Washington myopia undercuts Indo-Pacific partners

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Over the last few weeks, Washington has been abuzz with everything India. On June 22, President Joe Biden, cabinet secretaries and the US Congress gave a rousing reception to visiting Indian Prime Minister Narendra Modi.

For his part, the prime minister cheered Republican and Democratic congressmen with his quip that he could “help them reach bipartisan consensus,” referring to the across-the-aisle support India enjoys in Washington.

It was certainly an apt decision to honor the Indian leader, given that the US-India partnership has significantly expanded under Biden. Both the White House and several members of the Biden administration, from National Security Advisor Jake Sullivan to Indo-Pacific Coordinator Kurt Campbell, have characterized it as the “most important bilateral relationship of the 21st century.”

However, over the last few months, some of the Biden administration’s regional policies in the Indo-Pacific have done more harm than good to its partners, particularly hurting India and its geopolitical leverage in the Indo-Pacific region. 

The Biden administration’s foreign policy cut a significant departure from its predecessors until last month, when it returned to Washington’s old ways: myopic democratic interventions, benevolent outreach to adversarial nations and partisan bickering.

Over the last few weeks, Washington’s primary Indo-Pacific partners, India and Japan, have borne the brunt of these missteps.

Biden, in a last-minute change of plans, canceled his scheduled trip to Papua New Guinea and Australia to address the debt ceiling crisis in Washington, with Republicans stalling the Democrats from raising the debt ceiling levels.

While Secretary of State Antony Blinken went ahead with his own trip to Papua New Guinea and signed a crucial defense agreement with the Pacific Island nation, Biden’s cancelation of that leg of the tour was not the best messaging to a region increasingly falling under China’s orbit.

Prior to Biden’s cancellation, the Indian government had decided to accommodate his visit and cut short Indian official visits as a courtesy to the incoming American presidential delegation. Modi went ahead with his travel itinerary as scheduled – and turned it into an opportunity to showcase India’s position on the global stage.

Prime Minister Narendra Modi arrived in Papua New Guinea on May 21 and a rare moment was seen at the Port Moresby airport when PNG Prime Minister James Marape, in a traditional welcoming gesture, touched Modi’s feet and sought his blessings. Photo: NDTV

New Guinea Prime Minister James Marape hailed Modi as the leader of the Global South. Taking an implicit jab at the United States and China, the island nation leader told Modi, “We are victims of global power play, and you are the leader of Global South. We will rally behind your leadership at global forums.”

While this was a minor setback for a coordinated approach toward Chinese expansionism in the Pacific, the Indian Ocean challenge is a more geopolitically complex Gordian knot.

In mid-May, Blinken threatened Bangladesh with sanctions if the Indian Ocean state did not host free and fair elections in the 2024 poll. Suppose the United States were to follow through with its threat.

In that case, India and Japan would be in a quandary as they have consistently positioned Bangladesh as a gateway connecting the Indian subcontinent to Southeast Asia for supply chain and infrastructure connectivity initiatives.

Geographically, Bangladesh is nestled between India’s state of Bengal to the west and India’s northeastern provinces to the east, bordering a thin strip of land the connects the rest of India to the northeast (also known as the “chicken’s neck”).

Thus the densely populated country’s interaction with the rest of the world is directed through India or the Bay of Bengal and the Indian Ocean.

Both New Delhi and Tokyo have invested in infrastructure in the region and have long-term plans to invest in Dhaka’s growth. Recently, Japan and India agreed to jointly develop the Matabari deep-sea port in Bangladesh to serve as a “strategic anchor” in the Indian Ocean.

Though often underreported, Japanese investment plays a vital role in South Asian development. Japan is also undeniably India’s Northeast region’s major infrastructure and development partner.

Development assistance projects supported by Japan in India’s Northeast amount to more than 231 billion yen ($1.7 billion). Graphic: Japanese government

Through the Bay of Bengal-Northeast India Industrial Value Chain, the Japanese government envisions increased connectivity between India’s landlocked northeast and Southeast Asia, creating a single economic zone and an alternative trade connectivity project to China’s Belt and Road Initiative.

Japanese prime minister Fumio Kishida, articulating his government’s Free and Open Indo-Pacific strategy in New Delhi in early March this year, called for increased integration of India’s Northeast with Bangladesh to transform the region into a single economic zone.

Moreover, Japan is attempting to capture the businesses moving out of the pricier markets of Southeast Asia, using the Bay of Bengal region. Japan’s regional strategy has neatly complemented the Modi government’s policies.

Modi transformed the older “Look East” policy into an “Act East” policy of increasing strategic and economic engagement with Southeast Asia as a countervailing force to China’s involvement in the region. 

Tokyo has slowly and steadily supported this transformation. A case in point is Tokyo and New Delhi’s hosting of the India-Japan Act East forum to discuss cooperation on a range of projects that will increase connectivity in India’s Northeast to Southeast Asia.

India’s Northeast has a history of civil unrest and strife, making it a challenging region for development. Furthermore, its landlocked topography and poor infrastructure limited its connectivity to both its neighboring countries and the rest of India. Only a party interested in the long game or having a vision for the region could invest in that part of the world, and in this case it is Japan.

Interestingly, as an extension, both Japan and India are engaging the immediate eastern neighbor to Bangladesh and India, Myanmar. Sanctioned by the United States, Myanmar has limited partners on the world stage. Nonetheless, Japan and India have continued engagement with the military junta to prevent the nation from falling entirely under China’s influence.

