Telecom rally signals broader China tech shares surge – Asia Times

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China’s telecom stocks, a proxy for the value of industrial automation, turned in the best performance in China’s CSI 300 Index of mainland large-cap stocks during February. The telecom subindex of the CSI 300 rose by nearly 20% as of Feb. 20 from its January 17 low.

Although the telecom index has gained about 20% since January 2019, the recovery looks like a dead cat bounce on the chart. Closer analysis, though, indicates that the telecom rally just before and after the Lunar New Year holiday is significant.

Telecom companies in the West are a consumer business. In China, they provide key infrastructure for industrial automation, in the form of dedicated broadband networks for industry, mining and logistics. 5G networks offer high data capacity as well as low latency (very rapid response to signals), and support a wide range of artificial intelligence applications.

High-speed cameras upload thousands of photos per minute of industrial machines or components on a conveyor belt, automating preventive maintenance, quality control and other functions. Machine learning algorithms analyze the uploaded data and identify defective parts, machines in need of maintenance, foreign objects in mining output and other functions.

Wireless communication among industrial robots, moreover, speeds the optimization of automated production and supports quality control. 

A statistical technique called principal components decomposition drills down in to the factors that move markets. The first factor is the overall movement of the market. This explains 64% of the daily variation of the sectoral indices of the large-cap A-shares market.

The second most important factor is the relative movement of telecom stocks against the rest of the market. This could be thought of as an investment-vs-consumption factor (it is positive for telecoms and negative for consumer staples and consumer discretionary stocks.) A strong showing in this factor suggests that investors believe that high-tech investment will earn disproportionate profits.

During the past several days, the “telecom factor,” or the second principal component of CSI 300 returns, had one of its strongest showings ever, and came in February 20 at three standard deviations above its long-term mean. That’s a significant move, and it suggests stronger investor confidence in high-tech profitability.

Several circumstances conspire to keep equity valuations lower in China than in most major markets.

The American boycott of high-end chipmaking technology as well as the most powerful AI chips designed by US manufacturers forces China to duplicate foreign products at substantially higher cost. In the most visible case, Semiconductor Manufacturing International Corp. (SMIC) produced high-end 7-nanometer chips for smartphones and AI processors using the older lithography machines that China is allowed to buy. The unit cost of home-made chips is almost certainly much higher than in the West. 

Add to these costs the negative wealth effect of the property market slump, the lingering effect of Beijing’s regulatory pressure on Internet companies, and weak growth in world trade, and Chinese stocks have had a miserable year. To be sure, the S&P’s performance is overstated by the bubble in a half-dozen AI stocks. The small-cap Russell 2000 Index is still 20% below its peak.

Chinese large-cap A-shares in the CSI 300 Index are trading about one standard deviation below their three-year average, while the S&P 500 is trading at one standard deviation above its three-year average.

China’s consumer sector will continue to lag due to the continuing impact of lower property prices. High-tech industry will remain the focus of Beijing’s largesse and the telecom sector seems to be the clearest harbinger of improving investor expectations.

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India reaping benefits as investors divert billions of dollars away from China amid slowing economy

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MUMBAI: India’s stock market is reaping the benefits as investors divert billions of dollars away from China, amid its slowing economy, towards the South Asian giant.

The trend of China’s economic slowdown is likely to persist in the coming years, as the country struggles with sagging productivity and a rapidly ageing population, the International Monetary Fund (IMF) said earlier this month.

Meanwhile, India’s economic growth, large population, and policy reforms are all factors that are driving cash into its equity markets, according to market analysts.

Potential risks still remain, however, including the outcome of India’s general election this year and the broader geopolitical landscape.

Analysts are widely expecting India’s benchmark Sensex and Nifty indices, which include the country’s largest and most actively traded stocks, to continue rising this year with a double-digit percentage increase.

Sectors across the board are poised to perform well, including those seen as having been overvalued, such as public sector banks and power companies, said analysts.

These could benefit from the government’s budget for the next financial year presented at the start of February, which would increase spending in areas such as infrastructure.

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The Big Read: E-commerce layoffs – heyday of online shopping could be over, with consumers on the losing end

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Another difference is that e-commerce firms have a less-robust revenue stream, while the other tech companies have either multiple or more reliable revenue streams.  Professor Lawrence Loh, director of the Centre for Governance and Sustainability at the National University of Singapore (NUS), said that for e-commerce firms, their ability toContinue Reading

‘Cheap Japan’ falling fast on global economy tables – Asia Times

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TOKYO – No Japanese leader wants to preside over a bad milestone — like your economy dropping from No 3 to No 4 globally.

Welcome to Prime Minister Fumio Kishida’s hellish 2024. Barely six weeks in, Kishida’s Liberal Democratic Party is struggling to spin Japan’s falling behind Germany’s gross domestic product (GDP) in US dollar terms and the LDP’s culpability for this symbolic changing of the guard.

Kishida’s party is also giving Chinese leader Xi Jinping something of a much-needed soft power win. At a moment when Beijing is struggling to tame a property crisis, head off deflationary forces, restore confidence in the stock market and address record youth unemployment, news that it is pulling further ahead of arch-rival Tokyo sure is making for a welcome positive news cycle.

