CASE issues alert against car rental company after complaints about deposit forfeitures

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SINGAPORE: The Consumers Association of Singapore (CASE) on Friday (Jun 9) issued an alert against a car rental company after several consumers lodged complaints that their security deposit had been forfeited over alleged speeding claims and repair fees. 

CASE said it had received 23 consumer complaints against Prestige Carz Rental between Jul 1, 2022 and Jun 5, 2023.

“In general, consumers complained that their security deposits, ranging from S$1,000 to S$2,500, paid to Prestige Carz Rental were forfeited,” added CASE.

“Some consumers also disputed claims by Prestige Carz Rental that the vehicles were damaged while under hire and the repair fees that they were asked to pay for the alleged damage.” 

The repair fees arose due to alleged damage to the rented vehicles.

However, consumers disputed these claims on the grounds that there were no fines or notices issued by the Traffic Police and the Land Transport Authority.

No other forms of evidence were also provided in relation to the speeding claims made by Prestige Carz Rental, other than the company’s records of Global Positioning System (GPS) trackers installed in the vehicles, according to CASE.

“In some instances, affected consumers disagreed with the claims on the basis that they were not driving the vehicle at the specific location during the time of the alleged speeding,” it said.

“Consumers also claimed that clauses pertaining to the forfeiture of deposits were not highlighted to them before they signed the vehicle rental agreement.”

They also disagreed with Prestige Carz Rental’s justification of the damage and the repair fees, with some of them also reporting that the car rental company had engaged the services of third-party debt collectors to collect the outstanding fees from them. 

According to Prestige Carz Rental’s terms and conditions, consumers are required to pay a deposit, which varies from vehicle to vehicle, said CASE.

The deposit will be forfeited by the company in instances such as driving the vehicle outside Singapore, traffic violations and speeding.

The company is also allowed to deduct from the deposit any amount which is owed to them by consumers, and if the deposit is insufficient to cover the amount owed, it will charge the outstanding amount to the consumer, said CASE.

SECURITY DEPOSIT FORFEITED 

In one case, a consumer paid S$2,000 (US$1,490) – a rental fee of S$500 and a refundable deposit of S$1,500 – to rent a car from Prestige Carz Rental for four days in August 2022.

But on the third day of the rental, the company repossessed the car and presented the consumer with an internal speeding report, according to CASE.

Based on that report, Prestige Carz Rental claimed that the consumer had violated its policy and forfeited his security deposit of S$1,500.

The consumer disputed that claim as the speed limits for certain roads were “inaccurately reflected” and there were no traffic fines from the Traffic Police. 

He also complained that the clause on the forfeiture of the security deposit was not explicitly mentioned to him when he signed the agreement with Prestige Carz Rental, said CASE. 

The consumer then sought a refund of the security deposit and two days’ worth of rental due to the repossession of the car but did not succeed in doing so.

CASE said it had engaged Prestige Carz Rental on several occasions to resolve outstanding consumer complaints and review the deposit forfeiture clauses in their terms and conditions. 

However, the car rental company has maintained its position on the basis that its insurer does not cover instances where consumers are speeding.

ADVICE FOR CAR RENTAL CUSTOMERS 

Consumers who intend to rent vehicles should go through the terms and conditions “thoroughly” before signing any vehicle rental agreement, said CASE. 

“In particular, consumers should pay attention to the terms of use, the amount they are liable to pay and the treatment of security deposits in the event of breaches to the terms of use or damage to the vehicle,” it added.

If the terms and conditions are not agreeable, consumers should not proceed with the rental. 

Consumers are advised to check for any damage and to take photos of the vehicle’s condition upon collection of rental vehicles. Any pre-existing issues or damage should be immediately highlighted to the vehicle rental company for transparency.

They can also consider patronising CaseTrust-Singapore Vehicle Traders Association accredited motoring businesses as these firms are committed to fair trading, transparency and consumer-friendly policies.

CNA has reached out to CASE and Prestige Carz Rental for more information. 

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HK dollar de-peg argument gains new currency

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As China angles to increase the yuan’s role in trade and finance, economists are wondering what it means for Hong Kong’s long-time peg to the US dollar.

The will-the-peg-survive question has popped with regular popularity since the late 1990s amidst the Asian financial crisis. One such episode was in November last year when New York hedge fund manager Bill Ackman announced he was betting against the peg.

At the time, Ackman’s Pershing Square Capital Management cited Sino-US decoupling tensions as a rationale. That, he seemed to believe, raised the odds Hong Kong might be forced to end the peg.

And that the turmoil would make the trade profitable, unlike previous attempts by Hayman Capital’s Kyle Bass and George Soros decades before that.

Enter economist Andy Xie, who last week argued it’s time to ditch the US peg and link the Hong Kong dollar to the yuan. It’s hardly a new idea, but one Xie, a former top Morgan Stanley economist, argues has come of age in a recent South China Morning Post op-ed.

The gist of his argument is that “Hong Kong’s currency peg to the dollar is not sustainable. The city risks being increasingly led by US monetary policy as the utility of the fully convertible Hong Kong currency in meeting China’s demand for US dollars is fading. As global yuan demand grows, switching to that currency would boost Hong Kong’s financial fortunes.”

How likely is this? Not very, at least for the foreseeable future. Neither Chinese President Xi Jinping nor new Premier Li Qiang appears ready to make such a momentous change to a 40-year policy that’s served the greater China region quite well.

To be sure, the peg is now generating serious economic headwinds, warranting brainstorming in Beijing. US inflation at near 40-year highs and aggressive Federal Reserve tightening are forcing Hong Kong to tweak monetary policies in kind, undermining the business hub’s growth potential.

