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

Investment strategy: Not a time to play the hero

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

Ukraine: What next and to what effect?

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

The China bailout that wasn’t

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

Russian air offensive intensifies as Ukraine grapples with stalemate

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

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

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

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

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

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Ukraine war gives China’s yuan a needed boost

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

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

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

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

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

Chinese yuan’s slow progress

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

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

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

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

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

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

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

US dollar’s dominance questioned

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

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

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

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

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

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

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

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

Yuan still not freely available

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

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

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

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

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

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

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Pheu Thai shelves digital cash plan

Pheu Thai’s digital wallet scheme will be shelved for the time being to make way for the social welfare policies of the Move Forward Party (MFP), according to the party’s secretary-general, Paopoom Rojanasakul.

Speaking after a meeting of the party’s economic team yesterday, Mr Paopoom said while the country would still benefit from further economic stimulus, the scheme, which would cost 560 billion baht, will be put on hold.

The decision was taken to allow the MFP to make good on its promises to improve social welfare through policies which analysts have estimated would cost around the same as Pheu Thai’s digital wallet scheme, he said.

The MFP, which will lead the formation of the coalition government, has vowed to focus on education, children, people with disabilities and retirees.

Mr Paopoom said the meeting also discussed which of the party’s economic policies will be pushed at talks with other coalition partners. These will include tax reforms, measures to boost exports and foreign direct investment, tackle non-performing loans, especially in the SME sector, and other problems relating to ageing society tax reforms.

The party wants to seek new markets for the export sector with a focus on the Middle East and develop products and services to meet market demand better. It also advocates a flexible policy to attract FDI, and there will be no “one size fits all” approach, he said.

With regards to non-performing loans in the SME sector, Mr Paopoom said defaults are on the rise and measures are needed to tackle the problems before they worsen.

He said the team debated ways to find new sources of revenue to offset expenditures which are expected to spike, as well as how to increase efficiency in the agriculture sector and the appropriate minimum wage.

Mr Paopoom said the minimum wage and the establishment of new economic zones would be raised at a June 6 meeting with prospective coalition partners.

He declined to comment on the MFP’s economic policies, which have come under criticism as they would result in higher taxes, saying every policy has its advantages and disadvantages.

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Singapore’s plant-based entrepreneurs are targeting meat eaters

In an unassuming butcher’s shop on Singapore’s Ann Siang Hill, juicy steaks hang from hooks in the windows. Local favourites – chicken satay skewers and beef rendang – sit in cool glass booths. 

But the meatiness is an illusion, the satays are soy-based and the steaks pumped up with shiitake mushroom. But, Love Handle, Asia’s first plant-based butcher, is not targeting Singapore’s vegans, or the vegetarian diets of the country’s Buddhist and Hindu communities. About 70% of its customers are meat eaters and its mission is to reach the mainstream. 

“Our target audience is specifically not vegans,” said Ken Kuguru, Love Handle’s CEO and founder. “It’s a bit of a paradox. [But in everything] we are a little bit paradoxical.” 

Love Handle CEO and co-founder Ken Kuguru (right) works to bring meaty flavours to plant-based dishes at his meat-free butcher. (Photo supplied)

As a city-state that imports more than 90% of its food and has little room for actual livestock, Singapore has a vested supply chain interest in shifting from traditional meats. 

Last year, a three-month chicken export ban from Malaysia, which provides the Lion City with about 34% of its poultry, halted the normal inflow of approximately 1.8 million broiler chickens a month. The ban caused a hike in poultry prices and concern over the country’s food security.

At the same time, environmental sustainability concerns are pushing many in Singapore and beyond to rethink their diets to reduce consumption of animal products. Restaurants and suppliers are increasingly following a similar path as Love Handle in using plant-based foods to reach customers beyond just vegans and vegetarians. Though challenges remain in making a convincing meat substitute, a rising class of Singaporean food entrepreneurs are betting on new techniques to recreate favourite dishes in a more eco-friendly way. 

For some of them, this isn’t just a business decision – it’s a way to possibly prevent the worst outcomes of global climate change while preparing for a new world brought on by environmental crises.

Hawker Neo Cheng Leong (right) and his apprentice Lim Wei Keat at Neo’s chicken rice stall in Singapore. Recent chicken export bans have triggered food supply chain fears for the country, which imports 90% of its food. (Photo: Roslan Rahman/AFP)

In the Lion City, about 7% of the population are vegan or vegetarian, according to a 2020 poll by research firm YouGov Singapore. Individual reasons for the diet typically include environmental and health concerns, which together accounted for 70% of the reasons to give up meat.But it is unlikely that change will be driven by the small minorities who are willing to fully embrace a plant-based diet. 

“There’s a lot of dishes that already cater to this community,” said Kuguru. “It’s established, it’s traditional, it’s there – but it hasn’t grown.”

To penetrate beyond this small and set demographic, he believes it’s important to emulate the “meaty” flavours that might hold people back from moving away from animal proteins. 

Love Handle’s products replicate the umami tones of meat by catalysing the natural chemical interactions released from vegetables through the cooking process. Some plant-based companies replicate meat’s bloody qualities through leghemoglobin, a red protein found in soybeans. 

