Crony capitalism delays India’s economic arrival

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The January 2023 Hindenburg Research report accused the Adani Group — one of India’s largest conglomerates — of share price irregularities. 

The Adani Group is mainly an infrastructure and energy company with assets acquired through privatization and has received significant financing from public sector banks. Its market value had risen dramatically since 2019 until the report caused its share prices to plummet.

This episode has catapulted “crony capitalism” to the center of a strident political debate in India. Opposition parties have demanded a parliamentary probe, which Prime Minister Modi’s government is reluctant to initiate. 

The Supreme Court appointed an expert committee to advise it on possible errors by the Securities and Exchange Board of India — the top financial market regulator. Though it found no apparent regulatory violation, the controversy seems unlikely to abate soon.

But this is not the first controversy concerning business–government relations in the market liberalization era. In 2011, former prime minister Manmohan Singh’s government was accused of corruption and biased allocation of coal blocks and telecom spectrum to private firms. 

These episodes were politicized and led to the Supreme Court canceling coal mining licenses. These incidents recur due to two structural features — weak regulatory and policymaking institutions and socio-political trends triggered by economic liberalization, particularly increasing inequality and costly elections.

Indian market reforms replaced state-led planning with deregulated markets. Industrial decontrol stimulated private entrepreneurial dynamism. But the reforms failed to create effective institutions of economic governance for policymaking and regulation that are necessary for efficient markets. 

Several “independent” regulatory bodies were established in infrastructure and natural resource sectors to support private sector participation in areas run by government monopolies. Such new institutions need to evolve, improve and be accepted by stakeholders.

Prime Minister Narendra Modi has largely cosseted the capitalist class. Photo: Asia Times files / AFP / Noah Selam

Yet their evolution has been stunted by the lack of a strategic roadmap. Turf wars occurred between government departments, new institutions and private stakeholders. The new institutions lacked independence, clout, professional expertise and financial resources. Political figures remained influential in regulatory decisions. 

Also, the allocation of valuable natural resources to private enterprises persisted as a source of “rent-seeking” controversies. In the case of coal licenses, politicians resisted the introduction of a transparent auction system. It is easy to see how crony capitalism can arise under such conditions.

Effective economic governance institutions in democracies require autonomy from political pressure. A politically weak government may flounder, while a strong government’s commitment ensures fair and proper procedure. 

Many regulatory institutions have matured over time but some remain weak. India’s independent judiciary played a key role in shaping the structure of successful regulators. Court decisions on legal disputes also contributed significantly to the demarcations of roles and the creation of appellate bodies.

Economic reforms in the 90s promised a liberal market-based economy. Yet even after three decades, many enabling conditions for this goal do not exist in India, including minimal state ownership, the quick legal enforcement of formal contracts and the government’s equidistance from competing private business interests.

The corporate sector is buoyant but is dominated by five major business houses. Industrial concentration has increased with the share in assets and sales of the “top 5” private companies rising since 2015. 

The top 5 initially expanded their reach across a broad range of industries and then increased their presence in these industries, aided by mergers and acquisitions. They have grown at the expense of the next largest corporations.

Their dominance has evoked comparisons with the South Korean chaebols (‘national champions’) that rose during former South Korean president Park Chung Hee’s heavy and chemical industrialization drive. 

Unlike India, two important disciplining mechanisms pushed the chaebols to deliver efficiently. The South Korean chaebols functioned within a clearly articulated national industrial strategic plan. 

The support that they received from the government was conditional on fulfilling their commitments. They also had to face intense international competition in product markets.

Unlike South Korea, India requires foreign investment to bolster its industrial competence and hopes to be an alternative investment destination to China. Yet the dominance of the top 5 dissuades the entrance of foreign companies, who worry about whether the playing field is level and about policy consistency over time.

Traders hold placards during a demonstration demanding the closure of online shopping platforms Amazon and Flipkart in New Delhi on January 15, 2020. Photo: AFP / Sajjad Hussain

The Indian Planning Commission was dissolved in 2014 and replaced with think tank NITI Aayog. For all its flaws, the past Indian policymaking style was widely consultative. Yet as of 2023, there are no effective participation mechanisms to determine and communicate long-term strategic policy goals. 

Public acceptance of policies is important for implementing policies in a diverse, disparate, federal democracy. In 2021, India witnessed protracted dissent and political protests from farmers over proposed agricultural market reforms.

In the context of the revival of industrial policy across the world, India needs to redesign its policymaking institutions. Here, India can learn from South Korea’s example of combining industrial policy with global integration.

The East Asian policymaking style, its consensus-building and vision-generating processes offer valuable lessons

Chiranjib Sen is former Visiting Professor at the School of Development, Azim Premji University.