As Xie puts it: “With China’s interest rates expected to stay lower than US rates, due to lower Chinese inflation, embracing the yuan would stabilize Hong Kong’s asset markets. Sticking with a US-pegged currency, however, means exposure to volatility.”

Xie adds that “entrenched US inflation threatens to bring back dollar swings like in the 1970s and/or US interest rate surges like in the 1980s — the effect on Hong Kong could devastate its property market.”

Again, President Xi’s financial team hasn’t displayed much tolerance for risky policy shifts. But to economist Raymond Yeung at ANZ Bank, Xi’s ambitions for the yuan — including putting it at the center of oil purchases — are forcing the Hong Kong dollar’s peg back into the global spotlight.

“As geopolitics and economies change, so do pressures on the HK dollar peg,” Yeung says. “In recent months, more countries have expressed interest in using the yuan for transactions with China.”

What’s more, he notes, “the potential emergence of a ‘petro-yuan’ regime may seem to promote the reserve currency status of the Chinese yuan. Speculation about pegging HK dollars with the renminbi and ending the US dollar’s hegemony is also intensifying.”

China’s yuan is gaining ground as a currency of trade. Image: Twitter

That intensity can be found in surging interbank rates in Hong Kong. It reflects a drop in banking system cash amid speculation of tighter monetary conditions to come. In mid-May, the Hong Kong Interbank Offered Rate rose to its highest level since December 2019.

The need for the Hong Kong Monetary Authority to keep the city’s currency in a tight range of 7.75 to 7.85 to the US dollar is complicating financial management. Over the last month, the HKMA’s aggregate balance – a key barometer of the amount of cash in the system – hit HK$44.5 billion (US$5.7 billion).

That’s the lowest since the 2008 global financial crisis. More recently, on May 30, Hong Kong’s de facto central bank loaned nearly US$500 million through its discount window.

The main cause for such liquidity squeezes is that “the Fed’s rate hike in June is on the table,” notes strategist Ken Cheung at Mizuho Bank.

Strategist Cheung Chun Him at Bank of America notes that HKMA might have to serve more and more as “lender-of-last resort” as the “scramble for funding will be particularly acute” through the end of the current quarter.

That’s becoming harder, though, as US Federal Reserve rates and those being set by the People’s Bank of China diverge.

Many economists make the argument that in order for the yuan to become a reserve currency rival to the US dollar, China’s financial system would benefit from more explicit ties to Hong Kong’s. This dynamic, though, works both ways.

“Since the city is highly integrated with China’s economy, the currency should be compatible with China’s business cycle instead of that of the US,” says ANZ Bank’s Yeung.

As peg speculation rises, Yeung thinks it’s useful to view things through the lens of Nobel laureate Robert Mundell’s 1960s theory of the “optimal currency area.” Mundell’s framework, Yeung notes, “seems to lend support because using the same currency for economies in a single market should promote economic efficiency.”

To be sure, Yeung hedges, “it’s not totally applicable to Hong Kong because the renminbi market has been extended to it. Trade, investments and financial flows can already be transacted in Chinese yuan.”

But “in our view, the yuan could eventually be a functioning currency in the stock market for transactions, including dividend payments, amid increased acceptance by global investors. Therefore, there is no need to impose unnecessary changes on the existing peg.”

Yeung speaks for many when he argues that “unnecessary change may do more harm than good.” He adds that “in short, stability is key. Although there have been rising concerns about the long-term outlook of the US dollar after the recent banking crisis, it remains a global standard.”

Looking forward, Yeung notes, China’s Belt and Road Initiative “may also attract new segments of investor interest. Countries worried about ‘weaponization’ of the US dollar could also see an alternative in the HK dollar as Hong Kong maintains free capital flows and its legal system is based on the common law.”

Still, speculators like Ackman think the Hong Kong peg’s days are numbered. The city’s precarious place is between a US that’s ratcheting rates higher and a China moving in the opposite direction. Some economists worry China is hurtling toward deflation, exacerbating Hong Kong’s troubles.

As Hong Kong struggles to straddle these two giants, it’s shackled with exactly the wrong monetary policy at a challenging moment. The straight jacket Hong Kong is forced to impose on itself could exacerbate the economic strains already damaging the government’s legitimacy, not least due to some of the worst income inequality in the developed world.

The tensions emanating from the currency peg have only grown over the last five years, in part because of Chinese money bidding up already elevated property prices. As economist Vincent Tsui at Gavekal Research points out, home prices have increased by double digits year after year.

“But if we look at the household income growth,” Tsui notes, “that has been stalled since 2018, before the social unrest, before the pandemic.”

“So basically, this dividend from the economic integration with China has been exhausted. Second, it’s the debt servicing costs, right. So there has been a period of extra low interest rate for a decade. And now actually the interbank rates are triple the level we have seen over the past decade,” says Tsui.

“So, two factors combined together on the demand side, have pretty much weakened as well. The whole supply-demand dynamic is switching in the Hong Kong housing market, making it a much shakier ground as we have seen before,” he adds.

Such risks might reduce the tolerance for fundamental changes to the mechanics of Hong Kong’s financial system. No piece is more central than the US dollar peg ­– or more destabilizing if a change were announced.

Ackman’s case against the Hong Kong peg has its merits, just as Bass’s did before Hayman Capital closed out its short position in 2021. This goes, too, for Soros in the late 1990s. And Xie’s take also makes some great new points.

Economist Andy Xie has raised fresh doubts about the Hong Kong dollar’s peg. Photo: Screengrab / BBC

“Riding on the yuan’s rise would be a big plus for Hong Kong,” Xie explains. “The yuan accounts for just over 2% of the global payments system, and about the same in global forex reserves. China accounts for about 18% of the world economy and around 30% of global manufacturing output.