These kinds of efforts are already showing promise in the marketplace as consumers around the world gain a taste for the meat-free lifestyle. According to Bloomberg Intelligence data, the global market for plant-based foods could see fivefold growth by 2030

On the other hand, the quantity of meat produced over the past 50 years has increased threefold and remains on an upward trajectory, according to an October report on sustainable food by accounting giant PwC’s strategy consulting business. 

Another report by the Stockholm Environment Institute a month later stated animal-based foods could be responsible for at least 16.5% of total greenhouse gas emissions. The report warned that if current consumption trends continue, it will be impossible to keep global warming below the 1.5° Celsius mark and increasingly challenging to stay below the 2° Celsius upper limit.

Vegan alternatives of popular local food … appeal[s] to the masses, draws them in to give vegan food a try”

LK Ong, Chef, VeganBliss

The high environmental stakes have provided extra motivation to those hunting the elusive secrets of re-creating meatiness. 

For VeganBliss restaurant, which opened last year amongst the bright Peranakan shophouses of Joo Chiat Road, the key to selling a wider market on sustainable eating has been emulating not just the meat, but also the meal. The restaurant’s “roast chicken rice” bestseller is made from natural gluten but resembles the sliced fillets found at most of the country’s popular hawker food markets. 

“Making vegan alternatives of popular local food … appeal[s] to the masses, draws them in to give vegan food a try, [and shows them] that the switch to veganism doesn’t entail sacrificing your favourite food,” says LK Ong, chef at VeganBliss. 

For other restaurants, branching out from familiarity of local favourites has raised a challenge.

“In Asia, we eat based on tradition. You eat what you do because that’s what your mum did and grandmother did,” said Christina Rasumussen, a chef and entrepreneur. “But this doesn’t work for our planet anymore … we have to change.” 

Chef and entrepreneur, Christina Rasmussen is tackling preconceptions of what a plant-based diet should look like. (Photo supplied)

After working at Michelin-starred restaurant Noma and a plant-based collective in her native Denmark, Rasmussen moved to Singapore in 2022. When launching Mallow, her first pop-up concept in the city-state, she grappled with the challenge of how to integrate a vegan business into a culinary culture that celebrates local dishes such as poached Hainanese chicken rice and seafood laksa soup noodles and where traditional hawker food markets have gained UNESCO heritage status.  

“Overall, vegan concepts are not popular like you may find in other western cities,” she said.

Most of Mallow’s customers were not vegan. As she prepares to launch her first permanent restaurant, Fura, she has consciously moved away from “plant-based” or “plant-forward” labels, to instead focus on “what our diet could look like in the future, due to climate change”. The menu will use ingredients that are in abundant supply, including insect proteins. 

“We don’t openly brand ourselves as being vegan on purpose as it turns many away, instead we say plant-focused,” Rasmussen said. “[We’re] slowly changing people’s perceptions of what being conscious can look and taste like.”

Meat-free roast chicken fillet made from gluten resembles its animal-based counterpart. (Photo: Amanda Oon/Southeast Asia Globe)

As a small island metropolis, making sustainable diets the norm in Singapore will rely on sustainable supply chains.

Last year’s upheaval of chicken imports brought this fact into stark relief. 

“We intend to grow more food locally to serve as a buffer in times of supply disruption,” said Grace Fu, minister for sustainability and the environment, in a parliamentary response to the chicken situation.

Fu and others in government used the issue to promote Singapore’s “30 by 30” campaign, an ongoing effort that aims to boost domestic food production to about 30% of everything consumed in the city-state by the end of the decade. 

A demonstration for flavour smell testing room at ADM’s Plant-based Innovation Lab in Singapore. (Photo: Roslan Rahman/AFP)

Restaurants including Love Handle and Fura focus on native ingredients such as soybeans, jackfruit and mushrooms. But the market still faces serious challenges in cost accessibility. Currently, Love Handle’s prices parallel those of high-end meat butchers in the city. 

“Green Rebel” beef steak, made from mushrooms and seasoned with Cajun spices, costs $5.91 (SGD 8) for a 180 gram portion, while a 100 gram packet of vegetable “sausage” mince is priced at $5.17 (SGD 7). 

In comparison, $10.16 (SGD 13.75) can buy 500 grams of Australian grass-fed beef mince and a 250 gram New Zealand striploin beef steak costs $8.49 (SGD 11.50) at local supermarket FairPrice. At local wet markets, prices can be even cheaper. 

“In order to bring plant-based meats closer to the [meat-eating] consumer, the company will often add in additives, flavourings, colours, textures – when you add in all these new ingredients, you add to the cost, you add to the energy consumed in the process,” said Willam Chen, a professor in food science and technology at Singapore’s Nanyang Technological University. 

“Subsequent processing of plant-based protein foods to suit consumers’ demand also needs energy. There is no holy grail.”

