Japan’s yen stuck in a ‘Groundhog Day’ time loop

By:
On:
In: Asia

TOKYO- The international financial system’s rendition of” Groundhog Day” is a plunging renminbi.

Currency traders have frequently had to worry about whether the Ministry of Finance and Bank of Japan will step in to stop the dollar’s drop since 1993, when the precious Bill Murray movie stars a meteorologist trapped in the middle of the worst day of his career until he changes program hit venues.

Currently, the goal is to prevent a hankering that is currently trading at 150 to the money from rising to 160 in the coming days. At a time when the US Federal Reserve is implying additional interest rate increases, that is simpler said than done.

However, as this most recent movie hits a nearby economic nyse, the stakes are higher. Japan is even more stuck between the proverbial stone and a hard place than it has been over the past 30 years as US provides continue to rise and China’s economy stagnates.

After all, it wasn’t until 1993 that Tokyo started to accept the fallout from the collapse of the 1980s” bubble economy” time. Banks in Japan were left with trillions of dollars’ worth of dangerous loans as a result of the real estate collapse.

Today, economists typically use that time period as a cautionary tale for the current real estate crisis in China. However, Japan has not yet fully recovered from the 1990s in many ways. Take a look at the BOJ’s” Groundhog Day” get-it-right situation with statistical moderation.

In the 1993″ Groundhog Day” humor, Bill Murray plays Phil Connors. The dollar’s” Groundhog Day” conundrum is not amusing. Photo: Screengrab, Columbia Pictures, and YouTube

When Governor Kazuo Ueda arrived at BOJ offices in April, there was a lot of rumor that QE’s days were numbered. Ueda’s career did not result in the happy ending traders had anticipated; rather, it only made the story more complicated.

Ueda stooped down just this week to refute the idea that the BOJ may cut back on cash. He emphasized that there is” also a long way to come” before the BOJ abandons its extremely loose monetary policy. This could indicate 2025 or afterwards based on the rate at which father Haruhiko Kuroda operated.

According to Mohamed El – Erian, chief consultant at Allianz,” The FX weakness reflects policy decisions within the forex and curiosity rates.” The” trade-off facing the Chinese authorities” is” accentuated by both the government of yield-curve power monetary policy and higher provides globally.”

News that the Financial Services Agency will start conducting stress testing on about 20 banks is a crucial clue. The evaluation should be finished by July 1st, 2024, but chances are it will take longer.

Discussions about the findings would therefore take place between regulatory bodies, government agencies, the BOJ, and the office of the prime minister. All of this suggests that the BOJ is hesitant to” taper” until it is certain that ending QE won’t cause meltdowns akin to those at Silicon Valley Bank.

Governor of the Bank of Japan Kazuo Ueda. Wikipedia image

Time, however, is not on Tokyo’s area. The japanese will experience even more extreme downward pressure as US Fed Chair Jerome Powell considers another price increase or two. This occurs as Japan struggles with two additional 30-year goals, including the best Nikkei Stock Average protest since the first 1990s and the highest inflation rate.

The problem of inflation is difficult for Ueda’s group. Tokyo has been struggling with recession since 1999, when the BOJ became the first significant central banks to reduce rates to zero. The group led by then-governor Masaru Hayami pioneered QE in 2000 and 2001.

Unfortunately, though, Tokyo’s long-desired inflation arrived before the second-largest economy in Asia was prepared. Instead of increasing demand at home, it is primarily being imported due to rising power and food expenses.

As a result, the 126 million people in Japan are cutting back on household spending, and business leaders are changing their minds about wage increases.

As the hankering declines, Saudi Arabia reduces oil production, and Russia continues its invasion of Ukraine, Japan runs the risk of importing yet more inflation. Citizens are being reminded by this powerful how little the Liberal Democratic Party of Prime Minister Fumio Kishida has done to boost incomes over the past 30 years.

According to economist Yasunari Ueno at Mizuho Securities, Kishida’s” government would gain nothing diplomatically by showing the Chinese people that it is committed to addressing the import price spike brought on by a weaker yen.”

Local advertising is evaluating Kishida’s state at the two-year mark this week. The general consensus is that Kishida has brought balance to Tokyo but has not implemented any reforms to lower bureaucracy, renew innovation, overhaul labor markets, or encourage businesses to share hefty profits with a workforce that lacks confidence in the future.

A Nikkei Stock Average that has reached 30-year spikes collides with this striking reality. Due in part to initiatives to improve corporate governance, extend boardrooms, and boost returns on equity since 2014, Asian businesses are once again popular with international investors.

In 2020, Warren Buffett’s Berkshire Hathaway attracted sizeable and headline-grabbing opportunities in Japan Inc. Interest charges are” less expensive than completely, and the real effective exchange rate has fallen ,” according to CLSA planner Nicholas Smith,” making Japan cruelly aggressive.”

yet fiercely aggressive enough to start a moral cycle of rising consumption and fat paychecks? Information of this dynamic is currently virtually nonexistent.

Kishida has vowed to quicken the process of financial revamping. His” new capitalism” initiative to promote gross domestic product ( GDP ) advantages has largely failed. As a result, the BOJ is now in the driver’s seat and must help development.

Opening a way for the US$ 1.6 trillion Government Pension Investment Fund, the largest of its kind in the world, to finance an upsurge in startups is another strategy that has failed. Kishida had pledged to attract more foreign funding in addition to utilizing GPIF’s sizable property pool.

To entice international talent to Tokyo, ideas include creating English-only unique enterprise zones. The hourly minimum wage was recently increased to 1,000 yen( US$ 6.69 ) by Kishida’s party. In, say, 2003, both concepts might have been helpful. In 2023, not so much.

The financial benefits of Kishida’s” new capitalism” have not been delivered. Screengrab image

Ueda is under increasing stress hardly to budge due to political unrest. The japanese will continue to be under downward stress as the BOJ maintains its fire. Shunichi Suzuki, the finance minister, stated on Tuesday that” all methods” are being taken to put a stop to the renminbi.

The Ministry of Finance and the BOJ were rumored to have intervened in marketplaces later that evening or early the next morning. Authorities have yet to provide confirmation.

The chief of the money for the finance ministry, Masato Kanda, will declare that” We may continue with the existing position on our response to excessive dollar moves.”

While we are essentially like Gulliver in the market, he continued,” we are even coming and going as a business person, so typically we didn’t say whether or not we’ve intervened each time.”

According to researcher Edward Moya at OANDA,” A good Chinese money treatment may have also put a major in place for the dollar, which is providing some support for oil.”

A change in BOJ policy, according to analysts at MUFG Bank,” even becomes more probable, and we would expect solid opposition to yen weakness at levels over 150.00.”

However, among those who are unsure whether the Tokyo authorities’ decision to buy yen did succeed this time is planner Marc Chandler at Bannockburn Global Forex. He explains that the” BOJ intervened three times last season, nothing during the US day area.”

