Japan reminds world why it’s stuck in QE quicksand

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TOKYO – The Bank of Japan bowed to financial realpolitik Tuesday (October 31) by allowing bond yields to top 1%. But Governor Kazuo Ueda remains tethered to a level of policy unreality sure to keep the yen under strong downward pressure.

Ueda’s step was the tiniest the BOJ could have gotten away with without shoulder-checking global markets. It means far less than currency traders may think in terms of when and how Japan might exit a 23-year-old quantitative easing (QE) experiment.

The BOJ meeting “ended up somewhat confusingly but largely dovish leaving the yen still vulnerable to a further sell-off versus the dollar,” says Gary Dugan, chief investment officer at Dalma Capital.

In fact, the events of the last month might have ensured that Ueda’s team remains stuck in the QE quicksand longer than markets appreciate.

Since taking the helm in April, Ueda has been testing markets’ readiness for BOJ “tapering.” It hasn’t gone well so far. A move in late July, for example, to let 10-year bond yields rise from 0.5% to 1% sent the yen higher than Tokyo expected.

In the weeks that followed, the BOJ executed countless large and unscheduled bond purchases. That signaled to traders that the July tweak was inevitable given the surge in US yields to 17-year highs and that overall BOJ rate policies hadn’t changed. It was similar to the one-step-forward-two-steps-back maneuver the BOJ pulled off in December.

Tuesday’s tweak is more of the same. As US rates continue drifting upward, causing extreme tensions between dollar and yen rates, the BOJ has no choice but to adjust. After all, it remains to be seen how many more US tightening moves are in store for global markets. News that US gross domestic product (GDP) rose at a 4.9% annualized pace in the third quarter upped the odds the Federal Reserve will keep hiking rates.

Yet Ueda’s challenge grew markedly bigger this month for other reasons, too. One is the sudden explosion of violence in the Middle East. The Hamas-Israel war threatens to accelerate increases in oil prices, adding to inflation risks caused by Russia’s 2022 Ukraine invasion. Japanese inflation is running the hottest in three decades at close to 3% year on year.

Significantly, the BOJ raised its inflation forecast to 2.8% from 2.5% for fiscal 2023. For 2024, price expectations have been raised to 2.8% as well.

But even as commodity price surges warrant tighter policies, China’s economic downshift is pulling BOJ priorities in the other direction. In October, mainland factory activity slid back into contraction, while the services sector slowed more than expected.

The manufacturing purchasing managers index dropped to 49.5 from 50.2 in September. Non-manufacturing activity fell to 50.6 from 51.7.

“China’s economic activity fell to an extent, and the foundation for a continued recovery still needs to be further solidified,” says Zhao Qinghe, senior statistician at China’s National Bureau of Statistics. Economist Raymond Yeung at Australia & New Zealand Bank adds this “downside surprise” means Beijing “will still need to deliver growth-supportive policy.” 

As Japan’s top trading partner stumbles, exporters are bracing for a rough 2024. That’s dimming hopes that Japan Inc might boost wages, kicking off a virtuous cycle of income and consumption gains.

As headwinds mount, Prime Minister Fumio Kishida’s government is rushing to roll out fresh stimulus. They include proposals for tax cuts for the middle class, reduced corporate levies and cash handouts to households facing higher inflation.

Japanese Prime Minister Fumio Kishida’s ‘new capitalism’ looks a lot like the old. Photo: Government of Japan

The large and growing price tag for fiscal initiatives could increase pressure on the BOJ to add more, not less, liquidity. Otherwise, government bond yields might surge, adding to financial pressures on banks and households.

Yet Kishida’s latest proposals complicate Ueda’s options in another way. By shoveling fiscal money to fill economic holes, the ruling Liberal Democratic Party is treating the symptoms of Japan’s troubles, not the underlying ailments.

As inflation spikes higher, Kishida’s approval ratings are plummeting, currently around 29%, to the lowest of his two years in power. Hence the rush to ramp up fiscal stimulus efforts.

Missing, though, are proposals to raise Japan’s political game. When he took power in October 2021, Kishida pledged to implement a “new capitalism” plan to spread more equitably the benefits of economic growth.

Part of the strategy was addressing the unfinished business from the “Abenomics” era, reference to Shinzo Abe’s 2012-2020 premiership, the longest in Japan’s history.

Abe promised a supply-side revolution the likes of which modern Japan had never seen. It included moves to loosen labor markets, reduce bureaucracy, boost innovation and productivity, empower women and restore Tokyo’s place as Asia’s premier financial center for multinational companies and stock listings.

Mostly, Abe leaned on the BOJ to supersize QE. In March 2013, he hired Haruhiko Kuroda as governor to turbocharge an experiment that the BOJ pioneered in 2000 and 2001.

Within five years, Kuroda’s binging on bonds and stocks pushed the BOJ’s balance sheet above $4.9 trillion, topping Japan’s annual GDP. A resulting plunge in the yen boosted exports, juicing the stock market and generating record corporate profits.

Yet Abe’s team put very few reform wins on the scoreboard. Other than steps to strengthen corporate governance, the Abe era failed at nearly every turn to recalibrate growth engines, level playing fields and give chieftains confidence to fatten paychecks.

One big concern is that Tokyo’s same-old-same-old policy approach has lost potency over time. Economist Sayuri Shirai at Keio University notes that, this time a falling yen isn’t altering Japan’s export and trade deficit dynamics like in the past. Industrial production and corporate investment also “remain sluggish,” says Shirai, a former BOJ policy board member.

“While the government’s revenue is increasing due to inflation-induced income and consumption taxes, this is essentially a tax hike,” she explains. “Wage growth has not caught up with the rate of inflation. Given rising government and corporate debt, a rapid interest rate hike is likely to cause significant stress to the economy.”

But weak exchange rates leave Japan uniquely vulnerable to surging energy and food prices. This dynamic is colliding with a domestic economy that might not be ready for a shift away from ultraloose monetary policy. One big worry: the risk of a Silicon Valley Bank-like blowup amongst Japan’s 100-plus regional lenders.