Nuggets made from lab-grown chicken meat are displayed during a media presentation in Singapore, the first country to allow the sale of meat created without slaughtering any animals, in December 2020. (Photo: Nicholas Yeo/AFP)

To address this issue, some innovation hubs are developing alternative proteins grown from animal cells in labs. Last year, Singapore became the first country in the world to grant regulatory approval for the sale of lab-cultured meat.

It’s a sector of innovation that fascinates Kuguru. For Love Handle’s next venture, he is  partnering with a research lab to fuse animal and plant cells to create alternative proteins at a larger scale. 

While not involving the slaughter of live animals, these new hybrid meats would not be considered vegan. But Kuguru is confident this move will not shut most vegans out.

“Anecdotally, the vast majority of vegans and vegetarians opted to move to a vegan and vegetarian diet because of either environmental reasons or animal cruelty reasons,” he said. “For those groups, moving to hybrid meat products would solve their core issues and allow them to reintroduce sustainable and ethical meat products back into their diets.”

As companies vye to keep up with consumer tastes, the wider industry has a more pressing issue on its plate. For Kuguru, switching to greener alternatives from traditionally farmed, animal meats may quite literally be a way to save the earth. 

“Given the data on the beef industry, the carbon emissions, the amount of land that’s available, the math doesn’t work,” he said. “The planet is going to implode.”

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BRICS expansion and a message to the West

Saudi Arabia is in talks on joining BRICS’ New Development Bank (NDB), a precursor to inclusion in a club that comprises Brazil, Russia, India, China and South Africa.

Extending membership to Riyadh would signal the bank’s interest in challenging the West’s monopoly over global financial institutions and represent a counterweight to rich-country clubs such as the Group of Seven, which are seen as neocolonial structures, especially in the Global South.

Saudi Arabia’s financial heft would give the BRICS – or BRICSS? – bank a more prominent role in multilateral funding and is aligned with the group’s plans to create alternative financial structures not dominated by Washington.

Critics often point out that the International Monetary Fund (IMF) and World Bank tend to be structurally under-represent the Global South in their decision-making, and are too closely aligned with Western foreign-policy goals. As global funds shrink away from investments in Russia and China, the NDB might offer an alternative.

In this context, the entry of Saudi Arabia to BRICS would send a message that its current and future members are likely to seek alternative structures of global governance and financing. The West seems to have taken note: The G7 this year invited India, Brazil, the African Union, Vietnam, Indonesia and South Korea as observers.

Double standards

Like current BRICS members, Saudi Arabia is neutral on the Russia-Ukraine conflict. One factor behind this is that while BRICS states are largely in sync with the post-World War II consensus on the sanctity of national borders and sovereignty, they share a mutual frustration with the West’s double standards in this area.

The calamitous aftermath of US president George W Bush’s Iraq invasion, which killed hundreds of thousands of Iraqi civilians, resonates as a painful reminder of that hypocrisy.

Where BRICS member states diverge markedly from their Western counterparts is on the principle of non-interference in domestic affairs, as they all operate under vastly different regime types and don’t comment on one another’s domestic politics. Politically, this is broadly the glue that keeps the BRICS together.

Saudi Arabia joining BRICS would cement this geopolitical trend while reminding Washington of its diminishing clout. Despite US President Joe Biden’s journey to Saudi Arabia last year to persuade the kingdom to raise oil output to offset high global energy prices, Saudi Arabia did the opposite.

That decision, which no doubt benefited Russian President Vladimir Putin – and which Riyadh justified on the basis of economics – was viewed as a way to distance the kingdom from Washington’s approach to Russia and China.

At the World Economic Forum this year, Saudi Finance Minister Mohammed Al-Jadaan said Saudi overseas funding would now come with strings attached: It would be tied to economic reforms in recipient countries. As such, Saudi Arabia’s BRICS membership would give the kingdom a seat at the table as the grouping seeks to reshape the global financial landscape.

Domestically, at a time when the kingdom is planning to diversify its economy, expand its tax base, and reduce its generous public sector, BRICS membership would provide a platform to showcase a new approach to external funding that is responsible and prudent.

China has likely played a role in championing Saudi Arabia’s BRICS bid. In March, Saudi Arabia joined the China-centric Shanghai Cooperation Organization (SCO) as a dialogue partner and was in active talks with China to conduct oil-related transactions in yuan. 

Not that Saudi membership would raise many objections from other BRICS states. None would be averse to de-dollarization initiatives as a form of insurance against repeated American weaponization of the global dollar-dominated financial system.

After taking over the NDB’s presidency in March, Dilma Rousseff, a former president of Brazil, emphasized the bank’s future strategy to fund projects in local currencies, thus nurturing domestic markets and shielding borrowers from volatile currency-exchange fluctuations.

Expansion hurdles

As more countries express interest in joining BRICS, there are likely to be many challenges for its members. 

First, the NDB is at least a decade from bypassing Western sanctions against Russia. To assuage investor concerns, the NDB suspended its financial involvement with Russia in March 2022 and has also stopped financing new projects in the country.

Second, there are territorial rivalries among the BRICS (China and India, for instance) that may hamstring the group.

Third, except for India, none of the other BRICS countries have the same rosy economic prospects they enjoyed at the group’s inception in 2009. 