Representatives from BOJ are equally likely to rely more on jawboning industry. According to dealer Takehiko Masuzawa at Phillip Securities Japan,” It appears that Ueda’s new remarks were intended to stop the yen from falling against the money.” These remarks” are operating almost the same as federal action.”

Given the main company’s growing concern with the yen, Stefan Angrick, an economist at Moodys Analytics, claims that” the shift in tone is probably an effort to avoid sounding overly dovish.”

The worries about the yen, according to Angrick, are” understandable given that the price is creeping towards 150 ( yesen ) to the dollar, the level that last prompted FX intervention in October 2022.” However, it has also increased the obscurity of the BoJ’s contacts.

According to Angrick, the BOJ’s purposes become more difficult to discern with each new policy change and every new guide to acting with flexibility.

When rates spend more time above zero than below,” A 0 % target for long-term rates carries little meaning ,” he observes. This” creates a policy stance that aims to avoid the appearance— and cost — of tightening while raising interest rates ,” says Angrick. Potential coverage is now more difficult to predict as a result of all of this.

According to Angrick’s” best guess ,” recent styles” will see the BOJ hold major economic policy levers stable for the time being ,” but due to the central banks’ increased emphasis on the yen and confusing communication, there is now a greater chance of policy surprises and missteps.

US interest rate increases hurt the renminbi. Photo: Facebook

However, according to planner Win Thin at Brown Brothers Harriman, the US continues to play a significant role in this situation. We believe that quarter-end balancing is most likely the cause of this money weakness, which is corrective in nature. Investors should be on the lookout for a chance to go long dollars suddenly at lower levels, though we’re not sure how long this revision lasts.

The japanese does more than just convey that trust in Japan is dwindling as it moves toward 160. It gives China more leeway to accept a weaker yuan in order to increase imports. As one of the most divisive US elections in history heats up, all of this runs the risk of raising questions about Asiatic money policy in Washington.

Although Asia investors have seen previous iterations of this film, the upcoming plot twists may cause the world’s economic structure to collapse in a chaotic manner.

At @ WilliamPesek, follow William Peserk on X, formerly Twitter.

Continue Reading

Individual creativity solves the impossible

By:
On:
In: Asia

The new Nobel Prize in Physiology or Medicine was given to Katalin Kariko and Drew Weissman, and this has drawn a lot of media attention to the fact that the two encountered several skepticisms during their study and that their fruitful collaboration began as an accident encounter in the copy room. never during a Zoom meeting. The Wall Street Journal notes that” Pair met with questions, then get Nobel Prize.”

Great accomplishments in the face of scepticism are more frequent than most people realize in my profession in technology development and investing, and they serve as the foundation for my conviction that it is crucial to support the work of gifted, creative people who are free to follow their intuition. & nbsp,

My experience has included both private equity funding management of technology product and service organizations and managing a top experiment, the RCA Laboratories. I’ve discovered that exceptional artistic people who can solve problems that people find impossible to solve consistently produce great results. & nbsp,

However, for concepts must be carried out with excellent performance that quickly resolves blocking issues. This & nbsp was true in my experience in other fields as well as in the Nobel-winning technology that made mRNA vaccines possible. The great entrepreneurs may execute their ideas with equal excellence. Success is made possible by fantastic management team led by outstanding leadership in this area. & nbsp,

The development of color tv at the RCA Laboratories encountered numerous obstacles in its ability to produce three-color digital photos, and unfeasible solutions were put forth. One person saved the job by coming up with a workable solution.

Integrated circuits chips in semiconductors did a bad job of dissipating the heat produced by switching. One scholar created the CMOS( comparable metal-oxide-semiconductor ) architecture, which eventually became business standard and then enables billions of devices on a device the size of an enormous thumbnail– as well as smartphones with the features we desire.

My work in semiconductor and nbsp lasers was immediately discouraged because of earlier findings that the devices would be destroyed by the great currents required for lasing. My job, along with others’ and nbsp’s, eliminated the root of the problem, and laser have been in use for a long time. & nbsp,

Every instance I’ve given these involved exceptional development that put ideas on the market after the initial contribution. & nbsp,

I could give numerous instances from my trading career where people made advances possible. My favorite development is the development of Ethernet contacts.

The transfer of electronic computer information on common twisted-pair copper lines used in digital telephone systems was modeled by two engineers working on their own projects. There was a lot of doubt about the viability of for transportation. Their research demonstrated how software may get around significant phone network and nbsp limitations and enable the transmission of great digital data rates.

Level One Communications was established( and supported by us ) and nbsp, which under the direction of Robert Pepper rose to become the industry leader in Ethernet bits before Intel bought it. Systems is now widely used.

That these laureates’ function is receiving so little consideration makes me happy. They serve as a reminder that commissions don’t create something. When given the freedom and resources to complete the deemed impossible, brilliant people do. & nbsp,

Technologist, engineer, writer, and lifelong private equity investor Henry Kressel.

Continue Reading

China’s economic ills infecting the rest of Asia

By:
On:
In: Asia

The latest assessment of China’s decline from the World Bank is reassuring for the rest of Asia. However, the likelihood is not really awake enough.

The biggest market in Asia’s property sector is still receiving negative news, which is having an impact on global markets. The consensus among economists is that the multilateral lender is still far too optimistic as the World Bank lowers its 2024 China growth projection from 4.8 % to 4.5 %.

Consider the most recent assessment of the region’s consequences by the Asian Development Bank of China. The ADB issues a warning that” dangers to the prospect have intensified” as weaknesses in China’s house sector” hold back local growth.”

Investors have fled as a result of the struggles of China Evergrande Group & nbsp, which resumed trading on Tuesday. A significant debt restructuring plan has failed, the creator, which filed for default in 2021, just acknowledged. Authorities have prohibited the organization from issuing new loan because its president, Hui Ka Yan, is the subject of a criminal investigation.

According to researcher Thomas Gatley at Gavekal Dragonomics, that” threats to bring even more harm to China’s real estate sector and the broader business.”

Additionally, Gatley notes that” the likelihood of a government policy failure that disrupts markets and the economy has increased.” He therefore issues a warning that” as engineers delay or fail to make payments to their manufacturers, the financial strain of house developers is spilling over onto other businesses.”

For Asian neighbors who are relying on President Xi Jinping’s team to stabilize growth, the fact that the property sector in China accounts for up to 30 % of the gross domestic product ( GDP ) is terrible news. As a result, there is talk in Asia about andnbsp, disease risks, and the state’s 2024.

According to researcher Rick Waters at the Eurasia Group firm,” Industry and homebuyer attitude will likely continue to diminish and contribute to financial uncertainty as defaults snowball through the industry and Beijing withholds relief.”

In order to maintain the real estate industry, Beijing is in fact implementing a number of steps. The government is making an effort to ease monetary pressures without re-inflating real estate bubble, in contrast to earlier instances of slowing progress.

Regulators pushed commercial banks to reduce payment ratios for first-home purchases to 20 % and to 30 % in late September. Lenders reduced current first-time loan rates for borrowers with 40 million or more.