Japan, meanwhile, entered 2024 in recession. GDP contracted an annualized 0.4% in the October-December period after a 3.3% retreat in the previous quarter. “Japan’s economy is in poor shape,” says Stefan Angrick, senior economist at Moody’s Analytics.

Yet that’s true, too, of the longer-term trajectory as Germany surpassing Japan indicates.

Granted, this change in the league tables might rock Tokyo a bit less than China blowing past Japan’s annual output. Depending on which data set you use, that happened in 2010 or 2011, somewhere between the premierships of Naoto Kan and Yoshihiko Noda, and set the stage for the LDP’s return to power in 2012.

At the time, premier Shinzo Abe didn’t exactly sell his return to power as a beat-China mission. But so-called “Abenomics” was indeed a reformist retort to China becoming the world’s No 2 and Japan relegated to third place.

Sadly, the Abe era prioritized weakening the yen over reviving Japan’s once-vaunted innovative spirits. That failure, 11 years on, did more than anything to enable Germany to put Japan in the rearview mirror.

Adding insult to injury is the “sick man of Europe” narrative now plaguing Chancellor Olaf Scholz’s economy.

Germany’s once-fabled growth model has lost its groove. China’s slowdown and Russia’s war on Ukraine have become headwinds for Germany. So is softening global demand for autos, machinery, chemicals and other vital German industrial products.

At a moment when Europe is desperate for growth engines, Germany is looking at its second year of post-pandemic economic disappointment.

“At this point, economic underperformance of the German economy and the whole Eurozone is the key risk to the downside to our forecasts,” says Juraj Kotian, an economist at Erste Group Bank AG.

Economist Daniel Kral at Oxford Economics says “it’s clear that Germany was the worst performer among the major eurozone economies last year.”

In other words, it’s debatable whether Germany overtook Japan or Tokyo ceded the road to its fellow Group of Seven member. And this gets us back to Kishida, who’s now fighting for his political life.

Japanese Prime Minister Fumio Kishida looks wobbly. Image: Twitter Screengrab

Kishida ended 2023 with a 17% approval rating largely because inflation has been outpacing top-line growth and wage gains. On top of a host of political finance scandals afflicting his party, Kishida is now struggling to finesse the second bad milestone of recent months.

The other: China overtaking Japan to become the globe’s largest exporter of automobiles. Those headlines brought back that 2010-2011 feeling that Japan has little choice but to accept China’s rising dominance in Asia.

But might this latest wake-up call be the one that jolts the LDP from its legislative slumber?

Since October 2021, Kishida telegraphed a series of promising ideas to take control of the economic narrative. One was a “new capitalism” that redistributes wealth to middle-class families to boost consumption. Another was catalyzing a startup boom to disrupt Japan’s top-down and rigid economic system.

This latter scheme seemed particularly promising. It entails opening a path for the $1.5 trillion Government Pension Investment Fund, the world’s largest such entity, to help finance entrepreneurs and provide incentives to pull more overseas innovators Japan’s way.

But just as during the 2012-2020 tenure of mentor Abe, Kishida’s 28-plus months in office have been maddeningly unproductive from a structural reform perspective. In fact, Kishida has put virtually no upgrades on the scoreboard.

Falling to No 4 globally seems as good a reason as any to get busy. What better way to get Kishida’s approval ratings back toward 30% than clawing back Japan’s global economic status?

Were economic time travel possible, imagine where Japan might be if Kishida’s party had acted boldly since 2012. If only it had moved more assertively then to reduce bureaucracy, increase innovation and productivity, alter the tax code in favor of startups, empower women, lure foreign talent and remind global CEOs and investors that Tokyo is as good a place to be as any.

Yet the second-best moment to launch a financial “big bang” is the present. First, though, Kishida and his party have to move beyond the weak yen crutch on which they have been leaning.

An undervalued exchange rate and hyper-aggressive Bank of Japan policies took pressure off government officials and corporate chieftains to do the hard work of recalibrating growth engines or taking risks.

Now, Tokyo’s weak yen-centric strategy is backfiring. The reason? The “cheap Japan” strategy of recent years is increasingly diminishing Japan’s global relevance in GDP terms.

This characterization has been popularized in recent years by economist Hideo Kumano at Dai-Ichi Life Research Institute. Since at least 2019, he’s been warning that reducing Japanese purchasing power in the long run is a risky way to boost GDP in the short run.

The costs of this complacency can be seen in Kishida’s abysmal approval ratings but also in how Japan is essentially walking in place as even troubled Germany steps forward.

Meanwhile, India is setting the stage for the next round of surpassing-Japan headlines that Tokyo must explain to the next generation of voters. Being surpassed by South Asia’s biggest economy would be another big blow to the collective Japanese psyche.

Of course, the magnitude of headwinds facing Germany is a source of keen debate. At Davos in January, German Finance Minister Christian Lindner dismissed the “sick man” label.

“I know what some of you are thinking: Germany probably is a sick man. Germany is not a sick man — Germany is a tired man after a short night,” Lindner said, arguing that the economy just needs a “cup of coffee” to regain momentum.

Japan bulls make a similar point as Tokyo stocks rally to the highest levels in 30-plus years. “We remain bullish on Japan equities which are our largest overweight recommendation in our coverage universe,” says strategist Jonathan Garner at Morgan Stanley MUFG.