Worries about another SVB abound in the US, too. As Fed Chairman Jerome Powell’s team mulls another rate hike — perhaps as soon as November 1 – investors are scouring the financial landscape for the next bank that might buckle under the pressure of rising US yields.

A relentlessly strong dollar is also raising default risks in Asia, particularly in China. It’s making offshore debt harder to manage.

“The greenback continues to draw smaller benefits from strong US data and high rate advantage than it should, likely due to its overbought status, but upside risks remain predominant,” says Francesco Pesole, an analyst at ING Bank.

Analyst Adam Button at ForexLive says the constant threat that Japan’s Ministry of Finance might intervene to support the yen is capping the dollar’s gains – at least for now. But the dollar, Button notes, “should be stronger than it is this week, and I think it’s just a matter of time until it materializes.”

In general, though, traders need to figure out where both US and Japanese rates are heading to know where risks lie. “Additional positioning doesn’t really make sense until those two key risk events are out of the way,” says Bipan Rai, currency strategy at CIBC Capital Markets.

The fragility of Japan’s sprawling regional bank network remains a clear and present danger to Asia’s second-biggest economy. Many of these lenders service rapidly aging communities in already sparsely populated areas of the country. That squeezed profits well before the banking shocks of the last 15 years, including fallout from the 2008 “Lehman shock.”

That crisis, fast-aging customer bases and an accelerating exodus of companies to Tokyo had regional banks these last 15 years hoarding government and corporate bonds instead of lending the credit the BOJ has been churning out. It was a similar practice that blew up SVB and New York-based Signature Bank.

Earlier this month, Japan’s Financial Services Agency telegraphed efforts to stress-test at least 20 banks to surface any SVB-like landmines across the nation. Part of the worry is the specter of similar social-media-fueled bank runs.

No developed economy prizes stability and financial market decorum more than Japan. And few, if any, face greater concerns about hidden cracks than Japan with scores of fragile regional banks in harm’s way.

Photo. Reuters / Yuya Shino
The Bank of Japan has some tough decisions to make. Image: Asia Times Files / Reuters

At the start of 2023, SMBC Nikko Securities estimated that regional leaders were sitting on about $10.5 billion of unrealized losses on foreign bonds and other securities. That has Ueda’s team wondering how big losses might become if government bond yields rose to 2% or even higher.

The comparisons between midsize banks in the US and Japan are limited, of course. SMBC Nikko analyst Masahiko Sato argues that the average threat to capital ratios is only about 2%. Therefore, Sato does “not think potential losses are on a scale with systemic implications.”

At the same time, many of Japan’s regional lenders, like SVB, tend to prioritize bonds that can be sold rather than holding debt to maturity. But BOJ tapering or even a rate hike or two could change this calculus, and fast.

If regional banks face profit pressures with rates at zero, the fallout from a big rate pivot by Ueda could be extreme. This could explain in part why “markets are seemingly underpricing the risks of an early normalization,” says Charu Chanana, a senior market strategist at Saxo Capital Markets.

Stefan Angrick, senior economist at Moody’s Analytics, says “this doesn’t rule out the BOJ dropping negative rates at some point — we speculate this may happen in April 2024, after the spring wage negotiations that year.”

But, he concluded, “it suggests that the way forward is towards zero interest rate policy with some form of quantitative easing, rather than a sharp lift-off on the short end.”

Follow William Pesek on X at @WilliamPesek

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Why we’re seeing shifting patterns in global manufacturing

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The 10th anniversary of the Belt and Road Initiative (BRI) in Beijing on October 18 witnessed the usual smiles and handshakes. But China’s economic landscape, dependent on robust supply-chain networks, is facing turbulent times.

The US-led trade war had already disrupted Chinese industry and supply chains before the Covid-19 pandemic further backlogged ports and exacerbated disruptions. President Joe Biden’s administration has meanwhile continued to expand policies restricting China’s access to the US market and technologies, including new restrictions on advanced chip exports announced just one day before the BRI summit.

Foreign direct investment into China also plummeted by 43% in 2022, while the United States has persuaded allies to curtail their economic collaborations with China. For instance, Italy, which joined China’s BRI in 2019, announced its withdrawal from the project this April.

Meanwhile, the Netherlands began imposing restrictions on semiconductor exports to China in March. The 2018 arrest of two Canadian businessmen, widely perceived as retaliation for Canada’s detention of Huawei chief financial officer Meng Wanzhou at Washington’s request, has made foreign executives increasingly hesitant to travel to China.

The greatest concern for Beijing, however, is the threat to China’s manufacturing and export-led economic model, which has driven China’s growth for most of the 21st century. In the first half of 2023, China’s share of US goods imports stood at 13.3%, a decline from 21.6% in 2017, marking the lowest figure since 2003.

Some of this decline can be attributed to “re-shoring” policies, which are encouraging American companies to build factories in the US, with European companies also promoting local manufacturing.

Economic decoupling initiatives have also prompted Western companies to establish manufacturing infrastructure in friendly or nearby countries, often referred to as near-shoring or friend-shoring.

Countries such as Vietnam, Malaysia, Taiwan, Indonesia, India, Mexico and others are vying for Western companies’ attention, offering subsidies, tax breaks, and other incentives. The newest iPhone was assembled in India, for example, while more than half of Nike’s shoes are now made in Vietnam.

Mexico steps up

However, it is Mexico that appears poised to reap the most benefits from this “lifetime opportunity,” according to Bank of America. Its proximity to the US and the USMCA free-trade agreement with the US and Canada has driven American companies to ramp up production in Mexico.

Combined with the growing automation of the US manufacturing sector, these developments have sparked debate about whether China’s “peak manufacturing” has already passed.

Nonetheless, as the “world’s factory,” China’s dominance in manufacturing remains stable enough to support its economy. Its share of global manufacturing actually grew from 26% in 2017 to 31∞ in 2021 (aided by the global decline in manufacturing in the years leading up to and during the Covid-19 pandemic), whereas India, Mexico and Vietnam contributed only 3%, 1.5% and 0.6% respectively.