There, once again, Indo-Japanese interests are affected by America’s sanctions. In May, India-Myanmar inaugurated the Sittwe port in the Rakhine state of Myanmar. India supported this port to enhance sea lane connectivity between India’s eastern states and Myanmar.

However, since the sanctions, Indian companies have either had to depart Myanmar altogether or face global scrutiny for working with the military junta-led government.

India-financed Sittwe Port in Myanmar. Photo: PTI

As satellite images released earlier this year indicated, increased activity on the Great Coco Islands of Myanmar had the markings of Chinese military involvement. With the Great Cocos less than thirty miles north of India’s Andaman and Nicobar Islands, any potential militarization of the Coco Islands by the Chinese could pose a significant threat to India’s security in the Indian Ocean.

In this geopolitical equation, India cannot afford to disengage from Myanmar. And yet, America’s economic statecraft is undercutting India’s vital regional partnerships.

Henry Kissinger, who celebrated his 100th birthday in May, summed up this dynamic well: “It may be dangerous to be America’s enemy, but to be America’s friend is fatal.” It is undoubtedly proving so for Japan and India, but more so for New Delhi in the Indian Ocean. 

Against the backdrop of these measures come the Biden administration’s attempts at thawing relations with China. While Biden departs from his predecessors as the only recent president not to ask for Kissinger’s advice, he is beginning to walk in the footsteps of the grand strategist by making attempts to mend ties with China.

Katherine Tai. Photo: Wikipedia

From the dialogue in Vienna to Blinken rescheduling his trip to Beijing for last month to the official abandonment of economic “decoupling” for the less confrontational “de-risking,” Washington’s approach to China shows signs of softening.

While members of the Indo-Pacific Economic Framework for Prosperity (IPEF) agreed on moving ahead with a supply chain agreement in Detroit, US Trade Representative Katherine Tai met with her Chinese counterpart to discuss trade and economic ties in the same week on the sidelines of the APEC meeting.

Washington’s blow-hot, blow-cold approach does not reassure allies and partners – particularly partners that it courts for strategic competition with China – of the consistency of its priorities and policies.

Furthermore, Washington’s skewed sanction policies, opposing democratic backsliding in a few states at the same time it calls for engagement with authoritarian China, raise questions about the motives behind such policies.

While the United States has sanctioned Chinese officials allegedly involved in human rights abuses in Xinjiang, it continues to do massive business with Beijing. This selective condemnation only further isolates partners and strengthens Chinese engagement with the sanctioned nations.

This misbegotten strategy, according to Rob York, director for regional affairs at Honolulu’s Pacific Forum, is “a holdover from America’s unipolar moment that we need to outgrow. America’s moral authority, and the benefits of aligning with Washington, are no longer assumed but must be competed for, and sanctions must be employed far more judiciously than they have been.”

This type of awakening to multipolar realities of the world order should inform Washington of the pitfalls and shortsightedness of its foreign policies. America’s sanctions and other tools of economic statecraft should not be used for democratic interventions but to deter its enemies. If not, the United States will have few allies in its strategic competition with China.

Akhil Ramesh ([email protected]) is a senior fellow at the Pacific Forum and author of the US-India chapter for Comparative Connections: A Triannual E-Journal of Bilateral Relations in the Indo-Pacific.

The article in this version was first published by Pacific Forum. An earlier version appeared in The National Interest. Asia Times is republishing with kind permission.

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Evergrande: Crisis-hit Chinese property giant reveals bn loss

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A woman rides a scooter past the construction site of an Evergrande housing complex in China's Henan province in September 2021.Getty Images
By Annabelle Liang
Business reporter

Crisis-hit Chinese property giant Evergrande has revealed that in 2021 and 2022 it lost a combined 581.9bn yuan ($81.1bn; £62bn).

The firm, which defaulted on its debts in late-2021, reported its long overdue earnings to investors in Hong Kong.

Evergrande has been struggling with an estimated $300bn (£229bn) of debts.

The huge losses highlight how much the developer was rocked in recent years by the property market crisis in the world’s second largest economy.

In filings to the Hong Kong Stock Exchange late on Monday, the company said it lost 476bn yuan in 2021 and 105.9bn yuan last year.

That came as revenue more than halved over the two-year period.

Evergrande said the losses were due to a number of reasons, including the falling value of properties and other assets as well as higher borrowing costs.

Shares in the firm, which was once China’s top-selling property developer, have been suspended from trading since March last year.

China’s real estate industry was rocked when new rules to control the amount big real estate firms could borrow were introduced in 2020.

The following year, Evergrande missed a crucial deadline and failed to repay interest on around $1.2bn of international loans.

Its financial problems have rippled through the country’s property industry, with a series of other developers defaulting on their debts and leaving unfinished building projects across the country.

Earlier this year, Evergrande laid out plans to restructure around $20bn in overseas debt.

The company racked up debts of more than $300bn as it expanded aggressively to become one of China’s biggest companies.

Over the last decade and a half the company’s expansion encompassed a wide range of industries including sports, entertainment and electric car making.

In 2010, Evergrande took control of Guangzhou FC and changed its name to Guangzhou Evergrande Taobao FC.

With an infusion of new money, the squad was strengthened and it immediately won promotion to the top tier of Chinese football. From 2011 it won the Chinese Super League title eight times, including seven seasons in a row.

Last year, the club was relegated from the Super League, while Evergrande’s plans for a $1.8bn stadium were shelved. The club has also reverted to its previous name – Guangzhou FC.

