Belt and Road a net benefit for Bangladesh

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In recent years, China has emerged as Bangladesh’s largest trading partner and one of its biggest providers of development assistance. Since 2016, the two sides have been a strategic partnership.

Like 150 other countries, Bangladesh joined China’s Belt and Road Initiative (BRI). Since then, nine BRI projects have been agreed upon, including the Padma Rail Link, the Bangabandhu tunnel under the Karnaphuli River and the Dasherkandi sewerage treatment plant.

These three are on the verge of completion while six other projects are either underway or waiting to begin. Apart from the BRI, China provides development finance in various forms including public-private partnerships and soft loans. As Bangladesh accepted these loans and projects cordially, there has been a boom in Chinese projects across the country in the last eight years.

While the specter of a “debt trap” has hung over the relationship, as skeptics drew parallels with the Hambantota port lease deal in Sri Lanka, it seems Bangladesh has proved the specter – in its own case, at least – to be a myth thanks to Dhaka’s sustainable infrastructure drive.

Bangladesh’s deepening trade and financial engagement with China has created the image of a “China-tilting country” in the eye of the US – even though Bangladesh is determined to remain neutral amid the superpower rivalry. Despite worries about a debt trap, it seems Bangladesh has gain a net benefit from BRI and other Chinese projects.

A caveat: Net benefit refers to summing up all benefits and then subtracting the sum of all costs of a project. Net benefit provides an absolute measure of benefits rather than the relative measure provided by a benefit-to-cost ratio, which in today’s neoclassical economics may be the more popular approach to determining success and failure.

While net benefit normally would be expressed as a crunched number, i.e. a specific amount of money, I am not aware of any quantitative analysis specifically on Bangladesh’s BRI projects.

Here I use the term in a qualitative sense, to provide only an overview of the idea. My argument is that the input for Bangladesh is money while the outputs are diverse – and, subjectively, are clearly greater. In this sense, I posit that there has been a net benefit.

Bangladeshi Prime Minister Sheikh Hasina gives flowers to Chinese President Xi Jinping before their meeting at the Prime Minister’s Office in Dhaka on October 14, 2016. China is an important geopolitical player in Bangladesh. Photo: Asia Times Files / Anadolu Agency / Stringer

Bangladesh’s infrastructure drive

In the last decade, Bangladesh focused national policy on developing physical infrastructure to boost connectivity. The riverine country with a fast-growing economy identified infrastructural development as a prerequisite for expanding the size of the economy as well as socio-cultural development.

In the absence of significant infrastructure, it was difficult for Bangladesh to expand its economic activities outside of the capital and coastal region. For instance, the North Bengal and North-West region could not be industrialized without smooth connectivity and logistical infrastructure, both of which it lacked.

Development finance was needed to fill the gaps. But until China arrived, the existing development finance market could not raise the required funds for several projects in the billion-dollar range. In this context, Bangladesh’s demand met with China’s ambition to expand its geo-economic ambition under BRI.

Take, for instance, the new benefit accrued from the BRI-funded Dasherkandi treatment plant. As in many developing countries, rainwater and household waste combined in primitive systems that stank and caused severe health problems.

Now, the new treatment plants refine these dirty waters before they get to water bodies – from where the water is again collected, treated and supplied for household use. Besides Dasherkandi, which I have seen, there is also another Chinese treatment plant in Dhaka. The advantage of having those, if not priceless, surely is worth more than Bangladesh’s cost.

Other Chinese-funded or assisted projects are also benefitting the country. The Padma Bridge – the country’s first self-funded project implemented by Chinese engineers and using Chinese technology – is already bringing benefits to Bangladesh’s north and northwestern regions. It has shortened transport routes significantly and connected these regions directly with the capital, Dhaka.

The economy is already expanding and the circular economy – sharing, leasing, reusing, repairing, refurbishing, recycling – is also becoming larger in terms of geography. The bridge has also reduced pressure on internal waterways, which benefits commercial carriers greatly.

It is eye-popping that a single bridge is estimated to have increased the entire country’s GDP by 1% and reduced poverty by 0.84% at the national level. Other Chinese-funded or assisted projects are also benefitting Bangladesh as they contribute to the country’s effort to revamp the circular economy and address energy demand.

BRI and other Chinese projects are also introducing the country to sophisticated technologies. Take, for instance, the Bangabandhu tunnel project under the Karnaphuli River, marking the first time a tunnel-boring machine has been used in Bangladesh.

It has also marked the first time the country has undertaken underwater excavation. As Bangladesh now has a tunnel-boring machine in the country, the technology will be used for the underground section of the country’s first metro-rail.

Bangladeshi’s Bangabandhu tunnel under the Karnaphuli River. Photo: Pakistan Today / Twitter

Besides technology transfer, revamping and increasing the circular economy and growing the overall economy, BRI projects are also benefitting the country by increasing connectivity and trans-border trade.

