China – East West Markets

Belt and Road Initiative

Gordon Brown, Britain’s former Prime Minister, is at the forefront of the China Belt and Road Initiative – a road and sea route linking up China with the West. The initiative – discussed later this month at a conference in Edinburgh – will provide substantial opportunities for investment and developments between the east and west.

Known as the BRI, the project – costing $95 billion – will provide an immense opportunity to sell goods, infrastructure and advisory services to various wealthy clients around the world. brown is an appropriate choice for leading this venture (at Edinburgh University) since not only was he a rector there but during his time at the helm of British politics, he was a huge supporter of the promotion of trade links with China. At the conference he is set to offer participants his “unique geopolitical perspective on the continued development and influence of Asia and China on global trade.”

The BRI has also been hailed as “a road map to the future…offer[ing] a modern-day solution that fosters inclusive growth and development in the 21st century.” Spanning 60+ countries and regions from Asia to Europe, the goal is that by 2050 it will “contribute 80 per cent of global GDP growth, and advance three billion more people into the middle class.”

Australian Partnership: East or West?

Australia has to decide whether it will go west (with France or Germany) or east (with Japan) vis-à-vis its choice of partner for the next generation of submarines. This project is set to be Australia’s “biggest ever defense procurement programme.”

While all three countries have quite the resume for this position, what will ultimately decide which direction Australia chooses will be the following issues: capability, cost, risk and schedule. In addition, the way that these countries’ systems and software applications collaborate with America – Australia’s alliance partner – will be an additional major consideration.

It could well be that ultimately Australia will decide to go the eastern route. Just last month during its talks with Japan, the military discussed potential design and production issues of the submarines, possibly narrowing down its choice. But nothing is yet set in stone. Proposals are still being welcome from all three countries. And, no matter which country is chosen, much work will still take place in Australia.

One reason China and Russia are not being considered (despite the fact that they are experts in this field) is because Australia does not generally work with these countries in military matters.

Ultimately, price will probably be one of the key determining factors as to which route Australia will ultimately take on this project.

Economic Growth: Japan and America

Japan could be slipping back into a recession. Thankfully, this is unlikely to have a negative effect on America’s economy but internationally, concern is expected to increase. The reason America is less likely to be impacted is two-fold: a mere 4.1 percent of American exports go to Japan and the falling value of the yen vis-à-vis the dollar which results in cheaper Japanese imports in America. Experts predict at most, a decline of around a tenth of a percentage point.

The regions that could be negatively affected however is Europe and China; areas that are already dealing with the challenges of slow economic growth.

Japan’s disappointing performance may be connected to the escalation in its sales tax. This was somewhat substantial – an increase of 5 to 8 percent. While it did help in reducing the overwhelmingly large budget deficit, it simultaneously had the negative impact of making consumer spending less appealing. Clearly, the economy just wasn’t up to this kind of move.

Shinzo Abe, Japan’s Prime Minister last year put money into the fiscal system, lowering interest rates through bond purchases last year. At that time, the region encountered a peak, following a stagnation of over two decades. But now, growth in the economy has weakened to around 1.5 percent.

Perhaps Abe needs to do a bit of what he did a year ago to get the region back on track.

Asia America Relationships

It is possible that the various internal conflicts within the Asia region are adding to the attractiveness of America. Since there are tensions between Sothern and North Koreans, Bangladeshis have misgivings about Indians, etc. But when it comes to Asia America, trust issues seem to be better. Indeed, a recent survey conducted by Pew has proven this point statistically.

Pew’s Balance of Power Survey found that most respondents in eight Asian countries viewed America as their “chief ally.” Only Pakistan and Malaysia from Asia said they felt they were most comfortable with China in this realm.

The idea that a pro-US and a pro-China camp are both being built up in the region appears to have some traction based on Pew’s research. Two countries that named China as their chief ally also named the US as their main regional threat—as did China itself. Meanwhile, three states that said the US was their primary partner saw China as their nation’s main regional threat.

China on the other hand, does not view America as its closest ally, but rather Russia. This might be somewhat surprising, given the somewhat stressful history between the two nations. Returning to the topic of inter-Asian relations, again Pew found that there wasn’t all that much love lost. A mere 7 percent of Japanese respondents felt positive toward China with 8 percent of Chinese respondents feeling more or less the same about their Japanese counterparts.