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Ayala’s path to an ESG driven business | FinanceAsia

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With several ESG-backed initiatives in recent years, the Philippines-based conglomerate Ayala has solidified its commitment to sustainability. Operating across verticals including energy, finance, infrastructure, and real estate, Ayala has committed to net zero greenhouse emissions by 2050. The conglomerate’s energy wing ACEN recently created the world’s first energy transition mechanism (ETM) in November 2022, backed by BPI and RCBC.

On the social front, Ayala’s GCash app and BPI’s BanKo have  played pivotal roles in financial inclusion for unbanked Filipinos and small to medium size enterprises. BPI and Globe are currently reviewing their framework to consciously focus on these areas.

When it comes to governance, Ayala’s boards are working towards an appropriate level of diversity and independence. This involves maintaining high standards when it comes to transparency and disclosure.

The 190-year-old company’s social and sustainability initiatives have a long history. Albert de Larrazabal, CFO at Ayala Corporation said, “We have always aligned ourselves to national interest and had very high standards of governance and stewardship. As we must be mindful of the ecosystems we operate under, ESG in various forms has always been part of our value proposition.”

Ayala’s approach to ESG

Today, ESG-based financing is a priority for Ayala. Apart from ACEN’s implementation of the world’s first ETM, Ayala has issued a social bond with the IFC in support of its cancer hospital. Larrazabal said, “We are looking to do KPI-linked social and ESG financing, which incorporates targets into the commercial terms and conditions of the loan.”

Even during the M&A process, the conglomerate is mindful of integrating new acquisitions into its ESG framework. Ayala has also taken steps to ensure that ESG is a priority that is ingrained at the highest levels of the organisation, leveraging its membership with the World Business Council for Sustainable Development (WBCSD). The conglomerate’s board has received training which ensures they can play an active role in tracking and monitoring developments in the ESG space.

Corporates making public commitments to sustainability draw a lot of attention, not all of it positive. Asked how Ayala approaches concerns about greenwashing, Larrazabal said, “Sometimes it happens inadvertently because of incorrect measurements. That’s why we brought in South Pole. We have taken steps to ensure we are on the right track by committing to independent verification, to give people a degree of reassurance.”

Building a model for the APAC region

While the need for sustainable leaders is strongly felt across APAC, many countries in the region have a minimal contribution to emissions — the Philippines emits half the global average on a per capita basis. Larrazabal said, “Between 80% to 88% of our emissions — depending on individual businesses — are scope 3.” These emissions are defined as the result of activities from assets not owned or controlled by a reporting organisation, but which are a part of its value chain. Larrazabal said, “Our scope 3 is somebody else’s scope 1 and scope 2. We need an environment that enables, incentivises, and if that fails, penalises those who disregard scope 1 and 2.”

Many emerging markets grapple with issues similar to those facing the Philippines — adopting renewable energy, while meeting the demands of a growing population and economy. As a result, ETM-like arrangements may be embraced to a greater extent. Asked for his advice on managing such a transaction, Eric Francia, president and CEO at ACEN said, “It is important for investors to reconsider their position on coal, so long as the principles are well understood. One may be investing in a coal plant, but for a good purpose, which is enabling its early retirement.”

Offering a financial perspective on the ETM, TG Limcaoco, president and CEO Bank of Philippine Islands added, “We provided lending and brought in other institutions. We took reduced rates of returns for equity and debt exposure, which allowed us to shorten the life of the plant by 10 to 15 years. It is a big win for everyone involved.”

For more on Ayala’s adoption of ESG and a deeper insight into the world’s first ever ETM, please watch the accompanying video.

 

 

¬ Haymarket Media Limited. All rights reserved.

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The remarkable story of a fiery Indian courtesan

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Courtesan bookManish Gaekwad
By Cherylann Mollan
BBC News, Mumbai

“I danced in the dark. I used to light up the room with candles and perform. In the blackout, my naseeb (fate) was going to shine.”

The year was 1962. War had broken out between India and China over a disputed border and the Indian government had declared a state of national emergency.

Fear gripped people as wailing sirens and days-long blackouts became a part of daily life. The future seemed uncertain.

But Rekhabai wouldn’t let the fear of dying dictate her destiny. Instead of shutting shop like the other courtesans (women entertainers), she would dress up in a beautiful sari night after night and sing and dance for the groups of men who came to watch her in the kotha – a Hindi word for a place where professional female dancers performed for men, or sometimes, even a brothel.

Her life had taught her that hardship was often a gateway to opportunity, or at least, survival. Rekhabai’s tumultuous life is now the subject of a book, The Last Courtesan – Writing My Mother’s Memoir, authored by her son Manish Gaekwad.

“My mother always wanted to tell her story,” Gaekwad says and adds that he felt no shame or embarrassment in narrating it as, having lived with her in the kotha up until his late teens, her life was no secret to him.

“Growing up in a kotha, a child sees a lot more than he should. My mother knew this and didn’t feel the need to hide anything,” says Gaekwad. His book – written from the memories his mother narrated to him – gives the reader a shockingly honest look into the life of an Indian courtesan is the mid-1900s.

Courtesans, also known as tawaifs in popular culture, have been around since 2BC in the Indian subcontinent, says Madhur Gupta, an Odissi dancer and author of Courting Hindustan: The Consuming Passions of Iconic Women Performers of India.

“They were women entertainers whose function was to entertain and pleasure royalty and the Gods,” says Ms Gupta. Before India came under British rule, courtesans were viewed as respected performers; they were highly trained in the arts, wealthy and enjoyed the patronage of some of the most powerful men of their times.