Although BRI projects are providing net benefit for the economy and improving living standards, the sudden surge of Chinese funding in Bangladesh since 2016 has drawn the attention of the US. Washington now perceives Bangladesh as a China-tilting country, even as Dhaka aims to maintain an equal balance among the great powers.

The key to avoiding unnecessary costs and a debt trap is to equalize odds in geopolitical aspects, assess the economic viability of projects and stick to sustainable financing.

Bangladesh has showed prudence in these aspects as it scrapped or declined many proposed projects that may not be viable economically and is only opting for crucial projects that address its “infra-shortage” without giving geopolitical advantages to one superpower over the other.

Doreen Chowdhury is a Doctoral Researcher at the University of Groningen.

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China banks under pressure as local debt crisis mounts

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Large Chinese banks are under pressure from Beijing to sacrifice their margins and extend new loans to cash-tight local government financing vehicles (LGFVs).

Bloomberg reported that state banks have in recent months been offering LGFVs loans with a maturity period of 25 years, instead of the normal 10 years. Some of the loans came with waivers on any interest or principal payments for the first four years, though the interest will be accrued for later payment, unnamed sources were quoted as saying in the report.

Since the Bloomberg report appeared on July 4, the Industrial and Commercial Bank of China (ICBC) and the Agricultural Bank of China’s shares have fallen by 15.1% and 15.6% respectively. The Bank of China’s stocks have lost 12.7% while the China Construction Bank has declined 14% over the same period.

Some analysts surmised that the central government is dumping local debt problems on the big banks by making them lend more to developers and expand their loan books generally.

The People’s Bank of China (PBoC) said on July 11 that local financial institutions extended 3.05 trillion yuan (US$423 billion) worth of new loans in June, compared with 2.8 trillion yuan a year ago in the same month. The figure is above economists’ forecasts of 2.3 trillion yuan.

The Shanghai Securities News said on July 11 that China is expected to accelerate its policy roll-out in order to promote the “stable and healthy” development of the beleaguered real estate market.

Wang Qing, chief macro analyst at Golden Credit Rating, said policymakers may take further measures such as relaxing property purchase and mortgage rules as well as cutting mortgage rates to achieve a “soft landing” for the property market.

Goldman Sachs in the crosshairs

The recent downward pressure on Chinese bank shares was fuelled partly by a Goldman Sachs report published on July 5 that downgraded five Chinese lenders to “sell” ratings based on various downcast assumptions.

After being criticized by Chinese media, Goldman Sachs said on July 6 that its research report is not bearish as it had also rated four Chinese banks as “buy” and three others as “neutral.”

“Goldman Sachs’s report has made some investors worry about China Merchant Bank (CMB)’s asset quality,” a CMB spokesperson told the Shanghai Securities journal on July 10. “The report used data from the 2022 annual report, without any new numbers,” the spokesperson claimed.

The spokesperson also said the report was misleading as it has made errors in its calculations of CMB’s and LGFVs’ data.

Goldman Sachs has a “sell” on China Merchants Bank. Image: Twitter

He said CMB’s on-balance sheet local debt amounted to 132.56 billion yuan, or about 2.32% of the bank’s total loans, at the end of 2022. He added that the size of the bank’s LGFV loans is small and far below Goldman Sachs’s estimation of one trillion yuan. He asserted the bank’s overall risk exposure to local debt is manageable.

Other state banks have not yet commented on the Goldman Sachs report.

The Shenzhen-based Securities Times on July 7 published an article with the title “It’s undesirable to misunderstand the fundamentals of Chinese banks.” It said the Goldman Sachs report is misleading as it used “pessimistic” assumptions to recommend selling Chinese lenders’ shares. 

It noted that the PBoC launched 16 measures in November to ensure stable and healthy growth of property markets. It said due to the lagged effect of these measures, banks may still record more non-performing loans (NPLs) this year but their risk associated with LGFV loans is declining not rising. 

On Monday, the PBoC extended the implementation period of the 16 measures from this month to the end of 2024, aiming to help property developers and homebuyers borrow money more easily. 

No bailout?

There are two kinds of local debt in hina. Local governments are given an annual quota by the Ministry of Finance to issue bonds, which they rely on taxes, fees and land sales to pay. These bonds are welcomed by state banks as they are collateralized with high-quality assets and backed by the central government.

China’s outstanding local government bonds rose from 30.47 trillion yuan at the end of 2021 to 35.06 trillion yuan at the end of last year. The 2022 figure included 14.39 trillion yuan of bonds for “general purposes” and 20.67 trillion yuan for “special projects.” 

Local bonds for general purposes have 8.5-year maturities on average while those for special projects have a 10-year-maturities. The two categories together had an average coupon rate of 3.39% at the end of last year.

Another kind of local debt are LGFV loans. Most local governments set up LGFVs to finance their infrastructure and city renewal projects. They rely mainly on land sales revenue to repay their LGFV loans.