Worst faring in the Pew survey was Pakistan, that no-one seemed to like particularly. Indeed, even though a large amount of Pakistanis (57 percent) named China their top ally, only 30 percent of the Chinese were positive about Pakistan.

How about America? How does America feel about Asia? Well, America does need its allies to balance China. But there again this is a two-way street since its allies need China to balance America. As a result of this, Asia-Pacific security has become heavily reliant on America with its economy dependent on China. Long-term this is not the best situation for America. So ultimately America should be deciding whether or not to continue its containment strategy, or work for advancement in Asia-Pacific’s region. So that’s where America is holding right now, vis-à-vis Asia.

US Economy Has to Get off the Cliff

If America fails to deal with its economic issues, the fiscal cliff will turn into a fiscal abyss. According to China’s Xinhua news agency, America’s politicians need to take a more active role in sorting out its $16 trillion debt. Clearly they are afraid of becoming unpopular by reducing spending and increasing taxes. Instead, they are seemingly ignoring the issue and just getting into more debt. It is for this reason that the abyss is feared.

America’s economic issues are obviously going to impact other countries. One of them is China since around two-thirds of its holdings are invested in American dollar assets. America is also a major export for China. And it’s not just China. There was an increase in stock markets around the world last week. This was due to what the world perceived America did to thwart the rise in taxes and cuts in spending that could have been the straw that broke the economy’s back. But since America has been so near the edge of the financial cliff, it does not bode well for ensuring it will be able to climb out of an abyss.

As a reflection of Chinese administrative thinking, Xinhua also put out a demand to America to “live up to its global economic responsibilities” and pointed out that the reason it was in such a “mess” was because of its badly-functioning political system.

Expanding China-Europe Business Co-operation

It seems that growth in China are resulting in all sorts of developments for the region, vis-à-vis other countries. According to Song Tao, China’s Vice Foreign Minister, one of these developments is increased co-operation with Europe. Indeed, there has been such significant progress that Song is hopeful that the long-term future will witness a “China-EU free trade area.” Currently the countries have plans in place to work together in the areas of finance, urbanization, sustainable development and trade and have already been united on a variety of global issues.

China and Europe have had a comprehensive strategic partnership in place now for close to a decade. While Europe was undergoing its substantial debt crisis, it was China which provided significant support, mainly through its $43bn IMF contribution. As well, it helped Europe buy European bonds and escalated imports from the region. China has also been supportive of Europe’s integration process.

Despite Europe’s assistance, China is still not completely out of the woods. Naturally, its weakened position has impacted its relationship with China. For example, according to China’s Ministry of Commerce, there was a reduction in foreign direct investment (FDI) from the EU to China by 6.3 percent year-on-year from January to September to $4.83bn. In addition, China’s exports to Europe plummeted 30.3 percent over the same time period.

Thus, according to Haitong Securities Co. Ltd.’s Deputy GM and Chief Economist, Li Xunlei, China’s general FDI situation is decline as inflation has rendered its environment for FDI somewhat less attractive than it has been in recent years. The fact that China’s economic growth has slowed in recent years hasn’t helped the situation much either.

So while Europe has been instrumental in assisting China’s development, there is still much to be done on the east’s end to really get it back in an attractive investment environment for foreigners.

Made in America

Economics and Politics

Historically, it’s been China where manufacturers have felt most comfortable. It’s traditionally been a huge financial saving. But this could be changing. Already many are moving their business out of China and back home as noted in a previous post.

And now, as part of his campaign, Barack Obama is claiming that since manufacturers are coming home, this is clear evidence that the country’s economy is back on track. He is using this argument to point out that Mitt Romney was one of the early proponents of encouraging US corporations to outsource blue-collar jobs to low-wage economies overseas.

At the same time, Obama – along with other proponents of doing business in America – is claiming that taking business abroad is becoming more expensive. In addition, workers in America are becoming increasingly more efficient, and it’s thus making more sense for businesses to come back to the States.

So it seems that the household phrase Made in China could very soon be replaced by Made in America.

Focus Media Holding Ltd. Subject of Largest Chinese Leveraged Buyout

Analysts and investors in the Chinese economy are carefully taking notes as the largest leveraged buyout in China proceeds.

Private equity firms, including the Carlyle Group, are bidding on Focus Media Holding Ltd, a Chinese advertising company. As of mid-August the bidders have made only a “non-binding” offer of $27 for each ADR (American Depositary Receipt) or share. This offer represents a 15 percent increase in the value of Focus Media’s stock as of August 10th.