“The yuan’s share in global payments and currency reserves is bound to rise. Before it becomes fully convertible, Hong Kong has a unique opportunity to ride its rise and consolidate its status as a global financial center,” he says.

The first step, Xie adds, could be Hong Kong “starting the transition” by shifting the government payroll to yuan and collecting taxes in yuan. “As the stock market gradually makes the shift, along with asset markets and the real economy, bank deposits and credit would follow naturally,” Xie argues. “The Hong Kong dollar would fade away.”

Yet for any of this to happen, Xi’s government would have to display a level of audacity and risk tolerance it hasn’t over the last decade, economists say. That’s why the odds still favor Hong Kong’s peg to the US dollar remaining for the foreseeable future.

Follow William Pesek on Twitter at @WilliamPesek

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Why Japanese equities are attracting foreign investors

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International investors are likely to increase their exposure to Japanese equities or, indeed, consider including them in their portfolios for the first time this year and beyond.

The reason is that the world’s third-largest economy is experiencing inflation that reached a four-decade high in February and continues to run hot.

Sharp price gains are rarely desirable, but Japan is an exception after bouts of deflation since the late 1980s and early 1990s.

Japan has been grappling with a persistent problem of low inflation and deflation for several decades for four main reasons. 

First, it has an aging population and a declining birth rate, which has led to a shrinking workforce and reduced consumer spending. With fewer people entering the workforce and spending less, there is lower demand for goods and services, resulting in stagnant prices.

Second, Japan has experienced prolonged periods of economic stagnation, characterized by sluggish growth and weak consumer and business spending. This has limited the potential for inflationary pressures to build up.

Third, the country has one of the highest debt-to-GDP ratios among developed countries. To manage this debt burden, the government has implemented accommodative monetary policies, including low interest rates and quantitative easing. While these policies aimed to stimulate economic growth, they have not translated into significant inflationary pressures.

And fourth, Japan has faced structural challenges in its economy, such as excess capacity in certain industries, weak productivity growth, and limited wage increases. These factors have contributed to a lack of upward pressure on prices.

Economic recovery

However, in more recent times, as the economic recovery continued amid supportive monetary and fiscal policies and a surge in tourism, inflation has surged.

For this reason, cash is no longer king as the rising prices are eroding Japanese investors’ purchasing power.  

As such, they’re increasingly looking for alternatives, and we expect Japanese equities are going to be the go-to as a way to preserve or even increase the real value of their investments.

Equities are often seen as a potential hedge against inflation. When prices rise, the value of a company’s revenue and earnings may increase, leading to higher stock prices. 

Should Japanese investors pile into the Tokyo and Osaka exchanges, equity values will naturally increase, and this will pique the interest of international investors looking to further diversify their portfolios to seize opportunities and mitigate risk.

Japan experienced a prolonged period of economic stagnation in the 1990s and 2000s, often referred to as the Lost Decades. This era was characterized by low economic growth, deflation, and a weak stock market. The negative perception of Japan’s economy during this time seriously deterred international investors from considering Japanese equities.

In addition, historically, Japan’s corporate governance practices and transparency standards were considered relatively weak compared with other developed economies. This lack of transparency and shareholder-friendly practices made some would-be overseas investors cautious about investing in Japanese companies.

Plus, of course, equities in Japan have not consistently outperformed other global equity markets in recent years.

But as values are likely to rise as investors shed cash and fixed-income investments because of rising inflation, this trend for overlooking Japanese stocks will be reversed.

Nigel Green is founder and CEO of deVere Group. Follow him on Twitter @nigeljgreen.

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Biden’s contrasting styles and priorities

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For weeks, US President Joe Biden publicly demanded that the issue of raising the debt ceiling was a done deal and not negotiable. As the prospects of national default loomed, the Biden White House quietly began negotiations with Republican House Speaker Kevin McCarthy, and arrived at a compromise in the nick of time so as to avert default.

It seems Biden understood, after all, that avoiding the disaster of a default and the mortal pain on the American economy was more important than sticking by his guns. However, he apparently does not understand that the outcome of his negotiations with China is equally crucial to America’s future; his approach has been steadily unyielding, unfriendly and unhelpful.

Biden’s China team has adopted a strategy of saying one thing and then doing just the opposite. Every one of his cabinet officers would declare that he or she wishes to meet with their Chinese counterparts to discuss cooperation and collaboration – but always on the US terms, meaning that the US reserves the right to discuss the issues it wants to discuss, but will continue to criticize, attack and sanction China on others.

This is the way an imperious hegemonic power acts toward a subordinate country and expects obeisance and compliance. Except China no longer sees itself as a lesser power to the US. China has simply ignored the many White House requests. 

The latest example came at the Shangri-La security forum in Singapore. The US had asked for a meeting between Defense Secretary Lloyd Austin and his counterpart Li Shangfu on the sidelines of the forum. China refused. The US promptly accused China of irresponsible behavior endangering the bilateral relations by not keeping the lines of communication open.

US wants to meet with China for what purpose?

Of course, communicating and agreeing to face-to-face meetings are two separate matters. China expects prospects of a useful outcome to justify arranging in-person meetings. For possible constructive results, China wants to see serious and sincere gestures from the US.

All too frequently in previous meetings, the American officials viewed them as opportunities to crow about China giving in to American demands, whether actually true or not.

That Biden did not even bother to lift the personal sanction imposed on Li Shangfu during Donald Trump’s administration and still expects to have a summit meeting of military leaders seems stupid and arrogant.

Mind you, Li was sanctioned for purchasing fighter jets from Russia on behalf of China as part of his duty at the time in charge of procurement for the People’s Liberation Army (PLA). What right does the US have to sanction an official of another country for doing his job? India buys arms from Russia; Turkey buys arms from Russia, apparently with no sanctions. 