Homebuyers in China have been refusing to make mortgage payments. Image: Twitter Screengrab

Most of these LGFV loans, which often lack transparency, are off-balance-sheet items for their lenders. Chinese media estimated that all outstanding LGFV loans in China amounted to 65 trillion yuan at the end of last year, up from 56 trillion yuan at the end of 2021. 

On January 8, Chinese Finance Minister Liu Kun was quoted as saying by the National Business Daily that the central government will not bail out heavily-indebted local governments as it follows the principle of “all parents raise their own children.” Liu also said, however, the central government plans to launch a system for LGFVs to default.  

In the intervening months, Guizhou, Guangxi and Yunnan provincial governments  have said they cannot resolve their local debt problems and may default if Beijing does not intervene.

Property crisis

Some economists said the current local debt crisis is a result of the property market collapse that began in July 2021.

Li Chao, chief economist at Zheshang Securities, said in an interview earlier this year that the ongoing property crisis is having a negative impact on local governments and LGFVs. He said the central government should avoid a situation where the property and local debt crises form a vicious cycle and create systemic risks to the banking system.  

Last month, more economists and property experts called on the central government to stimulate home prices and resolve local debt problems.

An article published last month by a Henan-based columnist said that if local governments fail to generate enough revenue from land sales, they should sell their state-owned enterprises.

Read: China urged to boost home prices or face recession

Follow Jeff Pao on Twitter at @jeffpao3

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SUSTAINABLE FINANCE POLL 2023: Asian debt markets sharpen ESG focus | FinanceAsia

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It’s looking increasingly like the time for sustainable finance to shine. After a fall in the year-on-year volume of green, social and sustainability (GSS) instruments globally during 2022, a rebound is forecast this year – to around US$1 trillion in issuance, forecasts S&P Global.

Asia Pacific (APAC) is well-placed to capitalise on this upswing. S&P Global’s projections, for example, are that GSS issuance volume in the region will jump by as much as 20%, to reach US$240 billion, roughly a quarter of the global landscape.

The longer-term story looks promising, too, especially amid ambitious climate goals. Even in South-east Asia alone, about US$180 billion needs to be invested in clean energy projects every year until 2030 to keep the transition journey on track, based on the International Energy Agency’s Sustainable Development Scenario. Putting this in context, from 2016 to 2020, investment in clean energy was $30 billion per year, on average.

Adapting to climate change is certainly a key driver. But according to more than 100 investors and borrowers in APAC who took part in the 6th annual poll by ANZ and FinanceAsia in April and May 2023, multiple dynamics indicate an ever-bigger role for GSS instruments.

Among the key factors is a mix of policy and regulatory initiatives to foster greater transparency. This should, in turn, boost investor demand and issuer appetite. At the same time, as this segment of the region’s capital market continues to mature, active GSS bond investors and issuers can expect greater potential for newer formats of issuance to help bridge social and environmental priorities such as biodiversity and gender equality.

10 top takeaways from the survey

  1. 92% of all respondents have integrated GSS factors within their strategy, with 77% confirming that the market volatility over the past 12-18 months either hasn’t changed or has increased their focus on GSS.
  2. Nearly half (49%) of investors now have their own in-house ESG research and analysis capability, a notable increase from the 42% poll finding 12 months ago.
  3. 70% of investors have some type of experience with sustainable finance, with bonds much more popular than loans.
  4. While just under one-third of investors have exposure to transition finance instruments, another 45% are interested in investing in them, either in the next year or over the medium to long term.
  5. Although 92% of investors haven’t yet invested in Orange (gender equality) bonds, half of them say they would do so if they were more widely available.
  6. 88% of investors and 90% of borrowers believe further regulation of sustainability and sustainable finance would have a positive impact on the market overall.
  7. 49% of investors and 41% of issuers say a ‘greenium’ of at least 4 bps is typically priced-in to new GSS bond issues.
  8. Alignment with sustainability objectives, better access to capital and investor diversification are the top three drivers for issuers of GSS instruments.
  9. Time, availability of targets and set-up cost are the biggest hurdles to issuing GSS instruments.
  10. Only 19% of borrowers have never issued a GSS instrument – compared with 64% in last year’s poll.

Read more survey findings and analysis here

 

¬ Haymarket Media Limited. All rights reserved.

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FinanceAsia Volume Two 2023 | FinanceAsia

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By now, most of our subscribers will have received print editions of the latest FinanceAsia Magazine: Volume Two 2023. 

Over the course of the summer, we look forward to sharing online our in-depth magazine features, including the detailed rationale behind our jury’s selection of winners across our recent flagship FA Awards process.

You can access the full online edition here.

To whet your appetite, read on for our editor’s note.

Positive predictions

As a snake (according to the Chinese zodiac), I have so far fulfilled my Year of the Rabbit prophecy in securing opportunity for career growth within the Haymarket Asia business. A successor will soon have the good fortune to step up as editor in my place, as I become content and business director and oversee the editorial strategy of our finance publications: FinanceAsia, CorporateTreasurer and AsianInvestor.