China’s share of global manufactured exports by value also grew from 17 % to 21% in the same period, and despite some declines in bilateral trade, US-China trade hit a record high in 2022.

China’s resilience to global supply-chain shifts can be attributed to strategic infrastructure investments that have streamlined its manufacturing and export operations. Efficient ports, extensive highways, reliable rail systems, well-established industrial parks, stable governance, a large working-age population, and other factors set China apart from potential competitors.

Although the value of manufacturing in the US has risen and 800,000 manufacturing jobs have been created over the last two years, for example, this has not kept up with job growth in other industries, and manufacturing’s share of US GDP has continued to decline. There are also fears that the US will have a shortage of 2.1 million skilled manufacturing workers by 2030.

India faces challenges related to competition from cheaper imports, high input costs, taxes, and regulatory hurdles, while Mexico contends with corruption and instability from cartels and Vietnam grapples with power outages and bureaucratic red tape.

Resistance to change

Instead, many of China’s manufacturing competitors have opted to collaborate with China, reinforcing traditional supply-chain dependencies that Washington is striving to break. This is exemplified most clearly in Mexico, where the advantageous conditions for US companies have also made it an attractive destination for Chinese companies seeking a nearby gateway to the US market.

Remarkably, 80% of the land leased to foreign companies in Mexican industrial parks is now in the hands of Chinese enterprises (compared with 15% for US companies), allowing Chinese goods to be delivered for final assembly before being exported to the US.

This phenomenon extends beyond Mexico. At the end of 2022, the US Department of Commerce discovered that major solar suppliers in Southeast Asia were barely altering Chinese products before they were sent to the US. Across the region, Chinese green tech companies are making significant inroads into the manufacturing infrastructure.

Even Vietnam, despite its ongoing and historical tensions with China, has cautiously embraced Chinese companies looking to drastically expand their presence in the country.

After spending billions of dollars building economic relations with their Chinese counterparts, US companies have also resisted cutting ties with their Chinese partners. A 2021 Federal Reserve research note suggested that many are underreporting their imports from China to evade tariffs imposed by Washington.

Others are encouraging their Chinese partners to establish factories in North America. Additionally, the cancellation of programs (or those slated to expire in the next few years) allowing goods from many developing nations to enter the US duty-free may leave room for China to step in as a preferred source for US distributors.

Despite the limitations of Western decoupling policies, it’s worth noting that China is also working toward a form of decoupling to reduce its dependence on the West. Announced in 2015, the Made in China (MIC25) initiative seeks to eliminate Chinese companies’ reliance on foreign nations for critical technologies and products.

Policies also continue to be introduced to expand China’s domestic market to compensate for restrictions on overseas markets.

Adjustments to Chinese policy

China’s economy will continue to be characterized by strengths and weaknesses. The rising wages of Chinese workers have steadily eroded the international competitiveness of the country’s shrinking labor pool, while an ongoing property crisis has shaken faith in China’s domestic economy. Moreover, Beijing has become less liberal with capital, opting instead to recover outstanding loans from the BRI.

However, Chinese officials and businesses are increasingly lobbying local governments with “small but beautiful projects” that negate the need for consultation with more suspicious national leaders. China also remains crucial in areas such as rare-earth minerals and is expanding its role in manufacturing higher-end products, from aviation to green tech, to compete with high-tech Western firms.

Chinese endeavors in Latin America and Southeast Asia to adopt Chinese supply chains also position it to sell to these markets.

Although it may seem that we have “already hit or passed the peak share of China in world manufacturing,” no other country has or is projected to rival China’s manufacturing power and export networks. Furthermore, neither China nor the West is able or willing to sever their economic ties.

Even amid the collapse in relations between the West and Russia since 2022, Russian energy has continued to flow to Western countries, Western technology has continued to enter Russia, and Western companies that have said they are leaving Russia have remained.

The massive disruptions required for true economic decoupling from China are unpalatable to the public and the private sector. This reality is reflected in the shifting language of US and EU officials, who now emphasize de-risking instead of decoupling from China.

Chinese and Western companies instead look to continue bypassing restrictions and conducting business, reflecting the resilience of the Chinese manufacturing sector and making it clear that US-Western economic co-dependency is a formidable bond that won’t be easily broken.

This article was produced by Globetrotter, which provided it to Asia Times.

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Redex Group raises mil Series A funding led by Aramco Ventures

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Investors from the Middle East, SEA & Japan also participated in this round
Funds will enable global expansion and streamline REC issuance and digitisation

Redex, Asia’s leading Renewable Energy Certificates (RECs) solutions provider, announced the completion of its US$ 10 million (RM47.6 million) Series A funding round, with Aramco Ventures as the lead…Continue Reading

Smoother trips for people working on both sides of Causeway with Johor-Singapore special economic zone: PM Lee

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COOPERATING ON RENEWABLE ENERGY, DEVELOPING SMEs Beyond that, Mr Lee said the countries agreed to strengthen cooperation on renewable energy, as they move towards a low-carbon and sustainable future. Singapore has said it intends to import 30 per cent of its electricity supply from low-carbon sources by 2035, while MalaysiaContinue Reading

Albanese to China with trade war in quiet retreat

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When Australian Prime Minister Anthony Albanese visits China this week, he will be able to celebrate a figure that previous Australian leaders could only dream of. Over the past year, China has imported more than AU$200 billion (US$127 billion) worth of Australian goods and services.

In August 2023, the Australian Bureau of Statistics put the annual value of goods exports at AU$194 billion and services at AU$9.5 billion. In 2016, the last time an Australian prime minister visited China, the combined figure was less than half the current level at AU$95.6 billion.

Besides buoyant commodity prices and the emergence of new areas of trade such as lithium, exports have reached a record high because the disruptive measures imposed by Beijing in 2020, affecting barley, coal, lobsters and more, have been steadily removed. 