Courtesan book

Bhansali production

“But they also faced exploitation at the hands of men and society,” Ms Gupta says. India’s courtesan culture began to decline after the British – who saw them as “nautch girls” (dance girls) or merely sex workers – enacted laws aimed at curbing the practice.

Their status declined further after India gained independence in 1947 and many courtesans were forced to turn to prostitution to survive. The practice has completely died out now, but stories of famous courtesans and their fascinating lives live on in books and films.

And one such story is that of Rekhabai.

She was born in a poor family in the western city of Pune as the sixth among 10 siblings. Rekhabai doesn’t remember the exact year or date, her memory about time is hazy. Tired of siring five girls, her drunk father allegedly tried to drown her in a pond after she was born.

At the age of nine or 10, she was married off to settle a family debt, and was later sold by her in-laws to a kotha in Bowbazar area in the eastern city of Kolkata.

She was not yet a teenager when she began training as a tawaif, learning to sing and dance. But her life and earnings were controlled by a female relative who was also a courtesan there.

During the India-China war, the relative left and Rekhabai got a chance to take charge of her own life. Her candlelight performances helped her become independent and left her with the realisation that she could be her own provider and protector if she was brave enough.

This would become her guiding principle for the rest of her life. Rekhabai – unlike her famous Bollywood counterparts in the films Umrao Jaan and Pakeezah – never pined after a man. She chose not to remarry, despite having a long list of patrons who courted her – from small-time criminals to rich sheikhs and renowned musicians – as it would mean having to give up her life as a tawaif and leave the kotha.

The kotha – the small space in which she performed, lived, raised her child and sheltered various members of her family at different times – ironically became a symbol of freedom and power for her.

Yet, it was also a space fraught with conflict and hardship, where circumstance ate away at innocence, stripped away humanity and evoked destructive emotions like rage, fear and despair.

Courtesan book

Manish Gaekwad

In the book, Gaekwad narrates some deeply distressing memories his mother recounts, like when a thug pulled out a gun to shoot her after she refused to marry him.

In another place, Rekhabai recounts the abuse she faced from courtesans who were jealous of her success. Some tried to intimidate her by hiring gangsters to lurk outside her room; others called her a prostitute when she wasn’t one.

But the kotha also forged her into the steely woman she became eventually. It’s where she discovered her talent as a dancer, and the power it wielded over men looking to escape their own insecurities or the tedium and melancholia of life.

It’s where she learnt to read men by the way they treated her and to placate egos when needed, or shred them to bits if they threatened to destroy her own.

“I had mastered the language of the kotha. I had to speak it if required,” she says.

But along with this feisty, charming, street-smart performer, the kotha also saw Rekhabai transform into a doting, fiercely-protective mother who did everything in her power to give her son a better life.

Courtesan book

Getty Images

As a baby, she kept him close to her in the kotha. She recalls how she would run to check up on him between performances if she thought she heard him cry.

Later, she sent him to a boarding school and then bought an apartment so that he could invite his friends over without feeling embarrassed.

She took pride in the man her son was growing into – even though his English medium-education and more refined upbringing in the boarding school made him different from her in many ways.

In a heart-warming anecdote, she recalls a time her son, who was visiting during vacations, asks for a fork and spoon to eat with.

“I knew of forks [kaanta in Hindi], but I had never heard what it was called in English before… I had to go to the market to buy them when you explained [what it was],” she says in the book.

In the late 2000s, the courtesan culture had completely vanished and Rekhabai left the kotha to live in her apartment in Kolkata. She died in the western city of Mumbai in February. Gaekwad says he will always remain in awe of his mother, her fortitude, talent and zest for life.

“I hope men read this book,” he says, and adds that Indian men have these “constructs around the mother figure, where she has to be a paragon of purity”.

“But I hope this book helps people identify the individuality of their mothers and accept who they are as people, independent from their relationship with us.”

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Is the worst over for Sri Lanka’s economic crisis?

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People gather to buy clothes on the busy street market of Maharagama, near Sri Lanka's capital ColomboGetty Images
By Archana Shukla
BBC News, Colombo

At first glance, life in Sri Lanka’s financial capital Colombo looks deceptively normal.

Roads are packed with traffic, public spaces and restaurants are full of both locals and tourists, while shops are bustling.

It is hard to imagine that just a year ago, this was a country struggling with massive shortages after it ran out of foreign currency.

With no money to buy fuel, roads were empty with even public transport at a standstill. Sri Lanka had to go back to pandemic-era measures such as online classes and working from home. But even this was not practical because of power cuts – some of which went on for up to 13 hours a day.

Food, medicine and other essentials were also in short supply, exacerbating the crisis. People had to stand in such long queues in the brutal heat, that at least 16 people – mainly the elderly – died.

But now, just a year later, food, fuel and medicine are available again, offices, schools and factories are all open, and public transport is back up and running.

Restaurants, especially high-end ones, are bustling.

A vendor deals in rupee notes on March 21, 2023, in Colombo, Sri Lanka.

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“Last year this time I was on the verge of selling my restaurant. We had to close for a few days as the shortage of fuel meant no customers were coming. But now footfall has gone up nearly 70%,” said Chathura Ekanayake who runs a fine dining restaurant in Colombo.

The country’s main source of foreign currencies – tourism – is also witnessing a revival. The industry has recorded a 30% jump in revenue from the previous year.

“The recovery has been magical for us. Last year we didn’t even know if the country would survive”, said Hiran Cooray, CEO of Jetwings Symphony, a leading travel and hospitality player in Sri Lanka.

Despite these good news stories, Sri Lanka’s economy is still in a precarious place.