This is just one example of Secretary of State Antony Blinken’s “rules-based international order.” That order is arbitrary and is whatever the US says it is. Blinken was hankering for an invitation to meet in Beijing. Then the wandering weather balloon from China gave him the excuse to cancel the visit on an invitation that never came. Not only that, he reaped a PR dividend by blaming China for the debacle.

Examples of hypocrisy and deception abound. Biden warmly embraced Xi Jinping in Bali and swore by the one-China principle and that Taiwan is part of China. Then he openly sells arms to Taiwan and impose complete sanctions of export semiconductor technology to China. 

Treasury Secretary Janet Yellen goes out of her way to ask China for support of the US treasury debt and then goes to Africa to warn African nations to beware of China’s debt-trap diplomacy.

Commerce Secretary Gina Raimondo asked for a meeting with her counterpart to discuss increasing bilateral trade. What she actually meant was she wanted China to buy more but did absolutely nothing to reduce the tariffs imposed on Chinese imports by the Trump administration that might actually raise the volume of bilateral trade.

US on the path of self-destruction

Decoupling from China is not his intention, Biden claims, but then every action by his team is just the opposite. Every prospective bilateral outcome has to be on US terms, or else. What the Biden White House does not appreciate is that it has embarked on a path of self-destruction for America.

The damaging blowback from Biden’s China policy may not be as obvious as not raising the debt ceiling, but there is a strong element of cutting off Uncle Sam’s nose to spite his face that the leaders in Washington seem oblivious to. Just a few examples follow.

When Biden first came to office, if he had intended to resume a constructive relationship with China, he could have eliminated the tariffs levied by Trump on Chinese imports. Instead, he retained the tariffs despite hurting the American consumer much more severely than China’s manufacturers. The desire to inflict pain on China far outweighed protecting Americans from even greater pain.

Whether it’s assembling new subway cars with Chinese components, installing the world’s most cost-effective port-handling cranes, or surveillance cameras made in China, Washington let its paranoia run wild and turned away the cost savings from buying superior products from China.

The sanction of Huawei is an extreme case. Huawei has developed the world’s most advanced fifth-generation (5G) telecommunication system, which has received acceptance around the world. Because of US fear of being spied upon, Washington not only has refused to buy from Huawei but pressured many of its allies to rip out billions of dollars’ worth of Huawei equipment already installed. 

After enduring the US sanctions for three years, Huawei has just announced the complete replacement of operating software based on Western technology. It will now sell to the world without any constraints, while the United States’ allies suffer hundreds of billions of dollars from the teardown of already installed Huawei equipment and the huge opportunity costs 0f not having a state-of-the-art telecommunication system.

China has also surpassed the US in EVs

Of course, telecom is not the only technology where China has surpassed the US. Among others, China’s emergence as the world’s leading producer of electric vehicles and owner of leading technology for the batteries that go into the EVs has taken the West by surprise. China has become the No 1 exporter of EVs around the world. 

Ford and Tesla, among many automakers in the West, would like CATL to build an advanced battery plant next to their EV plants in the US. (CATL is abbreviation for Contemporary Amperex Technology Ltd headquartered in Ningde, China, and is an acknowledged leader in EV battery technology.) 

The potential deals raise interesting questions. Will Beijing forbid CATL’s transfer of battery technology to the US along the same logic as Washington’s semiconductor sanction on China? Or will some senator, such as a Marco Rubio, raise the specter of Chinese batteries in EVs forming a terrifying network for spying on America?

Biden thought he had cleverly jumpstarted the US semiconductor industry by snatching a leading-edge operation from Taiwan Semiconductor Manufacturing Co to Phoenix, Arizona. Now the TSMC management has discovered that they are not able to hire enough people from an American workforce that are qualified and/or willing to work in the rigors of a Taiwanese operation.

In the meantime, the people of Taiwan are feeling increasing betrayed by America’s ham-fisted ways. This is a classic lose-lose outcome in the making.

Another is Defense Secretary Austin’s insistence on playing the “freedom of navigation” game in waters around China and flying surveillance planes off coastal China. Since Nancy Pelosi’s visit to Taipei last year, China has emphasized its territorial claim over Taiwan and has been increasingly aggressive in responding to American intrusions in Beijing’s back yard.

Just last Saturday, a US destroyer along with a trailing Canadian frigate attempted to sail through the Taiwan Strait, which China regards as its territorial waters. In response to this provocation, a Chinese destroyer intercepted the American warship and forced it to change course.

Obviously, the PLA is increasingly willing for a showdown over whether China’s territorial waters can continue to be treated as America’s international waters. The firepower and technology of the PLA warships have surpassed the Americans’, and the Chinese appear confident and ready to put it to a test. 

If the US Navy should succeed in provoking the PLA into a firefight, it is certain that both parties would be losers.

China has more friends than US has allies

Geopolitically, the US continues to count on the Group of Seven and a handful of other countries to be its allies. Biden’s stipulation is to insist on strict compliance of his foreign policy even at the expense of each ally’s own national interest.

Consequently, France is becoming a doubting Thomas about the wisdom of going along with the US, South Korea is trying to wriggle out of not losing China’s sales, as is ASML of the Netherlands. Germany and Australia in their own ways are holding on to their trade relations with China. In sum, the American alliance is increasingly questioning the shakiness of US leadership.

Concurrent to American hectoring over its version of “rule-based” order, 19 countries have expressed interest in joining BRICS (Brazil, Russia, India, China and South Africa) purely for the economic advantages of being a body that requires no military allegiance.