Australian Trade Minister Don Farrell says that under the Albanese government’s watch, by September 2023 AU$20 billion of “trade impediments” had been reduced to just AU$2.5 billion.

There is one narrative in Australia, particularly popular among those who championed former prime minister Scott Morrison’s government’s abrasive approach to China relations, that this positive outcome resulted from firm Australian resistance. It suggests that eventually, Beijing had no choice but to “capitulate” under Australian pressure. This narrative is both misleading and self-serving.

It is true that by the end of 2021 Beijing had recognized that its campaign of trade disruption was causing more harm to itself than it was shifting Canberra’s foreign policy positions.

Upon his arrival in January 2022, the new Chinese ambassador to Australia, Xiao Qian, said he was on a “noble mission” to work with “the Australian government and friends in all sectors … to jointly push the China–Australia relations back to the right track.” 

But Australian resolve provides only a partial explanation of the removal of the disruptive trade measures. What triggered Beijing’s actions in 2020 was not a particular policy by the Morrison government, but rather its diplomatic posturing. 

After the early Australian moves that disadvantaged China, such as Australia leading the world in banning Chinese technology companies from participating in its 5G rollout in August 2018, and accusations then that Beijing was threatening Australian trade, there was little sign of it. 

It was only in early 2020 when the Morrison government began aping the political attacks launched by former US President Donald Trump against Beijing over the Covid-19 pandemic that Beijing took steps against Australian trade.

Then-Australian prime minister Scott Morrison often aped US president Donald Trump. Photo: Facebook

Beijing wasn’t alone in being taken aback by Australia’s political assault. On Morrison’s call for international health inspectors to be given powers akin to “weapons inspectors.” 

Martin Parkinson, the usually reserved and then recently retired secretary of the Australian Department of Prime Minister and Cabinet, remarked, “what whizz kid … dreamed up those talking points, what did they think they were going to achieve with that?”

When the Albanese government restored “calm and consistent” diplomacy, little wonder that ministerial visits resumed and trade disruptions began to ease.

A critical ingredient in the restoration of trade ties has been the multilateral trading system, overseen by the World Trade Organization (WTO). 

This system, which supports open and competitive global markets, blunted the effects of Beijing’s bans on Australia by facilitating the redirection of exports of Australian coal, barley and other commodities, previously destined for China, elsewhere.

The WTO also provided a neutral forum in which Canberra and Beijing could engage in their disputes relating to barley and wine.

After Washington drove the WTO’s regular appeals body into dysfunction in December 2019, Australia and China both stuck to a rules-based process by joining the workaround to the WTO dispute settlement process, the Multi-Party Interim Arrangement. This meant that neither would appeal an unfavorable WTO panel finding “into the void.”

In the case of barley, the timeline is telling. The WTO panel circulated its final report on Australian barley exports to both parties on March 15 – reportedly in Australia’s favor.

On April 10, Canberra and Beijing announced a deal had been struck in which Beijing would undertake an “expedited review” of the tariffs it had imposed. This led to Chinese tariffs being lifted on August 4.

Chinese tariffs on Australian commodities hit agricultural producers hard. Image: Twitter/NDR

Australian Foreign Minister Penny Wong calculates that Australia “would not have been able to get this outcome without working through the WTO.” Later that month, Trade Minister Farrell farewelled the first shipment of 55,000 tonnes of Australian barley, at a healthy price premium, destined for China.

October brought the news that the same process was in train for wine. On the informal measures still affecting lobsters and beef, Farrell says that warming relations and the experience of the barley episode mean that Australians can “be very confident … that we can resolve all of those outstanding issues.”

Australia’s resistance to Beijing’s attempts at economic coercion was undoubtedly right. But in celebrating the latest trade numbers, when in Beijing Albanese might propose a toast to professional diplomacy and a shared commitment to the multilateral trading system, including an independent, rules-based resolution of disputes. Recommitment to both is the right way forward.

James Laurenceson is Professor and Director at the Australia-China Relations Institute at the University of Technology Sydney.

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

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Counting on coal: Cambodia’s fossil fuel push flounders with delays

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The skeletal exterior of one of the newest coal power plants in Cambodia sat silent amongst farmland in Oddar Meanchey. On a still afternoon at the very end of June, weeds entangling brick stacks, cement mixers and truck tires showed construction at the Han Seng plant had been long paused.

Locals toasting to happy hour down the road from the front gate of the site complained of months of delayed pay for a relative working there as a security guard, adding there was no set date for operations to resume. There was little more information at the nearby Ou Svay commune hall.

“Maybe the plan changed to complete construction by 2025?” questioned Roeun Phearin, who was a commune consultant for the plant. “The construction is now paused and we don’t know the reason because it is the internal information of the company.”

Cambodia bet big on coal in 2020. The Kingdom doubled down on fossil fuel that year with plans to develop three coal power plants to meet rising electricity demand and, in the process, flip most of Cambodia’s power production from renewable sources to coal.

The move bucked the global push for clean energy and dismayed sustainability advocates, but the announced plants are now facing years of delay – raising questions about when, or if, the Kingdom’s last coal projects will go online.

When announced, all three plants were attached to China’s infrastructure-focused Belt and Road Initiative. But while China’s 2021 pledge to cut support for coal power abroad killed projects elsewhere in Southeast Asia, Cambodia’s plans appeared to survive the chopping block.

Southeast Asia Globe documented the slate of projects across three provinces, as well as Cambodia’s original coal-fired power plant. Of these three sites – which the Cambodian government pledged are its last coal plants – two are in varying stages of inertia. The third is finished and operational.

In deep-rural Oddar Meanchey province, the 265-megawatt, semi-built Han Seng project missed its deadline to go online last year. Falling revenue for the Chinese companies in charge pivoted the project to new contractors, who are sticking with coal – but also now investing in solar energy at the same plant.

One of Cambodia’s newest proposed coal-fired power plants in Oddar Meanchey province has been dormant for more than a year. Photo by Anton L. Delgado for Southeast Asia Globe.