Other Chinese companies have seen increased values in their own ADRs as short-sellers showed interest in them as well. The bidders on Focus Media include Citic Capital Partners as well as the CEO of Focus Media Jason Nanchun Jiang. Their offer values the company at $3.5 billion.

Sachin Shah, a special-situations and merger-arbitrage strategist at New Jersey-based Tullett Prebon Plc said that this offer

“is another example of how Chinese are taking more and more of their companies private. The U.S. market isn’t properly valuing them and doesn’t know if the offer price is right, allowing the management of the companies to possibly win in getting the assets at lower valuations.”

Fortune Global 500: Asia and America

In a Fortune Global 500 list on the world’s largest companies based on revenue, in an unprecedented move, China came in higher than Japan. Despite this achievement, American firms still took the most positions on the list. Indeed, a staggering 132 companies from the United States were featured, with China as number 2 on the list, featuring 73 companies and Japan with 68.

Europe’s Impact

While Europe lost 11 companies in 2011 on the list, China gained 12. Nonetheless, as Fortune pointed out, even though there is a financial crisis in Europe, and Japan has encountered many disasters, the big international companies have continued to escalate in both profit and revenues.

Despite its lead position, America shouldn’t be sitting back on its laurels. The superpower should be aware of the fact that it was the only country to lose so many companies on the list over the last 10 years, having lost 65 headquartered companies throughout that timeframe. In addition, companies in China were showing post-crisis success in 2009, with a move to gas and alternative energy and away from oil. After a hard 2011 vis-à-vis investments, so far 2012 is going well, in America especially, but also noteworthy throughout the world.

East-West Currencies

Clearly connected to all this news is the fact that trading companies are not as enthusiastic about converting the American dollar to the Chinese Yuan. Indeed it is the US dollar that companies want to accumulate since it is strengthening. What happened was, that at the time the Yuan was increasing, rather than buy the US dollar and sell the Yuan to pay for imports, companies would borrow US dollars from banks so as to pay for imports, which shorted the US dollar, which was good since it was anyway the US dollar was weakening. Today the opposite is the case; traders are hanging on to US dollars for longer which impacts China’s monetary condition since its inflows force central bank intervention. China thus finds itself in a strange place, with its domestic economy requiring easier monetary condition but flows leading it in the opposite direction.

Global Economic Leader: China or US?

Perceptions Versus Reality

Even though more people see China as the global economic leader, the truth is, America is still way ahead of this eastern superpower. A survey carried out by the Pew Research Center this year found that a mere 36 percent of (over 26,000) respondents (spanning 21 countries) regarded America as the leading economic power – a drop from 45 percent in 2008. Why? Probably because many people still see America’s economy as being in turmoil, due to the western recession that impacted it the most. However, even with all of that, it is still ahead of China. In addition, the fact that Europe’s economy isn’t giving anyone anything to smile about, is not helping matters either.

Indeed, regarding figures for China’s economy just a couple of months ago, the situation doesn’t look good. However, it’s not all doom and gloom since according to Dow Jones Newswires and Reuters, industrial production increased 9.6 percent in May (compared to figures from May 2011). In addition, between January and May, fixed asset investment in urban areas increased by a little over 20 percent. Vis-à-vis inflation, wholesale and consumer price gains eased much more than expected.

China’s Economic Windfall

It should be noted that China has experienced significant outbound investments. In the first quarter of 2012, the level of acceleration reached $21.4 billion (following a standstill in 2011), boasting assets in the resource sector and South America being the most popular commodity pool operator. As well, data from the Ministry of Commerce shows China attracted nearly twice as much inward investment as the $60.1 billion it sent outbound in 2011.

Approximately 50 percent of China’s attempted foreign forays ended in failure last year. In addition, there was a sharp increased enjoyed in the country’s imports and exports in May. So, the question begs, with all this good news and the economic forecast in America not looking all that hot (especially vis-à-vis the country’s “faltering” job market), why is the perception that China is doing better than its western counterpart, not the reality? Indeed, as JPMorgan Chase economist, Michael Feroli, noted, America’s most recent economic data has been “decisively disappointing.”

The truth is, even with the optimistic economic data coming out of China, caution is still being recommended. In response to a poor economic performance for China in May, policymakers China’s slashed interest rates for the first time in over three years.

Ultimately, while both China and America are currently facing their various economic challenges, the perceptions are that China is doing better, but the reality is the opposite.