Guangzhou was China’s second top-tier city to end restrictions on purchasing more than two properties for people or one for nonresidents last quarter. Different cities can be seen doing the same.

Homebuyer trust will be lower despite easing measures, according to Waters, as more developers face definition and liquidation. Rates and sales will likely continue to decline in lower-tier cities.

Widespread Asia is starting to have issues with China’s real estate problems. Photo: Twitter

We believe that more top-tier places with district-specific restrictions will follow suit to encourage non-core areas and possibly key areas as well, according to Karl Shen, an scientist at Fitch Ratings. Given that their house sales are typically more constrained by policy, for policies, if they are implemented, may further focus demand in larger cities. Given top-tier cities’ little share in full, this will add little to the federal new homes market.

Officials warn Beijing to do more to encourage developers to fix balance sheets and prevent more defaults, saying that it may take China’s real estate market as long as a time to recover.

Selling in China’s largest cities may start to increase again in the next four to six months, according to Li Daokui, a past member of the monetary policy committee at the PBS and nbsp. However,” it will take anything from six months to one time for a great treatment” in smaller cities.

The World Bank’s most recent forecast simply contains a small amount of encouraging information: South Asian growth is expected to significantly accelerate in 2024, excluding China, thanks to better prospects for manufactured goods and commodities.

However, as economists at the World Bank note,” what happens in China matters for the entire place.” A 1 % decrease in its progress is correlated with a 0.3 percent point decline in regional development.

or perhaps even more, as the loss of Asia’s primary development website has a negative impact on investor, household, and business confidence throughout the region. Negative threats include political unrest as well. They include the possibility of Saudi Arabia announcing new oil production reductions, raising the risk of international prices.

According to Aaditya Mattoo, chief economist for East Asia and the Pacific at the World Bank, experts in the region predicted that China’s post-pandemic treatment may be” more prolonged and more important than it turned out to be.”

Rather, governments from Bangkok to Jakarta to Seoul are dealing with the reality of stagnant wages, poor retail sales, sweet private business expense, and elevated home debt levels that may spread throughout the area.

According to Mattoo,” this entire region, which had bizarrely benefited from trade tensions between the US and China, is now suffering trade diversion apart from it.”

China’s” third quarter has started on a weak note ,” according to economist Stephen Innes at SPI Asset Management,” with weakening exports and imports in July ,”” a significant property developer reportedly missing bond payment ,” and” consumer price inflation joining producer price in the negative year-over-year territory, although primarily due to food prices.”

The two main drivers of China’s development, exports and real estate, are facing significant setbacks, according to Innes, which are having a negative effect on both the local and global ASEAN chance markets.

Following Covid-19, the Association of Southeast Asian Nations ( ASEAN ) economies are dealing with rising debt levels. The region’s ability to manage this overhang while also investing in domestic infrastructure, increased productivity, and human capital is clearly and currently in danger due to rising & nbsp, US debt yields, etc.

In the meantime, Jerome Powell, chairman of the US Federal Reserve, is making hints about a 12th tightening walk in the upcoming 18 times, adding to the pressures on Wall Street and the world’s largest economy.

Jerome Powell, chairman of the US Federal Reserve Board, is in charge of how the world market will turn out. Asia Times Files, AFP, and Mandel Ngan

The combined effects of the Fed’s most extreme tightening since the mid-1990s are having a negative impact on US growth. According to Goldman Sachs planner David Kostin, solid and long-term rate increases are starting to hurt corporate profits and returns on capital.

The main risk for S & amp and P 500 ROE will be higher interest expenses and lower leverage in the new” higher-for-longer” rates environment, according to Kostin. It would be a departure from the traditional trend for” a situation in which interest cost and leverage consistently weigh on ROE.”

The world keeps getting more expensive, according to Capital.com scientist Kyle Rodda. The increase in oil increased the upwards pressure on bond yields, and the combination of higher fuel, higher yield and a higher ruble does not typically portend properly for equities.

There is some hope that the Fed’s tightening cycle is truly coming to an end, to be sure. According to scholar Rubeela Farooqi at High Frequency Economics,” Nevertheless, spending remains optimistic and inflation is slowing, which will be pleasant news to politicians.”

The Federal Reserve Bank of Chicago’s president, Austan Goolsbee, expressed optimism that the US is moving toward taming inflation without a formal recession next year.

According to Goolsbee,” The Fed has the opportunity to accomplish something very uncommon in the background of northern banks: to thwart inflation without tanking the economy.” The gold route may be studied for years if we are successful. If we don’t succeed, it will also be researched for a long time. But this strive to be successful.

Additionally, there is hope that China’s economy will start to recover more quickly than naysayers anticipate.

According to Morgan Stanley scholar Robin Xing,” a northern government-led, detailed plan to reduce local bill danger may be unveiled before / at the Third Plenum this drop.” ” From the third quarter 2023 onward, the business may be able to recover modestly thanks to the combination of these steps.”

The housing market will likely maintain in half a year, according to Yao Yang, dean of Peking University’s National School of Development. He claims that officials used to” overshoot” in their real estate onslaught. The central authorities will now” slowly release up on the supply side, very.”

After four consecutive months of collapse, China’s fresh home prices increased substantially in September. Developers accelerated launches to take advantage of Beijing’s new support measures as a result of the respite.

According to China Index Academy, a real estate consulting, the regular price increase starting in August was the largest month-over-month gain since October 2021. Just 30 of the 100 island places polled reported drops in new home prices.

The commencement of investing in China Evergrande stocks on Tuesday, along with a strong rallying price of up to 42 % on the Hong Kong Stock Exchange, may psychologically benefit the company.

Stocks of the business and subsidiaries like Evergrande Property Services Group were suspended on September 28. Hui, the leader of China Evergrande, was reportedly detained by police a moment earlier.

However, according to scientist Liu Jieqi of UOB Kay Hian Holdings, reform is still desperately needed. The” only option for debt restructuring ,” a move that” faces great uncertainties ,” continues to be the conversion of all debt to shares of Evergrande or of its arms.

Others, however, contend that China’s 2024 is a negative sign given the recent failure of designer Country Garden.

According to analysts at Barclays,” Country Garden was associated with China’s mass-market cover and urbanization story.” What little trust remained in the market was” shaken” by its difficulties making loan repayments.

Kenneth Rogoff, an analyst at Harvard University, adds that” the entire business is in trouble” as a result of China’s$ 18 trillion economy experiencing years of severe home shortages. Since the majority of China’s riches might collapse, how can you avoid the Chinese people from going into a stress mode? Rogoff queries. ” It’s not simple.”

The fact that” Chinese households no longer view cover as a healthy investment” presents an additional challenge, according to Société Générale analyst Michelle Lam.

President Xi Jinping and Chinese Premier Li Qiang. Xinhua image

In order to persuade homes to invest in stocks, Xi and Premier Li Qiang have intensified efforts to strengthen China’s money industry. and to create stronger social safety nets to persuade customers to spend more money and protect less. The switch from funding and property-led development is, at best, still in the early stages. That’s accurate both in China and elsewhere.