Meanwhile, near the coast in Koh Kong province, the politically connected Royal Group conglomerate has yet to even break ground on a 700-megawatt power plant initially scheduled to go online this year. Former residents of the area allege unfair deals and heavy-handed evictions.

Finally, just across the Bay of Kampong Som in Sihanoukville province, Cambodia International Investment Development Group’s (CIIDG) new 700-megawatt coal project appears to be the only of the three to hit its expected completion targets.

Just down the same road from it in Steung Hav district is another plant, the 250-megawatt Cambodian Energy Limited (CEL) coal complex, which was the first of its kind in the Kingdom. Local residents fear for the effects these power plants could have on their health and environment.

“This is not good for us,” said fisherman Hang Dara, who left his job as an electrician at CEL because of health concerns. “But it will be much worse for the next generation in this province since they now have even more coal projects.”

Hang Dara, a former electrician turned fisherman, passes the two active coal-fired power plants in Sihanoukville’s Steung Hav district. Photo by Anton L. Delgado for Southeast Asia Globe.

Future of fossil fuels

While addressing the U.N. in 2021 and in order to stay “committed to harmony between man and nature”, President Xi Jinping pledged China would stop building coal-fired power projects abroad and step up support for renewables and low-carbon energy.

As a major financier and equipper of coal-fired power plants, China’s announcement was hailed as a major step toward achieving the Paris Agreement’s goal to limit global temperature rise by cutting greenhouse gas emissions.

The fate of 77 Chinese-backed coal projects around the world that were in varying stages of development before Xi’s pledge were still uncertain as of October, according to the Helsinki-based Centre for Research on Energy and Clean Air (CREA).

Almost half of those power plants would be in Southeast Asia.

If these 37 projects in Indonesia, Vietnam, Laos, Cambodia and the Philippines are operated for their standard 25-to-30-year lifespans, CREA calculated they’d emit a total of nearly 4,230 million tons of carbon. That’s a little less than U.S. emissions for just last year, the centre said.

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The three coal projects in Cambodia continued after China’s pledge, but 14 power plants were officially cancelled in Indonesia and Vietnam, according to CREA, nixing the production of 15.6 gigawatts of coal-fired energy.

“With the very dramatic drop of costs for clean energy and the increase of costs for coal, the Cambodian government has the chance to re-evaluate if those coal plants are the best way to meet Cambodia’s power needs,” said Lauri Myllyvirta, lead analyst at CREA.

Cambodia is opting into an especially precarious position, Myllyvirta said, as the country mostly depends on foreign imports of coal.

“The wild swings in coal prices and global coal markets in the past three years have vividly demonstrated the economic risks of depending on fossil fuels,” he said, adding that price fluctuations would only “become more volatile.”

In 2021, Cambodia imported approximately $222 million worth of coal, according to records from the U.N. Comtrade Database processed by Harvard Growth Lab’s Atlas of Economic Complexity.

The trade data underlines the role of Indonesia as Cambodia’s largest coal exporter for more than a decade. Nearly 85% of coal imported by Cambodia from 2012 to 2021 came from Indonesia.

A shipment of coal is piled onto a dock in Sihanoukville’s Stueng Hav district, home to two of Cambodia’s coal-fired power plant complexes. Photo by Anton L. Delgado for Southeast Asia Globe.

Zulfikar Yurnaidi, a senior officer at the ASEAN Centre for Energy in Jakarta, agreed with Myllyvirta that the future of coal is increasingly uncertain. Yurnaidi said the international “allergy towards coal” continues to be an unaddressed ASEAN issue.

“We cannot wish coal and fossil fuels gone right away,” Yurnaidi said. “Support from foreign financial institutions is still required. Maybe not to install a dirty power plant, but to help us reach the end goal of reducing emissions by upgrading fossil fuels and investing in renewable energy.”

As coal funding runs dry, international climate finance has risen in Southeast Asia with millions of dollars going into the ‘just energy’ transitions in Vietnam and Indonesia. After the third Belt and Road Forum in mid-October, Cambodia’s Prime Minister Hun Manet announced Chinese state-owned power companies had offered the Kingdom more than $600 million for renewable energy projects.

Despite foreign funding, Yurnaidi said ASEAN’s emphasis on economic growth will continue to require coal while bloc member-states shift to renewable energy sources.

“ASEAN is a very huge ship with hundreds of millions of people and trillions in GDP,” Yurnaidi said. “With the energy transition, we know this ship needs to take a turn. But we cannot just make a sudden roundabout because then everyone will fall into the sea.”

A fisherman in Sihanoukville province passes the coal power plants on the coast of Steung Hav district. Photo by Anton L. Delgado for Southeast Asia Globe.

Counting on coal

Cambodia’s bet on coal seemed to embody that idea.

In the aftermath of Covid-19, Cambodia’s Power Development Master Plan charts the way for the country’s energy expansion from 2022 to 2040 and predicts a steady rise in national demand for energy.

The first five years of every “energy scenario” within the plan prioritises the development of Cambodia’s proposed roster of three new coal sites.

At a meeting before the 26th U.N. Climate Change Conference in 2021, also known as COP26, Cambodia’s Minister of Mines and Energy Suy Sem said the country would no longer approve additional coal projects.

The years of construction delays facing two of the power plants have some experts wary of potential energy shortages. Chea Sophorn, an energy project manager who specialises in renewable developments, said shortages would depend on how quickly the Kingdom’s post-Covid economy, and thus energy demand, recovers.

But with international investors turning away from fossil fuels, Sophorn emphasised that securing support to jump-start the two stalled projects could be difficult.

“What type of investor will still be able to finance stranded assets like this?” questioned Sophorn, explaining that without China there are few to no places for these projects to turn.

Cheap Sour, an official with the Ministry of Mines and Energy, declined to comment and referred to the ministry spokesman, Heng Kunleang, who left Globe’s text and voice messages on read. Eung Dipola, the director-general of the ministry’s Department of Minerals, was unavailable for comment.