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

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The makings of a yen vs yuan currency war

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TOKYO – The yen’s 10% tumble so far this year has the makings of the kind of wildcard that global investors hate.

Granted, Asian governments from Seoul to Jakarta are plenty used to Tokyo’s mercantilist predilections. Since the 1990s, the biggest consistency among the blur of Japanese leaders who came and went is maintaining a weak yen to juice exports. 

Today’s government headed by Prime Minister Fumio Kishida seems more than happy to keep this cycle going. Yet there is good reason to worry Tokyo is courting more trouble than ever before.

This is the first time, for example, that Tokyo is testing Asia’s tolerance for a weak yen at a moment when China’s economy is slowing. Reassurances Tuesday from Premier Li Qiang that China will hit this year’s 5% economic growth target were music to investors’ ears. Even so, big doubts remain as headwinds intensify.

Another reason: a US election cycle that’s sure to feature Asian trade like none before in an atmosphere of intense bickering between Democrats and Republicans. The odds that undervalued Chinese or Japanese currencies morph into politicized flashpoints on the US campaign trail are increasing fast.

It’s worth considering how Tokyo’s beggar-thy-neighbor strategy might play out in South Korea or Southeast Asian economies still harboring PTSD from the late 1990s. Back then, the US Federal Reserve’s aggressive rate hikes boosted dollar-yen exchange rates to levels that forced officials in Bangkok, Jakarta and Seoul to abandon currency pegs. 

Those competitive devaluations set in motion the 1997-98 Asian financial crisis. In the decades since, governments strengthened banking systems, increased transparency, created bigger and more vibrant private sectors and amassed foreign exchange reserves to better shield their economies from global shocks.

Yet the Covid-19 crisis demonstrated that Asia is still too reliant on exports for economic growth. Over the last 18 months, as Asia exited the pandemic era, global inflation and the most assertive US Fed tightening since the 1990s stymied recoveries.

The yen’s slide and its implications for China is a complicating factor of the highest order.

Yi Gang, the governor of the People's Bank of China, has tried to reassure investors. Photo: AFP / Wang Zhao
PBOC Governor Yi Gang must keep a close eye on the yen. Photo: AFP / Wang Zhao

At People’s Bank of China (PBOC) headquarters, Governor Yi Gang has stepped up the pace of rate cuts as the economy slows. For Beijing, any competitive advantage it can derive from exchange rates is welcome in 2023.

“One-way traffic in the currency is not something the PBOC will want to see,” says economist Robert Carnell at ING Bank. “But we don’t believe they will be totally averse to seeing the Chinese yuan weaken further if it does so in a controlled fashion, especially as we doubt that they are done with cutting rates just yet.”

Within reason, though, given that Xi’s team had been working for years to increase international trust in the yuan (it’s down nearly 5% so far this year). An unstable exchange rate might squander that progress.

“Right now,” Carnell adds, “China is bucking the global trend and cutting, not raising rates, reflecting what is a very mediocre and rather disappointing reopening following zero-Covid.”

And “one of the upshots of this,” he explains, “is that the yuan has been weakening, with the PBOC seemingly quite tolerant of such weakness with all policy levers being considered to help offset the economy’s weakness.”

Yet the yen’s trajectory is surely turning up the heat on Asian governments and foreign exchange managers. That goes, too, for Ministry of Finance officials in Tokyo.

“As things currently stand, physical intervention to support the Japanese yen looks increasingly likely,” says Stephen Gallo, global currency strategist at BMO Capital Markets.

On the one hand, a weaker yen is exacerbating Japan’s inflation troubles, increasing the risk that price gains become permanent. On the other, Tokyo is loath to run afoul of US Treasury Secretary Janet Yellen’s team.

Earlier this month, Yellen’s team removed Japan from its currency watch list for the first time since 2016. It’s the list on which no trade-reliant economy wants to find itself. 

In its twice-a-year report to the US Congress, the Treasury placed seven economies on its “monitoring list” — China, Germany, Malaysia, Singapore, South Korea, Switzerland and Taiwan.

It surprised many that Tokyo avoided a reprimand for foreign exchange interventions in September and October. Many observers surmised it’s because President Joe Biden’s team sees Tokyo as a vital partner in the “decoupling” effort vis-a-vis China.

At a June 16 press briefing, a top Treasury official said that FX interventions should only be conducted in “very exceptional circumstances” after consultations with other countries. China, by contrast, is being monitored as “an outlier among major economies” thanks to Beijing’s lack of transparency.

For Kishida and Japanese Finance Minister Shunichi Suzuki, this is an indulgence that Tokyo doesn’t want to lose. One concern from Suzuki and BOJ leader Ueda is that the yen’s downdraft might get away from them, taking on a life of its own that is hard to reverse.