According to Mattoo, reforming the services sectors to take advantage of the digital revolution will be the next major driver of progress in a location that has truly prospered through trade and manufacturing investment.

In the interim, Asia is in danger. not just from China, either. The World Bank notes that the protectionist policies andnbsp of US President Joe Biden directed at China are having a negative impact on technology and electronics exports. Indonesia, Malaysia, the Philippines, Thailand, and Vietnam are among the countries under consideration.

According to Mattoo,” The care under these rules is discriminatory against nations that are not exempt from the local information requirements.”

2024 appears to be the year to lock those seatbelts, with China’s downturn and Washington struggling with recession rumors.

At @ WilliamPesek, you can follow William Peserk on X, formerly known as Twitter.

Continue Reading

Building a business that also helps underprivileged women ‘an uphill task’ but these Singaporeans have done it

By:
On:
In: South-East Asia

The hole-in-the-wall bookstore quickly became a viral sensation. 

And as a result, not only was Books Beyond Borders able to fund a school bag distribution programme, it also helped raise money for supplies to support school libraries, art classes and even STEM labs in Nepal. 

To date, the social enterprise has raised more than S$37,000 towards these efforts, which required Chong to work closely with nonprofit organisation Teach for Nepal, whose fellows are employed in some of the most underfunded schools across the country.

It was this partnership that drew his attention to a “critical gap” in Nepal’s education system: The absence of a scholarship programme for girls completing 10th grade. 

“Most girls in Nepal, after completing their 10th grade schooling, lack the means to pursue higher secondary education and are often expected to start raising a family,” said Chong.

“This perpetuates the cycle of poverty.

“By bridging this gap and enabling more girls to attend school, the likelihood of their future generation receiving an education increases,” he added.

Chong announced this year that Books Beyond Borders was narrowing its philanthropic focus to helping young Nepalese women achieve higher education, specifically by donating 5 per cent of its monthly profits to the scholarship programme.

Continue Reading

TSMC to help Europe break its Asia chip dependency

By:
On:
In: Asia

In contrast to Dutch manufacturing equipment maker ASML’s position at the center of the US-China trade and technology conflict, most European semiconductor makers are maintaining a low profile.

For those who have not been following the issue, Netherlands-based ASML has a monopoly on the most advanced semiconductor lithography equipment (EUV), which it is not permitted to sell to China under US export restrictions.

Europe’s largest semiconductor makers are Germany’s Infineon, Switzerland-headquartered STMicroelectronics and the Netherlands’ NXP, which rank 9th, 10th and 12th worldwide in terms of sales. In the second quarter of 2023, Infineon’s sales were 35% as large as industry leader Intel’s.

In July, on a visit to the Inter-University Microelectronics Center (IMEC) in Belgium, European Commission President Ursula von der Leyen said, “We need to reduce our dependency on too few suppliers from East Asia. And we actively have to de-risk our supply chains for chips – it is vital.”

The Europeans think their semiconductor industry is too small and, in fact, data from market research and industry organizations indicate that only 5% of global semiconductor production capacity is based in Europe and that European companies account for only 9% of global chip sales. Europe buys about 20% of the world’s semiconductors.

With this in mind, von der Leyen said, “We need to promote the design, testing and production [of semiconductors] here in Europe. For that, the Chips Act is the game changer.”

European Commission President Ursula von der Leyen, shown at a press conference after a virtual summit between EU and China in Brussels on June 22, 2020, wants Europe to up its chip-making game. Photo: Asia Times Files / AFP / Dursun Aydemir / Anadolu Agency

That was a reference to the European Chips Act, which was adopted on July 25. In the words of the European Commission, it “will mobilize more than 43 billion euros (US$45.5 billion) of public and private investments and set measures to prepare, anticipate and swiftly respond to any future supply chain disruptions, together with Member States and our international partners.”

The European Chips Act aims to:

  • Strengthen Europe’s research and technology leadership towards smaller and faster chips;
  • Build and reinforce capacity to innovate in the design, manufacturing and packaging of advanced chips;
  • Address the skills shortage, attract new talent and support the emergence of a skilled workforce;
  • Put in place a framework to increase production capacity to 20% of the global market by 2030; and
  • Develop an in-depth understanding of the global semiconductor supply chains.

More specifically, it entails: 

  • Investments in next-generation technologies;
  • Providing access across Europe to design tools and pilot lines for the prototyping, testing and experimentation of cutting-edge chips;
  • Certification procedures for energy-efficient and trusted chips to guarantee quality and security for critical applications;
  • A more investor-friendly framework for establishing manufacturing facilities in Europe;
  • Support for innovative start-ups, scale-ups and SMEs in accessing equity finance;
  • Fostering skills, talent and innovation in microelectronics;
  • Tools for anticipating and responding to semiconductor shortages and crises to ensure the security of supply; and
  • Building semiconductor international partnerships with like-minded countries.

All that should keep EU bureaucrats busy but might be enough only to keep pace – not catch up – with technology and workforce development, market security measures, capacity additions and industry subsidies in the US, Taiwan, South Korea, Japan and China. But it needs to be done and should make a substantial future contribution to Europe’s economy.

On August 8, TSMC, Bosch, Infineon and NXP announced plans to establish a joint venture known as the European Semiconductor Manufacturing Company (ESMC). Situated in Dresden, Germany, it will provide semiconductor manufacturing services for the automotive, industrial (including IoT, or internet of things) and other economic sectors. One of the world’s largest semiconductor manufacturing complexes is already in Dresden.

Headquartered in Taiwan, TSMC is the world’s largest and most technologically-advanced integrated circuit (IC) foundries. It is the most prominent of von der Leyen’s “too few suppliers from East Asia” upon which Europe now depends. Bosch is a leading German supplier of automotive, industrial, IoT and other technology and services.

TSMC will own 70% of the ESMC joint venture and its three local partners – which will also be its main customers – will own 10% each. The total investment is expected to exceed 10 billion euros ($10.6 billion), including equity, bank borrowings and subsidies from the EU and German government and falls within the framework of the new European Chips Act.

Construction of a wafer fabrication facility (fab) with a monthly production capacity of 40,000 300mm (12-inch) wafers per month is scheduled to start in the second half of 2024. The scale is similar to that of TSMC’s operations in Nanjing, China, and its joint venture in Japan.

TSMC will operate the fab, utilizing its 28/22 nanometer (nm) planar CMOS and 16/12nm FinFET process technology. Most German semiconductors are fabricated at these process nodes. Production is scheduled to commence by the end of 2027.

TSMC deputy spokesperson Nina Kao told electronic engineering trade paper EE Times that “Bosch, Infineon and NXP are all long-time TSMC customers and key European players in the automotive segment and industrial semiconductor supply chain.” ESMC will make chips that would otherwise be made in Taiwan.