The sprawling site of the 265-megawatt, semi-built Han Seng coal power plant in Cambodia’s Oddar Meanchey province. Surrounded by fields of cassava and other crops, the project missed its deadline to go online last year and was silent when reporters visited at the end of June. Photo by Anton L. Delgado for Southeast Asia Globe.

Construction in Cambodia

In Oddar Meanchey, financial difficulties have already pushed the companies backing the $370 million Han Seng power plant to pivot.

The state-owned Guodian Kangneng Technology Stock Co. suffered a massive decrease in its net profit for shareholders in the first half of last year and brought in a new contractor, Huazi International, in September. 

The plan to install 265 megawatts of coal-fired power hasn’t changed – but Huazi has since announced intentions to add 200 megawatts of solar capacity to the site. This is the first time any other type of energy production has been associated with the struggling Han Seng power plant.

Farmer Boy Troch, who neighbours the Yun Khean coal mine in Cambodia’s Oddar Meanchey province. Photo by Anton L. Delgado for Southeast Asia Globe.

Just two kilometres from the semi-constructed project site, the Yun Khean coal mine, which would supposedly one day supply the plant, is operating as usual.

Boy Troch, who lives a stone’s throw away from the mine’s slag heaps, believes mining operations contaminated the groundwater beneath his farm, damaging crops and sickening wildlife.

“There are a lot of lands affected by the mine, but village and commune chiefs do not care,” Troch said, pointing at shifting heaps of coal-streaked earth across the road from his land.

Heaps of earth from the Yun Khean coal mine contrast with the surrounding farms and forest two kilometres from the Han Seng power plant in Cambodia’s Oddar Meanchey province. Photos by Anton L. Delgado for Southeast Asia Globe.

With his grandchildren by his side, Troch said he feared coal mining would proliferate in his district if the power plant went online.

“We are afraid to protest because our voice isn’t heard,” Troch said. “We are ordinary people. We are more afraid that they will evict us from this land.”

In Koh Kong, stories from evicted residents may validate these fears.

Royal Group, one of the largest investment conglomerates in Cambodia with direct ties to former Prime Minister Hun Sen, received a nearly 170-hectare land concession in 2020 within Botum Sakor National Park for the coal power plant.

People living on the site without land titles complained of rough, uncompensated evictions. Former resident Keo Khorn’s home was torn down in 2021 by a government task force. With 37 evictees, he petitioned for reparations.

Residents who were evicted or sold their land to Royal Group, signed petitions and wrote letters to provincial and national authorities for fairer compensations to no avail. Photos by Anton L. Delgado for Southeast Asia Globe.

“We all came together to complain about the company,” Khorn said. “Everyone heard us, the provincial ministries and the national ministries. But no one did anything.”

The project site is currently vacant, but workers are clearing forests around the location. These areas, also within the national park, were given to Royal Group in a second, nearly 10,000-hectare land concession this year.

Thomas Pianka, with Royal Group’s energy division, flatly refused to speak with Globe reporters.

“No, I don’t need to talk to you,” he said before hanging up a call.

While the first land concession Royal Group received from the government for the coal project has seen little to no activity, the area given to the company in a second concession within the national park is steadily being cleared. Photo by Anton L. Delgado for Southeast Asia Globe.

Where coal plants are actually operating, residents in Sihanoukville province have different worries. 

A plant security guard for the older Cambodia Energy Limited site said other workers have told him about health concerns, but said the company has never mentioned any risks.

The guard’s deputy village chief, Ly Socheat, said she regularly fields complaints about the smell from the power plant. Socheat said many of the families in her village have stopped collecting rainwater in fear of contamination from the coal.

While Socheat attended several meetings about potential employment opportunities at the power plant, she has also never been informed of any potential health impacts.

Residents complained of respiratory issues and headaches. But coal-fired power plants have also been linked to cancer – a 2019 study estimated 1.37 million cases of lung cancer around the world will be linked to such plants by 2025.

In the waters just off the coast, fisherman Hang Dara recounted why he left his job as an electrician at CEL to instead cast for crabs by the power plant. He believed the plant’s discharged water was heating the bay and harming the environment.

Loy Chaem, a crab fisherman in Sihanoukville province, passes the coal power plants on the coast of Steung Hav district. Photo by Anton L. Delgado for Southeast Asia Globe.

“I was very worried about my health,” said Dara, who explained he had severe headaches and chronic coughs while working at the power station. “But now I am very worried about the health of the fish.”

As Dara stood by the bow, his fishing partner Loy Chaeum drove from the stern. As they passed coal loading docks supplying the two power plants, Chaeum excitedly pointed out a vulnerable Indo-Pacific humpback dolphin surfacing for air.

“I don’t see many dolphins now, they don’t like the coal. Like us, they must go farther and farther away to survive,” said Chaeum, who explained he motored across the bay every morning in search of a better catch.

That brings him closer to Koh Kong, where one day there may be another coal-fired power plant.

“If they build it, there will be nowhere for them or us to go,” he said, turning back to land, having lost sight of the dolphin.

Contributed reporting by Andrew Haffner and Sophanna Lay. A Khmer-language version of this story can be found here, with translations by Sophanna Lay and Nasa Dip.

This article was supported by a ‘News Reporting Pitch Initiative’ from the Konrad-Adenauer-Stiftung Foundation in Cambodia.

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Court gives Evergrande one last chance to agree debt deal

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Evergrande sign.Getty Images
By Peter Hoskins & Nick Marsh
BBC News

A Hong Kong High Court judge has given crisis-hit Chinese property giant Evergrande one last chance to come up with a new deal over its huge debts or face liquidation.

A winding-up hearing, initially scheduled for Monday, was adjourned to 4 December.

Justice Linda Chan said it would be the last hearing before a decision is made.

Evergrande is the world’s most indebted property developer with more than $325bn (£268.4bn) of total liabilities.

It defaulted on its debts two years ago and has been working on a new repayment plan ever since.

Justice Chan said Evergrande had to come up with a “concrete” proposal before that otherwise it was likely the company would be wound up. A liquidator would still be able negotiate with creditors, she added.