It is said that those born in 2023 will be blessed with vigilance and quick-mindedness. Very useful personality traits, I would think, as artificial intelligence (AI) advances globally, at pace. We are witnessing great development in this field in Hong Kong – and across the wider Asian economy, as emerging tech becomes the next positive disruptor and the capital markets work to respond through evolving regulation and new listing regimes.

In this summer issue, Christopher Chu delves into the value disruption put forward by generative AI, with consultants estimating its worth to breach $16 trillion by 2030. He explores its sophistication and how its potential is interwoven with political factors, while questions are posed around data ownership.

Also intertwined within the realm of transformative technology, is this edition’s flagship interview with BNP Paribas’ CEO for Asia Pacific, Paul Yang. He shares his journey navigating a career path that has taken him from IT coding in Paris, to leadership of the bank’s Asia Pacific business. He offers insights around his accomplishments to date and details plans to progress the bank’s 2025 Growth, Technology and Sustainability (GTS) strategy.

Reviewing activity across Southeast Asia, Liza Tan inspects the market’s prominent position in the ongoing start-up story, through assessment of the current venture capital (VC) fundraising landscape. Her discussion with experts asserts that fintech is inherently fused with human approach and that quality conversations and connections are key to future success.

Indeed, as FinanceAsia’s recent in-person awards celebration underlined, we have much to look forward to in the second half of the year and it is the human elements involved in dealmaking that have capacity to shape the road ahead. I think we all agree that recognising and nurturing talent is vital and so I hope you enjoy reading our evaluation of market resourcefulness, ingenuity and skill that informed the jury’s selection of award winners, amongst truly outstanding competition.

Finally, Sara Velezmoro and I explore the outlook for Asia’s debt capital markets – investigating what opportunity is on offer alongside the changing environment; and whether the momentum surrounding Japanese equities can be sustained, if the government were to reverse yield curve control.

Amid uncertainty we must focus on potential, so please join me in acknowledging the positive strides being taken by Asia’s market movers.

Ella Arwyn Jones

(Please feel free to send feedback or suggestions to [email protected])

 

¬ Haymarket Media Limited. All rights reserved.

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SocGen announces new Asian leadership roles | FinanceAsia

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Paris-headquartered Société Générale has announced via media note two newly created leadership appointments within its global banking and advisory businesses.

In addition to her role as head of Corporate Coverage for Southeast Asia, Singapore-based Eliza Ng becomes head of Global Banking and Advisory for the Southeast Asian region; meanwhile, Kanta Murata takes on responsibility for Japan as market leader of Global Banking and Advisory, alongside his current capacity as Japan head of Corporate Client Coverage and deputy branch manager of the bank’s Tokyo office.

Effective from the end of June, the appointments mark the bank’s continued commitment to strengthen its local capabilities to support clients in local markets, the release detailed.

In their new roles, the pair will supervise all global banking and advisory endeavours, excluding business related to the bank’s institutional and debt capital markets (DCM) efforts. They both report regionally to Stephanie Clement de Givry, head of Global Banking and Advisory for Asia Pacific; and to Olivier Vercaemer, her deputy.

Ng and Murata shared with FinanceAsia their priorities as they settle into their new functions.

“My priorities revolve around three main areas: customer-oriented approach; regulatory compliance and credit risk management; and growth, especially across ESG-related aspects,” said Murata.

He emphasised his work to enhance client experience through expertly structured finance arrangements to meet evolving market needs, while prioritising robust risk management practices to ensure the security and stability of the bank’s operations.

The ESG arena is another area where he targets expansion. “To stay competitive and relevant in a rapidly evolving ESG landscape, it is essential to embrace innovative approaches,” he explained.
Ng agreed that ESG is embedded in the bank’s business and is a focus for the regional teams.

“My immediate priority is to leverage the expertise and capabilities that our expanded franchise can offer our clients in the Southeast Asia region,” she said, adding that she looks forward to continuing to accompany clients on their energy transition aims.

This effort, she explained would complement and further support development across the region’s emerging economies.

Ng added that such regional sustainability efforts are bringing with them new business opportunities across several segments, “including the transportation value chain and new technologies in the renewable energy sector.” 

Murata also observes a trend towards decarbonisation across Japanese activity.

“According to the latest preliminary figures as of 1Q23, the Bank of Japan’s “Flow of Funds” [demonstrate that] the loan balance of private non-financial corporations has been steadily growing during past quarters; partly driven by economic recovery, capital expenditure, and ESG-related investment opportunities.”

He said that this growth opportunity is further supported by the Japanese government’s push for carbon neutrality by 2050, which will require more than JPY150 trillion ($1 trillion) in investment from public and private sectors over the next ten years.

In terms of landmark deals, both Ng and Murata have been involved in a number of the bank’s key transactions.

Murata pointed to his involvement in an accelerated bookbuild for a Japanese client that saw the bank organise a block trade so it could divest European stocks; meanwhile, Ng highlighted the bank’s role across Temasek Financial’s EUR 1.5 billion ($1.65 billion) four and ten-year dual tranche senior unsecured bonds, earlier this year. 