The production start date might seem less than urgent, but is probably realistic. On September 26, The Wall Street Journal reported that Intel’s heavily-subsidized fab construction project in Germany faces delays due to an acute shortage of technicians, high energy prices and “an at-times Byzantine bureaucracy.” Production is slated to begin four or five years from now.

TSMC will give Europe’s chip-making drive a big helping hand. Photo: Handout

By the end of the decade, Intel plans to build two leading-edge fabs in Magdeburg, a Germany city between Hanover and Berlin, to make Intel products and serve Intel foundry customers. The total investment is expected to exceed 30 billion euros ($31.7 billion) – “the single largest foreign direct investment in German history,” according to Chancellor Olaf Scholz.

“Along with Intel’s existing wafer fabrication facility in Ireland and its recently announced assembly and test facility in Poland,” says Intel, “the new wafer fabrication site in Magdeburg will create a first-of-its-kind, leading-edge end-to-end semiconductor manufacturing value chain in Europe, serving European customers and helping to fulfill the EU’s ambitions for a more resilient semiconductor supply chain.”

There are currently no European companies among the world’s leading semiconductor foundries, memory chip makers or makers of cell phone, computer and AI processors. But over the next several years, TSMC and Intel will add foundry services and processors to Europe’s production base. The Europeans can also buy memory chips from America’s Micron Technology if they don’t want to overly depend on South Korea.

Still investing in Asia

That said, the Europeans are adept at making automotive ICs. According to market research firm TechInsights, Infineon, NXP and STMicro ranked first, second and third worldwide in terms of sales in 2022, with a combined global market share of 33%. They also have a major presence in other industrial-use ICs.

In June, STMicro announced a joint venture with China’s Sanan Optoelectronics to make SiC (Silicon Carbide) power semiconductors in Chongqing for electric vehicle, industrial and alternative energy (solar and wind) applications. The total investment is expected to reach about 3 billion euros ($3.2 billion) and production is scheduled to start by the end of 2025.

In August, Infineon announced plans to spend up to 5 billion euros ($5.3 billion) on a large additional expansion to its fab in Kulim, Malaysia, with an aim of raising its share of the global market for SiC power devices from 12% to 30% by 2030.

This investment decision is supported by design wins and prepayments from six customers in the auto industry, three of them from China; four customers in renewable energy, including three Chinese photovoltaic and energy storage companies; and a capacity reservation for Schneider Electric.  

These projects are driven by market dynamics, not the European Chips Act, and they were launched without interference from Brussels or Washington, DC.

Follow this writer on Twitter: @ScottFo83517667

Continue Reading

South India’s progressive politics vs North’s regressive politics

By:
On:
In: Asia

“You cannot expect any rational thought from a religious man. He is like a rocking log in water.” – E V Ramasamy

Erode Venkatappa Ramasamy, revered by his followers as Periyar, was an Indian social activist and politician who started the Self-Respect Movement. He is known as the “Father of the Dravidian movement.”  

Dravidianism or Dravidian nationalism is based on the idea that people living in the southern part of India are racially and culturally different from the North Indian (Indo-Aryan). Periyar claimed that Brahmins of the south were originally Aryan migrants from Northern India, who spoke Sanskrit and brought caste system to South India.

Periyar promoted Dravidian nationalism, which was based on the principle of rationalism, dismantling Brahmin hegemony by abolition of the caste system and revitalization of Dravidian languages.

He rebelled against Brahminical dominance by preaching to people that the Brahmins had monopolized and cheated other communities for decades and deprived them of self-respect. Periyar also led a strong rebellion against the imposition of Hindi as a compulsory subject in Tamil Nadu schools, viewing it as an attempt to establish “North Indian imperialism.”

Periyar’s legacy of self-respect, women’s rights, and caste eradication continues to influence South Indian politics, particularly in the state of Tamil Nadu. 

On September 2, Udhayanidhi Stalin, minister of youth welfare and sports development and son of Tamil Nadu Chief Minister M K Stalin, while speaking at a writers’ conference in Chennai, sparked a massive controversy with his remarks on Sanatana Dharma (Hindu religion).

He said Sanatana Dharma is against the idea of social justice and must be “eradicated.” He argued that the idea is inherently regressive, dividing people based on caste and gender, and is fundamentally opposed to equality and social justice. The controversial remarks drew widespread condemnation from the Bharatiya Janata Party, with the BJP terming it a “genocidal call.”

 In defense, Udhayanidhi Stalin wrote on Twitter that he never called for genocide, but opposed the principle of Santan Dharma, which divides the people in the name of caste.

He has accused BJP leaders of twisting his statements and vowed legal action.

After the remarks, Paramhans Acharya, the chief priest of the Tapaswi Chawni temple of Ayodhya, Uttar Pradesh, the largest North Indian state, offered the equivalent of US$1.2 million to the one who beheads Udhayanidhi Stalin over his remarks against Sanatana Dharma.

But the bigger question is why North India is becoming so sensitive or radicalized with respect to its religion. A society must be able to understand that every religion has certain flaws, which must be corrected over time.

Certainly, Periyar’s views of making a rational society rather than a religious one based on superstitions and prejudice have played a crucial role in the development of South Indian states. 

What North India can learn from South India

Telangana, Andhra Pradesh, Kerala, Karnataka and Tamil Nadu are commonly considered South Indian states. Bangalore, the capital city of Karnataka, is known as the “Silicon Valley of India” and accounts for one-third of India’s software exports. Tamil Nadu is known for manufacturing as it alone accounts for two-thirds of exports of personal vehicles from India.

Andhra and Telangana are known for being a pharmaceutical hub, accounting for 22.5% of all pharma manufacturing facilities in India.

Kerala is famous for its tourism industry. According to 2018 official data, tourism constitutes 10% percent of Kerala’s GDP and provides about 23.5% of employment in the state.

Millions of migrant workers from the North reach the South in search of better jobs, putting an extra burden on the states. Data show that southern Indian states continue to outperform the rest of the country in health, education, and economic opportunities.

Kerala has the highest literacy rate in India. A state’s prosperity is measured on two indicators, gross state domestic product (GSDP) and per capita income. According to Wikipedia, four of the five South Indian states rank among the top 10 Indian states in terms of GSDP. Telangana, Karnataka, and Kerala make it into the top 10 states by per capita income.

Besides a strong industrial and IT base, the southern states have also been blessed with robust banking and finance infrastructure. Apart from public and private sector banks, NBFCs (non-banking financial companies) play a crucial role in lending infrastructure, a vital factor in supporting entrepreneurial spirit.

Today’s South Indian states are far better than all the other regions of India on every Human Development Index. But the bigger question is what led the South Indian states to march ahead of their North Indian counterparts. 

In South India, social revolution always preceded the political revolution. But in the North, it’s just the opposite.

North Indian electorates remain swayed by emotive, irrational appeals by following a herd mentality to vote based on caste and religion, leading to long-term dominance by one party more than a decade.