The Nikkei 225 Stock Average is currently over 38,000 and “now seems likely to break near term the all-time high of 38,916 which was set as long ago as December 1989,” Garner says.

“In our view, the major turning point for the Japanese equity market came in late 2012 – when the Nikkei was below 9,000 – with the launch of the three arrows of Abenomics and [the BOJ’s] initiation of an innovative policy approach to combat deflation,” he says.

Amundi Asset Management strategist Eric Mijot argues that Japan’s stock market “remains attractive.” As economic headwinds intensify, he says, “this robust performance is unlikely to be replicated with the same strength in 2024, but the outlook for the market remains favorable.”

Sadly, though, all Japan is proving in 2024 is that 1980s-style “trickle-down economics” works no better today.

A woman looks at shoes on sale at an outlet store in Tokyo’s shopping district, Japan. Photo: Asia Times Files / Twitter Screengrab

Abe did indeed take steps to strengthen corporate governance, setting the stage for record profits and share buybacks. But none of these tweaks translated into significant wage increases or broad-based efforts to increase productivity and innovation.

At the same time, everything BOJ officials thought they knew about 2024 is going awry. “The Bank of Japan will likely now become even more cautious about any policy change,” says economist Min Joo Kang at ING Bank.

Just six weeks ago, it seemed a foregone conclusion that BOJ Governor Kazuo Ueda would end quantitative easing (QE) and raise rates as soon as next month. Now, economists are scrambling to walk back those expectations.

A similar whiplash is confronting Fed watchers in the US as the economy confounds the skeptics.

“While pricing for the March [Fed meeting] has been trimmed to negligible levels, there’s still latent upside fuel for the US dollar in pricing for FOMC meetings beyond that,” says strategist Richard Franulovich at Westpac. “We assume US resilience can extend well into 2024 … and will make for a bumpy disinflation last mile.”

In the meantime, as the “cheap Japan” problem ruins Tokyo’s year, the race is on to see what drops faster: Kishida’s approval numbers, Japan’s GDP – or any remaining hope that Japan will ever regain its position as a top-three global economy.

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

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Ex-CEO loses lawsuit against hawker after failed S0,000 investment in prawn noodle business

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SINGAPORE: They were childhood friends who became business partners in an award-winning prawn noodle shop, but the relationship between the investor and hawker turned sour when the business failed during the COVID-19 pandemic.

It culminated in a court case, with one of them – a former CEO who invested S$350,000 (US$260,000) in the business – suing the other to claw back what he claimed were “loans”.

However, the judge dismissed the claim made by Mr Tan Cheng Soon Don against his hawker friend Mr Teo Aik Hua.

In a judgment made available on Wednesday (Feb 14), District Judge Vince Gui stated that Mr Tan did not produce “a single shred of evidence” to prove his case.

Mr Tan “relied on nothing more than a bare assertion” that the loans were indeed made to Mr Teo, said Judge Gui.

THE CASE

The court heard that Mr Tan and Mr Teo had been childhood friends since their kampung days in Bukit Timah more than 30 years ago.

Mr Tan became CEO and director of Singapore-listed Sin Heng Heavy Machinery.

Mr Teo has been a hawker since the age of 16 and eventually sold his signature prawn noodle dish at Zion Riverside Food Centre, at a stall called Zion Road Big Prawn Noodles, or Fresh Taste Big Prawn Noodle.

The noodles won several accolades, including the Michelin Bib Gourmand in 2018. The Michelin Guide called his dish a “great bowl of noodles” rich in flavour with fresh prawns, chilli and pork rinds.

Judge Gui said this accolade was a “monumental milestone” in Mr Teo’s career, opening doors to all sorts of business opportunities.

An investor reportedly offered S$500,000 for his recipe in 2019. The Select Group, known for its catering business, also offered him a chance to run a stall at “Hawker’s Street” in ION Orchard, with the right to choose a prime spot.

However, Mr Teo was not interested in these opportunities, the judge noted, partly due to his reluctance to work with strangers and fear of being taken advantage of with his little formal education.

Mr Tan, who regularly patronised Mr Teo’s stall, offered to become his business partner to open a restaurant.

Mr Teo did not take up the offer immediately but agreed in June 2020 after hearing that Zion Riverside Food Centre would undergo renovation for a few months.

He estimated that the start-up costs would amount to about S$250,000.

The two men agreed to name the restaurant Zhi Wei Xian @ Zion Road Big Prawn Noodle and set up a company called 2 Bowls in November 2020.

Shareholding in the company was split among Mr Tan, Mr Teo and Mr Teo’s fiancee Lisa Lin at 50 per cent, 30 per cent and 20 per cent respectively.

They agreed that Mr Tan would provide loans to fund the venture, with his loan to be recovered from the company’s profits if it turned profitable. Any excess profits would be split in accordance with the shareholding.

The restaurant opened on South Bridge Road in January 2021.

Mr Teo and Ms Lin managed day-to-day operations. He introduced new dishes such as a cold crab to elevate the restaurant’s standing. He also personally selected wild-caught prawns at Jurong Fishery Port every day after midnight.

Mr Tan disbursed S$250,000 in total into the company’s bank account over about six months.

THE BUSINESS’ DEMISE

When the government tightened COVID-19 measures in 2021, such as restricting dining group sizes, business was affected.

The restaurant closed its doors at one point to cut costs.