Saudi Arabia along with other oil-producing countries becoming members of BRICS+ will change the global alignment. The body will be far more populous and economically powerful than the US-aligned G7+.

And, by the way, a top agenda item for the new BRICS is to discuss a plan to introduce a new currency to replace the need to settle trade accounts in US dollars. This move is in direct response to Biden weaponizing the dollar and denying dollar access to countries he doesn’t like, such as Russia.

The Regional Comprehensive Economic Partnership (RCEP) has just come into full force. Members of the partnership consist of the 10 ASEAN countries plus China, Japan, South Korea, Australia and New Zealand. They will enjoy booming, tariff-free trade among themselves. The US is on the outside looking in.

Since China initiated the Belt and Road Initiative 10 years ago, around 150 countries have become beneficiaries of projects and investments through BRI. At reasonable financing terms, China supplies their expertise to build infrastructure such as ports, railroad, highways, bridges, airports and many others to enhance the economic development of the recipient country.

By far, BRI has been China’s most effective tool for making friends around the world. 

The US? It stands impotently on the sidelines and watches with envy, and occasionally throws stones by calling these BRI projects debt traps.

Despite Washington’s mighty effort to suppress and obstruct China’s rise, China has become relatively impervious to American sanctions and restrictions. Just like Huawei, China’s semiconductor industry will find ways around the ban.

At the same time, China has become the foremost trading partner to virtually every country in the world. China’s economy remains strong and technological innovations will continue, hardly affected by actions from Washington.

The Biden administration has concentrated virtually all its efforts on keeping China from rising, to no avail. At the same time, the administration has not done anything concrete to lift the competitiveness of the American economy.

In a long line of mediocre leadership, Biden may prove the be the worst.

George Koo retired from a global advisory services firm where he advised clients on their China strategies and business operations. Educated at MIT, Stevens Institute and Santa Clara University, he is the founder and former managing director of International Strategic Alliances. He is currently a board member of Freschfield’s, a novel green building platform. Follow him on Twitter @george_koo.

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BRICS currency gambit a timely warning to the buck

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On the sidelines of the recent BRICS gathering in Cape Town, South Africa, officials contemplated as rarely before the five most dangerous words in economics: things are different this time.

For years now, Brazil, Russia, India, China, South Africa and other emerging economies hoped to break the dollar hegemony that complicates geopolitical calculations. In Cape Town, BRICS foreign ministers presided over what might be remembered as the moment the anti-dollar movement grew genuine legs.

In the lead-up to the confab, BRICS members urged the bank that the grouping set up to study how a joint currency might work — logistics, market infrastructure and how sanctions against Russia play into things.

Equally important is the flurry of foreign exchange arrangements popping up that exclude the dollar: China and Brazil agreeing to settle trade in yuan and reals; France beginning to conduct some transactions in yuan; India and Malaysia increasing use of the rupee in bilateral trade; Beijing and Moscow trading in yuan and rubles.

The 10-member Association of Southeast Asian Nations (ASEAN) is joining forces to do more regional trade and investment in local currencies, not dollars. Indonesia, ASEAN’s biggest economy, is working with South Korea to ramp up transactions in rupiah and won.

Pakistan is angling to begin paying Russia for oil imports via yuan. The United Arab Emirates is talking with India about doing more non-oil trade in rupees.

Over the weekend, Argentina announced it plans to double its currency swap line with China to roughly US$10 billion. It’s partly desperation as Argentina’s foreign currency reserves evaporate amid 109% inflation that has its central bank in damage control mode.

But it’s also a sign of the rising anti-dollar movement in South America.

“Despite America’s likely opposition, de-dollarization will persist, as most of the non-Western world wants a trading system that does not make them vulnerable to dollar weaponization or hegemony,” says Frank Giustra, co-chair of the International Crisis Group. “It’s no longer a question of if, but when.”

Economist Rory Green at TS Lombard adds that “geopolitics and China’s economic heft is driving — and will continue to drive — RMB adoption for trade and reserve holdings. Greater international use of the RMB will provide channels for sanctions-busting, but the dollar is not under threat.”

A clerk counting yuan and US dollar notes at a bank. Photo: AFP

To be sure, Green adds, “China is politically unwilling and economically unable — barring significant structural reform — to run a sustained current account deficit and to provide sufficient supplies of RMB assets globally,” which complicates Beijing’s designs on competing with the dollar.

Here, BRICS members’ stepping up with a strength-in-numbers gambit could be a game-changer.

Already, they account for 23% of global gross domestic product (GDP) and more than 42% of the world’s population. At present, at least 19 other countries — including Saudi Arabia — want to join the BRICS fold, which would greatly grow its influence.

For now, the five BRICS nations are pooling $100 billion of foreign currency to act as a financial shock absorber. The funds can be tapped in emergencies, allowing members to avoid going to the International Monetary Fund. Since 2015, the BRICS bank has approved more than $30 billion of loans for infrastructure, transportation and water.

The BRICS currency issue has been gaining greater traction since mid-2022, when the 14th BRICS Summit was held in Beijing. There, Russian President Vladimir Putin said the BRICS were cooking up a “new global reserve currency” and were open to expanding its usage more widely.

In April, Brazilian President Luiz Inacio Lula da Silva threw his support behind a BRICS monetary unit.

“Why can’t an institution like the BRICS bank have a currency to finance trade relations between Brazil and China, between Brazil and all the other BRICS countries?” he asked. “Who decided that the dollar was the trade currency after the end of gold parity?”

Lula’s return to the presidency four months earlier was a boost to the “Global South” ambitions that Chinese leader Xi Jinping has been championing. In his third term, Xi is putting greater emphasis on morphing the Global South, or developing countries in the regions from Latin America to Africa to Asia to Oceania, into a bigger economic and diplomatic force.