¬ Haymarket Media Limited. All rights reserved.

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SoftBank is at the center of yearlong Nikkei rally

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TOKYO – It’s no surprise, perhaps, that SoftBank Group’s 22% stock rally these last 12 months exactly mirrors that of the broader Nikkei 225 index.

Few Japanese conglomerates have benefited more from the Nikkei rally – or from the Bank of Japan’s ultra-loose policies – than the one that Masayoshi Son built.

Case in point: SoftBank’s telecom unit just pulled off one of the biggest yen bond sales in recent memory thanks to wide-scale market expectations that the BOJ will keep its foot on the monetary gas.

SoftBank‘s feat in raising US$840 million managed to lift confidence in credit markets that big debt issuance deals were back. It more than confirmed promising hints from earlier sales by Mitsui Fudosan Co and Kubota Corp. It was even better that the SoftBank sale was supersized from an initially planned US$350 million amid demand that was more than twice what SoftBank anticipated.

Yet as much as SoftBank is benefiting from the Nikkei rally and the BOJ’s largess, it remains unclear if one of Japan’s three richest men is ready to return the favor.

The reason Son is a subject of global intrigue is the US$100 billion SoftBank Vision Fund he created in 2017. It has since remade the global venture capital game, with Son adding the financial firepower of a Vision Fund 2. Very quickly, a meeting with Son’s team became the top aspiration for young entrepreneurs from Silicon Valley to Hyderabad to Seoul.

Son’s VC ambitions were always a way to tap growth outside aging Japan. Japan’s deflation, dismal demographics and a play-it-safe corporate culture had Son deploying billions and billions in China, India, South Korea, Indonesia, Bangladesh, Brazil, Kenya, Israel and elsewhere.

The plan was to ride a herd of tech “unicorns” around the globe to riches SoftBank could no longer find at home in Japan.

At the core of Son’s vision, of course, was recreating the magic he achieved with China’s Alibaba Group 23 years ago, around the same time the BOJ pioneered quantitative easing.

In 2000, Son had the remarkable foresight to hand US$20 million to an obscure English teacher in Hangzhou. By the time Jack Ma took Alibaba public in New York in 2014, SoftBank’s stake was worth more than $50 billion.

Softbank Group founder Masayoshi Son and Alibaba founder Jack Ma. Photo: Asia Times files / Getty via AFP

The feat earned Son a reputation as the Warren Buffett of Japan. The launch of his Vision Fund was an attempt to replicate that success over and over again.

Yet Son has found that to be easier said than done. Among the big swings that Son missed: a perplexing fascination with WeWork, which over time became the Vision Fund’s cornerstone investment. Son bought into founder Adam Neumann’s claims to be creating the next Apple Inc with his office-sharing empire.

By 2019, as WeWork looked more like a financial house of cards and epic losses mounted, Son admitted “really bad” judgment in having championed the company as the next big thing. As Son scrambled to stabilize the Vision Fund, sandbagging efforts included selling roughly $7.2 billion worth of Alibaba. Son’s team is also working on an initial public offering of Arm Ltd, SoftBank’s chip unit.

Might Son now pivot to investing big in Japanese startups as opposed to prospective Chinese unicorns?

A few big data points have changed some Asia-region calculus since Son’s WeWork debacle:

  • slowing Chinese growth following leader Xi Jinping’s crackdown on mainland tech;
  • a deepening Sino-US trade war aimed particularly at tech goods; and
  • a Nikkei rally that has top global investors like Buffett rediscovering Japan.

In recent days, US Treasury Secretary Janet Yellen and Chinese Premier Li Qiang tried their hand at rebooting the Sino-American relationship. But with US President Joe Biden’s team determined to limit Chinese access to key technology like semiconductors — and Xi curbing exports or rare earth materials — tensions appear to be going from bad to worse.

This has Team Son rethinking its aversion to putting big money to work in Japan. Here, Buffett’s own bets on Japan’s economy may come into play.

In May 2022, Prime Minister Fumio Kishida took his campaign to lure more foreign capital to London, where he implored businesspeople to “invest in Kishida.” It was a play on a plea that Kishida’s mentor had made in New York nine years earlier.

In September 2013, then-Prime Minister Shinzo Abe brought his “buy my Abenomics” tour to the floor of the New York Stock Exchange. Abe pledged to reduce bureaucracy, loosen labor markets, incentivize innovation, boost productivity, empower women and reclaim Tokyo’s place as Asia’s undisputed financial center.

Mostly, though, Abe relied on BOJ easing to juice Japanese gross domestic product via a weaker yen. That, and some modest tweaks to corporate governance had Buffett and his ilk kicking Japan’s tires.

The so-called “Buffett effect” first hit Japan in August 2020. The Oracle of Omaha surprised many in the Tokyo establishment with sizable investments in five old-economy companies. Buffett took 5% stakes in rather stodgy “sogo shosha” trading houses: Itochu, Marubeni, Mitsubishi, Mitsui and Sumitomo.