The Indian National Congress ruled across North Indian states for five decades. Such a monopoly disconnects citizens from government activity and the government takes the people for granted, which results in less development in those states compare to South.

However, South India experiences stable political competition, with alternating parties in power such as the DMK and AIADMK in Tamil Nadu, LDF and UDF in Kerala, BJP, Congress and JDS in Karnataka, Congress, YSR Congress and TDP in Andhra. This healthy competition encourages governments to perform better and promotes citizen participation and activism, unlike the North, where politics tends to overshadow governance.

This has resulted in quality of governance and better leadership, which pushed the states on the path of development and prosperity. Effective population control consistently over the decades is a testimony of their leadership.

However, statistics show that South India is not getting enough reward for such good performance from the central government. Even South Indian politicians have expressed concerns about the state of federalism in India.

North’s regressive politics pulling India down

The central government collects taxes from all states and distributes them among states based on Finance Commission recommendations, considering three criteria: needs, equity, and state performance.

Recently the 15th Finance Commission increased weightage for the population criterion to 15% from the previous 10%, which some critics in South India believe is rewarding states with high populations that haven’t controlled population growth or provided better governance. 

As a result, states like Uttar Pradesh, which have a large populations but low Human Development Index scores, receive more funding (17.9% ) than states with higher development indices like Karnataka (3.65%), Tamil Nadu (4.08%), and Kerala (1.09%). This appears to reward mis-governance, low productivity, and irrationality, raising questions about the fairness of Indian federalism.

More important, South Indian politicians are denied opportunities at the central leadership despite excellent performance in their respective states. The fact that only three cabinet ministers from South India are in the current Modi government is a testimony. 

South India seems to be the biggest loser from this financial arrangement, where South Indians work hard to contribute more to national growth, while the North gets all the rewards for mis-governance and low productivity.

More important, the question arises, how long will South India fund the mismanagement and political shambles in North India, allowing non-performing states to set the country’s agenda? Udhayanidhi Stalin’s statement reflects the frustration with the kind of politics done in North India or Delhi for which South Indians have to pay a price.

Rather than tackling the issue of governance, productivity, HDI, economic opportunity, jobs, and better infrastructure, religion has become the center of the debate for the last nine years. In the real world, one who pays the bills is likely to get most of a deal. Unless we support the principle of prosperous regions always assisting poorer ones.

Continue Reading

Nickel nationalism working well for Indonesia

By:
On:
In: Asia

The International Monetary Fund’s June 2023 assessment of Indonesia’s export ban policy has reignited debate on Indonesia’s downstream industrial policy. 

Advocates emphasize its substantial impact on export revenues and value addition, while critics pinpoint the fiscal cost and the market distortions caused by the policy. A more nuanced assessment suggests the merits of both perspectives.

Indonesia’s experiment with downstream industrial policy began with the 2009 Mining Law signed by former president Susilo Bambang Yudhoyono, which mandated the domestic processing of all mineral commodities mined in the country. 

But the policy was only implemented in 2014 for nickel and bauxite amid widespread opposition from the mining sector. It was in nickel that Indonesia found its success.

Before banning nickel ore export in 2014, Indonesia predominantly exported raw nickel ore, which is minimally processed into nickel matte. The country’s nickel-related exports were a modest US$6 billion in 2013. 

By 2022, this figure had skyrocketed to nearly $30 billion, propelled by the exports of higher value-added products such as stainless steel and battery materials.

The most crucial factor to this success appears to be Indonesia’s exploitation of its “market power” in nickel production through an export ban. 

Chinese firms that were large players in the downstream nickel-based production had no choice but to expand their operations within Indonesia to secure access to its abundant nickel resources.

The rapid growth of the nickel sector was facilitated by concessional financing under the Belt and Road Initiative. Chinese state-owned banks financed the construction of coal power plants and basic infrastructure, integral components of the industrial areas that fostered economies of scale and agglomeration.

President Joko Widodo (third left) visits the PT Obsidian Stainless Steel (OSS) production line, during a series of events for the inauguration of the China-invested nickel smelter factory PT Gunbuster Nickel Industry (GNI) in Konawe, Southeast Sulawesi, in a file photo. Image: Twitter / Doc Palace / Agus Suparto

But while the export revenue gains are evident, the extent to which this revenue is retained and equitably shared within the country remains uncertain. 

This is mostly due to the capital-intensive nature of the nickel sector, the high share of foreign equity and the sector’s limited linkage with other parts of the economy beyond the primary sector.

Growth in gross domestic product may not directly translate into gross national product as export earnings by foreign investors may be entirely repatriated out of Indonesia. Yet the downstream industrial development strategy has contributed significantly to structural transformation.

Nickel-based manufactured products now stand as the third-largest export commodities behind coal and palm oil. The impact on regional economic development is also significant as the industrial areas are concentrated in eastern Indonesia, which generally lacks a large formal manufacturing sector.

A balanced evaluation necessitates weighing these benefits against the costs. Basic trade theory suggests that an export ban will depress domestic prices relative to global prices, resulting in winners and losers within the economy. 

The nickel mining sector has borne the brunt of subsidizing the downstream industries, which may affect the incentive to explore new reserves.

The fiscal costs of tax holidays and forgone royalties may also be substantial. The environmental and social costs associated with nickel processing should also be considered. Nickel smelting tends to be emission-intensive due to a reliance on coal-fired power plants. Industrial expansion has also been associated with deforestation and water pollution.

In terms of social cost, labor rights violations have been amply documented. The building of industrial areas has also been associated with the displacement of local communities traditionally dependent on agriculture and fishing.

As Indonesia contemplates extending the policy to other commodities, it is imperative to note that its nickel-based export success was highly contextual and whether comparable outcomes can be realistically expected for other commodities.

This underscores the necessity for the downstream industry development strategy to move beyond export bans and tariffs.

A nickel mine in Sulawesi, Indonesia. Image: Twitter

While harnessing market power through export restrictions has attracted investments, there is an inherent risk to this strategy due to its impact on global prices and supply. It potentially incentivizes the innovation of substitutes and provokes retaliatory trade measures from other countries.

Indonesia needs better policies to internalize the social and environmental externalities associated with nickel processing. Better enforcement of labor and environmental regulations will be key. Indonesia could also draw inspiration from certain aspects of the US Inflation Reduction Act.

While Pigouvian taxes remain the optimal way to internalize externalities, linking fiscal incentives to broader social and environmental objectives — such as reducing carbon intensity and creating quality middle-class jobs — can be another method to achieve similar goals.

Also, as natural resource advantage diminishes the more downstream a sector is, a more holistic approach that focuses on ecosystem development through the provision of key public inputs will be essential. 

Developing human capital and subsidizing public research and development will amplify positive spillovers as well as support downstream industrial growth, promoting more inclusive and shared prosperity.

Finally, increasing the share of value-add that stays in Indonesia will require financial market deepening and removing foreign direct investment barriers. These will incentivize the reinvestment of export receipts in the country.