The country still has more than $80bn (£61.1bn) of debt – both foreign and domestic. In the worst of the crisis last year, the country defaulted on its foreign debt for the first time in its history.

Ranil Wickremesinghe who took charge as President after widespread protests saw then-ruler Gotabaya Rajapaksa resign, has managed to secure a lifeline of $2.9bn from the International Monetary Fund (IMF).

This has been crucial to opening other funding channels and easing shortages, but the money came with strict economic and governance policy reforms. The country is now seeking to restructure terms of its debt payments with both foreign and domestic lenders, as mandated by the IMF.

The main focus has been on restructuring its $36bn of foreign debt. This includes more than $7bn of loans from China, Sri Lanka’s largest bilateral creditor.

However, it is the restructuring of domestic debt that is likely to have a much bigger impact on the Sri Lankan people. Domestic borrowing accounts for around 50% of the country’s total debt. Sri Lanka’s cabinet recently approved a domestic debt restructuring proposal, but it has drawn massive criticism as it aims to cut workers’ pensions, while banks will not be affected. There have been protests against the proposals in Colombo.

It highlights that while life may seem to have returned to normal, in reality people are still struggling.

Protesters chant slogans during the protest on July 12, 2023, in Colombo, Sri Lanka. The Inter-company Employee Union held a protest in front of the Labour Department. This protest was held, asking not to touch the Employees' Trust Fund and Employees Provident Fund.

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Essentials are available, but unaffordable for many. Things are more expensive than ever before. Almost half of all Sri Lankan families spend about 70% of their household income on food alone. And prices of food, clothing and housing are continuing to rise.

To add to the burden, income tax has been hiked to as much as 36% and subsidies on everything from food to household bills have been removed.

One area where this has had a huge impact is electricity bills, which have soared by 65% after the subsidy was removed.

“Many families from the middle class have now slipped below the poverty line,” said Malathy Knight, a senior economist with private think tank Verite Research.

And according to the World Bank, this is likely to continue for a while.

“Poverty is projected to remain above 25% in the next few years due to the multiple risks to households’ livelihoods,” it said in a report. The organisation has extended a $700m loan to Sri Lanka for budgetary support, including $200m for the poor and vulnerable.

This is a dramatic fall for a country that was long held up as an economic success story and had one of the highest average incomes in South Asia. The quality of its infrastructure, its free public health and education systems and its high levels of social development have all been held in high regard.

So how did things get so bad?

The government blamed the crisis on the Covid pandemic, which badly affected tourism. However, although the pandemic was a factor, disastrous economic policies were more to blame. Populist moves like big tax cuts in 2019 cost the government $1.4bn in annual revenues. And a move to ban imports of chemical fertilisers in 2021 caused a domestic food shortage.

Police used batton to disperse the university students during an anti-government demonstration by university students in Colombo On June 7, 2023.

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In order to cut expenses further the government has proposed privatising state-owned enterprises like Sri Lankan Airlines, Sri Lankan Insurance Corporation and Sri Lanka Telecom. This has triggered a fresh wave of protests – this time by trade unions.

“The government should not put the burden of the reforms on the salaried class and middle class who are already affected by the economic crisis,” said Anupa Nandula, the Vice President of the Ceylon Bank Employees Union.

Mr Nandula and his union participated in a recent demonstration against the proposal to privatise the Sri Lankan Insurance Corporation. He believes privatisation will lead to massive job losses and further burden the working class.

Ever since last year’s demonstrations were violently broken up, Sri Lankan authorities have been using force – such as tear gas, water cannon and even beating protesters. But experts warn that this is not a tactic that can work.

Rather than using force, the government needs to be transparent and explain that reshaping the economy will be tough, says Bhavani Fonseka, a constitutional lawyer working with Centre for Policy Alternatives.

“I think people since the crisis has happened have gotten used to a harder lifestyle. But in the absence of information coming, in the absence of answers being given, there is growing uncertainty and fear that we will go back to a crisis point.”

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China’s GDP data point to need for stimulus, but will it come?

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China published its second-quarter GDP data on Monday with a big – but disappointing – number, 6.3% growth year on year. The reason for the disappointment comes from the  hugely positive base effect, as last year’s second-quarter GDP growth was virtually because of the severe lockdowns happening in Shanghai and elsewhere in the country. 

The underwhelming growth in the second quarter is not all about the lack of external demand. Although exports have clearly been hit in June, they  had remained rather resilient in April and May. If anything, external demand will become much more of a problem in the second half of 2023 based on June’s data.

The main reason for the poor second quarter, though, is lackluster domestic demand. This is particularly the case for fixed-asset investment, dragged down by the real-estate sector, but also consumption. In fact, retail sales grew even less in June than in March, and consumption propensity remains lower than before the pandemic started.

Given the above, the 5% GDP growth target the Chinese government set for 2023 during the Two Sessions in March will be hard to achieve without stimulus.

This is ironic, since 5% was generally considered too low a target for an economy that was reopening after three years of zero-Covid policies, but China’s new premier, Li Qiang, was already warning during his press conference in March that the 2023 GDP growth target would be hard to achieve, and so it has been.

Against this backdrop, the People’s Bank of China continued to ease monetary conditions in the second quarter, but there has not been any visible impact in terms of credit growth. In other words, the recent cuts in interest rates have not led to an increase in consumption or investment thanks to cheaper borrowing as the borrowing itself keeps decelerating. 

Based on Japan’s experience in the 1990s, there is the risk that China is entering a liquidity trap due to the risks of balance-sheet recession. In other words, there is a risk that Chinese corporates and households, pushed by their very negative sentiment about the economic outlook, prefer to disinvest and deleverage in the light of falling revenue generation.