The bets paid off handsomely. Last month, around the time Buffett topped up those investments — to an average 8.5% — shares had roughly doubled among his initial five investments. Buffett, true to his value-investing-guru reputation, front-ran the Nikkei’s biggest rally in 30 years.

The question now is how Son responds. Part of it involves how Kishida plays things.

Japan Prime Minister Fumio Kishida in London seeking investment, May 5, 2022. Photo: Prime Minister’s Official Residence

Kishida took power in October 2021 with grand plans to implement a “new capitalism.” Part of the scheme involved redistributing wealth to increase domestic consumption. Kishida also aimed to enliven Japan’s startup scene.

One early Kishida idea that holds great promise: devising a way to harness the $1.6 trillion Government Pension Investment Fund – the largest of its sort – to finance a startup boom. There, Kishida talked of facilitating the “circulation” of GPIF’s ginormous asset pool “into venture investment.” He talked of championing “stock options and other measures to promote the growth of start-ups.”

According to Ranil Salgado, an economist at the International Monetary Fund, there’s a need for a “holistic approach to address the constraints in the labor market, as well as improving the financing options and entrepreneurial education.”

Salgado adds that the “grand design of the new form of capitalism” includes measures to support venture capital, such as through public capital investment. In addition, it recognizes the constraint of personal guarantees on entrepreneurship, highlights the importance of entrepreneurial education, and strengthens the role of universities as startup hubs.”

Increased availability of venture capital equity funding, Salgado says, “is crucial to support startups and innovation. Reduced personal guarantees could help encourage entrepreneurship and allow unproductive firms to exit, which could in turn support investment and innovation, generate employment and improve productivity.

“Furthermore,” he says, “a more flexible labor market and a gradual shift from the lifetime employment system could encourage the most talented college graduates to venture and create new companies and have a reasonable backup option in case startups fail.”

Yet how SoftBank responds to these challenges and myriad others may decide how Asia’s number two economy fares in competition with the continental colossus that’s number one.

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China raises five demands during Yellen’s visit

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The Chinese government has made five demands on the United States, including the cancellation of its chip exports ban and sanctions, during US Treasury Secretary Janet Yellen’s four-day China trip ended Sunday.  

China’s Ministry of Finance said in a statement on Monday that it has expressed concerns to Yellen about the extra tariffs, company sanctions, investment restrictions, export controls and Xinjiang product bans imposed by the US on China in recent years. It said the US should take concrete actions to respond to China’s concerns.

Chinese commentators said the China side arranged meetings between key economic officials and Yellen, showing that Beijing attaches great importance to her visit. They said Washington knows clearly what to do if it wants China to purchase its treasury bonds.

During her four-day trip ended Sunday, Yellen met with Premier Li Qiang, Vice Premier He Lifeng, Finance Minister Liu Kun and People’s Bank of China (PBoC)’s party secretary Pan Gongsheng, as well as former Vice Premier Liu He and PBoC governor Zhou Xiaochuan. She had a total of about 10 hours of discussions with them.

“China’s development is an opportunity, not a challenge, for the US. It is a gain, not a risk,” Deputy Chinese Finance Minister Liao Min said in a statement published on Monday. “Strengthening cooperation between China and the United States is the practical need and the correct choice of the two countries.”

“To achieve a healthy Sino-US economic relationship, we must fully respect the legitimate development rights and interests of all parties, and conduct healthy competition in accordance with market economic principles and World Trade Organization rules,” he said. “Differences should not be a reason for estrangement, but rather a driving force for strengthening communication and exchange.”

He said China and the US should seek consensus on important issues in the bilateral economic field through candid exchanges, so as to inject stability and positive energy into their economic relationship. He said that during Yellen’s trip, China had shown its willingness to help resolve global challenges, such as financial stability, climate change and smaller countries’ debt problems.

Technology curbs

Last month, media reports said Washington will soon announce its plan to ban Nvidia from shipping its A800 and H800 artificial intelligence chips to China, and also restrict US funds from investing in China’s high-technology sectors later this month.

Yellen told the media on Saturday that Washington will listen to China’s complaints about security-related curbs on US technology exports. She said the Biden administration will try to avoid unnecessary repercussions but she did not indicate any possible changes. 

“We will open up channels so that they can express concerns about our actions, and we can explain and possibly in some situations respond to unintended consequences of our actions,” she said.

She said she had tried to explain to Chinese officials that the United States’s strategy of “de-risking” is not the same as “de-coupling.” She described her conversations with top Chinese officials as “direct, substantive and productive.”

“Even where we don’t see eye-to-eye, I believe there is clear value in the frank and in-depth discussions we had on the opportunities and challenges in our relationship, and the better understanding it gave us of each country’s actions and intentions,” she said. “Broadly speaking, I believe that my bilateral meetings – which totaled about 10 hours over two days – served as a step forward in our effort to put the US-China relationship on super footing.”