Evergrande did not immediately respond to a BBC request for comment.

The case was originally brought by Top Shine Global, an investor in Evergrande unit Fangchebao, in June 2022.

It said Evergrande had not honoured an agreement to buy back shares the investor had bought in the business.

Evergrande’s plans to rework its agreements with creditors were dealt a major blow last month when it confirmed that its founder Hui Ka Yan and one of its main subsidiaries were under investigation for suspected criminal activities.

The company also said that it was it barred by Chinese regulators from issuing new dollar bonds, which was a key part of its plan to restructure its debts.

It also cancelled planned votes by creditors on its restructuring plan, which were originally scheduled for late last month.

Most of Evergrande’s debt is owed to people within China, many of whom are ordinary citizens whose homes have not been finished.

When the firm defaulted on its huge debts in 2021, it sent shockwaves through global financial markets as the property sector contributes to roughly a quarter of China’s economy.

Several other of the country’s major developers have defaulted over the past year and many are struggling to find the money to complete developments.

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ASEAN economies facing a dangerous combo

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A potent combination of factors, including a stronger US dollar, a weaker Chinese economy, and rising oil prices, is creating a dangerous cocktail that threatens to disrupt the stability of Southeast Asian economies. 

A strong dollar makes servicing dollar-denominated debt more expensive, increasing the burden on countries with substantial external debt. 

Additionally, it could lead to capital outflows as investors seek higher returns in the US, putting downward pressure on currencies of the members of the Association of Southeast Asian Nations. As a result, import costs rise, contributing to inflationary pressures.

A slowing Chinese economy translates into reduced demand for ASEAN exports, particularly raw materials and intermediate goods. This has a direct impact on growth and could lead to reduced foreign investment as China’s economic health influences investor sentiment.

Meanwhile, higher energy costs contribute to inflation, which may prompt central banks to raise interest rates to combat rising prices. This, in turn, slows economic growth and impacts business and consumer sentiment.

The combined impact of a stronger dollar and higher oil prices can exacerbate current-account deficits in some ASEAN countries. These deficits lead to currency depreciation, making it challenging to attract foreign investment and service external debt.

Currency depreciation, driven by these factors, increases the cost of repaying foreign-denominated debt. This could prompt greater financial instability, especially for companies that have borrowed in foreign currencies, which may have trouble servicing their debt. As such, investors in these companies face heightened default risks.

Another issue is that the volatile mix of a strong dollar, a weaker Chinese economy, and higher oil prices can trigger stock market corrections, resulting in capital flight. Investors may reduce their exposure to ASEAN equities, leading to bearish market sentiment.

In addition, with slowing economic growth and currency volatility, foreign direct investment (FDI) into the region could slow. International investors may divert their capital to safer havens or more promising emerging markets, diminishing the flow of foreign funds.

Governments in ASEAN countries will need to implement sound economic policies and structural reforms to counteract these challenges. For example, diversifying trade partners and reducing reliance on China will help mitigate the risk of a weaker Chinese economy.

They should also consider targeted fiscal and monetary policies to stimulate domestic demand and investment.

Global investors should closely monitor the economic and financial conditions in ASEAN nations. 

Diversifying their portfolios and incorporating risk management strategies with an independent financial adviser will be crucial in navigating these turbulent waters. 

In the midst of these challenges, opportunities may also emerge for those investors who carefully assess risks and seize them as they arise.

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

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US-China stuck in a cycle of tit-for-tat ironies

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This is the last of three parts. Read part 1 and part 2.

Successful development like China’s leads to a crucial international transition. When countries are poor and weak, they receive special forbearance to encourage their development. All successful developing countries, including the US, stole intellectual property, denied foreigners access to their markets, and heavily subsidized their companies.

Rich countries reluctantly tolerate this and celebrate successful growth in poorer countries. For instance, the US and Europe complained about but took minimal action against Japan, South Korea, Taiwan and Singapore during the early and middle levels of their development. There is still substantial tolerance for extensive trademark theft by Malaysia, Thailand and India.

In my youth, I bought most of my books as knockoffs at Caves bookstore in Taipei and most of my CDs and video disks as knockoffs in Singapore, and later I bought clothes for my family at the Silk Market in Beijing.

But success brings huge scale that begins to distort global markets and create intolerable damage. That threshold occurred in the 1980s for Japan and later for South Korea, Taiwan and Singapore. Japan’s subsidized and protected cars and consumer electronics threatened to destroy all competitors through unfair competition. The US and EU reacted strongly with tariffs, quotas and other measures.

After a difficult decade, Japan (mostly) accepted the rules of fair competition. Since then, Toyota has often been the world’s biggest car company, but Americans and Europeans welcome Toyotas because Toyota’s victories are achieved by building better cars, not by theft and subsidies.

Developing country victim – or superpower global leader?

China’s success has reached that transition point. Take just one of many examples: When the Chinese fishing industry was small and poor, subsidies were acceptable. Now the coasts of North Korea, Africa and India have very extensive communities that have been impoverished by China’s huge, government-supported fishing fleet.

China’s formerly impoverished fishermen are now depleting fishing stocks and creating hunger along the coasts of South Asia, Africa and Latin America.

Chinese fishing boats heading out to sea from Zhoushan in Zhejiang province. Photo: US Naval Institute

Likewise, when China was poor, copying American CDs brought a noisy but in practice minimal response. But now the costs to the US of intellectual property theft are estimated at hundreds of billions of dollars annually, and even small venture firms report over 100,000 computer intrusions per day from China.

When CATL and Huawei threaten to destroy all European competitors because they have access to all world markets while the Europeans are constrained in China, the damaaged parties react. Chinese spokesmen often characterize these reactions as attempts to keep China down. No, they are demands that China accept the responsibilities of success.

In the view of an exceptional range of neighbors, as well as their friends and allies in the US and EU, China has evolved from a victim to a predator – because policies that were acceptable or tolerable when China was weak cause serious damage to neighbors and global markets now that China has become a great power.