Brazilian Finance Minister Fernando Haddad has been highlighting the increased use of local currencies in bilateral trade instruments like credit receipts. The focus, he says, must be phasing out the use of a third currency.

“The advantage is to avoid the straitjacket imposed by necessarily having trade operations settled in the currency of a country not involved in the transaction,” he told reporters.

Lula may get his answers in August when the BRICS summit of heads of state is held in Johannesburg. The desire for a BRICS version of the euro might get a boost from countries like Egypt, Indonesia, Turkey and Saudi Arabia joining.

Visiting Brazilian President Lula da Silva and Chinese President Xi Jinping (left), at an official reception in April 2023. Photo: Wikipedia / Ricardo Stuckert

BRICS Ambassador Anil Sooklal says others keen to join include Afghanistan, Algeria, Argentina, Bahrain, Bangladesh, Belarus, Iran, Kazakhstan, Mexico, Nicaragua, Nigeria, Pakistan, Senegal, Sudan, Syria, the United Arab Emirates, Thailand, Tunisia, Uruguay, Venezuela and Zimbabwe. Sooklal hints that some European countries might sign up, too.

That, of course, also could add to the BRICS’ troubles. The more this grouping adds members with disparate economies and challenges and conflicting ambitions, the more vulnerable the enterprise becomes. Russia’s involvement alone, post-Ukraine invasion, complicates the broader legitimacy of the BRICS project.

The main problem, says Paul McNamara, investment director at GAM Investments, is that BRICS is still an acronym in search of a cohesive economic argument. It was coined in 2001 by then-Goldman Sachs economist Jim O’Neill.

More likely, McNamara says, it will be one country alone that challenges the dollar: China. After all, he reasons, without China at the core, would most current global elites care about the BRICS?

Some think it could take longer to dislodge the dollar. Though the dollar’s dominance will take time to unravel, the trajectory away from it is clear, says Vikram Rai, a senior economist at TD Bank.

“Within the next decade or two, there is great potential for regionally dominant currencies and a multipolar international regime to emerge, with the roles filled now by the dollar shared with the euro, a more open yuan, future central bank digital currencies and possibly other options we have yet to see,” Rai argues.

In a report last week, Moody’s Investors Service analysts wrote: “We expect a more multipolar currency system to emerge over the next few decades, but it will be led by the greenback because its challengers will struggle to replicate its scale, safety and convertibility in full.”

Yet a bigger US pivot to protectionism, further risks of a default and weakening institutions are threatening the dollar’s global influence, Moody’s warns.

“The greatest near-term danger to the dollar’s position stems from the risk of confidence-sapping policy mistakes by the US authorities themselves, like a US default on its debt for example,” Moody’s analysts say. “Weakening institutions and a political pivot to protectionism threaten the dollar’s global role.”

Even though US lawmakers raised the debt ceiling this time, Fitch Ratings is keeping Washington on watch for a potential downgrade. Fitch worries that the threat of default is now becoming a routine political ploy.

Fitch cautions “that repeated political standoffs around the debt-limit and last-minute suspensions before the X-date — when the Treasury’s cash position and extraordinary measures are exhausted — lowers confidence in governance on fiscal and debt matters.”

What worries Fitch analyst James McCormack is US lawmakers missing the plot of protecting America’s AAA rating. Politicians must understand that “you’re playing with live ammunition here,” McCormack told CNN. “This is an extremely dangerous situation. There is a lot at stake.”

US Speaker of the House of Representatives Kevin McCarthy pushed the US to the brink of its first ever debt default. Image: CNN Screengrab

Among the biggest risks the US is taking is losing the “exorbitant privilege” that comes with printing the international reserve currency. This phrase was coined by 1960s French Finance Minister Valéry Giscard d’Estaing, who noted the dollar’s pivotal role allowed the US to live beyond its financial means, year after year.

In April, French President Emmanuel Macron said that Europe should curb its dependence on the “extraterritoriality of the US dollar.”

That’s particularly so as Sino-US tensions intensify. If the tensions between the two superpowers heat up, Macron said, “We won’t have the time nor the resources to finance our strategic autonomy and we will become vassals.”

That same month, Tesla founder Elon Musk warned via tweet that “de-dollarization is real and is happening fast. If you weaponize currency enough times, other countries will stop using it.”

Economist Stephen Jen at Eurizon SLJ Asset Management notes that “exceptional actions” — including sanctions imposed by the US and its allies against Moscow — have made all too many nations less willing to hold dollars.

Jen is quoted saying that the dollar suffered a “stunning collapse” in its market share as a reserve currency in 2022, “presumably due to its muscular use of sanctions.”

He calculates that the dollar’s share of official global reserves fell to 47% last year, down from 55% in 2021 and a marked collapse from the 73% in 2001. Its loss of market share in 2022 alone was 10 times faster than the steady erosion over the past two decades, Jen says.

Billionaire Ray Dalio, founder of the Bridgewater Associates hedge fund, agrees that “there’s less of an eagerness to buy” US Treasury securities.

He points to Western steps to freeze about $300 billion of Russian central bank assets, punitive moves Dalio says, “increased the perceived risk that those debt assets can be frozen in the way that they’ve been frozen for Russia.”

Yet, even just based on the economics, says BRICS concept founder O’Neill, the global system seems ready for a pivot.

“The US dollar plays a far too dominant role in global finance,” O’Neill notes. “Whenever the Federal Reserve Board has embarked on periods of monetary tightening, or the opposite, loosening, the consequences on the value of the dollar and the knock-on effects have been dramatic.”

That dynamic helped pave the way for events in Cape Town over the last few days, an event that may have legs in currency circles for generations to come.

