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China’s military spending spree

5 Mar

In terms of Western decline and Eastern rise it is not just the economies that are moving apart. On the day when an old hero of the 1982 Falklands War, Major-General Julian Thompson, warned just how vulnerable Britain’s South Atlantic territories are to foreign conquest because of military cuts, it was announced that Chinese annual military spending had reached $100 billion for the first time.

While the UK and its Western allies, including the United States, are planning and executing further savings on defence budgets, China and many other Asian nations are actively rearming with the latest hardware. Although an arms race has yet to begin, India and Japan are concerned at the rate of increase in China’s military spending – up 11.2% this year alone. This does not include any off-balance-sheet spending too, which is believed to add as much as 50% more than the official figure.

Rapidly expanding

China obviously rejects any notion that this extra resource allocation is anything to be feared. The Beijing government’s declaration of China’s peaceful rise is still the national mantra, and there is no acknowledgement that massive more arms spending could be seen to contradict this strategic objective. ”China is committed to peaceful development and follows a national defence policy that is defensive in nature. China’s military will not in the least pose a threat to other countries” a National People’s Congress spokesman said.

Despite the smooth words, the budget increase is causing concern amongst China’s 12 Asia-Pacific neighbours – particularly when it becomes apparent that by 2015 Beijing’s military spending will have surpassed their combined defence allocation. The source of this unease is China’s increasing assertiveness over long-standing territorial claims.

The South China Sea is the likeliest flash point, given that China’s demand for full sovereignty are being resisted by half a dozen nations. Japan and India both have disputes with China too, with India having fought a 1962 war over the contested areas. Indeed, India’s Prime Minister has been quoted as saying that his country “must prepare to counter China’s territorial ambitions”.

China also has economic interests to think of. The deployment of Chinese armed police to the Mekong river area in South East Asia last year was partly to protect their investments in the region, as well as expressing their local muscle. The development of a blue water navy – as evidenced by its new aircraft carrier development – is also designed to ensure China can further protect its international interests, especially around trade.

The truth however is that no one really knows how and why China is enhancing its military capabilities. The opaqueness of the Government means that its actual and potential rivals often have to guess at what they are doing.

Luckily for America, it still has some breathing space when it comes to military superiority given that its defence spending is still five times that of the Middle Kingdom. China recognises that this means there is a significant imbalance between the two, and as such is looking obliquely at the situation to nullify the US lead more quickly than if it went into standard competition with the world’s superpower. An article written in the Harvard Asia Pacific Review sums it up so:

“Despite America’s overwhelming military superiority, China aims to exploit vulnerabilities in key US capabilities using counter-space, counter-carrier, counter-air, and information warfare to prevent the United States from dominating a military confrontation or achieving quick and easy victory.”

The US has made Asia the centre of its foreign policy for the coming century. As such, it is highly likely that it will take into keen consideration China’s rising military capabilities to stay ahead of the race. The difficulty though will be in the understanding China’s plans. So long as it keeps the world guessing at where this extra spending is going and for what reason, Beijing will be well placed to ensure that its aims and objectives are easier to achieve without resorting to actual force.

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A call to Britain: get real and move to the Pacific

16 Feb

The momentous events of last December have permanently changed the UK’s relationship with Europe. To the average Europhile, this is something to be lamented and mourned, the moment Britain became a so-called pygmy on the world stage.

To others, David Cameron’s stand will have benefits far greater than appeasing his own Eurosceptic MPs. It will allow the UK to open its eyes to the rest of the world, and the enormous trading opportunities there.

Here is a question. If you had a business, would you rather sell to the penny-pinching customer with the uncertain future, or the flash kids with money to burn?

Britain finds itself in such a quandary right now. We have been members of the European project for nearly forty years, and our economy has merged with the Continent’s to such extent that our largest trading partners are across the Channel.

The issue though is that the European economy is crumbling. The rest of the world is leaving Europe far behind, a situation that is highly likely to worsen given the EU’s inability to sort out its financial problems.