Yellen did not announce any agreements on major disputes with Chinese officials. She said both sides will have more frequent and regular communication.

Three bows

Ahead of Yellen’s visit to Beijing, Chinese commentators had said that the former Fed chairman was coming to China to sell US treasury bonds. 

This view came after US President Joe Biden and top Republican lawmaker Kevin McCarthy reached a tentative deal to raise the federal government’s US$31.4 trillion debt ceiling in May. The decision will be followed by the issuance of nearly $1.1 trillion in new treasury bills over the next seven months. 

An animated GIF of Yellen’s bows Photo: 163.com

When Yellen met top Chinese economic official He Lifeng on Saturday, she was seen bowing three times to him while they were shaking hands. She was criticized by some US lawmakers and academics for showing weakness with such a diplomatic gesture. Yellen’s official Treasury Department biography doesn’t mention any previous Asia forays in which she might have boned up on relevant protocol.

Chinese netizens turned the footage of her bows into an animated GIF picture, making her bow repeatedly. 

On Monday, Tian Liu, a Hubei-based columnist published an article with the title “If Yellen wants China to buy US debt, she must complete China’s tasks. Three bows are not enough.”

“From our or Yellen’s official statements, it is not difficult to see that the two sides mainly ‘exchanged views’ this time, and neither side got what they wanted. The US did not agree to lift the sanctions, and China did not agree to buy US debt,” the article says.

“Finding buyers for US debt is the top mission of Yellen. From a medium-and-long-term perspective, China is disposing of US debt,” it says. “Who else will buy it? Japan is the biggest creditor of the US but cannot buy more. The United Kingdom is facing an economic recession and sold $30 billion of US debt in April.”

“It is only the US side’s wishful thinking that the US can sell its debt to China, or set guardrails for the Sino-US relations, without giving what China wants,” Liu’s article says.

“Yellen’s bows will not be able to change anything. If the US does not satisfy China’s five demands, we will not respond to its call of buying US debt,” the article continues. 

“It is possible that the US may not consider any of our demands and use all possible means to contain and suppress our country,” it says. “If the US does not show some sincerity, the Sino-US relations will not improve.”

However, some other analysts have said that whether China will invest in US debt depends on its trade surplus situation, not its relations with the US.

No immediate war

Chinese media and commentators have so far made positive comments about Yellen’s trip.

Caixin said in its editorial on Monday that people should look at the competition and cooperation between the US and China rationally. 

It said China is not afraid of competition but opposes malicious confrontation. It said both China and the US can set areas and boundaries for competition and should avoid “de-coupling.” Another pundit also surnamed Liu says in his vlog that Yellen’s visit to China is important as it shows that China and the US are still having dialogues and will not have an immediate war. 

“Yellen is obviously the dovish among all top US officials. If we do not want to talk to her or we fail to achieve anything, it will send a pessimistic signal to the whole world,” Liu says.

“China and the US almost had a hot war, but still both sides have some hopes on each other in the economic areas,” he says. “China hopes that the US can ease its blockages and sanctions and lower some tariffs. Although the chance is slim, Chinese leaders have not given up as these are what we urgently need now.”

He says the US wants China to buy US debt, completely open up its markets and stop investing in high technology but Beijing will only consider the first request.

Read: Cordial tone in Yellen’s Beijing visit

Follow Jeff Pao on Twitter at @jeffpao3

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Aims to bridge gap between traditional banking & Asia’s unbanked
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Paywatch, an Earned Wage Access (EWA) startup based in Malaysia, announced last week an MoU with Visa to promote financial inclusion among Asia’s workforce. In a statement, the firm said it aims to…Continue Reading

Byju’s: The unravelling of India’s most valued start-up

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Byju Raveendran, Founder and CEO of BYJU'S learning appGetty Images

Byju’s, once among the most valued edtech start-ups in the world and a darling of investors during the Covid-19 pandemic, has seen a dramatic downturn in its fortunes after operational and financial setbacks in recent months. Experts say it marks a necessary correction in the bull run of Indian start-ups.

“Byju’s is a company that has grown too fast too soon,” says Shriram Subramanian, who heads an independent corporate governance research and advisory firm.

Founded in 2011, Byju’s launched its learning app in 2015. With 15 million subscribers by 2018, the edtech firm became a unicorn (valued at $1bn) amid much fanfare.

It expanded substantially during the Covid-19 pandemic as students turned to online classes during lockdowns. But in 2021, it posted a loss of $327m, which was 17 times more than the previous year.

Since then, the edtech giant has witnessed an extraordinary unravelling. Valued at $22bn (£17.28bn) last year, Byju’s has seen its valuation slashed to $5.1bn this year by Prosus NV, the company’s biggest investor and shareholder.

The company did not respond to the BBC’s queries.

“After the pandemic, when children returned to schools there was going to be a downturn,” Mr Subramanian said. “But Byju’s kept on growing and investors kept on putting money into it. They did not see the signs that there could be a downturn.”