Bank of Japan Governor Kazuo Ueda is making no sudden movements on QE. Image: Twitter / Screengrab

The specter of additional US Fed tightening moves hardly helps. The good news is that US inflation pressures are easing. In May, consumer prices rose roughly 4% year on year, the slowest in two years and down from 4.9% in April.

Overall, “the trend has become very encouraging,” says economist Stephen Juneau at Bank of America about US inflation rates. “We should continue to see improvement in core” consumer prices, which exclude erratic food and energy costs.

Even so, Fed Chairman Jerome Powell’s team is hinting at another rate hike or two in the months ahead. That adds to the BOJ’s challenges as it attempts to slow the yen’s drop without upending markets.

Economist Kristina Clifton at Commonwealth Bank of Australia notes the “stark contrast between the dovish Bank of Japan and other major central banks suggests the yen looks set to fall further in the near term. The weak yen may prompt some further verbal intervention from Japanese authorities.”

The trouble is, though, the gap between rate policy in Tokyo and Washington is becoming more and more extreme. “The yen is suffering from a big negative yield gap versus other G10 currencies,” says strategist Vassili Serebriakov at UBS. That’s why UBS thinks a change in the BOJ’s “yield curve control” policies at the upcoming July 28 meeting “is much more likely.”

A big risk is that the weak yen could backfire this time. Historically, says Charu Chanana, market strategist at Saxo Group, Japanese authorities have had a preference for a weak yen to boost exports and support the industrialization of the economy. Therefore, intervention moves mostly happen when the yen becomes too strong.

Yet the dynamics have changed, Chanana says. “A lot of Japanese companies have now shifted their production overseas and that means that a weaker yen isn’t benefiting export companies as much as it once did,” she explains. “Japan is also reliant on importing a lot of resources, mainly energy, and a very weak yen makes that expensive.”

Still, old habits die hard. Bank of Japan Governor Kazuo Ueda has only been in the job for 80s days yet bets that he might act quickly to exit Tokyo’s 23-year quantitative easing experiment have been dashed.

Now, economist Richard Katz, publisher of the Japan Economy Watch newsletter, thinks the yen’s drop could accelerate. He notes that the “gap between Japanese and American 10-year government bond rates, with a supremely high 97% correlation. The bigger the gap, the weaker the yen.”

Earlier in the year, Katz says, many market players believed that the gap would lessen as the BOJ raised interest rates and the Fed began cutting them toward year’s end. 

“Now,” he adds, “far fewer market participants still believe that; so fewer are willing to buy the yen at prices as high as they were a few months ago. The decreased demand for the yen causes it to weaken.”

Demand for Japan’s yen is falling. Image: Facebook

The BOJ remains AWOL, though. Analysts say Ueda may be gun-shy following his predecessor’s attempt at tweaking yield levels on December 20. That day, then-BOJ leader Haruhiko Kuroda announced that 20-year bond rates could rise as high as 0.5%. All hell broke loose in world markets as the yen surged. The BOJ has largely gone silent since then.

“Any signs of BOJ tightening could lead to massive liquidity drain on the global economy as the carry trades that use the Japanese yen as the funding currency could start to be reversed,” Saxo Group’s Chanana says. “This explains the market’s nervousness.”

Geopolitical risks abound, too, adding fresh elements of uncertainty. In his Tuesday speech at the annual World Economic Forum meeting in the coastal city of Tianjin, Chinese Premier Li said global efforts to “de-risk” supply chains from China are a clear and present danger to global stability.

“Everyone knows some people in the West are hyping up this so-called de-risking, and I think, to some extent, it’s a false proposition,” Li said, apparently referring to European Commission President Ursula von der Leyen’s views on the issue. “The invisible barriers put up by some people in recent years are becoming widespread and pushing the world into fragmentation and even confrontation.”

Li added that “we firmly oppose the artificial politicization of economic and trade issues.”

The premier also reassured markets that Beijing is on top of risks to China achieving this year’s 5% gross domestic product target. “We launch more practical and effective measures in expanding the potential of domestic demand, activating market vitality, promoting coordinated development, accelerating green transition and promoting high-level opening to the outside world,” Li said.

At the margin, a weaker yuan might help China get closer to 5% by way of an export spurt. Yet Li and Yi’s PBOC must ensure any such move is an orderly one. With the MSCI’s index of Chinese equities down almost 20% from a 2023 high in January, exacerbating capital flight is the last thing Beijing needs.

On Tuesday, the state-run China Securities Journal newspaper argued that national growth will soon stabilize – just as Li said it would – as the pro-growth moves of the last month kick in. In the interim, though, the yen’s decline may have the teams overseen by both Li and Yi and wonder why China, too, shouldn’t be maximizing trade advantage with a softer yuan.