The EU’s economic growth in 2010 was 1.8%. In contrast, the developing countries of East Asia – excluding Japan – are expected to have grown by a huge 8.2% in 2011, according to the World Bank. India’s growth has slowed, but to a respectable 7%, well above France’s forecasted 1.6% for last year.

By focusing mainly on Europe, the UK’s economy is ignoring the far bigger picture.

When will Britain see the Asian lights? (Photo from here)

The Asia Pacific (APAC) region in particular represents an enormous opportunity for anyone that is willing to work there. This is not new: a nineteenth century British trade delegation to China once mused that if the Chinese added one inch to their shirt-sleeves, ‘the textile mills of Lancashire would be busy for the next 100 years’.

China is an economic sensation. It has quadrupled in size over the last few decades to be the world’s second largest economy, and is projected by many to overtake the US into number one spot sometime over the next ten years. There are untold opportunities for British trade with the country, especially given Beijing’s current push to develop its internal markets: the country is expected to import over $8 trillion worth of goods in the next 5 years alone.

Yet APAC is far more than just China. Indonesia, the Philippines, and Thailand are just some of the countries that are developing fast and ripe to do business with.

The UK needs to start taking APAC far more seriously. There is huge admiration for the UK in Asia. Union Jacks adorn the latest fashions; British music and films are everywhere; English is the lingua franca for many. But we are just not capitalising on it: trade with APAC remains far smaller than with Europe or North America.

Where are the small Manchester companies roaming the Jakarta trade shows? Where are the Birmingham businesspeople looking for deals in Taiwan? Why don’t we see Shoreditch software entrepreneurs selling in Malaysia?

The British pavilion at the recent Shanghai expo is a telling reflection in the UK’s commercial relationship with Asia. A mesmerizing cube composed of 60,000 perspex rods, it was widely praised as the main architectural marvel of the six-month event. But there was nothing in it: a triumph of style over substance.

To be fair to David Cameron, he understands the need for more global trade. He has proudly pointed out that since his high-profile visits, British UK’s bilateral trade with India is up by 20% in the last year and exports to China are up 40%. In addition, embassies and high commissions are being made to provide more commercial support to UK enterprises.

Yet it is not enough. The US is taking an active lead in Asia, as it understand that the 21st century will belong to Asia. President Obama has recently announced that America will be signing up to the Trans-Pacific Partnership (TPP), a group of liberal-minded countries in the region which has the potential to be the world’s largest trade block.

(Although this grouping does not include China, this is not necessarily a bad thing: it does, after all, cement liberal trade as the dominant economic model for most of the region.)

One possible way for the UK to tap into the APAC growth story outside of China is by following the US lead and joining the TPP. The organisation’s agreement makes provision for its expansion to include any state that meets its liberal economic criteria, which the UK plainly does.

With the TPP having core British allies within its actual or provisional members – the US, Australia, New Zealand, Singapore and Brunei – and strong relations with others – like Malaysia and Japan – there is no obvious impediment to the UK joining, no Charles de Gaulle waiting to block our accession.

The only real barriers are the legal limits imposed by the EU, and our emotional ties to our nearest neighbours. The Europhile fear of Britain being blockaded by Europe if we looked elsewhere for trade has no foundation given the amount they export to us.

It will take great political courage to move Britain into the unknown and realign itself to be more world-focused. The Prime Minister though should remember that many companies have successfully reinvented themselves to take advantage of exciting and prosperous new markets. Nintendo – one of the world’s largest video game companies – used to make playing cards. Nokia, the Finnish mobile phone maker, started life as a paper manufacturer. It can be done.

The UK should move further onto the world stage. But the country needs room to manoeuvre, to focus its interests on the parts of the world that are growing, and not stagnating.

The only way we can do that is if we take the plunge and realise that Europe is the past, and Asia the future.

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2011: the year Asia really took off

31 Dec

2011 has been a pivotal year in the history of the world. The Arab Spring – which has changed the Middle East completely – has used traditional and new social media channels to inspire revolution. The importance of social media extends to the other global movement of the past year, the Occupy protests North America and Europe. Indeed, Eric Hobsbawn, the marxist historian, has equated 2011 to 1848, or the year of revolutions that set Europe on fire.