As funds were low, Mr Teo and Ms Lin sought more loans from Mr Tan.

Mr Tan later rejected a draft agreement presented to him on Sep 21 that year. According to Mr Teo and Ms Lin, Mr Tan threw the agreement on the table and said angrily that he would not sign it.

Mr Teo then said the restaurant would have to close.

They did so a week later, with Ms Lin sending Mr Tan a letter confirming the closure and other matters.

Mr Tan replied saying he agreed on the condition that Mr Teo transferred S$50,000 into the company’s bank account and the company paid Mr Tan S$50,000.

Ms Lin replied saying that Mr Teo did not agree to bank in S$50,000. She wrote that the understanding had always been that Mr Tan contributed funds to the company while Mr Teo and Ms Lin contributed “goodwill and branding”.

She added that it was Mr Tan who approached Mr Teo to start the business. If Mr Teo was required to put in money, he would not have worked with Mr Tan, said Ms Lin.

He could have worked with “big boys” such as Select Group, who purportedly offered to bear all the financial costs. She added that the company could not pay Mr Tan before the other creditors.

In response, Mr Tan affirmed their respective job scopes and responsibilities – that he was responsible for S$250,000 in “paid up capital contribution”, that Mr Teo was responsible for “food/cooking/strategy and branding” and Ms Lin was responsible for accounting, payments and HR matters.

Mr Tan said it was Mr Teo who asked him for advice, saying someone offered S$300,000 for the prawn noodle recipe.

Mr Tan then said that Mr Teo could consider rebranding the hawker stall and selling it at a better price. Mr Tan said Mr Teo had called him up only after failing to come to terms on a proposed venture with someone else.

Mr Tan argued that a total of S$162,500 from his “loans” of S$350,000 should be repayable to him.

He claimed that Mr Teo was evasive on the stand and had given false evidence, while Ms Lin was not a credible witness.

Mr Teo argued that the loans had been extended to the company alone. He supported this with witnesses and contemporaneous records.

JUDGE’S FINDINGS

Judge Gui found that Mr Tan had not proven his claim.

“His entire closing submissions rests on what he considered would have been a favourable deal for his entering into the venture,” said the judge.

“But the court does not rewrite the agreement to favour one party or another. The court looks at what was the objective understanding at the time the agreement was entered into.”

Judge Gui said Mr Tan, as a director and former CEO of a listed company, ought to have known the significance of not documenting a loan allegedly made to another individual.

Mr Tan’s claims that loans were made to Mr Teo were not backed by any documentary proof, the judge said.

Giving his view on the case, Judge Gui said Mr Tan had invested in the company by way of debt financing. If the restaurant succeeded, Mr Tan’s loans would be repaid by the profits, and he would stand to reap further profits as a 50 per cent shareholder.

“He stepped into the venture with buoyant spirits, confident that the restaurant, backed by a chef with the Michelin Bib Gourmand accolade, would attract the same following as the defendant’s hawker stall did,” said the judge.

“His predictions however did not come to fruition. The restaurant failed to escape the scourge of the COVID-19 pandemic which continued to linger and surge in the ensuing months.”

Judge Gui noted that Mr Tan’s investment of S$350,000 was substantially more than the S$250,000 he expected to commit at the outset.

He said Mr Tan changed tack to recover his losses, first claiming that Mr Teo and Ms Lin were required to contribute financially to the company because of their equity stake, then saying that the money was a loan.

“His claim however was not only unsubstantiated but also contradicted by the evidence,” concluded the judge.

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Trump’s China trade war threat already roiling markets – Asia Times

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Among the wackiest things to come from Donald Trump’s mouth recently is the former US president trying to take credit for China’s US$7 trillion stock reckoning.

“I mean, look, the stock market almost crashed when it was announced that I won the Iowa primary in a record,” Trump told Fox News on February 11. “And then when I won New Hampshire, the stock market went down like crazy.”

In reality, China’s spectacular stock rout has been playing out since 2021, well after Joe Biden moved into the White House. But there is one investor crowd taking notice of the growing odds Asia might soon be grappling with a Trump 2.0 presidency: currency traders.

Trump’s threats to impose tariffs exceeding 60% on Chinese goods has the cost of hedging the yuan soaring to the highest levels since 2017.

In China, “the most frequently asked questions among local investors include implications for China should Donald Trump become the next US president,” says Goldman Sachs economist Maggie Wei after a series of recent meetings with mainland mutual funds, private equity funds and asset managers.

Even today, well before Trump might have a chance to shake up global trade anew, “the outlook for trade flows going forward is likely one of moderation,” says Rubeela Farooqi, economist at High Frequency Economics. The downshift is thanks to “expectations of slower demand and growth going forward, both domestically and abroad.”

The specter of a supersized trade war is the last thing the global economy needs as 2024 unfolds. Any added headwinds from the West would compound the domestic troubles that have knocked Chinese stocks sharply lower, namely a deepening property crisis, weak retail sales, sputtering manufacturing activity and deflationary forces.

The threat of significantly higher taxes on Chinese-made goods destined for the US could slam business and household confidence. Executives might be even less inclined to add new jobs at a moment when youth unemployment is at record highs.

Trade war worries also might make China Inc less willing to fatten paychecks. This could imperil President Xi Jinping’s hopes of recalibrating economic engines toward a consumer demand-led growth model.