If you are South Korean President Yoon Suk-yeol, Indonesian President Joko Widodo or Singapore Prime Minister Lee Hsien Loong, why wouldn’t you be tempted to join the fray and weaken exchange rates, too?

A mournful Thai holds a Thai baht note. Photo: NurPhoto via AFP Forum/Anusak Laowilas
A mournful Thai holds a Thai baht note. Photo: NurPhoto via AFP Forum / Anusak Laowilas

The same goes for Philippine President Ferdinand Marcos Jr, Malaysian Prime Minister Anwar Ibrahim, Vietnamese Prime Minister Phạm Minh Chính or Thailand’s soon-to-be-determined leadership.

Even if it’s only Japan and China pushing the beggar-thy-neighbor envelope, politicians in Washington are sure to take note. As Biden runs for reelection, Republican challengers – many itching to investigate China over the origins of Covid-19 and suspicious of Asia in general – are sure to accuse Beijing and Tokyo of unfair currency manipulation.

It’s but one of the many ways Japan’s two-decades-plus obsession with a weak yen might backfire spectacularly this time. Nowhere more so than in Beijing, which can’t be happy about Tokyo’s benign neglect.

Follow William Pesek on Twitter at @WilliamPesek

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China’s premier is right about globalization

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Chinese Premier Li Qiang has condemned Western efforts to limit trade and business ties with his country, and encouraged international economic cooperation.

In his keynote address on Tuesday at a World Economic Forum event in the Chinese city of Tianjin in which he criticized “the politicization of economic issues,” Li said: “Governments should not overreach themselves, still less stretch the concept of risk or turn it into an ideological tool.”

His denouncing of economic “politicization” and defense of globalization in his speech at the so-called “Summer Davos” event in Tianjin will be music to the ears of investors around the world. 

They’ve been signaling that they are eager for a leader of a superpower economy to dismiss the prevailing protectionist narrative of the last few years as many countries have looked increasingly inward, becoming more and more nationalistic.

Globalization opens up a wider array of investment opportunities beyond domestic markets. Investors can access a diverse range of industries, sectors, and geographies, allowing them to build well-diversified portfolios. 

Emerging economies, in particular, offer unique investment prospects with higher growth potential compared with mature markets. By capitalizing on globalization, investors can participate in the growth stories of emerging markets, diversify their investment holdings, and potentially achieve higher returns.

Diversification is, of course, a fundamental principle in investment strategy. Globalization provides investors with the means to diversify their portfolios across different regions, asset classes, and currencies. 

By spreading investments across multiple countries, investors can mitigate the impact of localized risks and volatility. A well-diversified global portfolio can help reduce exposure to individual country-specific economic, political, or regulatory risks, thus enhancing the overall risk-adjusted returns.

Li’s call to drop economic politicization would allow investors to tap into innovative companies and sectors worldwide. 

Different regions specialize in specific industries, such as technology in Silicon Valley, automotive in Germany, or financial services in London. 

By investing globally, investors can gain exposure to companies at the forefront of technological advancements, disruptive business models, and emerging trends. This exposure to innovation can drive portfolio growth and potentially generate above-average returns.

The rise of globalization has seen the emergence of dynamic economies with robust growth potential. Investing in emerging markets offers the opportunity to capitalize on the economic progress of countries experiencing rapid industrialization, urbanization, and rising consumer demand. 

History teaches us that these markets often present attractive valuations and the potential for high long-term returns. However, it’s important to note that investing in these emerging markets also carries additional risks, such as political instability or regulatory uncertainties, which investors should carefully consider and manage with a financial adviser.

Another major benefit of globalization for investors around the world is access to global mega-trends such as urbanization, renewable energy, health-care advancements, and changing demographics that transcend national boundaries. 

On this issue of embracing globalization, China’s premier is on the right side of history. It empowers investors to build resilient portfolios, seize growth opportunities, and navigate an increasingly interconnected and dynamic global economy.

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

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When Miss World’s arrival in India ignited protests

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Miss world protests 1996Getty Images

A recent announcement that the next edition of the Miss World pageant would be held in India has revived memories of its last visit to the country – which involved violent protests, threats of self-immolation and predictions of a cultural apocalypse. The BBC’s Zoya Mateen revisits that tumultuous time, and examines what has changed since then.

The year was 1996. India had moved away from protectionist policies a few years ago, opening its markets to the world. International brands such as Revlon, L’Oreal and KFC were setting up shop in the country, sometimes sparking tensions with local activists and manufacturers.

Beauty pageants were already popular in India by then – two years ago, Sushmita Sen and Aishwarya Rai had become Miss Universe and Miss World, respectively, and would go on to become Bollywood stars. Millions of young women aspired to follow them and embark on glittering careers, though others criticised the emphasis these competitions placed on physical beauty.