Follow William Pesek on Twitter at @WilliamPesek

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Don’t underestimate China’s ability to catch up with the West

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Investment strategy: Not a time to play the hero

David Woo voices skepticism about the smooth passage of the debt ceiling deal and ponders the motivations behind Kevin McCarthy’s actions. He discusses the performance of GPM’s portfolio trades and a bullish outlook on gold due to the debt ceiling situation.

Ukraine: What next and to what effect?

Uwe Parpart questions the likelihood of a successful major offensive by Ukraine without air superiority and highlights the perspective of General Mark Milley, head of the US Joint Chiefs of Staff, who states that the war cannot be won militarily by Russia and predicts continued fighting until a settlement is negotiated.

The China bailout that wasn’t

David Goldman writes that while China’s post-Covid recovery has been below expectations, with weak consumption and property investment and an underperforming equity market, China’s exports to developing markets, especially in the auto sector, are showing strength, with China becoming the world’s largest auto exporter in April.

Russian air offensive intensifies as Ukraine grapples with stalemate

James Davis assesses that the war in Ukraine remains in a state of attrition, with Russian forces focusing on gradually weakening Ukrainian manpower and infrastructure. Both sides lack the readiness for large-scale offensives, leading to a probable continuation of the current stalemate with increased air and missile attacks.

China’s C919 passenger jet’s maiden voyage could invite US sanctions

Scott Foster writes that China’s COMAC could surpass Boeing to become China’s second-largest commercial aircraft supplier after its C919 passenger jet successfully completed its first commercial flight. There are concerns, however, that Washington may impose export restrictions on COMAC’s US suppliers.

Japan likely to benefit from ‘de-risking’ China, at least in the short run

Scott Foster believes US-imposed chip export restrictions are expected to have a limited impact on Japanese equipment makers in the short term, investments by TSMC, Micron and Rapidus in Japan’s semiconductor industry are anticipated to significantly enhance production capacity and technological sophistication.

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Ukraine war gives China’s yuan a needed boost

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The Chinese economy’s sheer size and rapid growth are impressive.

China maintained one of the highest economic growth rates in the world for more than a quarter of a century, helping lift over 800 million people out of poverty in just a few decades.

The country is the largest exporter in the world and the most important trading partner of Japan, Germany, Brazil and many other countries. It has the second-largest economy, after the United States, based on the market exchange rate – and the largest of all based on purchasing power.

And yet the yuan still lags as a major global currency. The war in Ukraine, which started in February 2022, may change that.

As a professor of finance and expert on international finance, I understand how this geopolitical conflict may put China’s currency on the next phase of its path to becoming a global currency – and prompt the onset of the decline of the US dollar from its current dominance.

Chinese yuan’s slow progress

China has long wanted to make the yuan a global force and has mounted significant efforts to do so in recent years.

For example, the Chinese government launched the Cross-Border Interbank Payments System, or CIPS, in 2015 to facilitate cross-border payments in yuan. Three years later, in 2018, it launched the world’s first yuan-denominated crude oil futures contracts to allow exporters to sell oil in yuan.

China has also emerged perhaps as the world’s largest creditor, with the government and state-controlled enterprises extending loans to dozens of developing countries. And China is developing a digital yuan as one of the world’s first central bank digital currencies. The trading hours for the yuan were recently extended on the mainland.

Thanks to these efforts, the yuan is now the fifth-most-traded currency in the world. That is a phenomenal rise from its 35th place in 2001. The yuan is also the fifth-most-actively used currency for global payments as of April 2023, up from 30th place in early 2011.

China’s yuan is gaining ground as an international currency. Photo: Facebook

Rankings can be misleading, though. The yuan’s average trading volume is still less than a 10th of the US dollar’s. Moreover, almost all trading was against the US dollar, with little trading against other currencies.

And when it comes to global payments, the actual share of the yuan is a mere 2.3%, compared with 42.7% for the dollar and 31.7% for the euro. The yuan also constituted less than 3% of the world foreign exchange reserves at the end of 2022, compared with 58% for the dollar and 20% for the euro.

US dollar’s dominance questioned

The US dollar has reigned supreme as the dominant global currency for decades – and concern about how that benefits the US and potentially hurts emerging markets is not new.

The value of the US dollar appreciated significantly against most other currencies in 2022 as the Federal Reserve hiked interest rates. This had negative consequences for residents of almost any country that borrows in dollars, pays for imports in dollars, or buys wheat, oil or other commodities priced in dollars, as these transactions became more expensive.

After Russia invaded Ukraine in early 2022, the US and its Western allies put sanctions on Russia, including cutting Russia’s access to the global dollar-based payments system known as the Society for Worldwide Interbank Financial Telecommunication, or SWIFT. That clearly displayed how the dollar can be weaponized.

With Russia largely cut off from international financial markets, it stepped up its trade with China. Russia began receiving payments for coal and gas in yuan, and Moscow increased the yuan holdings in its foreign currency reserves. Russian companies like Rosneft issued bonds denominated in yuan. According to Bloomberg, the yuan is now the most-traded currency in Russia.

Other countries took notice of Russia’s increasing use of the yuan and saw an opportunity to decrease their own dependency on the dollar.

Bangladesh is now paying Russia in yuan for the construction of a nuclear power station. France is accepting payment in yuan for liquefied natural gas bought from China’s state-owned oil company.

A Brazilian bank controlled by a Chinese state bank is becoming the first Latin American bank to participate directly in China’s payments system, CIPS. Iraq wants to pay for imports from China in yuan, and even Tesco, the British retailer, wants to pay for its Chinese imported goods in yuan.

The combined dollar amount of these transactions is still relatively small, but the shift to yuan is significant.