In the case of corporates, this process seems to have started, as profits have fallen substantially in 2023 and Chinese corporates have started deleveraging, especially private ones, and begun to reduce investment. 

For households, the growth of disposable income remains stagnant and youth unemployment reached record highs in June at more than 21%.

Why no stimulus?

If monetary policy is not so effective at the current juncture, the question is why a fiscal stimulus – a frequently used policy tool in China  – has not yet been put on the table as the easiest solution to China’s economic woes.

Rumors of an imminent fiscal stimulus have been in the market since mid-June, but nothing official has been announced yet. More specifically, such rumors included an 1-trillion-yuan package of special bonds to be issued by local governments mainly geared toward infrastructure projects and with the ultimate objective of lifting confidence.

While clearly needed for the now financially weak infrastructure sector, it is not really obvious whether yet one more infra-led package would do the trick of convincing investors that the Chinese economy will return to a faster growth path.

In any event, no such stimulus has been announced, which seems to indicate that Chinese policymakers are still wary about a too rapid increase in public debt, which already hovers around 100% when local governments’ off-balance-sheet debt is also taken into account, in  other words the borrowing conducted by local government financial vehicles (LGFVs).

The policy response, so far, seems to lean on easing the regulatory constraints that key sectors of the economy have suffered from in the last few years.

First and foremost, the three red lines that constrained the leverage of real-estate developers were quietly lifted and substituted by 16 easing measures introduced in November 2022. Those 16 measures have now been renewed, which, however, does not necessarily equate to an improvement in sentiment, as investors can see that their impact so far has been muted.

In the same vein, the tech sector briefly felt some relief from the settlement of the open case with Ant Financial through the equivalent of a US$1 billion fine. 

The reality is that investors are still wary about the Chinese economy, all the more after the publication of the second-quarter GDP data, and will find it hard to turn their sentiment to a more positive one only by regulatory measures.

The question, then, is whether these poor GDP data will move policymakers toward introducing a big stimulus, not only to be sure that the 5% growth target is reached in 2023 but also to avoid a very rapid deceleration in growth in 2024 once the base effects from the terrible 2022 data are no longer positive.   

Two considerations seem warranted when assessing such a possibility. The first is that Premier Li Qiang has been rather silent regarding policy announcements since he took office in March, beyond general statements on how the private sector, as well as foreign investors, should seek opportunities in the Chinese economy.

His behavior needs to be understood  in the context of the perceived subdued importance of economic growth in China’s policymaking today as opposed to national-security issues.

Against such a backdrop, a large economic stimulus could be hard to justify, all the more so since President Xi Jinping has long been critical of the 2008 massive stimulus introduced by his predecessors.

The second consideration points to the reduced effectiveness of one more fiscal stimulus, certainly when compared with 2008. Given China’s rapidly decreasing return on assets, an infrastructure-led fiscal stimulus would need to be much bigger to have the same economic impact.

This also implies that, with such a fiscal stimulus, public debt in China would jump well above the current 100% of GDP, which would place the economy among the most indebted in the world. 

Alicia Garcia Herrero is chief economist for Asia-Pacific at Natixis and senior research fellow at Bruegel. Follow her on Twitter @Aligarciaherrer.

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China needs better and deeper bond markets

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As Chinese tech equities rally, tensions building up in the US$20 trillion bond market risk pulling the rug out from under the sudden rush of bullish stock market sentiment.

China’s Big Tech shares are surging after Premier Li Qiang signaled a sharper pivot away from regulatory crackdowns toward championing the private sector.

Just days after letting Jack Ma’s Ant Group off with a nearly US$1 billion fine, Beijing said it’s increasing support for Tencent and other top tech platforms to raise China’s innovative game.

On July 12, Li said President Xi Jinping’s government is stepping up efforts to normalize China’s regulatory environment. The goal, Li said, is to “reduce the costs of compliance and promote the healthy development of industry.”

Li said that “on the journey of building a modern socialist country, the platform economy has great potential.”

He told tech chieftains in the audience – including officials from Alibaba Group, TikTok owner ByteDance and food delivery group Meituan – to “push to increase their international competitiveness and dare to compete on the global stage.”

To analyst Kelvin Wong at OANDA, “the latest rhetoric from the top man of China’s State Council is likely to boost positive animal spirits, in the short term at least.”

But China faces a longer-term threat to positive sentiment now shining on Asia’s biggest economy: a bond market that’s still not ready for global prime time.

Credit market strains are spreading as two large property builders reneged on a combined US$608 million worth of bond payments. Meanwhile, top mainland banks are avoiding the purchase of local notes, including in the Shanghai free trade zone.

The inclusion of Chinese government bonds in top global bond indexes, including the FTSE Russell benchmark, has pulled giant tidal waves of capital China’s way.

This opening has been a game changer — offering myriad opportunities to build diversified and resilient portfolios via new asset classes to ride the nation’s development.

The trouble is, though, China’s bond market is underpinned by a developing economy with limited liquidity and hedging tools, a giant and opaque state sector, and a rudimentary credit-rating system that often obscures risk and enables the misallocation of capital.

For all of China’s promises, this makes it more of a buyer-beware market in 2023 than many investors expected. It was 10 years ago, after all, that Xi took power pledging to let market forces play the “decisive” role in financial reform decisions.

The split screens of the last two years tell the story. On one screen, China’s inclusion in major benchmarks is luring bond giants like BlackRock Inc.