Fourth, the NDB has relatively little to show in terms of investments. Since 2015, it has funded about 96 projects to the tune of US$33 billion, compared with the World Bank’s disbursal of almost $67 billion for the year ending June 2022.

Fifth, member countries are separated by vast distances, have different political systems, are not fully complementary on trade, and aren’t fully aligned on geopolitical postures.  

Finally, even on the issue of expansion, there are divergences on criteria among member states. Without resolving these issues, an expanding BRICS (or whatever acronym it transitions to) may collapse under the weight of its own contradictions.

Nonetheless, even as the world watches these developments unfold – with interest or trepidation – the potential BRICS expansion should be interpreted by the West as a message that it cannot advocate for an international geopolitical order or global financial system while also attempting to monopolize the definitions.

This article was provided by Syndication Bureau, which holds copyright.

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China’s C919 takes off with US sanctions on the horizon

China’s Comac C919 passenger jet made its first commercial flight from Shanghai to Beijing on May 28, completing a state-backed development, manufacturing and qualification process dating back to 2007 that now promises to shake up the global civil aviation business.

China Eastern Airlines, the local airline that flew the plane’s first flight, took delivery of the C919 last December. The short- to medium-range plane is expected to go head to head soon with the Airbus A320 and Boeing 737 for local sales and global markets.

One passenger reputedly told China’s Communist Party-run Global Times: “I am so excited to be one of the first passengers to fly on the C919. I am so proud that China now has such advanced aircraft manufacturing industry.”

The state-run Beijing Daily triumphantly declared: “After generations of endeavor, we finally broke the West’s aviation monopoly and rid ourselves of the humiliation of ‘800 million shirts for one Boeing.’”

Critics were quick to note that the C919’s engine, avionics and other key components are procured from US and European suppliers. The Wall Street Journal, for one, reported the C919 “faces a steep path to success.”

But the fact remains that Comac’s assembling of a modern passenger aircraft marks a major Chinese accomplishment.

To put things in one comparative perspective, Japan’s Mitsubishi Regional Jet, also announced in 2007, has suffered numerous humiliating setbacks and was embarrassingly renamed Mitsubishi SpaceJet before it was altogether canceled in February of this year.

A comparison with Boeing is also instructive. Airbus took a slight lead over Boeing in the China market a decade ago, but the gap abruptly widened in 2019 after Boeing 737 MAX aircraft crashed in Indonesia and Ethiopia due to defective flight control software.

In 2022, Airbus sent more than 100 aircraft in China while Boeing delivered fewer than 10. US-China trade tensions also appear to have contributed to Boeing’s poor performance in China, where Airbus has no such problem.

Airbus now accounts for more than 50% of commercial aircraft in service in China and appears likely to maintain or increase its market share with the establishment of a second A320 assembly line at its factory in Tianjin, China.

The agreement setting this in motion was signed during French President Emmanuel Macron’s visit to China in early April. Airbus CEO Guillaume Faury was one of about 60 French business executives who accompanied Macron.

An Airbus A320neo plane under construction for delivery to China Southern Airlines. Credit: Airbus.

Although the 737 MAX is now back in service and China Southern Airlines is reportedly planning to order 103 new aircraft from Boeing (and 111 from Airbus), data from Aviation Week shows orders for 697 C919 aircraft, most of them from Chinese airlines and leasing companies.

If current trends hold, it seems that Comac could – in fact, is likely to – soon overtake Boeing to become the second-largest commercial aircraft supplier in China.

This, of course, will depend on whether or not Comac can assemble hundreds of aircraft in time to meet delivery schedules while avoiding the quality problems that have plagued Boeing. In April, Boeing revealed that deliveries of a number of 737 MAX aircraft had been delayed due to quality problems at US subcontractor Spirit AeroSystems.

The Chinese government wants the C919 to have 10% of China’s domestic commercial aircraft market by 2025. Five years from now, Comac wants to be producing 150 C919 aircraft per year. China Eastern will reportedly take delivery of its second C919 in June.

However, there are concerns that the US Department of Commerce may try to ground the C919 by imposing new export restrictions on its US suppliers.

In January 2021, then-President Donald Trump had the Department of Defense add Comac to its list of companies owned or controlled by the Chinese military. As a result, US investments in Comac were banned.

In April of this year, US Senators Marco Rubio and Rick Scott of Florida sent a letter to Under Secretary of Commerce for Industry and Security Alan Estevez complaining about the department’s failure to add Comac to its Military End User (MEU) list.

The senators wrote that:

“COMAC also works closely with Western aerospace companies, including firms that produce jet engines and many other components used in commercial and military aircraft. Given the CCP’s [Chinese Communist Party’s] commitment to acquire dual-use aerospace technologies through trade as well as forced joint venture and partnerships, these firms, and U.S. national security by extension, are at risk.”

For reference, Comac is owned by the State-Owned Assets Supervision and Administration Commission (SASAC) of China’s State Council (the chief administrative organ of the People’s Republic), state investment company Shanghai Guo Sheng, Aviation Industry Corporation of China (AVIC, which is on the MEU list), Aluminum Corporation of China, China Baowu Steel, Sinochem, China Electronics Technology and other corporations.