Asia has perhaps been a bit quieter in comparison. But the changes here have been just as important – and probably more so. For this was the year that the continent, in particular Asia-Pacific, has started to really take off. The flow of power and wealth that has been flowing from West to East since the financial world collapsed 5 years ago is now being entrenched, aided by the EU’s woes, America’s political deadlock, and the continued economic development of the Asian nations.

It is certain that we are one or two years away – at most – from the tipping point, when the fulcrum of the world moves from the Atlantic to the Pacific.

The Pacific century is about to begin.

Here are some of the more important events from Asia this year:

China flexes its might

China’s relations with its South East Asian neighbours have slightly deteriorated this year. Despite new initiatives to bolster Beijing’s influence, such as the deployment of Chinese police to the Mekong river, the region’s governments are seeking to

The neighbours are worried

broaden their relations with other countries, especially the US. The visit to Burma by Hilary Clinton and Vietnam’s welcome of a US aircraft carrier are just two such initiatives.

Chinese sabre rattling – such as Hu Jintao telling his navy to prepare for warfare, and intransigence over China’s claim to the South China Sea – has been a main source of these new tensions, but there are others too. Huge numbers of Chinese immigrants to Laos have led to concerns there, and South Korea and Japan have had clashes with their giant neighbour thanks to wayward fishing vessels.

China’s ‘peaceful rise’ might still be the official mantra, but it is looking less and less convincing to her fellow Asians – let alone the US.

US nails its colours to the Pacific mast

Washington has taken advantage of this regional anxiety by seeking to restrict China’s room for strategic manoeuvre in Asia-Pacific. It has done this with a mixture of bilateral and regional deals.

President Obama: more at home in the Pacific

The US free trade agreement with Seoul and its sale of fighter aircraft to Tokyo are two examples of America bolstering its influence with specific nations.

Washington is also looking to cement its position as the regional leader by joining the Trans-Pacific Partnership, and using that as a vehicle for APAC domination. If the TPP – which China is excluded from because of the liberal economic rules that dictate who can and can’t be a member – becomes the main APAC trading block then the US will have succeeded in maintaining its hegemony in the Pacific region.

All of which is looked upon with alarm by China, as numerous articles in its official newspapers bear witness. The chances of Beijing accepting America’s dominance are close to zero, so 2011 is only going to be the beginning.

The march of the Yuan to world currency status

China’s recent currency deal with Japan is a small but important step to making the Yuan a global reserve currency alongside the US dollar, the Euro (for now), and the Yen and Sterling. The deal – which allows Chinese and Japanese trading companies switch between yuan and yen without converting to dollars first – is not though just about regional trade.  China seeks a bigger role for its currency in global markets, and wants power in international forums that is commensurate with its economic might. The sooner its currency is fully convertible and its economy is open to global investment, the sooner this will happen.

Japan’s disaster

March 11 saw a huge earthquake and tsunami hit Japan, leaving at least 16,000 dead and causing $235 billion of damage – the world’s most expensive natural disaster. This came on top of two decades of economic stagnation which has led to Japan being overtaken by China as the planet’s second largest economy.

Prime Minister Noda

The net effect of the tsunami has been to shake Japan into realising its precariousness. For too long the country has been mired in deflationary decay and with a highly unhealthy political system that has seen 7 prime ministers since 2006.

The incumbant leader, Prime Minister Noda, seems to have recognised this and is looking for solutions. Reaching out to the Trans-Pacific Partnership earlier this year was a watershed in Japanese relations with its neighbours, and she has been busy making bilateral currency deals with China and South Korea.

Given the short-term nature of his position, it is hopeful that Noda can continue his apparent mission to further integrate Japan with the world economy well into next year.

India paralysed ahead of its 2012 elections

The world’s largest democracy has some way to go to catch up with its Asian rival China, as can be seen here. But it is not helping itself by sacrificing its economic development on the altar of party politics ahead of next year’s elections.