It also could lead to a big spike in exchange rate volatility and put downward pressure on the yuan. That’s precisely what Xi and Premier Li Qiang don’t want in 2024. For one, it could increase default risks of property developers with offshore debt. For another, it could set back Xi’s success to date in deleveraging the financial system.

Chinese President Xi Jinping and Premier Li Qiang in a file photo. Image: NTV / Screengrab

Then there’s the upcoming US election. The one thing on which President Joe Biden’s Democrats and Republicans loyal to Donald Trump agree on is being tough on China. And a weaker yuan falling ahead of the November 5 contest could provoke Washington in unpredictable ways.

In the meantime, the mere threat of a bigger trade war could spook investors currently piling into US stocks. If Trump were to add another 60% tariff on top of those that he imposed during his 2017-2021 presidency, American consumers would bear the brunt through costlier goods.

Trump’s initial trade war neither catalyzed a US manufacturing boom nor narrowed the US trade deficit with China. Meanwhile, the US government had to throw billions of dollars of federal aid to US farmers as China scrapped purchases of American agricultural goods in retaliation.

A big spike in US tariffs would necessarily be inflationary, complicating the US Federal Reserve’s hopes of cutting interest rates. Prolonging the period of high US bond yields would undermine corporate America while also reducing household disposable spending.

The inflationary impact of a Trump 2.0 presidency could shake up the economic trajectory of nations everywhere, not least in export-oriented Asia. An analysis by Bloomberg Economics reckons that a 60% tax on all Chinese imports would effectively shrink a vital $575 billion trade relationship to a trickle. 

All this leaves Xi’s Communist Party with decidedly mixed feelings about whether China would fare better under another four years of Biden or a second Trump term.

On the surface, at least, Biden is endeavoring to restore ties with Xi’s party, a pivot on full display last November when Xi visited San Francisco for the Asia-Pacific Economic Cooperation (APEC) Summit, a grouping dedicated to trade promotion.

Biden, though, has so far refused to lift the Trump-era tariffs that so enraged Xi’s economic team. The Biden administration also has gone at China’s soft targets with surgical precision, including limiting its access to cutting-edge technology like high-end semiconductors and the gamut of chipmaking equipment.

The last two years also saw the US devise a screening program to curb investments in China’s efforts to raise its game in quantum computing and artificial intelligence. Though Biden has taken the rhetorical tone down a notch, his policies have arguably exacted greater damage than Trump’s.

This includes investing hundreds of billions of dollars in domestic tech capacity that the Trump administration neglected. The US building new economic muscle at home worries Xi more than 1980s-style policies around which China can generally easily navigate. Here, think of Trump’s failed effort to kill giant Chinese telecom gear maker Huawei.

Looked at through this prism, there’s an argument that China might prefer Trump redux. As Zhu Junwei of Grandview Institution notes, there’s a reason the Beijing think tank’s research suggests 60% of Chinese prefer Trump because of how his unruly presidency might further dent America’s global standing.

Either way, Xi’s party is bracing for an US election cycle sure to see Democrats and Republicans trying to one-up each other at China’s expense.

Increased data security measures are sure to emerge as the year unfolds. The icy reception Shou Zi Chew, CEO of ByteDance-owned TikTok, received on Capitol Hill recently dramatized the race to curb services and transactions across industries.

China’s electric vehicles (EVs) market could face its own onslaught of data security speed bumps from either a Biden or Trump administration.

In a speech in late January, Biden’s National Security Adviser Jake Sullivan said there are “competitive structural dynamics” in the US-China relationship. But, he claimed, this competition “doesn’t have to lead to conflict, confrontation or a new Cold War.”

It already seems too late for that. But as November 5 approaches, currency traders are becoming increasingly antsy, as seen in recent spiking volatility. The gap between nine-month implied volatility on the offshore yuan and measures of six-month volatility is the highest in nearly seven years.

China’s yuan faces new volatility as US election season heats up. Image: Twitter Screengrab

As that electoral contest approaches, strategists at Deutsche Bank expect the US dollar will stay mainly within 2023 ranges even if the US Federal Reserve begins cutting interest rates, as many investors expect. “The market is likely to start adding to a dollar safe-haven premium through the year as election risks build,” Deutsche Bank argues in a note.

There’s an argument, too, that the dollar might be doomed if Trump gets another shot at naming a Treasury secretary. In 1971, then-US president Richard Nixon’s Treasury chief famously said that “the dollar is our currency, but it’s your problem.” This seems even truer now than in 1971 and the sentiment could be supersized during a Trump 2.0 presidency, if his first term was any guide.

While running for president in May 2016, Trump even hinted at defaulting on US debt. Trump told CNBC “I love debt. I love playing with it.” When asked what he might do if the budget deficit grew too fast, he said: “I would borrow, knowing that if the economy crashed, you could make a deal. And if the economy was good, it was good. So, therefore, you can’t lose.”

In April 2020, the Washington Post detailed how Trump officials, looking to punish China, mulled canceling debt held by Beijing. However, Treasury officials succeeded in talking Trump out of a stunt that likely would have made the 2008 Lehman Brothers crisis seem like a hiccup.

But who knows what tricks Trump may have up his sleeve in a second term? The risk is hardly a non-negligible worry for Japan, China and other top Asian central banks sitting on more than $3 trillion of US Treasury securities.