China, a country nearing the World Bank’s “high income” status, now demands all the special privileges of a weak, impoverished country while simultaneously asserting itself as a powerful global leader that will reshape the world into a community of common interest as interpreted by China. This contradiction is unsustainable.

China’s international contradiction reflects a domestic contradiction. In space exploration, in military technology and in many aspects of manufacturing industry, China is a modern superpower. Shanghai, especially Pudong, is a world-leading 21st century city. China’s trains, ports, airports, telecommunications and universal wi-fi access make the United States look backward by comparison.

Simultaneously, however, China’s rural healthcare systems, its systems to care for the aged, its pension systems, its insurance systems and its rural financial systems are those of a developing country rather than a modern superpower. China’s poverty reduction has been one of the greatest triumphs of human history, but the standard of living for several hundred million people remains very low.

A left-behind elder in the Chinese countryside. Photo: Hong Kong Heifer

Its fiscal system, which places most social burdens on local governments while retaining most revenues for the central government, has worked because local governments were allowed to be extremely creative, rule-breaking, financially risky and corrupt. Now, the effort to impose strict rules and financial accountability and to eliminate corruption is mak- ing the skewed distribution of responsibilities and revenues an untenable contradiction.

These contradictions arise because China has chosen in the 21st century to emphasize urban modernity and geopolitical glory over universal well-being for its citizens.

If China refocuses on its domestic social challenges, it will have a solid foundation for global economic and geopolitical competition. If China accepts responsibility for international stability, its fishing boats will be as acceptable globally as France’s. CATL and Huawei could enjoy accepted global preeminence, as Toyota does.

US overreaction

The US overreacts to the damage from these transitions, and it reacts fearfully to a challenge to its global primacy. Its unwillingness to accept massive intellectual property theft and destructive unfair competition is rational and reasonable. But, faced with a rival, America’s status insecurity becomes a triumph of passion over calculation.

US political elites often think and talk as if US global leadership, US global dominance, were some kind of moral right. The prospect that some other system might outperform US-style democracy is perceived as a mortal threat.

Faced with a rival, the US consistently exaggerates the capability and potential – and hence the “threat” – of the rival, which led to the extreme overestimates during the Cold War of the size and capabilities and prospects of the Soviet economy and also, in the late 1970s and 1980s, to extreme fear in important quarters of what was seen as Japan’s imminent superiority.

With Japan four decades ago and with China now, much of the Congressional reaction is populist, emotional, ideological and disproportionately fearful.

Faced with a serious competitor, the US is abandoning its strengths. During the Cold War, the US triumphed by creating a coalition of mutual prosperity, based on the Bretton Woods institutions, which triumphed over a Soviet Union that was autarkic and squeezed its citizens and its allies in the service of an overwhelming priority for the military.

In the competition with China, the US has crippled the expansion and modernization of the Bretton Woods institutions because expansion and reform would greatly enhance China’s role. Ironically, this has created a vacuum into which China’s Belt and Road Initiative, its development banks, its industrial standards and its currency swap system have moved. Every attempt by the US to pretend that China is not a big and equal player has backfired.

The US has undermined its own institutional system, refusing to join the UN Convention on the Law of the Sea and the International Criminal Court, preventing the appointment of judges to the World Trade Organization dispute system and abusing WTO rules by falsely arguing that tariffs on things like steel and aluminum are vital matters of national defense.

By abusing the rules-enforcing systems and ignoring the rules, the US undercuts its own core argument for a rules-based system.

By turning inward when the rest of the world is developing the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the Regional Comprehensive Economic Partnership (RCEP), a more consolidated EU, a Comprehensive Agreement on Investment (delayed, for the time being) and the all-time most comprehensive open trade agreement in Africa, the US risks being left behind by the rest of the world.

Leaders of ASEAN member states, Australia, China, Japan, Republic of Korea and New Zealand witnessed the signing of the Regional Comprehensive Economic Partnership (RCEP) Agreement online on November 15, 2020. Photo: Asia Times Files

Tariffs on steel, aluminum solar panels and much else damage the US more than China. They exemplify the contradictions at the core of Washington’s China policy.

Even more fundamentally, the US responds to a challenge as if it were primarily a military challenge, whereas the whole experience of twentieth-century geopolitics is that the key to long-run geopolitical success is the economic superiority of oneself and one’s coalition.

Military power of course remains important, but Beijing has seemed to understand better than Washington that the path to global leadership lies primarily through economic preeminence, both domestically and in international relationships. The Belt and Road Initiative embodies that understanding, just as US emphasis on the Bretton Woods system once did.

The two countries’ contrasting strategies in Africa (building infrastructure versus providing anti-terrorist military teams) symbolize that difference. America’s inward turn weakens its own economic performance and increases tensions with allies and partners. Gutting its diplomatic arm, its aid programs and, in 1999, its information service (the United States Information Service) has combined with its meager support for the Bretton Woods institutions to weaken its global leadership role and raise the risk of military conflict.

Ironically, the current administration in Washington justifies all this as “a foreign policy for the middle class,” based on the manufacturing jobs fallacy analyzed at the beginning of this essay.

Tit for tat ironies

In another layer of irony, however, China appears to be duplicating this American error as it raises the priority for security relative to economic development.

For three decades, the leaders of China and America wisely created perhaps the greatest generation of peace and development in human history. There were differences, conflicts, tensions and risks, and there always will be. But currently, both sides are magnifying the problems rather than managing them.

Both sides are avoiding difficult domestic dilemmas by blaming problems on the other. Both are pursuing geopolitical aspirations in ways that harm their domestic economies and popular welfare. In both cases, doing this actually weakens their long-term geopolitical prospects.

A reset will require not just diplomatic adjustments, but also fundamental shifts in the management of domestic politics.

William H Overholt ([email protected]) is senior research fellow at the Harvard Kennedy School’s Mossavar-Rahmani Center for Business and Government.

This article, first published in the China International Strategy Review, is slightly abridged and republished under a Creative Commons Attribution 4.0 international license.

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