Aniruddha Malpani, an angel investor and vocal critic of Byju’s business model, says the company had “paper fortunes”.

“There’s a big gap between value and valuation,” he said.

With exponential growth during the pandemic, Byju’s went on an acquisition spree in 2021, spending $2bn to acquire edtech start-ups and firms like WhiteHat Jr, Aakash, Toppr, Epic, and Great Learning.

It soon surpassed digital payments platform Paytm to become India’s most-valued start-up.

Byju’s channelled hundreds of millions into its marketing, roping in Bollywood superstar Shah Rukh Khan and football star Lionel Messi as its brand ambassadors. It became the main sponsor of the Indian cricket team and an official sponsor of 2022 FIFA World Cup.

But in recent months, the company has been dogged by complaints as parents accused it of not fulfilling its promises – coercing them into buying courses they couldn’t afford and then not providing the promised services. Some also said that the firm used predatory practices to exploit customers.

An employee of Byju's works on content development for the app at their office in Bangalore

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Former employees complained of high-pressure sales culture and unrealistic targets. The firm has laid off thousand of employees in the past year in a bid to cut costs.

Byju’s has denied the allegations made by parents and its former staff. It has also been facing investigations from the government.

In April, the firm’s office in Bengaluru was raided by Indian authorities over suspected violations of foreign exchange laws. The company denied any wrongdoing and assured its workers that it had fully complied with the laws.

In May, lenders to the company filed a suit in a US court, accusing it of defaulting on payments and breaching terms of the loan agreement, including months-long delays in releasing financial statements. The lenders also accused the company of diverting funds through its US-based subsidiary Alpha, a claim Byju’s denied.

In June, after reportedly missing an interest payment of nearly $40m, Byju’s sued the lenders over alleged harassment.

It also began another round of layoffs, firing nearly a thousand employees. There was more trouble waiting for the firm from its own auditors.

Deloitte Haskins and Sells Llp quit as the company’s auditors citing the delay in Byju’s submitting its financial statements. The auditors said it impacted their ability to assess the company’s books.

This was soon followed by news that three of its board members had resigned, leaving just CEO Byju Raveendran, his wife Divya Gokulnath and brother Riju Raveendran on the board.

The start-up is reportedly now in talks to restructure its debt load.

Reports also said that there were calls for the CEO’s resignation at a shareholders’ meeting this week, but two investors at the company denied these claims.

“Byju’s failed at holding itself to the standard expected of a company its size,” said K Ganesh, a serial entrepreneur and angel investor who founded one of India’s largest online grocers, BigBasket.

The delay in filing financial statements was “unacceptable and unconscionable”, he says.

“Most sectors that benefited from the pandemic and expanded rapidly are now facing headwinds because the return to normal has been more drastic than they expected,” Mr Ganesh said. “This is true for all companies in the edtech sector.”

Experts say the sector’s potential was overestimated during the pandemic.

“Technology by itself will never work,” Dr Malpani explains. “You need it along with safe space for children where there is adult supervision, peer to peer learning.”

“Byju’s was essentially selling hardware, like its tablets, with study material that could be found online for free,” he says.

An Indian student looks at the education technology start-up Byju's app at the company's office in Bangalore

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These start-ups were valued at a “stratospheric, unrealistic level” during the pandemic and are being valued at “realistic levels now,” Mr Ganesh said.

He added that one of the reasons Byju’s is at its current crossroads is the “detrimental” board structure of venture capitalist-funded companies.

“With just managers, founders and investors on board – each of whom is bound to protect their own interests – there is nobody to protect the interests of the company. This is unlike a public listed company where regulatory rules ensure a set of independent directors on board and insist on an audit committee headed by an independent director,” Mr Ganesh explained.

Several experts, including Mr Ganesh, have been advocating that start-ups that reach a certain level should be told to work like public listed firms.

At the shareholders’ meeting, the company is said to have agreed to form an advisory committee consisting of independent directors to advise and guide the CEO on the composition of the board and the governance structure

Mr Ganesh and Mr Shriram said the company could still course correct if it acknowledges its missteps and commits to immediate action on all fronts.

But Dr Malpani believes Byju’s has not shown the intent to do this.

“They need to conserve as much cash as possible which will give them a long runway and cut down on costs aggressively, more than just through layoffs,” says Mr Shriram. “Also, sell off some businesses to raise capital.”

Byju’s has set a timeline of September end for the completion of its 2022 audit and December end for its 2023 audit.

Analysts believe Byju’s current situation will only have a positive short-term impact on India’s start-up ecosystem.

“Due diligence, founders’ rights, the need for an internal auditor, independent board members and terms and conditions of corporate governance, which were earlier glossed over, will become stricter,” Mr Ganesh said.

“India has good corporate governance laws,” Mr Shriram said. “It is for the investors and other stakeholders to demand more from Byju’s.”

Analysts say investors are used to handling bull and bear runs and have short memories when it comes to these dips.

“There’ll be another [like this] in two years,” Dr Malpani says.

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