Not to India's liking - until 2012 anyway

The ruling Congress Party has been attempting to reassert its leadership and kick-start investment in the deteriorating economy, but has been blocked in several initiatives by opposition from other parties keen to position themselves ahead of 2012. The Government’s decision to halt foreign investment in the country’s huge retail sector is the main victim of this politicking, and has damaged India’s reputation as a place to invest.

The rupee’s 13% slide in 2011 – Asia’s worst performing currency – is a reflection on a lack of investment confidence.

If India is to start competing seriously with China then it needs to get its politics inline with what is best for its economy.

North Korea’s succession plans

The death of Kim Jong-il has been a major source of world anxiety. There has been widespread alarm at the youth of the apparent successor, Kim Jong-un, and the instability that his inexperience could bring.

Given the strong messages coming from Pyongyang over the last few weeks it seems likely that the young pretender is increasing his grip on the country. The worry therefore is less about a power vacuum, but perhaps too much power and with a need to use it.

As with all these events, time will tell. 2012 is going to be an interesting year indeed.

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Kim Jong-il dead: what next?

19 Dec

One thing springs to mind on hearing about the death of Kim Jong-Il: uh-oh.

The despot ridiculed by many as a heavy drinking, perverted odd-ball has finally died after years of ill-health. The world is becoming rather concerned about what happens next. Share in Seoul are already tumbling, and Japan and South Korea are preparing for the worst. America and Europe are keeping highly abreast of the situation.

A figure of fun with blood on his hands

The reason is that North Korea – the last Stalinist nation on earth – is highly unstable, with enormous internal problems. Famine has been widespread over the last few decades, leaving perhaps a million people dead. Millions of others have been left destitute by misjudged economic reforms that have established, abolished and then re-established limited private markets.

Tens if not hundreds of thousands have either escaped or been caught in the attempt. At least a similar number are assessed to be waiting for their time to flee the country.

Its internal issues are made worse by the fact that North Korea is now nuclear armed and with an army twice the size of China’s. The military has a long record of unprovoked assaults on its neighbours, from mass kidnappings of Japanese citizens to the shelling of a South Korean island and the murder of American servicemen.

The chance of something untoward coming out of the death of Kim Jong-il is thus rather high. The impact of wider instability would be quite immense.

Unfortunately, the opaque nature of North Korea means that no one really knows what is going to happen now. There are though some key issues which need to be considered to have even an inkling.

First is whether the heir apparent, Kim Jong-un, can secure the succession. The second is whether the new ruler will feel the need to mount a show of force to prove himself. Third is what China does.

A stable power handover?

One of the key problems that will be faced in the coming days, weeks, months and even years is how securely Kim Jong-il’s son, Kim Jong-un, can takeover the leadership of his father. Despite being named as the Great Successor, he is not guaranteed to inherit Kim Jong-il’s communist throne.

One of the weaknesses to his claim is the lack of time he has been groomed to take over the leadership.

Kim Jong-un. A wrong 'un?

As a comparison, when Syria’s Bashar al Assad took over from his own father, Hafez al-Assad, in 2000 he had had 6 years to be groomed for the role – not a long time in the scheme of things, but unavoidable given the untimely death of the heir apparent, Basil al-Assad. Al-Assad senior smoothed the succession in three ways.

First, support was built up for Bashar in the military and security apparatus. Second, Bashar’s image was established with the public. And lastly, Bashar was familiarized with the mechanisms of running the country.

Unfortunately, none of this has been possible for Kim Jong-un.

For a start, he is only in his twenties (no one knows his exact date of birth) and has apparently spent many years abroad. This means that he has probably not had enough time to build up strong political relationships or power-bases to guarantee his succession, despite a PR campaign that included making his holiday a national holiday. It is also unclear as to how well he understands the political system and how to manipulate it to his own benefit.

As Kim Jong-un has been named as head of the funeral committee and Great Successor, it is likely that he has at least some kind of hold on power currently. But given that the North Korean political hierarchy is almost completely unknown to outsiders, it is hard to say if there is anyone who is positioning themselves to make a challenge to the heir presumptive over the coming months.