The US entered 2024 with its national debt topping $34 trillion and Moody’s Investors Service warning it might yank away America’s only remaining top rating.

That came three months after Fitch Ratings downgraded the US to AA+ as Republicans and Democrats wrestled over funding the government and 12 years after a Standard & Poor’s downgrade amid partisan bickering over the debt ceiling.

More recently, Moody’s warned that “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. Weakening institutions and a political pivot to protectionism threaten the dollar’s global role.”

Moody’s adds that “although we expect that politicians will eventually agree to raise or suspend the debt limit and avoid a default on government debt, greater polarization in the domestic political environment over the last decade has weakened both the predictability and effectiveness of US policymaking. Sanctions further inhibiting the free flow of the dollar in global trade and finance could encourage greater diversification.”

Team Biden has raised concerns of its own over a “weaponized” dollar as Washington squares off with Russia over Ukraine. Those allegations emerged after the Biden administration, as part of sanctions, moved to freeze hundreds of billions of dollars of Moscow’s foreign reserves.

Yet at least one thing is clear: Asia’s markets will find themselves in harm’s way as Trump and Biden try to prove on the campaign trail who is tougher on China. But as the rival candidates flex and joust, there is much more at stake than the US presidency.

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

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Afghan-like retreat debacle looms in Pacific islands – Asia Times

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You think America’s tail-between-its-legs departure from Afghanistan was bad? Something even worse is coming in the Pacific, albeit more quietly.

US defenses in the Asia-Pacific center on a defense line running from Japan to Philippines to Taiwan and on to Borneo. The so-called First Island Chain.

Try defending against China along the first island chain without a secure rear area in the Central Pacific. And suppose it’s the Chinese in the rear.

American control of the Central Pacific depends on treaties – known as Compacts of Free Association (COFA) – with three nations: Palau, Federated States of Micronesia and Republic of the Marshall Islands. 

These nations and their huge maritime territory comprise most of an east-west corridor from Hawaii to the western edge of the Pacific which is essential for US control and military operations in the region.

The COFAs give the United States the legal authority to operate freely and to keep other nations’ militaries out.  In other words, military access and control. 

As part of the agreements, the three nations receive American financial and other support including their citizens’ right to reside and work in America. And one should never forget that COFA state citizens serve in the US military at higher per-capita rates than residents of almost all US states.

The COFA agreements are up for renewal, and the agreements have passed the tortuous dozen or so committees and now just need to be voted on and passed. That is very much in doubt.

One issue is $2.3 billion in offsets. That means that to fund the COFAs, US$2.3 billion has to come out of the federal budget elsewhere. The $2.3 billion is over 20 years so it averages out to about $40 million a year for each country. Yes, $40 million. A half-hour of Medicaid fraud.  

We blew a trillion or two in Afghanistan. And we’re complaining about $120 million a year?

Everyone is blaming everyone else. Congress blames other parts of the Congress and the White House. The White House blames Congress. The White House could find the money if it wanted. It doesn’t. 

There was, in fact, an “Asia tsar” at the White House National Security Council, Kurt Campbell, who should have made passage of the COFAs his mission. He was the tsar, after all. Instead, he bailed out and has failed upwards –  just confirmed as assistant secretary of state. That’s par for the course in Washington.

Congress could find the money too, if it wanted. It doesn’t – or it’s distracted by “the border,” Ukraine, Gaza and any number of other things.

Maybe the Department of Defense (DOD) – which has to do the hard work of defending the Asia-Pacific – could show some initiative and imagination and offer to redirect the money from elsewhere in its large budget.

Just $120 million a year? That’s easy. Cut diversity, equity and inclusion programs in DOD and anyone connected with them. Cut 10% of FOGOs – that’s “flag officers, general officers.” That would easily get your money – and nobody would notice the flags were missing.

Worse, in spite of widespread bipartisan support, the COFA agreements were in fact opaquely removed from consideration the other day.  No one is sure why, though one rumor is it was by a ‘budget conscious’ Senator, even though the bill it was in wouldn’t even have required an offset.  Now a large group of other Senators, led by Senator Risch and Senator Hirono, are fighting against the clock and to try to convince their leadership to put it back in.

Lose the Central Pacific and we’ll be defending from Hawaii and SoCal while all the countries that were counting on us – Japan, South Korea, Taiwan, Philippines, Australia and others – start to hedge their bets.

Map: Congressional Reference Service

China will love it. The PRC already has strong commercial and political presence in the COFA states (and just about every other Pacific island nation) and is aiming to pry them away from the United States. 

And it’s succeeding. Among the common approaches are financial payments, economic aid, bribes to officials, facilitating the entry of Chinese organized crime and even encouraging secession movements to weaken recalcitrant federal governments.

The president of each COFA nation is said to have a blank check from China on the desk. The checks haven’t been cashed – such is their deep attachment to the United States. But their patience is not unlimited, and when their erstwhile friend is giving them short shrift, they notice it. Indeed, they are darn angry – although they won’t show it.

Imagine you’re president of a Pacific island state and you’ve spent much of your term negotiating a deal with the United States that you and Washington finally signed. Then, you have to tell your citizens, months later, that Congress’s leadership cares so little it stripped it out of a bill without debate and we aren’t sure if it will ever be put to a vote. So we don’t have money for the post offices, schools, pensions or medicine – and taxes are going to have to go up. 