But weeks before the event, violent protests broke out – the objectors ranged from militant farmers to feminists to right-wing politicians – and made global headlines. The swimsuit round had to be moved to Seychelles for fear of the contestants’ safety.

“Defenders of the pageant – and they enjoy the sympathy of most Indians – find it hard to believe that an event so trivial has provoked such a tumult,” the Los Angeles Times wrote.

Filmmaker Paromita Vohra says that the reactions pointed to a tussle between conservative beliefs and the allure of a modern, glitzy world.

“Miss World came to India at the same time as the globalised market. It churned the culture and there was reaction to that churn,” she says.

Sushmita Sen

Getty Images

To be sure, things have changed in India since 1996. The country has won at least half-a-dozen more international pageants and is home to a million-dollar fashion industry which is globally recognised for its imaginative work and detailed craftsmanship. Films and web shows routinely deal with risqué topics; and conversations around women’s clothes and beauty standards have become more nuanced.

The 1996 pageant was organised in India by a company owned by Bollywood superstar Amitabh Bachchan. According to reports, the firm hired more than 2,000 technicians, 500 dancers and even 16 elephants for the event.

But weeks before the show, violent protests broke out in Bengaluru (formerly Bangalore) city, the venue.

Members of a women’s organisation threatened mass suicide, saying that competitions like Miss World would “increase promiscuity and prostitution”.

“Wearing miniskirts is not part of our traditional culture,” a leader of the group told The Washington Post. One man died by suicide “in protest”, CNN reported.

The pageant was also opposed by the Bharatiya Janata Party (BJP) – which now governs India – as well as a farmers’ group which threatened to burn down the cricket stadium where the pageant would be held (it wasn’t carried out).

Miss world protests 1996

Getty Images

Many feminists also protested, with one group holding a mock pageant where contestants were given titles like Miss Poverty and Miss Homeless.

Thousands of police personnel, including several in battle gear, were deployed across the city. Some preliminary events were held on the outskirts of Bengaluru, including an air force base. And of course, the most controversial round was moved out of the country.

Former model Rani Jeyaraj, who represented India at the 1996 pageant, says she was relieved when that happened. “By then, I was already overwhelmed giving interviews to channels. It felt wonderful to be whisked away to a little island where I wouldn’t be harassed all the time.”

The contestants were sheltered from the controversy as much as possible – they were cooped up inside a luxurious five-star hotel for weeks with little outside contact. “But it felt weird to be isolated and not being able to meet friends and family,” Ms Jeyaraj says.

“There was one moment, hours before the final competition, when I almost quit because I was so tired of everything.”

indian police stop demonstrators from a leftist women's group during a 23 November protest against the Miss World beauty pageant in Bangalore. The group attempted to disrupt traffic while marching toward Chinnaswamy Stadium, the venue for the pageant final later 23 November.

Getty Images

This wasn’t the first or last backlash against beauty pageants and women in swimsuits.

In 1968, a feminist collective organised an event outside the Miss America pageant, where protestors filled a trash can with beauty products. Two years later, activists entered the Royal Albert Hall in the UK and threw flour and rotten vegetables at the Miss World stage in support of women’s liberation.

In 2013, the final of Miss World was shifted from Indonesia’s capital Jakarta to tourist haven Bali after weeks of protests from conservative Islamic groups – there too, the bikini round was scrapped, with contestants wearing “modest, traditional Balinese sarongs“.

In 1996, swimsuits weren’t entirely alien to India – Ms Vohra points out that some Bollywood heroines were already challenging stereotypes and wearing them by then, though it wasn’t common. Several Indian contestants, including Rai and Sen, had also participated in swimsuit rounds at pageants abroad. 

But Ms Vohra says that perhaps the anxiety around the 1996 competition was also due to fears that “middle class, upper-caste women” – who usually participated in these events – would be seen wearing swimsuits in public.

Aishwarya Rai

WALTER DHALDHLA

But almost three decades after the protests in India, are beauty pageants still as relevant?

There was a time when they allowed women an entry point into a glamorous, economically promising world – if you became a model, you could travel the world, become an icon. Even firebrand American feminist Gloria Steinem participated in one as a teen because she said it seemed “like a way out of a not too great life in a pretty poor neighbourhood”.

In India, pageants have also been a way to enter Bollywood (though the success rate there has been mixed) and “that connection is the reason the glamour around it doesn’t reduce”, Ms Jeyaraj says.

But many young Indian women no longer see a beauty pageant as the only way to do that or consider it an empowering vehicle to achieve their dreams.

Ms Vohra says beauty pageants were never meant to be purveyors of authentic beauty or an ideal standard. Instead, she calls them an economic phenomenon “rooted in the market”.

When Miss World became popular in India, it also brought a different idea of beauty – of tiny sculpted waists, sherbet gowns and a heavily contoured face.

