers of third-party downloads and equipped to discern app permissions, the bank can bolster its defenses.

BANKS AND USERS MUST SHARE RESPONSIBILITY

OCBC’s move underscores a broader, industry-wide debate in which banks are walking the tightrope in an era of relentless digital transformation to maintain trust, especially as financial institutions will be expected to share liabilities in scam cases under an upcoming government framework.

The financial sector has thrived on customer trust. Security measures they implement, while ensuring safety, must not compromise this integral relationship.

It’s a complex interplay of trust, security, and convenience. It’s not just about stopping potential threats but also about ensuring that in doing so, the banks do not alienate their customers.

Banks need to understand that in the age of digitisation, customer expectations are evolving. They desire a mix of security, which protects them, and autonomy, which doesn’t make them feel surveilled or restricted. The challenge here lies in combining the two.

OCBC’s decision, while well-intentioned, highlights the intrinsic challenge digital banks face between ensuring a harmonious user experience and robust security. This measure might come off as overbearing to some, yet it underscores an immutable fact – in the realm of digital banking, both the institution and its users bear the responsibility of safeguarding against cyber threats.

The task of ensuring robust security isn’t solely the bank’s prerogative; users too need to be vigilant and well-informed.

Dr Jonathan Chang is CEO of Fintopia Indonesia – a digital lending fintech unicorn. He is also a lecturer, public policy advisor and an award-winning researcher.

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Evergrande’s debt case hits China’s stock markets

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An application in the United States seeking protection from creditors while Evergrande Group restructures its heavy debt has burdened Chinese stocks as it fueled investors’s concerns about China’s property crisis.

Evergrande asked protection from creditors under Chapter 15 of the US bankruptcy code, which is invoked when insolvency cases involve multiple countries. The company said it needs the protection while it makes efforts to restructure its debt during upcoming negotiations in Hong Kong and the Cayman Islands. Chapter 15 is used less commonly than chapters 7 and 11.

Hui Ka-yan, chairman of Evergrande, explained in a stock exchange filing on Friday that the company’s bankruptcy protection application is a normal procedure for offshore restructuring and does not involve an actual bankruptcy petition. He said the company is pushing forward its offshore debt restructuring as planned.

The Shenzhen-based property developer, which defaulted in mid-2021 and started restructuring its debt early last year, filed for Chapter 15 protection in New York on Thursday. The company proposed scheduling a Chapter 15 recognition hearing for September 20.

The Hang Seng Index, Hong Kong’s stock market benchmark, fell 375 points or 2.1% to close at 17,950 on Friday, the lowest level in 10 months and below the psychological mark of 18,000. The Shanghai Composite Index fell 31 points or 1% to 3,131 on Friday.

In fact, the Hang Seng Index has dropped by 10.6% so far this month while the Shanghai Composite Index has plunged 4.8%. Reuters reported on Tuesday that global hedge funds were dumping Chinese stocks in the first two weeks of this month due to fears about China’s property crisis.

Simon Lee Siu-po, a senior lecturer at the Chinese University of Hong Kong Business School, told the Hong Kong media that with bankruptcy protection in the US, Evergrande can prevent American banks from filing lawsuits against it and buy more time to restructure its offshore debts and continue its property projects.

Lee said it’s a political decision that Evergrande has not gone bankrupt in China as its bankruptcy would lead to a suspension of construction works and also hit its lenders.

He said it’s possible that other indebted Chinese property developers, such as Country Garden, will also file for bankruptcy protection in the US. However, he said more applications of this sort would hurt foreign investors’ confidence in the Chinese property sector.

Liu Zefeng, a Beijing-based solicitor at Jing Zhe Law Firm, told the mainland media that a company can apply for bankruptcy protection if its liabilities are more than its assets.

“If a company can successfully restructure its debts, it can ‘wake from the dead and return to life,’” Liu said. “The chance for Evergrande to have a successful debt restructuring is high as creditors can restore much more money from a haircut than a liquidation.”