And, meanwhile, China is offering to solve all your problems.

This is serious. The price of not renewing the COFAs – and not continuing to do the necessary to maintain our ties with these nations – will be paid by many dead American service personnel.  

One wishes the commander of the US Indo-Pacific Command, Admiral John Aquilino, would put his “stars on the table” and resign over this clown show.

Will he? Of course not. That sort of thing doesn’t happen anymore. The current crowd is not the same as Nimitz, Halsey, and Spruance.

And speaking of our friends in the Asia-Pacific, perhaps Japan might step in and offer to pay? It wouldn’t be the first time Japan Inc got out its checkbook when it saw its interests at risk.  

Island chain strategy. Map: ResearchGate

It pays close to $2 billion a year to support the American military presence in Japan, on which the nation’s security depends.

And as the US financial system was imploding in 2008, a major Japanese bank – presumably at the request of the Japanese government – wrote a $9 billion check to keep Morgan Stanley (and the US financial system) afloat.

An even better deal for Japan would be $120 million a year for 20 years ($2.3 billion total).

If the US government can’t get this done, maybe Tokyo will help. Otherwise, we deserve to lose.

Grant Newsham is a retired US Marine officer and former US diplomat. He is the author of the book When China Attacks: A Warning To America.

This article was first published by JAPAN Forward and is republished with permission.

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The right way to stabilize China stock markets – Asia Times

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China’s most recent initiative to show leaders that it is serious about stabilizing falling equities is now showing signs of serious growth.

Investors have purchased stocks in everything from Alibaba Group to Meituan to Tencent to Ping A Group, to Hong Kong Exchanges and Clearing as a result of information that the China Securities Regulatory Commission will act in areas to stop sharp fluctuations in property prices. Bloomberg reports that Tuesday, February 6, the CSI 300 standard closed 3.5 % higher, marking its best moment since soon 2022. &nbsp,

The CSRC did lead medium and long-term funds into the stock market via a massive stabilization fund while limiting short-selling and dealing that is thought to involve insider trading, even though the specifics of the bourse-boosting strategy are unknown.

And it was undoubtedly no accident that Beijing revealed on Tuesday that President Xi Jinping is scheduled to receive a lecture from authorities on the state of the second-largest market’s troubled financial marketplaces.

China’s stocks has start rising right away, according to impulses from the CSRC. The state-led initiative was launched one month after Vice Premier He Lifeng demanded “improvements in the performance and profitability of listed companies,” adding that “healthy firms are a crucial “microeconomic bedrock.”

” We view this as a sign that the central government has started to sprout afraid of the stock market sell-off and is looking to put the floor in order to increase confidence,” says Economist Carlos&nbsp, Casanova, at Union Bancaire Privée.

A ground under shares may be created as a result of the movements. The Chinese and Hong Kong stock markets have lost at least$ 7 trillion since their peak in 2021. However, the administration’s response has n’t yet addressed underlying issues that are causing severe economic unpredictability and a general lack of confidence.

Beijing’s patchy approach to date, however, will only be successful in the long run if it is accompanied by a daring and trustworthy housing-related plan. Here, the majority of economists see China Evergrande Group‘s debt problems as a result of the 1990s negative mortgage crisis in Japan.

There are many similarities, of course, including a maturing economy shifting growth engines to manufacturing-based services, an impasse in asset values brought on by unknowable amounts of bad debt, and aging demographics endangering future financial prospects.

Then there is the slow speed with which policymakers in Beijing now and Tokyo back then are addressing the economy’s glaring flaws.

According to Henry Hoyle, a senior scholar in the Asia-Pacific section of the International Monetary Fund, “key house industry vulnerabilities have yet to be addressed, suggesting ongoing dangers to sustainability.”

The 1980s Savings and Loan ( S&amp, L) Crisis in America, which was brought on by a real estate value crash that sent shockwaves through already shaky banks, could, however, serve as an even more useful benchmark.

As luck would have it, US officials will be in Beijing this week to exchange opinions on the country’s economical problems both now and in the future. China’s dynamic threat will probably be less on US Treasury Department officials ‘ minds when they arrive than its weaknesses.

The real estate crisis is getting worse, the Chinese stock market is sputtering madly, negative risks are growing, and there are ominous regulatory crackdowns on tech, finance, also due diligence firms, all of which are making investors nervous.

The US Treasury’s secretary for foreign affairs, Jay Schambaugh, will lead a delegation that will be interested in learning more about the strategy China is using to stabilize the largest economy in Asia.

Picking Treasury authorities ‘ thoughts about the more recent global financial crisis in 2008–2009 might be one immediate desire.

Many investors could n’t help but wonder if last week’s news that China Evergrande Group, a major real estate juggernaut, had been forced to be liquidated in Hong Kong.

Even if a judge in mainland China recognizes the Hong Kong court order, Beijing’s more violent stance to have risk as well as prospective political considerations means the fallout will likely be somewhat contained, according to Commerzbank analysts.

Evergrande constructed residential properties in Yuanyang in January 2022. Online photo

According to Shehzad Qazi, an analyst at advisory China Beige Book, Xi’s team basically controls every aspect of the financial system, making it nearly impossible for supply, lending, or borrowing dynamics to collapse in the Lehman fashion fashion.