Until now, it is not clear if the US Commerce Department will heed Rubio and Scott’s plaintive call. If it does, several US companies could be affected, including GE, Honeywell, Rockwell Collins and Parker Aerospace.

The Global Times commented that “The maiden commercial flight by China’s first domestically-manufactured large passenger aircraft… ushers in a new era for the cooperation between Chinese manufacturers and foreign companies.”

If that optimistic view is squelched, an aggressively nationalist response would be all but certain, to the detriment of US aerospace companies and the advantage of their Chinese competitors and Airbus. Mass production of the C919 would be delayed but not abandoned.

The C919’s cockpit is being developed by the Chinese Aeronautical Radio Electronics Research Institute, and will feature integrated 15.4-inch avionic Display Head units coming from Barco Display Systems of Atlanta, Ga. Credit: Comac.

As Wang Yanan, chief editor of China’s Aerospace Knowledge magazine, puts it: “We must have our own manufacturing capabilities for regional aircraft and large commercial airliners.”

Some 200 Chinese subcontractors supply the C919’s fuselage, wings, forged parts and other basic components and materials. Avionics and engines are likely to follow, with or without US sanctions.

Aero Engine Corporation of China is already developing an alternative to the LEAP jet engine manufactured by CFM International, a joint venture between GE Aviation of the US and Safran Aircraft Engines of France that powers the C919.

The question is, does the US want to participate in or decouple from the world’s most promising civil aviation market?

Follow this writer on Twitter: @ScottFo83517667

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Nvidia to turn Taiwan into a world-class AI hub 

Nvidia, a California-based graphic processing unit maker, is going to build a world-class artificial intelligence research center in Taiwan to accelerate its Omniverse project, a computing platform that supports 3D applications.

The announcement was made after the United States firm’s share price surged 24.6% to US$380.6 in a single day on May 24. On Tuesday, the valuation of Nvidia hit $1 trillion, making it the first US chipmaker to join the trillion-dollar club.

Because of this, Nvidia’s founder and chief executive Jensen Huang quickly gained the nickname “One-trillion man” in Taiwan, on top of his reputed status as the “godfather of AI.”

Nvidia’s shares had dropped by 50.3% to $146.14 at the end of last year from $291.11 a year earlier as the US kept tightening the export of high-end chips to China. Last August, the US government banned Nvidia from selling its A100 and H100 chips to China and Russia.

The shares have rebounded by 166% so far this year as the company vowed to invest in AI technology.

Nvidia will hire 1,000 people and invest up to TWD24.3 billion (US$790 million) in its new AI research center, or AI University, which will be jointly managed by the National Taiwan University. It has secured a subsidy of TWD6.7 billion from the Taiwanese government for this project.

Chip war takes a toll

Meanwhile, Huang told the Financial Times that further escalation of the chip war between China and the US would cause enormous damage to US companies . 

He said China will make more semiconductors itself if it can’t buy them from US companies. He said US lawmakers should be thoughtful while regulating or they will hurt the technology sector.

Huang also told a global media roundtable at the Computex Taipei industry expo on Tuesday that existing chip makers should continue to work hard to stay competitive and not underrate China’s ability to catch up in the industry.

He said China will cultivate its own chip companies amid the US sanctions, and that is why many GPU startups have been created in the country.

Currently, key Chinese GPU and AI chip makers include MetaX, Birentech, Enflame and Horizon. Many of these companies outsource their chip production to overseas foundries such as Taiwan’s TSMC.

Last October, media reports said Washington asked TSMC not to produce high-end chips for Birentech after the Shanghai-based firm claimed that its BR100, a 7 nanometer GPU chip, is faster than the A100 in AI processing.

China’s markets

In August 2022, Nvidia’s A100 and H100 chips were added to a US export control list as the government said the products could be routed to or utilized by a “military end use” or “military end user” in China and Russia. Nvidia was also barred from shipping its DGX, an AI server, to China if a unit contained one of the two chips.

Nvidia’s DGX system. Photo: Nvidia

At the same time, the US government also restricted sales of AMD’s MI250 Accelerator AI chip to China.

Last November, Nvidia said it would relocated its regional warehouse from Hong Kong to Taipei. It also introduced to the Chinese markets the A800, which is similar to the A100 but works at 400 gigabytes per second while the A100 operates at 600 gigabytes per second. Due to this difference, the A800 satisfies the US government’s export requirements.

Nvidia has a 60–70% share in the global GPU market while some cloud service providers, which develop application-specific integrated circuit chips, seize over 20% of the market, according to TrendForce, a Taiwan-based industry data provider.

Nvidia will be able to maintain its market dominance with a strong demand of its A100 in the US and A800 in China, as well as the growing demand arising from the development of chatbots and AI computations, said TrendForce analysts. Globally, GPU chip shipments will grow 46% year-on-year in 2023, they added.

Currently, Nvidia can still sell or ship high-performance computing hardware to China by obtaining a special export license. However, it remains possible that Nvidia will be banned from selling its A800 to the country one day.