“For instance, women in Bollywood films 30 years ago were more voluptuous than that globalised supermodel standard of beauty,” Ms Vohra says.

But international pageants helped create a new idea of an aspirational female figure.

“And it allowed women to enter that public life only if they were like that,” Ms Vohra says, adding that Indian women today are not dependent on these competitions for opportunities.

“That’s why I think the next Miss World in India will be an event like other events. Perhaps a quaint throwback at best,” she says.

Femina Miss India World 2022, Sini Shetty gestures during a promotional event in Kolkata on August 25, 2022.

Getty Images

For pageant enthusiasts, though, it is still a world they deeply love and believe in, not some relic of the past.

“These competitions are not just about showing off beauty but also their intelligence and accomplishments at a global platform. It’s their passport to the world,” says fashion designer Prasad Bidapa, one of the judges at the 1996 pageant.

According to him, it is impossible to wish away the allure of beauty pageants because in the end, “everyone wants to look better and dream big”.

“Some people are talented in science, they become scientists. Some people are beautiful, they become superstars.”

BBC News India is now on YouTube. Click here to subscribe and watch our documentaries, explainers and features.

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SC’s FIKRA ACE to Spur Islamic Fintech Innovation, Growth for ICM

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The accelerator programme global call for applications starts today
It is organised in collaboration with the Malaysia Digital Economy Corporation (MDEC)

The Securities Commission Malaysia (SC) today announced the launch of FIKRA ACE. This fintech initiative aims to enhance the Islamic capital market (ICM) ecosystem by facilitating the development of Islamic fintech through…Continue Reading

PBoC eases RMB, triggering a debate in the process

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The People’s Bank of China (PBoC) has allowed a 2% drop of the Chinese currency so far this month after China’s exports and foreign direct investment (FDI) fell year on year in May.

The country’s central bank on Monday lowered the Chinese currency’s daily midpoint by 261 basis points, leading to a further depreciation of renminbi.

On Monday, the yuan fell to 7.23 to one United States dollar, getting close to the 7.3 level recorded last October and November when China still had zero-Covid rules. Over the past three months, it has fallen by 5%.

Due to the yuan depreciation and the weaker-than-expected tourism data during last week’s three-day Dragon Boat Festival, the Shanghai Composite Index fell 1.48% to 3,150 on Monday. The Hang Seng Index, the benchmark of Hong Kong’s stock market, decreased 0.51% to 18,794.

The yuan depreciation triggered a debate on the internet in China over whether Beijing’s promotion of renminbi internationalization played a role.

Some Chinese commentators blamed Brazil, Argentina and Russia, which started accepting yuan payments for their exports to China earlier this year but kept selling the Chinese currency to obtain Western ones.

A Shandong-based writer surnamed Huang published an article with the title, “Is Russia crazily selling off renminbi? We cannot rule out this possibility.” 

“In recent months, some countries have accepted renminbi payments but they have been selling off the Chinese currency for the dollar,” Huang says in the article. “Some netizens believe that this is why the yuan has dropped significantly.”

He says China has trade deficits with Brazil and Argentina, which may not have a lot of renminbi to dispose of. But he says China has a trade surplus with Russia, which has accumulated about US$10 billion in the first five months of this year and may be selling off the Chinese currency now.

However, he goes on, it’s unclear whether Russia’s disposal of the yuan is strong enough to constitute a drag on the Chinese currency’s exchange rate.

A Henan-based columnist surnamed Niu says in an article published Sunday that Russian companies do not want to keep the renminbi they received from their exports to China. Niu says they sell the renminbi for euros and dollars and use these Western currencies to purchase raw materials and equipment.

“Such practice has formed a vicious cycle and caused renminbi depreciation,” Niu says. “To tackle this, China has recently taken some measures. Some media reports said the Bank of China has already stopped Russian clients from transferring renminbi to Europe and the US.”

RBC, a Russian media organisation, reported on June 18 that the Bank of China has restricted transactions for Russian bank clients to banks located in the European Union, US, Switzerland and the United Kingdom. But some analysts say Beijing’s move only aimed to avoid secondary sanctions from the West.

Widening interest rate gap

While the comments of Huang and Niu are welcomed by many netizens, some financial commentators and economists say their speculations have gone too far.

“Some people say Russia is selling renminbi for western currencies through Chinese banks while some others even blame the currency swap agreement between Russia and China,” Zhang Bin, a Jiangxi-based financial commentator, says in a video released on Monday. “Either these people are ignorant or they want to spread fake news to attract eyeballs.” 

Zhang says there is no mechanism for Russians to sell renminbi for Western currencies through Chinese banks and the currency swap agreement between Russia and China is only a financial tool for both sides to borrow each other’s currency.