He added that it’s unlikely that Evergrande’s debt restructuring or liquidation would affect Chinese homebuyers as they are well protected by China’s laws.

However, Evergrande is facing rising challenges with its huge losses and liabilities and its subsidiaries’ weakening share prices.

The company said on July 17 that it lost a combined 803 billion yuan (US$110 billion) in 2021 and 2022. At the end of last year, it had net current liabilities of 687.7 billion yuan and total liabilities of 2.44 trillion yuan.

Two main proposals

Trading of Evergrande’s shares has been suspended since March 2022 due to its offshore debt restructuring. According to the Hong Kong stock exchange’s rules, if the trading cannot be resumed by September 20, the shares must be delisted.

On March 22 this year, Evergrande said it had engaged in constructive dialogue with the stakeholders of its and its subsidiary’s US dollar-denominated senior secured notes worth a total of US$19.12 billion. 

The company proposed to its creditors that it either issues them new notes that will mature in 10 to 12 years, or bonds that are exchangeable into 21.57% of Evergrande Property Services (EVPS)’s shares and 28.54% of Evergrande New Energy Vehicle (NEV)’s shares.

The convertible bonds are only worth HK$9.38 billion (US$1.2 billion) at the current values of the EVPS and NEV. They are equivalent to 6.3% of the unpaid senior secured notes. 

Shares of EVPS fell 9.1% to close at 60 HK cents while shares of NEV dropped 16% to HK$1.26 on Friday. Shares of EVPS and NEV are 60% and 73.9% off, respectively, from their levels in March.

On August 14, Evergrande said NWTN, a Dubai-based and Nasdaq-listed company, agreed to purchase a 27.5% stake in NEV for US$500 million, or 63 HK cents per share, which represents a 59% discount to the average closing price of HK$1.55 for the last five trading days. 

The Securities Times said NWTN, formerly known as ICONIQ, was founded by a 41-year-old Zhejiang man called Wu Nan in 2014 and had cash and cash equivalents of US$212 million and total liabilities of US$71.97 million at the end of 2022. It said NWTN had zero revenue in the past three years.

Evergrande will then issue convertible bonds for NEV’s shares to its creditors. NWTN will become the largest single shareholder of NEV.

Evergrande said in March that if it is forced to liquidate its assets, offshore holders of its senior secured notes can only recover about 5.92 to 9.34% of their money while other offshore unsecured creditors can get back 2.05 to 3.53%.

Since 2022, the company has extended payment dates for nine onshore corporate bonds, comprising 53.5 billion yuan in principal and 3.7 billion yuan in interest. Besides, its overdue onshore debts amounted to 749.2 billion yuan, including 208.4 billion yuan of interest-bearing debt, 326.3 billion yuan of commercial papers and 157.3 billion yuan of contingent liabilities, at the end of last year.

The company said it will have to raise about 250 to 300 billion yuan in the next three years to complete its core task of “ensuring delivery of properties.”

Read: China’s property crisis hits state-owned developers

Follow Jeff Pao on Twitter at @jeffpao3

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China ‘contagion’ talk is last thing financial world needs

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China’s Zhongzhi Enterprise Group headline-making revelations have investors uttering global markets’ least favorite word: contagion.

A liquidity crisis at the troubled shadow bank comes just days after property development giant Country Garden missed coupon payments. Concerns surrounding Country Garden’s finances echo the China Evergrande Group default debacle of 2021.

Yet trouble in China’s US$3 trillion shadow banking sector raises the stakes considerably. The extreme opacity that pervades the industry means that neither investors nor credit rating companies know the true magnitude of leverage in the financial system.

Zhongzhi, with businesses ranging from mining to wealth management and high exposure to real estate, is a microcosm of the problem.

Its stumble has triggered broader fears of additional dominoes among Chinese conglomerates to fall. PTSD from earlier collapses of Anbang Insurance Group and HNA Group is just below the surface.