The good news is that if there is a challenge to Kim Jong-un’s reign then it is more likely that it will be dealt with internal to the hierarchy, rather than spilling out to a wider war.

Show of strength

Even if succession goes well, the next risk is if Kim Jong-un is pushed to make a strong-man stand to prove himself. This could quite easily take the form of a military strike on South Korea, which the North has a long track record in doing.

Getting ready to march?

If this were to happen then it could not come at a worse time. Given the impotence of the SOuth Korean military’s response to a shelling incident earlier this year, and the sinking of a warship that left 46 dead, there is considerable pressure on the South to massively respond to any North Korean aggression.

This would obviously have serious consequences in the region, and most likely lead to a sharp war unless the sides were restrained by their allies.

What China thinks

Allies though is not what North Korea has in plenty. China is their last major supporter on the world stage. Despite Kim Jong-il’s horrendous treatment of his Chinese sponsors – the pinnacle being him not telling them he was about to test a nuclear bomb in 2006 – China have stuck with him. This is mainly for geopolitical reasons, namely that the last thing Beijing wants is a reunited Korea allied to America on its borders. They will therefore do anything they can to keep the country divided.

What China don’t want either is for North Korea to implode. This would undoubtedly lead to hundreds of thousands (if not millions) of refugees trying to get across the border, causing instability to China and raising regional tensions.

The best result for China therefore is for an orderly transition to Kim Jong-un - or any leader capable of keeping the country together – and the maintainance of the status quo.

It might be assumed that China would have opposition to this. However, although there will be hawks in Seoul, Tokyo and Washington that demand regime change, it is highly likely that orderly succession will be wanted all round. The main reason is the cost of not having it.

For a start, regime change would be highly likely to lead to a conflict that would drag in the US, South Korea, and probably China and Japan too. No one wants that. Second, the cost of reunification – a likely byproduct of such change – is absolutely staggering, with estimates ranging up to $5 trillion. This is five times the total annual GDP of the South, and is simply unaffordable without outside help – but with the world economy in tatters, who would be able to give such assistance?

No one wants this

In the absence of any desire by the West to see Kim Jong-un fail, China is likely to get its way. They will also in all probability try to act as a brake to any misguided attempt to attack the South.

That said, this does depend on China still having the ear of the new North Korean leader. If China felt that it was being ignored and that the North Koreans needed reigning in for whatever reason, then regional tensions would rise – with unknown results.

In other words

Given the rapidity of the regime in anointing Kim Jong-un as Great Successor, we are probably going to see Kim Jong-un take over from his father, supported by Beijing. It is also unlikely that they will lash out at anyone, at least in the foreseeable future – especially if China has its way. However, until there is more certainty emanating from Pyongyang, the markets – and neighbouring governments – will remain rather jittery.

The caveat though has to be that no one really knows what is going on inside the Hermit Kingdom. Time is the only way we will know the future.

 

 

 

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A critical moment for Europe and the UK – some thoughts

12 Dec

Mark my words: December 9th 2011 will be seen by history as the day Europe changed. The refusal by David Cameron to allow the UK to join the Franco-German tax and budget plan has changed the political future of both Britain and the wider continent.

The full ramifications will not be known for some time, but what is certain is that the future will be very different now for both sides.

There are two questions to ask. First, how did it all come to this? And second, what does this mean for the future of the UK and Europe?

As to how it happened, the Economist has published an eminently credible article which well reveals what went on behind those closed doors on Thursday night.

In essence, the Germans arrived at the summit with a plan to redraw the treaty between the EU member states to push forward fiscal integration, and introduce penalties designed to prevent Greek/Italian-style profligacy in the future.

But the majority of the room disagreed with Dr Merkel in this, and instead pushed for a “quick and dirty fix” dreamed up by Herman van Rompuy, the president of the European Council and former Belgian Prime Minister. The fix was dreamed up by lawyers working for Mr Van Rompuy. They said that a legal device, known as “Protocol 12″, would allow the 27 leaders of the EU to agree most of the new rules and mechanisms for fiscal union in the euro zone by a simple, unanimous decision among themselves.