There is reason for cautious optimism and with the implementation of better evidence-based policies, Indonesia can expand on its initial success and achieve the intended goals of its downstream industrial policy.

Faris Abdurrachman is a Master’s student in Quantitative Economics at New York University Stern School of Business and Graduate School of Arts and Science and a former Research Analyst at the Australia-Indonesia Partnership for Economic Development.

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

Continue Reading

Private equity weighs up India vs China amid shifting landscape

By:
On:
In: Asia

Private equity firms have been carrying out multibillion-dollar fundraising rounds for many years now with a focus on China, the world’s second-largest economy, because of the rapid growth levels and abundant opportunities in the powerhouse country.

But with an evolving geopolitical landscape across Asia, things are changing.

Grappling with challenges related to changing dynamics in China, private equity organizations are now exploring alternative investment destinations, with India emerging as a key contender. 

Several factors are consistently being considered when navigating this shifting landscape.

First, China has been cracking down in recent times on various sectors, including tech, education and real estate, which has created uncertainty for investors. 

Regulatory changes and government intervention could potentially pose significant risks to the profitability of investments in China. Unsurprisingly, global investors are closely monitoring the regulatory environment and adapting their strategies accordingly.

Second, ramping up investments in India is increasingly seen as a diversification strategy. 

While India presents its own set of challenges, such as a complex regulatory environment and bureaucratic hurdles, it does offer a different risk profile compared with China. 

As such, investors are carefully assessing the risk-reward trade-off between China and India and many are considering diversifying their portfolios across the two nations to spread risk.

Third, India is one of the world’s most populous countries, with a growing middle class and a large consumer market. It offers a wide range of investment opportunities in sectors such as technology, health care, renewable energy, and e-commerce. 

Global investors should evaluate the potential for growth and profitability in these sectors and align their investments with India’s long-term economic prospects.

Fourth, private equity firms typically have a horizon for their investments, and exit strategies are crucial for realizing returns. 

Understanding the exit landscape in India, including such options as IPOs (initial public offerings), secondary sales, or trade sales, is essential for global investors planning to enter the Indian market. Many analysts have argued that these exit strategies are often easier to execute in India than in China.

Fifth, investing in multiple countries involves exposure to different currencies. Currency fluctuations can impact returns, so investors typically opt to have strategies in place to hedge against currency risks, which can include operating in more than one jurisdiction.

India’s political environment can vary at the state and national levels, and understanding the political landscape and its potential impact on business operations is crucial for long-term investors. That said, the political landscape is generally considered to be stable and certain – two factors that appeal to global investors, such as private equity firms.

In summary, global investors seeking to diversify away from China and explore opportunities are increasingly looking to India. While India offers considerable potential, success requires a strategic and informed approach to investment in this dynamic and rapidly evolving economy. 

It will also, we expect, take at least another five years before the subcontinent can truly rival China largely due to is its massive market potential. 

With a population of more than 1.4 billion and a growing middle class, China offers a vast consumer base for businesses to tap into. Rising incomes and increasing urbanization have fueled demand for various products and services, providing ample opportunities for investors across sectors such as technology, health care, and consumer goods. 

This is combined with Beijing’s proactive policies, such as stimulus measures and targeted reforms, which have effectively supported economic growth and stabilized market conditions.

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

Continue Reading

Higher for longer US rates ringing Asia alarm bells

By:
On:
In: Asia, Finance

The broadside Moody’s Investors Service just fired at the US dollar and interest rates dramatizes why the next few months could be uniquely chaotic for global markets.

It stands to reason that the one major credit rating company still holding Washington in AAA esteem is anxious to announce a downgrade.

Twelve years after S&P Global downgraded the US, Fitch Ratings last month followed suit. Fitch’s move was about more than America’s national debt careening toward US$33 trillion.

It was also a response to the “steady deterioration in standards of governance” as politicians play games with raising Washington’s statutory debt limit.

Now, Moody’s warns that the dysfunction surrounding a government shutdown on October 1, the latest manifestation of extreme polarization, may be the reason to cut Washington’s rating to Aa1.

Investors seem way ahead of credit rates as US yields move higher. Rates on 10-year Treasury bonds are at a 16-year high this week, a dubious milestone that’s slamming European and Asian markets. Benchmarks from Japan to South Korea to Australia plunged.

On Tuesday alone, MSCI’s gauge of global stocks plunged 1.24%, an outsized move for the benchmark. By Wednesday, the index was falling for a ninth day as it approaches its longest losing streak in more than a decade.

The Cboe Volatility Index, Wall Street’s so-called fear gauge, flashed its most intense warnings since May, when US inflation hit a 41-year high.

Adding to the disorientation is the dollar’s curious durability. The more investors fret about the state of global finance, the more the dollar rises. The yen’s move toward 150 to the dollar, a psychologically important level, has markets bracing for currency intervention by Japanese authorities.

The US Federal Reserve, meanwhile, is making it clear it’s not done hiking rates. When Minneapolis Fed President Neel Kashkari on Tuesday assigned 40% odds that rates will still go “meaningfully” higher, traders figure policymakers are telegraphing more austerity to come.

Already, 11 Fed tightening moves in 18 months are working their way through global markets. The specter of more hikes could wreak havoc in debt markets, equity bourses and property sectors everywhere.

Europe is uniquely poorly positioned to withstand the coming financial storm. Rising yields will hit real estate values from Tokyo to Seoul to Bangkok.

A major challenge for Asia is figuring out which financial shoes might drop next as well as how and where the tremors will be felt.

The US government shutdown for which Republican lawmakers are agitating would furlough hundreds of thousands of federal workers and suspend vast swaths of public services, crimping US economic growth.

US House Speaker Kevin McCarthy and his Republican party are angling for a government shutdown. Image: Twitter

“A shutdown would be credit negative for the US sovereign,” Moody’s analysts wrote in a note this week. They argue that “it would underscore the weakness of US institutional and governance strength relative to other AAA-rated sovereigns that we have highlighted in recent years.”

In particular, Moody’s adds, “it would demonstrate the significant constraints that intensifying political polarization put on fiscal policymaking at a time of declining fiscal strength, driven by widening fiscal deficits and deteriorating debt affordability.”

Economists at Wells Fargo write that “should a shutdown transpire, there could be a negative impact of the US dollar, albeit one that is likely to be modest and short-lived.”

Gita Gopinath, first deputy managing director at the International Monetary Fund, warns of “tougher global financial conditions.” As the “fight to bring inflation back to target continues,” Gopinath says, “we expect global interest rates to remain high for quite some time,”

Furthermore, she notes, “there are reasons to think that rates may never return to the era of ‘low for long.’ This possibility is reflected in US 10-year Treasury bond yields, which have surged” to the “highest level since the global financial crisis.” In this environment, Gopinath says, “financing conditions for emerging markets can be expected to remain challenging.”