Since the end of July, Zhongrong International Trust Co, a leading company controlled by Zhongzhi, has missed dozens of payments on investment products.

It’s the latest sign of how China’s property debt woes are rippling through the economy and imperiling global markets.

“The worry is that a ‘Lehman moment’ beckons, threatening the solvency of China’s financial system,” says economist Xiaoxi Zhang at Gavekal Dragonomics.

Economist Ting Lu at Nomura Holdings adds that “markets still underestimate the aftermath of the significant collapse in China’s property sector.”

Chinese property developers are having trouble meeting their financial obligations. Photo: iStock

Concerns about Zhongzhi, which has more than 1 trillion yuan of assets under management, Zhang says, is a reminder that “debt strains from property developers and local government financing vehicles are spreading across China’s economy.”

The good news, Zhang adds, is that regulatory vigilance means a rerun of the 2008 US crisis is unlikely. The bad news is that debt strains are popping up in too many sectors for comfort.

In the case of Zhongzhi, its affiliated companies offer trust products and private “directed financing” wealth-management products to high-net-worth individuals.

These target aggressive returns — typically above 6% per year — in part by investing heavily in so-called “non-standard assets,” a residual category that spans products from trust loans to accounts receivables.

The end borrowers, Zhang explains, are often firms that can’t access traditional bank loans so they turn to these more expensive shadow-financing channels.

They include many property developers and off-balance sheet local government financing vehicles, which face serious debt problems this year.

“The elevated risk of this type of lending is reflected in returns on ‘collective’ trust products,” Zhang says, “which raise funds from more than one investor — the majority of trust products. These returns have remained elevated in recent years, even as bank lending rates and corporate bond yields have fallen.”

Goldman Sachs analyst Shuo Yang notes that “given the recent net asset value markdowns and redemptions, we expect growth in trust products to slow, which could result in tighter property financing conditions, and affect banks’ earnings and balance sheets.”

Those financing conditions are partly contingent upon the direction of central bank policies from Washington to Tokyo.

Economists at ING Bank wrote in a note to clients that “we think the Fed will indeed leave interest rates unchanged in September, but we don’t think it will carry through with that final forecast hike.” They worry that further rate hikes could heighten the chances of recession.

Yang’s Goldman colleague, chief economist Jan Hatzius, says the US Federal Reserve’s first rate cut after tightening 11 times in 17 months, will likely be in the second quarter of 2024.

By then, “we expect core personal consumption expenditure inflation to have fallen below 3% on a year-on-year basis and below 2.5% on a monthly annualized basis, and wage growth to have fallen below 4% year-on-year.”

Hatzius adds that “those thresholds for cutting align roughly with the annual forecasts in the [Fed’s] summary of economic projections and the conditions at the outset of the last cutting cycle motivated by an intent to normalize from a restrictive policy stance as inflation came down in 1995.”

In 2022, Hatzius adds, “We initially took the view that the Fed was unlikely to cut until a growth scare emerged, but we softened our stance earlier this year and have since assumed that a convincing decline in inflation would probably be enough to prompt cuts.”

The People’s Bank of China would like favor a halt in US interest rate hikes. Image: Twitter

This could relieve pressure on the People’s Bank of China to manage a widening gap between US and Chinese debt yields. In the meantime, though, analysts at Citigroup expect more trust defaults as headwinds bear down on China’s property sector. But in a recent note to clients, they stopped short at predicting of Lehman Brothers-like reckoning.

“As the problems in the property development sector are not new and have already been unfolding for several years, we think investors would have already psychologically prepared for the potential of defaults,” Citi writes.

Yet the opacity that surrounds the property sector is intensifying worries that Country Garden won’t be the last company to delay payment on private onshore bonds.

“Unlike banks, which have holding power and are able to roll over credit to wait for an eventual resolution, alternative financing channels such as trusts may default once trust investors are unwilling to roll over the products,” says analyst Katherine Lei at JPMorgan.