In other words, the EU leaders decided to push ahead with fiscal union without bothering to consult their electorates. Democracy in the EU took another step backwards.

But into this stepped David Cameron. It appears he decided at this point to push forward the list of British demands. The full list appear on the Economist article, but in general they were around the way decisions are made by the EU and also some measures to protect the City – a bigger financial institution than in the rest of Europe combined – from Franco-German efforts to diminish it in favour of Paris and Frankfurt.

Unfortunately, it seems that the other EU leaders did not agree with Cameron. Instead, and thankfully for the peoples of Europe, the van Rumpuy plan was destroyed in the ensuing debates and an agreement made to create a new treaty, as the Germans had initially wanted.

It is this new treaty – calling for more integrated fiscal union between the member states – that the British have rejected. Other European leaders will now have the task of persuading their fellow national politicians to agree that this is the right way to go.

But why did other non-Euro countries not follow the UK’s lead? The answer may be because of the way Cameron handled his demands, by bringing them to the table without having secured widespread support beforehand.

In addition, David Aaronovitch (the Times journalist) argues, the Conservatives’ withdrawal from the main centre-right party, the EPP, has left them semi-isolated in Europe on a day to day level, so making it harder for any deal to be made full-stop.

In my opinion though, the main reason was that the European leaders were too scared of France and Germany to rock the boat. Continental economies are far more integrated with each other than with the UK, and in the case of numerous Eastern European nations like Poland and the Czech Republic, almost an extended arm of the German industrial base. It would have been political and economic suicide for them to have clashed so publically with France and Germany.

To this needs to be added the fact that Sarkozy has been planning on removing the UK from the European core for some time. A friend of mine who has known Sarkozy for most of his life (his father is a political contact of the President) told me some years ago that the Elysee Palace’s main political ambition was to reduce Anglo-Saxon interest in the world, particularly Europe.

This is a view backed up by our Government’s view of the situation. There are reliable signs of heavy Downing Street briefing over at the Daily Telegraph, where the well-connected Ben Brogan is reporting that it was all the fault of the French, who crammed the text on the summit table so full of impossible demands that the British had no choice but to walk away. He writes:

The events of the past 12 hours have exposed a truth that many chose to ignore, namely that in its relentless pursuit of its national interest, France’s strategic objective has been to drive the UK to the margins – if not out of the EU – and to destroy the City. The French narrative of the crisis is that it is all an Anglo-Saxon creation, and we must be punished for it. The failings of the euro so obvious to us are not recognised by the French. The British view is that packing the treaty proposals full of changes that Britain could never conceivably accept was a ploy to force us into a veto, and so into the departure lounge. Or here’s another way of putting from inside the machine: “The French are out to screw us,” one source tells me. “Despite all the jollity, the fact is that Sarko doesn’t gives a s*** about us. It’s all bull***. They have their view that the Anglo-Saxon model is a disaster and was responsible for the crisis.”

So what does this mean for Britain and Europe?

First of all, a two-speed Europe is now a reality. The Eurozone will attempt to press ahead with further integration, with the UK on the sidelines. In theory.

In practice, it is a strong possibility that one, two or maybe more Governments of Europe will block the new treaty. Even if this block is not permanent – witness the way the EU has forced member states to keep revisiting previous treaty issues until everything is pushed through, such as the Irish no to the Lisbon agreement a few years ago – it is likely that the economies of Europe cannot wait that long. Economic meltdown is a very real, and very close, reality.

My personal view is that the UK is “as isolated as somebody who refused to join the Titanic just before it sailed”, as Terry Smith of City firm Tullett Prebon commented last week.

Even if the treaty is passed quickly and fiscal union steps taken, the fact remains that the core-premise of an integrated Europe is flawed. I strongly believe that stable European fiscal union will not be achieved without political union, and that is impossible in a continent so divided by language, history and culture. Populists in countries such as Greece and Spain will look at any further leadership by Germany as an attempt by Berlin to cement their domination of the continent, and will use this as political leverage in elections.