He adds that renminbi depreciated for different reasons, including the United States’s rate hike and the weaker-than-expected economic recovery in China. He stresses that the yuan depreciation is within a manageable range.

A financial columnist who called himself Laonan says in an article that renminbi had grown more than 10% in dollar terms between 2020 and 2022 as the US economy declined while China’s exports continued to increase. Since that trend reversed last year, he notes, it is normal for the yuan to depreciate.

He says the widening interest rate gap, caused by the United States’s “crazy rate hikes” and China’s rate cuts, has also added pressure to renminbi. He says it’s ridiculous that Russia is blamed for “stabbing China with a knife.”

“The Japanese yen has decreased 9.57% so far this year. So, who stabbed Japan?” he asks.

Guo Lei, chief economist at GF Securities, told the media last month that renminbi will continue to fluctuate in the rest of 2023 but the chance it will have a sharp decline remains small. Guo said the renminbi’s value will depend on China’s economic performance.

China’s total exports fell 8% to US$283.5 billion in May from US$308.2 billion a year ago, according to the General Administration of Customs.

Besides, the Ministry of Commerce said on June 16 that China’s FDI fell 18.7% to US$10.85 billion in May from US$13.35 billion a year earlier. FDI decreased 5.6% year-on-year to US$84.35 billion in the first five months of this year from the same period of last year.

Read: China retail sales growth slow, job markets shaky

Follow Jeff Pao on Twitter at @jeffpao3

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Singapore families hiring new Indonesian domestic workers may face delays

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This involves verification by the Indonesian embassy to ensure that the potential employment is legitimate. Documentation will then be prepared and will need to be signed, she said. 

“It’s really just as simple as that. So once you follow all this procedure and all documentation, actually nothing will affect you,” she said. 

“The government set the regulation in order to assure that our citizens have the best or better protection through the procedures and proper documentation,” she added. 

DELAY SINCE LATE MAY 

Employment agencies told CNA that the delay affects those that did not go through the Indonesian embassy to get official employment contracts for new workers. Some agencies are also not accredited by the embassy. 

The agencies said these administrative steps are often lengthy. 

The delays in bringing Indonesian domestic helpers started in late May, they added. 

Ms Hilwah Brown, director of Hilwah Maid Agency said: “An agency like us who only specialise (in) Indonesian markets is greatly affected.  The feeling of being unable to receive migrant domestic workers is similar to during the pandemic period.” 

Co-founder of Ministry of Helpers Otbert de Jong said that the delay has been partly caused by immigration officers reportedly asking for a training certificate from PJTKI – Indonesian migrant work placement companies. 

These companies may be pushing for wider use of their certificate to deal with more maid agencies doing direct hires instead of going through them, he said. 

However, the certificate does not address problems like human trafficking, he added. 

Currently, many agencies go directly to agents in Jakarta to bring helpers into Singapore with an in-principal employment approval from Singapore’s Manpower Ministry, industry experts told CNA. 

THE INDONESIAN PERSPECTIVE 

Agencies have to see the situation from the Indonesian perspective, said Ms K Jayaprema, president of the Association of Employment Agencies Singapore. 

“What they are looking at is for domestic workers to have been properly correctly processed from the source country to be departing for employment to Singapore,” she said. Ms Jayaprema said her association has encouraged members to be accredited with the Indonesian Embassy and to go through the due processes.

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Why dollar doomsayers keep getting it wrong

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The position of the US dollar in the global league table of foreign exchange reserves held by other countries is closely watched. Every slight fall in its share is interpreted as confirmation of its imminent demise as the preferred global currency for financial transactions.

The recent drama surrounding negotiations about raising the limit on US federal government debt has only fuelled these predictions by “dollar doomsayers”, who believe repeated crises over the US government’s borrowing limit weakens the country’s perceived stability internationally.

But the real foundation of its dominance is global trade – and it would be very complicated to turn the tide of these many transactions away from the US dollar.

The international role of a global currency in financial markets is ultimately based on its use in non-financial transactions, especially as what’s called an “invoicing currency” in trade. This is the currency in which a company charges its customers.

Global network of supply and trade

Modern trade can involve many financial transactions. Today’s supply chains often see goods shipped across several borders, and that’s after they are produced using a combination of intermediate inputs, usually from different countries.

Suppliers may also only get paid after delivery, meaning they have to finance production beforehand. Obtaining this financing in the currency in which they invoice makes trade easier and more cost effective.

The dominance of the US dollars may be nearing its end. Photo: Wikimedia Commons

In fact, it would be very inconvenient for all participants in a value chain if the invoicing and financing of each element of the chain happened in a different currency. Similarly, if most trade is invoiced and financed in one currency (the US dollar at present), even banks and firms outside the US have an incentive to denominate and settle financial transactions in that currency.