On screen No 2, the crisis of confidence among creditors of China Evergrande Group offers a stark reminder of the mainland’s opacity and excesses.

The Evergrande Center building in Shanghai. Photo: Asia Times Files / AFP / Hector Retamal

The globe’s most indebted property developer owes them more than $120 billion, potentially posing system risks.

For the rest of 2023, analysts at HSBC Holdings and Goldman Sachs recently raised projections for defaults among junk-rated property bonds to about 30%.

“If property sales remain lackluster with a lack of stimulus from the authorities, we do not rule out the possibility of a further uplift in default rates,” says HSBC analyst Keith Chan.

Chairman Yu Liang at China Vanke Co, the nation’s second-largest developer by sales, says the real estate sector is looking “worse than expected.”

The property industry is “indeed seeing pressure in the short-term,” Yu says. The “real situation,” he concluded, “is a bit worse than what was expected.”

The magnitude of the risks has many economists perplexed about why the People’s Bank of China (PBOC) central bank isn’t acting more forcefully.

Recent “easing, which focused on developer financing, is far from enough to stabilize the sector,” says economist Larry Hu at Macquarie Group. “After all, credit risk for banks would remain elevated if the housing market stays weak.”

One reason: the yuan’s nearly 4% drop this year makes it harder for higher-indebted developers to make payments on US dollar-denominated debt.

The PBOC’s restraint also could mean government steps to stabilize the property sector are soon on the way.

“Looking ahead,” Hu notes, “expect to see more easing on the demand side, such as lowering the down payment ratio and easing purchase restrictions.”

The real challenge, though, is fixing the property sector, which can generate as much as one-third of gross domestic product (GDP) in good times.

Kate Jaquet, a portfolio manager at Seafarer Capital Partners, says that “beyond the importance of this sector to the overall health of the Chinese economy, another motivation for orderly restructurings of the many troubled property developers is the extensive and opaque web of their liabilities.

“Stakeholders in the restructuring process – roughly in order of payment preference – include contractors and suppliers, banks, homebuyers, wealth management product investors and, finally, bondholders.”

Jaquet adds that “there are also off-balance sheet liabilities and other hidden debts to consider. Investors, rightly concerned over the lack of disclosures, struggle to understand some of these off-balance sheet – and largely heretofore hidden – debts. These concerns are further compounded by property developers’ failure to file audited annual results with the relevant authorities.”

The bottom line, Jaquet says, is that “hasty or ham-fisted restructurings might require write-downs by holders of these lesser-understood obligations, which could have unforeseen consequences in other parts of the Chinese economy. It seems that China’s regulators know this and are taking a careful and measured approach to property sector restructurings, particularly the big ones.”

China’s property market is a drag on the economy. Image: Twitter

Considering the large role that property plays in China’s economy, “a great deal hangs in the balance with respect to restructuring in the property sector,” Jaquet says. “The details of how onshore and offshore creditors fare – in absolute terms, and relative to one another – matters a lot for the future health of China’s bond markets”

Jaquet says that “hopefully the restructurings will consider corporate governance and the rights of creditors. Lack of ready access to international capital markets will take a toll on this sector. While it is increasingly clear that the days of housing driving the Chinese economy are likely over, the big question is: where do the funds come from to keep the economy on an even keel?”

One ever-present time bomb: China’s $9 trillion-plus market in local-government financing vehicles (LGFVs) that opaquely finance everything from airports to power grids to roads and rarely raise enough to cover their obligations.

That requires bigger capital injections from municipalities that should be using the funds to build bigger social safety nets and invest in human capital.

China’s ongoing real estate crisis made matters worse. Cash flow pressures weighing on local governments have state-owned banking giants struggling to stave off a credit crunch. If China’s bond markets were more developed and robust, authorities would have more options to defuse blowups in credit markets.

The dearth of alternatives means that when, say, state pension entities sell off weaker bond holdings, it destabilizes the broader market. That, in turn, adds to the headwinds faced by LGFVs and property developers, causing new sentiment-killing feedback effects.

While offloading weaker bonds may help the state pension protect the value of its investments, it risks heightening market concerns about the health of LGFVs and developers at a time when Beijing is trying to restore confidence in the world’s second-largest economy.

Now, both LGFVs and developers are shortening the time intervals for extending credit and demanding higher borrowing costs.

“The most important variables impacting China’s economic growth over the next two years will be the success or failure of local government debt restructuring, and Beijing’s approach to the role of local government investment within China’s economy in the future,” analysts at Rhodium Group write in a new report. “A collapse in local government investment would be comparable to the economic impact of the crisis in the property market.”

All this has Beijing mulling fresh moves to support cash-strapped cities and counties around the nation. According to local press reports, this could entail green-lighting municipalities to boost bond issuance programs to finance the clearing away of hidden debt.

Reducing the prevalence of new LGFVs has never been more important. At the start of 2023, S&P Global Ratings estimated these schemes amounted to 40% of China’s non-financial corporate bond market.

The prevalence of LGFVs can be a major turnoff for foreign bond funds. Not only are they opaque and difficult to analyze, their fingerprints touch the operations of everything from commercial banks’ wealth management units to mutual funds to hedge funds to insurers to the gamut of securities companies.

Hence the urgent need for deeper bond markets. And, of course, for regulators in Beijing to avoid steps that spook global markets anew. Among recent missteps by Xi’s Community Party: this year’s clampdown on foreign consultancy firms on which global investors and multinational firms rely to navigate their way through China’s opaque companies and systems.