The UK may well be isolated from some decision making in the short term, but there are enough (behind the scenes) enemies of Franco-German domination of the EU that we will not be cut off from everything for long.

The UK domestic scene though will still be affected though.

The move will play an important part in the arguments surrounding the Scottish succession referendum. Supporters of a divided Union will use Cameron’s move to further their cause, saying that it weakens the country and an independent Scotland is needed to repair ties to the EU. In turn, Scottish eurosceptics will no doubt propose that succession would mean further control by the EU,

Looking ahead to the UK general election in 2015, the Liberal Democrats are caught between a rock and a hard place. With 49% of their members thinking Cameron did the right thing, Clegg et al need to be careful not to overplay their anti-Tory hand. But at the same time, their europhile nature is one of their unique selling points. Striking the right balance is going to be hard if they are not to lose all credibility.

As for Labour, the silence of Ed Miliband has been very noticeable. As the Scotsman newspaper notes, Labour’s claim he should have worried less about his rebellious back-benchers and sought a deal in Europe lacks credibility, first because the official opposition will not say what they would have done were they in power, and second, because even if the Prime Minister had spent last week touring every European capital it seems unlikely he could have avoided taking the stand he did, faced with the determination by Merkel and Sarkozy to proceed with their plan.

Overall, this has been a momentous week for Europe and the UK. New directions will be taken and new battles fought over the coming months. But I feel that overall, the European dream is still dead in the water. But at least they won’t be taking Britain down with them.

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Chinese President tells Navy to prepare for warfare; Indian ties pushed

7 Dec

The BBC reports that President Hu Jintao has told China’s navy that it should speed up its development and prepare for warfare.

Chinese aircraft carrier: needed soon?

He told military personnel they should “make extended preparations for warfare”.

As discussed by me here, China is locked in territorial disputes with several other nations in the South China Sea. Political tension is also growing with the US, which is seeking to boost its presence in the region.

The BBC continues:

Mr Hu told a meeting of military officials that the navy should “accelerate its transformation and modernisation in a sturdy way, and make extended preparations for warfare in order to make greater contributions to safeguard national security”.

The word “warfare” was used in official media, but other translations used “military combat” and “military struggle”.

Analysts say Mr Hu’s comments are unusually blunt, and are likely to be aimed at the US and Beijing’s rivals in the South China Sea.

As far as I can tell, this report is not carried in any of the Chinese news outlets. The story may therefore be overestimated in its importance. The small value of oil and gas deposits in the South China Sea makes any Chinese aggression pointless: they would be able to secure far more resources through bilateral agreements with for example African countries.

The sabre-rattling – if indeed is what this is – is probably more about the domestic agenda. There are clearly those within the Beijing Government who are annoyed at America re-stating its case to be an Asian power, and this may be an attempt to assuage the anger of the hawks.

In other related news, the Chinese Government paper the Global Times carried an article calling for closer Sino-Indian ties. The main thrust of the report is that India should create a close relationship with its fellow Asian nation rather than the US or the West.

From a strategic point of view it makes perfect sense for Beijing to enhance its relations with India. The last thing it needs is for a major Western ally – and nuclear armed at that – on its borders.

India will know this. Do not be surprised if New Delhi uses the situation to seek more support from the US in its push for more regional power.

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Asian Rise: weekly round-up 5 December 2011

5 Dec

Clinton and Sein

Hillary Clinton made her visit to Burma this week. Talks with the President Thein Sein appear to have gone well, and the President has in fact just signed a law allowing peaceful demonstrations for the first time, it was reported. The new law requires people to seek approval at least five days in advance, a significant change to before when all protests were banned.

This is an open gesture to the US and one the Chinese – who have long maintained Burma as a key regional ally – will no doubt interprete badly. Read more about this on my previous post on Burma.