This status quo becomes difficult to change because no individual organisation along the chain has an incentive to switch currencies if others aren’t doing the same.

This is why the US dollar is the most widely used currency in third-country transactions – those that don’t even involve the US. In such situations it’s called a vehicle currency. The euro is used mainly in the vicinity of Europe, whereas the US dollar is widely used in international trade among Asian countries. Researchers call this the dominant currency paradigm.

The convenience of using the US dollar, even outside its home country, is further buttressed by the openness and size of US financial markets. They make up 36% of the world’s total or five times more than the euro area’s markets.

Most trade-related financial transactions involve the use of short-term credit, like using a credit card to buy something. As a result, the banking systems of many countries must then be at least partially based on the dollar so they can provide this short-term credit.

And so, these banks need to invest in the US financial markets to refinance themselves in dollars. They can then provide this to their clients as dollar-based short-term loans.

It’s fair to say, then, that the US dollar has not become the premier global currency only because of US efforts to foster its use internationally. It will also continue to dominate as long as private organisations engaged in international trade and finance find it the most convenient currency to use.

What could knock the US dollar off its perch?

Some governments such as that of China might try to offer alternatives to the US dollar, but they are unlikely to succeed.

Government-to-government transactions, for example for crude oil between China and Saudi Arabia, could be denominated in yuan. But then the Saudi government would have to find something to do with the Chinese currency it receives.

Some could be used to pay for imports from China, but Saudi Arabia imports a lot less from China (about US$30 billion) than it exports (about US$49 billion) to the country.

The US$600 billion Public Investment Fund (PIF), Saudi Arabia’s sovereign wealth fund, could of course use the yuan to invest in China. But this is difficult on a large scale because Chinese currency remains only partially “convertible.”

This means that the Chinese authorities still control many transactions in and out of China, so that the PIF might not be able to use its yuan funds as and when it needs them.

Even without convertibility restrictions, few private investors, and even fewer Western investment funds, would be keen to put a lot of money into China if they are at the mercy of the Communist party.

China is of course the country with the strongest political motives to challenge the hegemony of the US dollar. A natural first step would be for China to diversify its foreign exchange reserves away from the US by investing in other countries. But this is easier said than done.

There are few opportunities to invest hundreds or thousands of billions of dollars outside of the US. Figures from the Bank of International Settlements show that the euro area bond market – a place for investors to finance loans to Euro area companies and governments – is worth less than one third of that of the US.

Full-colour US dollar and Chinese yuan notes torn in half and pictured beside each other over a grey map of the world.
Photo: NothingIsEverything / Shutterstock via The Conversation

Also, in any big crisis, other major OECD economies like Europe and Japan are more likely to side with the US than China – making such a decision is even easier when they are using US dollars for trade.

It was said that states accounting for one half of the global population refused to condemn Russia’s invasion of Ukraine, but this half does not account for a large share of global financial markets.

Similarly, it shouldn’t come as a surprise that democracies dominate the world financially. Companies and financial markets require trust and a well-established rule of law. Non-democratic regimes have no basis for establishing the rule of law and every investor is ultimately subject to the whims of the ruler.

When it comes to global trade, currency use is underpinned by a self-reinforcing network of transactions. Because of this, and the size of the US financial market, the dollar’s dominant position remains something for the US to lose rather for others to gain.

Daniel Gros is Professor of Practice and Director of the Institute for European Policymaking, Bocconi University

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

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Commentary: Transparent content moderation key to responsible political discourse in Malaysia

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This was on the purported basis of these groups being brazen enough to “steal” political power from the majority population. While some of this content was eventually removed, it came only after widespread circulation and public outcry.

GAPS IN UNDERSTANDING OF CONTENT MODERATION

Relatedly, social media platforms do not disclose what resources they allocate to individual markets, especially relatively smaller ones perceived as unproblematic, like Malaysia.

Resources here include how well-trained the AI models are at detecting issues specific to Malaysia, the number of human moderators dedicated to the country, and the language proficiency of the AI model and human moderators to account for hyperlocal colloquialisms and slang.

For example, none of the existing resources could flag, moderate, and remove the videos calling for a repeat of the May 13 racial riots of 1969, which involved sectarian violence between Malays and Chinese in Malaysia. This is because the date alone, when detached from its historical significance or context, would not suggest that it constitutes hate speech and incitement towards violence in the present day.

Understandably, content removal requests by the government also raised concerns. Fears are that such moves could lead to censorship of political speech, especially against critics of the current administration.

Of greater concern is that removal requests can be made on vague bases, such as infringing broadly applicable legislation, like Section 505(b) of the Penal Code and Section 233(1) of the Communications and Multimedia Act 1998. The former draws the line for free speech at statements bringing about public mischief, while the latter prohibits the improper use of network facilities.

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