Anton Shilov, a columnist at Tom’s Hardware, wrote in March that Nvidia will lose hundreds of millions of dollars in revenue if it cannot get licenses to sell the A800 and other products to Huawei and Inspur. He said it will not be easy for the company to replace these two Chinese customers with others.

His comments came after Inspur, the world’s third largest server maker, was added to the US Department of Commerce’s “entity list” in early March this year. Huawei has been on the list since 2019.

Two-year preparation

Nvidia has spent two years preparing for the launch of its Taiwanese AI project, which will help Taiwan nurture AI talents and offer a platform for academic use, said the Ministry of Economic Affairs. The project will be implemented within the five years ending March 2027, it said.

Separately, the company said Monday that it will build an AI cloud supercomputer in Israel for several hundred million dollars. The facility, supported by 800 technology startups and tens of thousands of software engineers, is expected to commence operation by the end of this year.

In a two-hour speech at 2023 Computex Taipei on Monday, Huang told an audience of 3,500 people about Nvidia’s AI development plan.

He said Taiwanese electronic makers can use Nvidia’s Omniverse, Isaac Sim and Metropolis to build virtual factories, simulate robots and conduct automated inspections, respectively. He also displayed how AI technology can be applied in online games, content generation and music production.

Read: China leads US in tech that matters most: report

Follow Jeff Pao on Twitter at @jeffpao3

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A glacial Sino-American thaw

US President Joseph Biden announced a thaw in China’s ties with the US. However, there is much more ice than meets the eye in this “thaw.”

When the US Secretary of Commerce Gina Raimondo returned from China last week, she declared that the US “won’t tolerate” China’s ban on Micron chips. Still, from Beijing’s perspective, why should China tolerate restrictions on tech supplies?

Then what will happen to China’s purchases of US Treasury bonds, for decades a cornerstone of bilateral ties and now extremely important because of the US budget crisis? Will they go ahead, or will China stop buying them or buy less? How will it impact the US and the global economy?

The urgency of Raimondo’s pressing to meet the Chinese side, the rush with which Secretary of State Antony Blinken and Treasury Secretary Janet Yellen moved in the following hours, told China that the US was in big trouble over the budget.

Speaking of a thaw and US government officials knocking on Beijing’s door to talk could give the impression in China that America is eager to mend fences with China because it feels weak.

Until a couple of months ago, all the messages coming from Washington were of fire and brimstone. Then, in March and April, the US budget crisis began and a problematic agreement had to be found between Democrats and Republicans to deal with it.

A not insignificant part of the budget goes into defense spending and generally to support domestic development plans aimed at national growth against Beijing.

It all looks very odd from Beijing, where people wonder: there is tension, but you want our money; what is it, a show?

Indeed, China has more than one reason to ask what’s happening and bargain with Washington. The US, keen on China’s bond purchases, has conceded something, although it is unclear how much.

In any case, China’s bond purchases have apparently muffled the recent saber-rattling. In the near future, the impression is that American allies will restrain controversial moves on Taiwan and elsewhere.

Meanwhile, Beijing will follow the problematic, divisive US election campaign with two candidates who are both weak on paper.

The Republican Donald Trump, more controversial than ever, is hounded by lawsuits and denunciations that make him a martyr to his follower base. The democratic Joseph Biden is cast by his foes as tired, fatigued and unable to handle the stress of the presidency.

Things should be under control for the next 18 months; there shouldn’t be a major bilateral crisis, Beijing seems to figure.

Central Asia’s moves

But politically, there is a lot of movement around China.

Tehran, on May 28, announced that talks have progressed between Iran and the US on releasing Tehran’s frozen assets in Iraq and South Korea, and an agreement on general terms will likely be achieved in the coming days. It could spin the political calculus of the area in a different direction.

Just two months ago, on March 10, China announced it had brokered a historic deal between Iran and Saudi Arabia. It inserted China into delicate Middle Eastern politics and seemed to sideline the US, recently battered in the region by the ruinous wars in Afghanistan and Iraq.

Still, at the beginning of April, CIA director William Burns visited Riyadh to confirm bilateral ties, as the US guarantees security to the Saudi court.

Now, the Iranian announcement could also pave the way for historic and new relations between Saudis and Israelis, which had been in the offing for years. Moreover, Iran’s new posture could turn the country to a new approach with Israel.

Wang Yi, China’s top diplomat (center), in Beijing on March 10, 2023, with counterparts Musaad bin Mohammed Al Aiban of Saudi Arabia and Ali Shamkhani of Iran. Image: China Daily

Certainly, nothing is set in stone but the US-China rivalry has extended to Central Asia and the Middle East, and it might have an overall positive spin for everybody.

China’s recent inroads in the region could have started a complex reassessment. This created a new Chinese presence and role in the area and spurred America to be more active, possibly taking Israel along.

China is not marginalized in this game, but certainly neither is the US. The two countries seem ready to play in the region according to different rules. This may change the political geography of the area, and no one is clear who will be the winner in the end.

Besides, the G7 met in Japan, inviting India, Indonesia, Vietnam, Australia and Brazil. It found unity on a platform against China. However, there is no longer talk of “decoupling” but rather “de-risking.”