Analyst Gennadiy Goldberg at TD Securities says “overall, we view the shutdown as one of the many headwinds the economy faces this fall.” Analyst Michael Pond at Barclays tells Bloomberg that a government shutdown “will likely lead to some heightened uncertainty,” given how vulnerable Asia’s export-led economies are to “hot money” flows.

Shutdown risks are coinciding with surging oil prices and a massive strike by Detroit auto workers, both of which are exacerbating inflation risks. As such odds are Fed Chairman Jerome Powell’s team will hit the monetary brakes even harder.

Count Jamie Dimon, CEO of JPMorgan Chase, among those who believe Fed rates – in the 5.25%-5.5% range now – could go significantly higher as inflation remains elevated.

“I am not sure if the world is prepared for 7%,” Dimon told the Times of India. “I ask people in business, ‘Are you prepared for something like 7%?’ The worst case is 7% with stagflation. If they are going to have lower volumes and higher rates, there will be stress in the system. We urge our clients to be prepared for that kind of stress.”

What’s more, Dimon referenced Warren Buffett’s famous observation that “only when the tide goes out do you discover who’s been swimming naked.” As Dimon notes of more assertive Fed tightening moves, “that will be the tide going out.”

“Investors,” says analyst Paul Nolte at Murphy & Sylvest Wealth Management, “are beginning to realize that a higher for longer interest rate environment is a likely outcome and are slowly adjusting to the new normal. Higher-for-longer has been the mantra of the Fed for a few months. It is only recently that the markets have been taking them at their word.”

The irony, of course, is that the worse things get for the US fiscal outlook, the more investors flock to the dollar. That’s luring capital away from China, Japan, South Korea and other top Asian economies at the worst possible moment for Beijing, Tokyo, Seoul and beyond. Counterintuitively, big losses in US sovereign securities are increasing the dollar’s appeal.

The dollar keeps getting stronger. Photo: Asia Times Files / AFP

Even before Moody’s stumbled onto the scene, global investors faced the specter of a third straight year of losses in the $25.5 trillion Treasury debt market. All the red ink reflects investor concerns about liquidity amid the most aggressive Fed tightening cycle since the mid-1990s and extreme volatility as inflation flares up across the globe.

Yet from an interest rate differential standpoint, says Nomura Inc strategist Andrew Ticehurst, the dollar’s legacy safe-haven status, America’s steady growth and high yields make for an “unusual and powerful combination” at a moment when the potential for sudden risk-off pivots abound in markets.

Another reason this appears to fly in the face of both political and financial reality: US President Joe Biden’s dismal approval ratings. As Congressional Republicans and Democrats lock horns, Biden’s low-40s support rate leaves the White House little hope of cajoling lawmakers not to shut down the government, gamble with Washington’s credit rating or pursue reforms to increase US innovation and productivity to tame inflation.

The same goes for Biden’s latitude to protect the roughly $3.2 trillion of US Treasury securities held by top Asian authorities. Those foreign exchange reserves could find themselves in harm’s way as Moody’s joins S&P and Fitch in closing the books on America’s AAA era.

Japan would be the biggest loser with its more than $1.1 trillion of US government debt. China holds $821 billion and Korea has $116 billion. Along with losses on state savings, surging US rates could devastate Asia’s biggest trade-reliant economies, each of which is navigating their own domestic debt troubles.

In China, it’s property markets and a titanically large shadow-banking sector. In Japan, it’s the most crushing debt load in the developed world made worse by a fast-aging population. In Korea, it’s record household debt undermining broader consumption dynamics.

Here, the dollar’s trajectory – and how its rally defies gravity as bonds sell off – is adding to Asia’s headaches.

Economist Jeongmin Seong at the McKinsey Global Institute says that “many Asian countries accumulated substantial foreign exchange reserves after the Asian financial crisis of the late 1990s.” In 2022, he notes, Asia accounted for 40% of global capital flows, four times the level in 2000.

“But there may be pockets of vulnerability to any sudden outflow of capital,” he explains. “In Indonesia and Vietnam, for instance, foreign direct investment accounts for 20% and 14% of total investment, respectively.”

Episodes of runaway dollar strength tend to end badly for Asia. Look no further than the region’s 1997-98 financial crisis, which was precipitated by the US Fed’s aggressive 1994-1995 rate hike cycle.

Episodes of yen volatility pose their own threat. Worries about surging Japanese government bond yields are rippling through global credit markets as the Bank of Japan hints at an exit from quantitative easing. That poses outsized risks because 24 years or zero-to-negative rates morphed Japan into the globe’s premier creditor nation.

These funds are then invested in higher-yielding assets from Brazil to South Africa to Indonesia. This giant “yen-carry trade” often explains why sharp yen moves often slam markets everywhere.

IMF economist Thomas Helbling says Asia is highly exposed on account of debt levels. “Asia’s increased borrowing in recent decades has augmented the region’s exposure to rising interest rates and heightened market volatility,” Helbling explains. “Borrowing by the region’s governments, companies, consumers and financial firms is well above levels prior to the global financial crisis.”

Trouble is, Helbling says, “highly leveraged companies face greater risk of default as monetary policies and financial conditions remain tight. Even with resilient economic growth, interest payments may exceed earnings as borrowing costs rise, reducing firms’ ability to service their debts.” Generally speaking, he adds, “corporate debt in Asia is concentrated in firms with low-interest coverage ratios.”

McKinsey economist Seong says that “some Asian economies, government, household, and corporate debt has risen by even more than the Organization for Economic Cooperation and Development average.”

Seong points out that nonfinancial corporate debt in China is 150% and in Japan, South Korea and Vietnam it is more than 120%. In 2021, Korea’s household debt reached 106% and Australia’s was 119%, against an OECD average of 60%. “Carrying this amount of leverage will be costly if interest rates continue to rise,” Seong notes.

A porter walks on a bridge in Chongqing, China with new residential buildings in the background.
Photo: CNBC Screengrab / Zhang Peng / LightRocket / Getty Images

On the property side, “there’s is a risk of a fall in asset prices, including real estate,” Seong says. Between 2015 and 2021, the average nominal housing price rose by 50% in China, 34% in Australia, and 17% in South Korea. Price inflation in cities is even higher. In Seoul, for example, the price-to-rent ratio increased 2.5 times in the 2015-2021 period.

At home, Biden also must ensure the stability of banks as Fed rate hikes continue. Mohamed El-Erian, advisor at Allianz, worries higher borrowing costs may cause havoc in real estate markets. “We’ve got to be really careful,” El-Erian warns. “The housing market is central to the economy.”

At the same time, the fallout from the collapse of Silicon Valley Bank in March “is casting doubt on America’s ability to maintain its leadership of the global monetary system,” notes economist Diana Choyleva at Enodo Economics. It’s up to Washington “to take decisive steps to shore up confidence, including extending dollar credit lines to a clutch of Asian countries.”

As Choyleva stresses, “it is in Asia that the United States’ global financial hegemony is being most keenly contested – by China.”

It’s hard not to think Washington’s shutdown showdown is doing Beijing’s work for it.

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

Continue Reading