“The default events may lead to a chain reaction on developer financing, adding stress to privately-owned enterprise developers and their creditors,” Lei said.

The geopolitical scene is adding fresh headwinds for President Xi Jinping’s economy. Last week, US President Joe Biden banned US investors from investing in sections of China’s chips, quantum computing and artificial intelligence industries.

The step could upend efforts to lift Sino-US ties from their historic lows, adding to the reasons why investors are worried about China’s trajectory.

This latest step is “spectacularly bad timing for China,” says economist Eswar Prasad at Cornell University.  It comes as confidence is “falling, growth is stalling” and China “seems to be sliding into a downward spiral” amid deflation, low growth and lack of confidence all feeding on each other, Prasad says.

Analyst Gabriel Wildau at political risk advisory Teneo notes that “the investment restrictions largely mirror export controls already in place, including those that ban exports to China of machinery and software used to produce advanced semiconductors.”

Wildau adds that “unprecedentedly tough restrictions that the US Commerce Department issued in October – soon to be expanded – already rendered new US investment in advanced Chinese semiconductor production effectively impossible, since any such factory would need imported equipment covered by those restrictions.”

All this, warns Jens Eskelund, president of the European Union Chamber of Commerce in China, amounts to a “perfect storm” damaging foreign investors’ confidence in Asia’s biggest economy.

“From an FDI perspective, China is experiencing a perfect storm in which there are many factors now conspiring,” Eskelund told the South China Morning Post, referring to supply chain chaos, manufacturing disruptions, geopolitical tensions and slowing economic growth that “affect investor sentiment.”

In the second quarter of 2023, multinational companies turned “less optimistic” on China in terms of macro trends, consumption, labor and cost metrics, according to Morgan Stanley’s mainland sentiment Index.

Morgan Stanley analyst Laura Wang notes that this marks the first time since late 2021 when all four areas showed deterioration.

What’s needed, analysts say, is for Xi’s Communist Party to make good on its 2013 pledge to give market forces a “decisive” role in Beijing’s decision-making. This means, in part, taking steps to put the proverbial horse before the cart.

Over the last decade, Xi’s party tended to over-promise and under-deliver reform-wise.

Chinese President Xi Jinping on a large screen during a cultural performance as part of the celebration of the 100th anniversary of the founding of the Communist Party of China on June 28, 2021. Photo: Asia Times Files / AFP / Noel Celis

During the Xi era, China has opened equity markets ever wider to overseas investors. Beijing has done the same with government bonds, which are being added to a who’s-who of global indexes.

Trouble is, access to exchanges in Shanghai and Shenzhen often outpace the domestic reforms needed to ready China Inc for the global prime time.

China, as is often said, is working from its own playbook, one that even detractors grudgingly admit has a way of beating the odds. Myriad times since 1997, analysts, investors and shortsellers predicted a credit-and-debt-fueled crash that has yet to arrive.

Even so, there are certain laws of gravity that still apply to economies transitioning from state-driven and export-led growth to services, innovation and domestic consumption.

One of those laws states that developing economies should build credible and trusted markets before trillions of dollars of outside capital arrive.

This means regulators must methodically increase transparency, prod companies to raise their governance games, devise reliable surveillance mechanisms like credit rating players and strengthen the financial architecture before the world’s investors show up.

On Xi’s watch, China has become less transparent and the media less free. And this is the problem facing Xiconomics: too often China has believed it can build a world-class financial system after, not before, waves of foreign capital arrive.  

Follow William Pesek on X, formerly known as Twitter, at @WilliamPesek

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Japan stock market miracle more mirage than reality

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The Japanese stock market has experienced an impressive upswing. Since January 2023, the Nikkei 225 index has risen by around 30% – by far outperforming US and European stocks. 

The boom is driven by foreign investors, with Berkshire Hathaway CEO Warren Buffet’s Japan visit seen as a “stamp of approval” for investing in Japan.

The boom is surprising because since early 2023 the corporate sector has had no positive news concerning innovations that would boost the international competitiveness of Japanese products. 