Among America’s allies, there is no agreement to decouple economically from China. It may seem like a step forward from Beijing, but it may be more complex.

There is an agreement to take away the Chinese risk, which is already factored into companies’ budget plans. Those inflate all ventures dealing with China.

The new costs, sanctions and restrictions budgeted in China’s companies’ plans make all foreign enterprises in the country less convenient. In recent years, burgeoning tensions and drastic anti-Covid measures have pushed foreign investors to isolate their China operations from the rest of the world; new costs make it less convenient to operate in China altogether.

Still, if processes are still active in the country, the promising Chinese markets are no place to flee. But new operations are less attractive.

While the G7 was convened in Hiroshima, China invited the five former Soviet republics in Central Asia (the five Stans) to Xi’an, its ancient capital. The five Stans occupy a territory about half the size of China, with just over 70 million inhabitants.

The signal was against the G7 and Moscow, the former ruler of the region. With the extension of its reach into the Stans, Beijing projects to the Caspian Sea, i.e., the Caucasus, i.e., the Black Sea and to the great Mediterranean.

It claims that the G7 resolution is weak and that Russia’s eventual defeat in Ukraine does not harm Beijing. On the contrary, it allows China to extend its impact where it had never gone before, bringing closer border contact with Iran and the Saudis.

There are reasons to be not so gloomy in Beijing. The urgency of US talks on bond purchases suggests more generally that there is something very wrong with the US economic situation and model.

China may have its own internal economic difficulties: the crisis in the real estate sector, the problem in the trusts sector and the challenges of local governments. Still, without full currency convertibility, the central government can better manage its economic affairs, and thus political bargaining, than Washington. Or can it?

It is time for observation and thinking about the extensive framework that still holds bilateral ties together. Here, constraints are very tight for Beijing.

A two-way surplus

Over 30 years ago, the US and China established a framework that constrained both countries. This framework is presently under duress, but it is still there.

The US is still giving China its largest surplus. Last year, it was about $700 billion. Without the G7, China would not have a surplus; it would have a deficit. The domestic economy would not be the same.

If there were a trade deficit, China should export its currency or change its entire trade strategy. Both options, however, are problematic.

With the currency export option, there would be a foreign RMB (freely-traded abroad) and a domestic RMB (with a rate adjusted by the central bank), and their exchange rates would differ. It would lead toward the free exchange of the RMB, which the government doesn’t want.

Changing Chinese trade is not easy either, because developing countries do not have much purchasing power to acquire so many Chinese goods.

Furthermore, factories will close once China does not have today’s surplus, and workers will lose their jobs. Then, there will be a social and political crisis.

China uses part of its surplus to buy US debt. The United States needs China to buy its debt to buy Chinese goods. The whole process, though, has stopped being cost-effective for the United States.

Photo: Reuters/Jason Lee
China is a big buyer of US Treasury holdings. Image: Agencies / Facebook

The United States buys hundreds of billions worth of goods yearly, so the total deficit with China in many years is many trillion dollars. But China buys only $1 trillion in US Treasury bonds.

By some accounts, the United States has transferred trillions of dollars to China in 30 years. This calculation is simplistic and partial, but reflects something visible in the two countries: China is bridging the economic gap with the US and has grown much faster than America in the past 40 years.

America thinks China should be grateful for this. It isn’t; it’s rather unhappy with America.

China can spin a story at home about addressing the issue, but abroad there is a growing consensus that something is wrong with how China handles its trade.

Then, would China be prepared to handle a long-term trade deficit? It would have to bear its costs. China can manage a trade surplus easily; a trade deficit is far more complicated.

Managing a long-term deficit requires convincing other countries to accept your currency in exchange for real goods. Therefore, it also entails two elements:

  1. Long-term internal reliability and stability (a fairly transparent political system, a military, accepted diplomatic and cultural clout, etc)
  2. Allowing other countries to make money in China and quickly removing the hurdles. It would need an advanced stock market and the development of new technologies that can create new markets and drive global growth, which can be exported to other countries. The new markets will bring new opportunities to prosper.

The United States and its old “buddy” Britain have both elements. Others are different. Even Germany and Japan rely on exports.

If the framework is not rapidly fixed, it will fall apart after the present lull and America and its allies will have established a new framework with other countries. China certainly has plans and is preparing, but of course, it’s unclear whether they will work.

Here time is of the essence. Is time on China or America’s side?

China may think that the longer I have, the better I can prepare for the coming conflict; a bigger economy can withstand the pressure, while American divisions will rip it apart over a longer time.

America may think the longer I have, the better I can consolidate my alliances and the weaker Russia becomes, surrounding China with more problems that will come for China’s sputtering domestic economy.

But, in the meantime, the crux of the matter might be different as both sides bide their time and draw the wrong conclusions about the other side’s weakness. The thaw doesn’t seem set to last and brewing troubles will get bigger and possibly come back with a vengeance.

Moreover, is the lull real? Aside from any rational calculations, the world around China is exceptionally volatile and many things can blow up, irrespective of Beijing’s intentions.