Yuan still not freely available

China keeps a tight grip on money coming in and out of the country. Such capital controls and limited transparency in Chinese financial markets mean China still lacks the deep and free financial markets that are required to make the yuan a major global currency.

For the yuan to achieve a truly global standing, it needs to be freely available for cross-border investment and not just serve as a payment medium to accommodate trade.

But the war in Ukraine may have just made it feasible for the yuan to eventually join the ranks of the dollar and the euro – even if the volume isn’t there yet.

And any US policy decisions that weaken the reputation and strength of US institutions – such as the recent drama over raising the debt ceiling, which brought the government to the brink of default – will accelerate the rise of the yuan and decline of the dollar.

Tuugi Chuluun is an associate professor of finance at Loyola University Maryland.

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

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Counting the costs of Cambodia’s Belt and Road

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China is Cambodia’s largest bilateral donor, lender, investor and trading partner. About a quarter of Cambodia’s total trade, a third of aid and two-fifths of foreign direct investment (FDI) and external debt involves China. Although Sino-Cambodian diplomatic and economic relations date back centuries, they have grown sharply over recent decades.

Economic relations have been strengthened by Cambodia’s active participation in the Belt and Road Initiative (BRI). Cambodia has been a vocal and enthusiastic proponent of the BRI since its inception in 2013. 

In Cambodia, the BRI focuses mainly on loans to develop physical transport infrastructure, although it has also been indirectly associated with the development and transformation of the port city of Sihanoukville. 

There are also investments in agriculture, energy and light manufacturing.

Participation in the BRI has costs and benefits. As a Least Developed Country aspiring to achieve upper middle-income status by 2030, Cambodia has embraced the BRI as an important instrument for addressing infrastructure deficits and reducing trade and transport costs. 

The BRI has also supported the development of the power sector and agricultural diversification. This has raised productivity and led to trade expansion and high economic growth without compromising debt sustainability.

Rapid economic growth has increased wealth inequality but also raised overall living standards and produced sharp reductions in poverty. Between 2009 and 2019, poverty incidence (US$1 per day) almost halved from about 34% to 18%. These achievements derive from multiple factors but the BRI’s contribution cannot be denied.

The government has not undertaken a quantitative cost–benefit analysis of the BRI in Cambodia. The presence of BRI projects alongside massive socioeconomic gains suggests that the country has derived net benefit from the BRI. 

There are also no concerns relating to “debt trap diplomacy” as debt levels remain below 40% of GDP. Still, there are risks associated with increasing reliance on just one country for economic and non-economic needs.

The BRI provided the transport and related infrastructure that facilitated the transformation of Sihanoukville from a sleepy, beachside resort town to a bustling entertainment center focused on gambling. The spill-over benefits of this rapid development to the local communities appear limited, while there is growing evidence of a rise in the cost of living, crime, corruption and various forms of inequality. 

A Chinese casino lit up by night in Cambodia's Sihanoukville. Photo: Facebook
A Chinese casino lit up by night in Cambodia’s Sihanoukville. Photo: Facebook

While the BRI was not directly involved in transforming Sihanoukville in this way, it did enable the conditions for its development. The real and perceived costs of these rapid transformations have caused dislocation and displacement among local communities.

Experts have concerns about the environmental and resettlement effects of BRI projects. The second BRI Forum in 2019 committed to mitigating problems through greater community consultation and stakeholder participation. It is still too early to tell if this consultation is really happening.

The forum also resolved to multilateralize the BRI by expanding the participation of regional, albeit still China-based, institutions. In Cambodia, this is occurring through a gradual shift in the financing of projects from Chinese state-owned banks and corporations — whose operations are sometimes opaque — to the Asian Infrastructure Investment Bank (AIIB), a multilateral development institution. 

The AIIB’s role is set to increase rapidly and raise overall transparency, including contractual obligations.

But the extent to which AIIB’s involvement will also raise environmental standards and other safeguards remains unclear. This is because the AIIB adopts national environmental and other standards and policies — which may fall short of global benchmarks. 

AIIB oversight of the implementation of environmental standards or resettlement policies may also involve national authorities rather than an independent party, which could be problematic.

How can Cambodia ensure that future projects are net positive?

The Committee for the Development of Cambodia reviews FDI proposals as part of the process of obtaining Qualified Investment Project (QIP) status and securing fiscal incentives. While some of the criteria used in determining QIP status involve assessing potential benefits to the local economy, the analysis lacks a comprehensive cost-benefit framework. 

This is also true of the new Law on Investment adopted in 2021, which is mainly designed to facilitate FDI. Both the QIP and the Law on Investment ignore macroeconomic issues such as debt or investment sustainability and do not attempt to measure broader spill-over effects on the economy.

A view of the Morodok Techo National Stadium, funded by China’s grant aid under its Belt and Road Initiative, in Phnom Penh. Photo: AFP / Tang Chhimn Sothy / POOL

Cambodia needs a formal framework to assess the potential costs and benefits of all project proposals as part of a conventional approval process.

Cambodia could consider setting up a new Projects Review Board, which could operate as a non-statutory body with inter-ministerial and multi-stakeholder representation, to assess individual proposals in a purely advisory capacity to the government. 

Technically competent staff who are capable of undertaking comprehensive cost-benefit analysis should support this project. A properly functioning Projects Review Board could help avoid the kinds of BRI projects that have left neighboring Laos in severe debt distress.

A transitional economy like Cambodia should be selective and strategic in its choice of projects if it is to grow in a sustainable and inclusive manner. It has done well so far but needs an independent assessment mechanism to ensure its success continues.

Jayant Menon is Senior Fellow at the ISEAS-Yusof Ishak Institute.

This article was originally published by East Asia Forum and is republished under a Creative Commons license.

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