Because of this, the S&amp, L assessment is probably more appropriate. The Financial Institutions Reform, Recovery, and Enforcement Act was enacted by US lawmakers in 1989 to rid a sector of unprofitable property.

While putting thrifts ‘ insurance under the Federal Deposit Insurance Corporation ( FDIC ), the legislation established the Office of Thrift Supervision.

The Resolution Trust Corporation (RTC ) was arguably the most significant development to take the remaining troubled S&amp, Es to heel. The RTC closed 747 S&amp, Init with property worth more than$ 407 billion at the time.

After successfully repairing the economic structure, the RTC was shut down by 1995. Not that the US had a lesson to learn. A few years later, Congress may make a mistake when they repealed the Glass-Steagall Act of 1933, which established barriers between banks ‘ business, purchase, and savings operations.

The” Lehman shock” of 2008 probably would not have occurred if that Depression-era law had n’t been repealed. The same was true of the Silicon Valley Bank explosion from the previous year, which served as a reminder to many of how problems in two mid-tier banks that some investors were even aware of could quickly turn into symbiotic risks.

These comparisons are important in 2024 because of how America’s S&amp, L problems started and persisted beneath the surface until it was too soon.

Laws of finance “always work,” according to Adrian Blundell-Wignall, a former analyst for Organization for Economic Cooperation and Development and present columnist for the Australian Financial Review. However, history is rife with the mistakes made by institutions trying to get away from them.

According to Blundell-Wignall, “it’s not only authoritarian governments that misallocate resources through state funding and money, capital controls, subsidies, and the problem that often travels with these elements.”

Problems will arise wherever money is raised with an explicit or implicit assurance. The Evergrande crises and nbsp in China make me think of the S&amp and L crises, but with the distinction that the latter is both a property developer and an intermediary. a triple risk.

Imagine &nbsp, Blundell- Wignall contends, a hybrid between an investment bank, private equity firm, and engineer. China, he contends, “has all the totalitarian regime issues and, where it permits proper well-connected private individuals to raise funds with an implicit promise to create residence, it ties onto this risk the S&amp, L-like problems squared.”

Several US Treasury officers attempted to sell Tokyo on the RTC rulebook in the 1990s. In the end, the organization had been successful in setting up the auction of bad loans as a way to draw in greedy investors and, in turn, strengthen public confidence in the system.

Could Xi’s team be more susceptible than Chinese officials making decisions in the middle to later 1990s? Only time will reveal. However, it would be wise for Premier Li Qiang and Xi to keep in mind that time is not on their part. &nbsp,

A file photo shows Chinese President Xi Jinping ( L ) and Premier Li Qiang ( R ) as time passes. NTV / Screengrab picture

The biggest lessons from Japan is that disposing of poor assets in a glacial manner leads to the very negative attitude that Japan still struggles with 25 decades later.

According to IMF economist and nbsp Hoyle, “many programmers have become non-viable but have avoided debt thanks in part to rules that allow borrowers to postpone recognizing their terrible mortgages, which has helped muffle spillovers to real estate prices and bank balance sheets.” Due to some places ‘ efforts to contain price drops through regulations and recommendations on listing prices, home prices have also decreased only slightly.

In other words, China is still addressing its problems ‘ indications rather than its root causes, just like Japan did in the past.

According to Hoyle,” China’s housing market faces more pressures in coming years from fundamental factors, in specific demographic change.”

” As the population falls and industrialisation slows, there will be less need for new housing in the coming times.” Millions of people moved to newer cover from older buildings devoid of modern facilities thanks to significant public subsidies in the previous ten years. As local government governmental restrictions have been tightened by declining land sale revenues and fewer residents are living in older housing, for demand will probably be more constrained, according to Hoyle.

Xi and Li do, in fact, have choices. The IMF suggests a quicker and easier move for the real estate industry. This entails allowing more market-based price changes and taking swift action to rebuild bankrupt developers.

This, according to the IMF, would eliminate the burden of inventories and allay concerns that prices will keep steadily falling. According to IMF leaders, regulations allowing banks to minimize recognition and nbsp of bad funding to developers also need to be phased out.

Beijing could take action to maintain top-line economic development in the 5 % collection over the course of both the short- and long-term.

The People’s Bank of China, the central bank, announced last month that it would release about 1 trillion yuan ($ 140 billion ) in long-term capital by reducing the reserve requirement ratio by 50 basis points.

According to economist Tao Wang at UBS Investment Bank,” The most recent PBOC behavior may be interpreted as the start of a policy tilt from previous sensitive and wholesale measures by investors, and they will continue to look for further signs and acts of policy help.”

China might be about to make a coverage change. Online Screengrab photo

According to Chris Metcalfe, chief investment officer at IBOSS Asset Management, “property companies continue to act as a lead weight on investment attitude despite several methods to help increase the cash available to home developers.”

These actions, he continues,” may help relieve the lingering cash crunch for Taiwanese developers who have been the target of Beijing’s crackdown to address the sector inflated debt levels.”

Beijing’s final solution to the home issue, however, is more significant than rising asset prices. Owners can only hope that Beijing’s sudden flurry of activity is a sign that the time has come.

William Pesek can be reached at @WilliamPess on X.

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