US domestic strife can find a sudden unity for any given incident, coalescing against China, the common denominator of the nation. Then, the issue of China’s bond purchases could vanish. Chinese assets abroad would be seized or frozen, as the same would happen to Western holdings in China. It was already the case with Russia.

Meanwhile, can there be a systematic solution to avoid a war? And what will be the price for peace? At the moment, not many seem to think about that.

This essay first appeared on Settimana News and is republished with permission. The original article can be read here.

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EU-Singapore in a deepening digital embrace

SINGAPORE – Singapore hopes to begin negotiations on a digital free trade agreement with the European Union, one of its major trading partners, as soon as this year, building on a non-binding digital partnership agreed between the two sides in February, according to Singapore’s Minister-in-charge of Trade Relations S Iswaran.

Addressing a business outreach event on Monday (May 29), Iswaran said Singapore and the EU are in the process of identifying projects to pursue through the partnership, which aims to strengthen the interoperability of digital markets and policy frameworks between the two sides, with the ultimate goal of enabling consumers and businesses to transact online at a lower cost.

The principles established in the EU-Singapore Digital Partnership (EUSDP) represent “the first step towards a bilateral digital trade agreement between the EU and Singapore [that] will give our citizens and businesses the clarity and legal certainty they need to transact confidently in the digital economy,” said Iswaran, who is also Singapore’s transport minister.

“We look forward to launching negotiations on a digital trade agreement with the EU soon hopefully, during Sweden’s Presidency of the EU Council,” Iswaran added, potentially placing digital trade talks in the first half of 2023 when Stockholm serves as rotating council chair, building on an existing Singapore-EU bilateral free trade agreement that entered into force in November 2019.

Known as the EU-Singapore Free Trade Agreement (EUSFTA), the deal was the first of its kind between the EU and a member state of the Association of Southeast Asian Nations (ASEAN) and is regarded as a template for a wider future trade pact with regional economies. Trade experts, however, note that an EU-ASEAN agreement is highly ambitious and remains a long way off.

A future EU-Singapore digital trade agreement would similarly be seen as a stepping stone for closer region-to-region connectivity. The EU’s digital partnership with Singapore is the third such agreement signed with a key trading partner in Asia after partnerships with Japan and South Korea were concluded last May and November, respectively.

Singapore Prime Minister Lee Hsien Loong; President of the European Council Donald Tusk; Jean-Claude Juncker, president of the European Commission; Mr Sebastian Kurz, Austrian Federal Chancellor, sign the EU-Singapore FTA agreement in Brussels, Belgium. 19 October 2018. Photo: EU

The EUSDP aims to facilitate research and regulatory cooperation in areas ranging from 5G and 6G service adoption, artificial intelligence (AI) governance and semiconductor supply chain resilience. It also seeks common rules on cross-border data flows, electronic invoicing and payments to provide small and medium-sized enterprises (SMEs) with more open access to overseas markets.

“The Singapore-EU partnership is not a binding agreement yet. It should be viewed as the first steps of potentially creating one,” Deborah Elms, founder and executive director of the Asian Trade Centre, a Singapore-based trade research and advisory firm, told Asia Times. “While Singapore clearly has no particular issues signing binding commitments on digital and has done so repeatedly already, the same is not true for the EU.”

Elms, who is also president of the Asia Business Trade Association, added that the EU has the challenge of managing “27 member states with varying levels of readiness and enthusiasm for digital trade. This always makes it hard for the EU to act, particularly on new issues like digital. Getting the EU to a comfortable place for signing up to commitments can be time-consuming.”

Data privacy differences may prove difficult to bridge said Elms, pointing out that Singapore has not made a binding commitment to align with Europe’s General Data Protection Regulation (GDPR), considered the toughest privacy and security law in the world, while instead implementing a different standard known as Cross-Border Privacy Rules (CPBR).

“The two systems are not incompatible but they aren’t exactly aligned either. Figuring out how to bridge the gaps could take time. If you stick to a framework, it may not be a problem to have two systems, but if you want to create legally binding commitments, fudging the differences can be harder. Time is also not standing still while the EU and Singapore sort out the partnership,” Elms said.

The EUSDP, which essentially serves as a set of digital trade principles, builds on Singapore’s extensive network of free trade agreements and digital cooperation initiatives, reinforcing its role as a global business hub. Key priorities for implementation in 2023 include common approaches in electronic identification and AI governance and facilitating the digital transformation of SMEs.

Singapore is a major destination for European investments in Asia, with bilateral foreign direct investment stock between the EU and Singapore expanding to an estimated 434 billion euros (US$464 billion) in 2022. Singapore is also the EU’s second-largest commercial partner in ASEAN, with more than 10,000 European companies headquartered in the city-state to serve the wider region.

“Integration with the rest of Southeast Asia is key for our companies who are looking to grow and expand. We need to have everyone working seamlessly together – not just the EU and Singapore, but the rest of the region,” said Jenny Egermark, chargé d’affaires at the Embassy of Sweden in Singapore. “That is the dream and long-term goal that we are working towards.”

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