The move, supposedly part of a nationwide anti-espionage campaign, reduced the appetite for investment from overseas firms. When US Treasury Secretary Janet Yellen recently visited Beijing, the consultancy policy was among the examples of “non-market” practices and “coercive actions” against American firms her team highlighted.

Deeper debt markets would help sort out the cart-before-the-horse problem that afflicts China’s economy.

During the Xi era and before it, China too often believed that pulling in more foreign capital was a reform all its own. However, it’s been slower to strengthen China’s financial system to efficiently absorb those waves of overseas capital.

For example, China’s inclusion in the World Trade Organization in 2001 did less to recalibrate its growth engines than to remake the global economic system to its advantage.

The 2016 inclusion of the yuan in the International Monetary Fund’s “special drawing rights” didn’t stop Beijing from imposing capital controls or accelerate capital liberalization nearly as much as hoped.

China still applies capital controls. Photo: Asia Times Files / AFP / Nicolas Asfouri

In 2019, A-share stocks’ addition to the MSCI index didn’t suddenly make China’s financial system sounder, the government more transparent, companies more shareholder-friendly or the ginormous shadow-banking world any less of a menace.

Strengthening China Inc. requires significant heavy lifting to curb the dominance of state-owned enterprises, increase economic space for the private sector and eliminate the risk of dueling bubbles in debt, credit and assets.

The key now, says Li Yunze, head of the National Financial Regulatory Administration, is for vibrant debt capital markets to help catalyze growth of all sectors, but particularly those in the high-tech space — the realm Premier Li has been at least rhetorically elevating in recent months.

While it’s important Beijing ends the regulatory volatility of recent years, he adds, more efficient capital markets would accelerate China’s move upmarket.

One priority should be building a big and liquid mortgage-backed securities (MBS) market. The good news is that interest in securitized mortgage loans used to finance residential and commercial buildings is growing, particularly in the green space, says Fitch Ratings analyst Jingwei Jia.

This comes, Jia says, “as the Chinese government prioritizes construction of environmentally friendly buildings to meet its climate targets.”

As Jian Chen, an analyst at MSCI, notes, China’s residential MBS market is growing as global investors eye its relatively high yields and seek diversification options for fixed-income portfolios.

However, he adds, “attracting new foreign investment to Chinese RMBS may depend on improving credit ratings and transparency in data and pricing.”

Another positive sign could be the ways in which LGFVs may be pivoting to issuing more infrastructure real estate investment trusts (REITs). This, says analyst Sherry Zhao, also at Fitch, follows “the authorities’ latest reiteration of the significance of selling infrastructure assets to improve capital efficiency and reduce public-sector leverage.”

Zhao notes that “this is especially for infrastructure assets closely aligned with LGFVs’ public policy roles, such as transportation, public rental housing, urban utilities, and industrial parks, among others.”

When it comes to the direction of reform, the need for a deeper bond market must be goal No 1. The financial opening that Xi and Li claim to be pursuing suggests they are scaling back China’s command economy. This alone should reassure foreign investors.

But the opening China really needs is deeper capital markets, in particular more transparent debt markets. Boosting support for – and loans to – the property sector are fine for today. China coming into its own as a top and productive economy, though, requires a serious bonding experience.

Follow William Pesek on Twitter at @WilliamPesek

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Gig workers ‘most financially stretched’ with spending exceeding income: DBS study

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RISING MORTGAGES LOOK “MANAGEABLE” FOR NOW

Turning to household debt, DBS said mortgage repayments have increased over the past year amid rising interest rates but remain “manageable” for now due to income growth.

The bank’s median customer is now borrowing around 3 per cent more for a home purchase. Median mortgage payments have also increased by about 12 per cent.

So far, the income growth across all customer groups has been “more than sufficient to offset the rises to mortgage rates and with some to spare”, said DBS Group Research’s analyst Fang Boon Foo.

Nevertheless, higher monthly mortgage payments could still impact those earning below S$5,000.

Firstly, these home owners are allocating a bigger portion – more than 50 per cent – of their income growth to service the increase in monthly mortgage repayments, according to the report.

This is higher than the 45 per cent for those earning between S$5,000 to below S$7,500, 40 per cent for those with income of S$7,500 to below S$10,000, and 43 per cent for income earners of S$10,000 and more.

Secondly, more than half of those earning below S$5,000 have mortgage loans under floating rates, meaning that additional stresses could arise when mortgages are refinanced on higher interest rates, the bank said.

Mr Seah sees more upside to come in the Singapore Overnight Rate Average (SORA), which is the benchmark interest rate used for various financial products, including floating home loans.

Amid the successive interest rate hikes by the US Federal Reserve, SORA has risen more than 10-fold from 0.3 in May last year to about 3.6 currently, he said.

“Our expectation is that the bias is still marginally on the upside. We do expect the SORA to end the year at about 3.7, with one more Fed hike coming up,” the economist added at the media briefing.

Meanwhile, DBS customers have increased their usage of credit cards, with spending up 12.8 per cent as of May 2023 from a year ago.

Reasons for the rise in usage include the ability to tap on card promotions and rewards, as well as qualify for higher interest rates under DBS’ Multiplier savings account.

Despite the increase, credit card debt looks “manageable” as customers are paying their credit card bills on time to avoid the high interest charges, the bank said.

Looking ahead, DBS expects inflation and interest rates to remain elevated. There could also be an additional challenge of slowing growth momentum, which would in turn weigh down on income growth.

“I think the underlying message to everyone is that we need to live within our means. We need to essentially practice prudent budgeting and also to be more watchful in terms of our spending,” said Mr Seah.

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