As the Bank of Japan (BoJ) has hardly lifted interest rates, financing conditions have remained benign, allowing corporations to postpone restructuring.

Prime Minister Fumio Kishida’s new capitalism has not come with comprehensive structural reforms. The Japanese education system continues to fail to produce innovative human capital and the fast-aging society is becoming an increasing constraint on labor supply. 

From this perspective, Japan’s growth perspectives remain gloomy. The boom seems more financial than real, supported by historically low real interest rates in Japan.

Foreigners drove the June 2023 Japanese stock market surge. In the United States and the euro area, the sharp inflation increase since mid-2021 has prompted central banks to lift interest rates high. This has clouded growth perspectives.

As financing costs for corporations have substantially increased and the value of bonds in the balance sheets of banks has declined, financial instability has emerged. With strong wage claims perpetuating inflation, a recession in the United States and Europe may be inevitable to tame inflation.

This seems to have tempted foreign investors to reshuffle funds to Japan, where the pressure on the BoJ to increase interest rates is lower and inflation has been less pronounced, standing at 3.3% in June 2023.

Central Bank Governor Kazuo Ueda remains committed to the yield curve targeting. The average credit interest rate was at 0.7% in June 2023 and the 10-year government yield has remained below 0.5%. 

New Bank of Japan Governor Kazuo Ueda hasn’t rocked the policy boat. Image: Twitter / Screengrab

With US and European interest rates rising high relative to Japan, the Japanese yen has depreciated by 36.3% against the dollar since January 2021. This has made Japanese stocks cheap in terms of US dollars.

Despite the slight easing of the yield curve control in July 2023, in the medium-term the scope to increase interest rates for the BoJ remains limited. With government debt amounting to 1.44 quadrillion yen (US$9.6 trillion), raising interest rates would fiscally paralyze the Japanese government.

The BoJ’s large asset purchases have created large deposits for the commercial banks at the BoJ (549 trillion yen as of March 2023). Lifting the interest rates on commercial banks’ deposits by only one percentage point would generate painful interest rate expenses for BoJ of about 5.5 trillion yen.

This implies that Japanese corporations can continue to expect public support via benign financing conditions. With the BoJ continuing to buy government bonds — the equivalent of roughly 70 trillion yen in the first half of 2023 — the Japanese government can also remain supportive of aggregate business activity. There is also a larger scope for subsidies, which were announced for semiconductor and battery production.

Domestically, the yen’s depreciation boosted the revenues of large export-oriented Japanese enterprises. At the same time, depreciation made the acquisition of foreign assets more expensive and repurchases of Japanese stocks more attractive. 

In 2022, stock repurchases by Japanese corporations reached a historical peak of 9.2 trillion yen. For 2023, SMBC Nikko Securities has already recorded a volume of 4.6 trillion yen as of mid-May.

While the Nikkei 225 is slowly reapproaching its peak before the bubble economy bursts, the new stock market miracle seems driven by state intervention — as previously in the case of Abenomics. 

On top of direct and indirect subsidies, the BoJ has in the past bought large amounts of exchange-traded funds (ETFs). As of June 2023, it held about 57 trillion yen (37 trillion yen in book value) in ETFs. This equated to 81% of all Japanese ETFs.

Whereas the Japanese government and the BoJ keep zombifying Japanese corporations, interest rate increases in the United States and Europe will exert pressure on US and European corporations to increase efficiency and push forward innovation. This suggests that the long-term fundamental growth prospects of stock markets are in favor of the United States.

Japan and its corporations will only be able to recuperate their past strength if the BoJ follows the interest rate policy of the US Federal Reserve. Doing so will prompt the corporations to increase efficiency and urge the government to implement decisive structural reforms.

Taiki Murai is Research Assistant at the Institute for Economic Policy, Leipzig University.

Gunther Schnabl is Professor of Economic Policy and International Economics at Leipzig University.

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