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The fallout from the US’s overtures to Asia continues. Chinese newspapers have vented their anger with numerous articles this week attacking not only American Asian policy, but the US and its allies too. The Global Times, a more hawkish state media outlet, has called for a more aggressive stance by China. 

To respond effectively, China needs not only a new strategy, but also a new foreign policy discourse without being seen as initiating a dispute or conflict.

This strategy, in turn, should retain the current focus on uninterrupted economic development as the top national priority. It should also replace passive diplomacy with active diplomacy and forgo the “peaceful rise” discourse in favor of the “responsible rise”.

China should take advantage of resentment against the US in certain parts of the world, it opines, so as to aid the country’s rise. Japan, South Korea, and Africa are all mentioned as being specific targets for Chinese influence to be groomed.

The China Daily has used the opportunity to highlight the levels of poverty in the US and call the American dream ‘broken’: “The large gap between rich and poor really leaves a lot of people feel down about the American Dream”.

The UK doesn’t escape, with the Global Times publishing a scathing attack on the current state of Britain.

The UK has been a role model for capitalist states, but its system has appeared incompetent when confronted by an economic downturn, growing social unfairness and unaffordable welfare system. It has lost the momentum it acquired after the Cold War and riches obtained during colonialism… The Britons need to lower their expectations for the future and accept the fact that their world-class living standards have to decrease gradually.

At least the paper was magnanimous enough to tell its readers that “We should not laugh at the UK’s misery”.
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This week has seen a number of unrelated protests across the region.

Hundreds of South Koreans demonstrated in Seoul against a free trade agreement signed with the US. Although the accord may help South Korea’s economy expand by 5.7 percent within a decade and create 350,000 jobs, according to the nation’s finance ministry, there are many opposed.

Some are annoyed by the way that the ruling Grand National Party used its majority in the National Assembly to ratify the deal despite parliamentary opposition and violent protests. Local television stations and newspapers showed images of opposition lawmakers shouting and one shooting a tear gas canister in the room where the voting took place.

This video clearly shows the canister being thrown:

 

As mentioned in the CCTV report, some in the country also fear that the deal is skewed in favour of the US and against the local workforce. But there is also residual ill-feeling to the US by many in South Korea. Partly this is down to several incidents where American soldiers – 31,000 of whom are stationed there – have attacked local civilians. Others blame the US for stoking regional tensions, especially around North Korea’s attempts to build an atomic weapon. As China will be pleased to see, not everyone in Asia prefers America.

Papua unrest

Meanwhile, in the Indonesian province of Papua violent protests erupted over the 50th anniversary of a failed declaration of independence. This comes on top of bitter clashes with American mining company Freeport-McMoRan, which is accused of exploiting workers and conspiring with the authorities to brutally suppress any unrest.

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Australia has overturned a ban on exporting uranium to India. Australia, which holds an estimated 40% of the world’s uranium, already exports it to China, Japan, Taiwan and the US. Up to now Canberra has forbidden sales to India because it is not a signatory to the Nuclear Non-Proliferation Treaty.

The decision is clearly part of the strategic manoeuvring to strengthen the regional power blocks, and comes hot on the heals of the US’s deal to station Marines in the country.

During a passionate debate on the issue at Labor’s annual conference, Prime Minister Julia Gillard said the change would be in the country’s interests. “We should take a decision in the national interest, a decision about strengthening our strategic partnership with India in this the Asian century,” Ms Gillard said.

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Clinton in Burma and Chinese ire

2 Dec

Hillary Clinton’s visit to Burma, which started yesterday, may not have drawn the mass crowds some were expecting, but it has done its job. Burma is now officially back on track to rejoining the international fold.

The two leaders meet (BBC)

Today the Secretary of State is meeting democracy campaigner Aung San Suu Kyi today. The Burmese Nobel laureate is an important tool for both the West and the Burmese Government in the normalisation of the country’s foreign relations: the acceptable face of Burmese politics.

As pointed out here, Burma is trying to internationalise itself to reduce dependence on China, one of its main trading partners but also a giant that has been flexing its muscles in South East Asia, to the concern of many.

This has not gone unnoticed in Beijing. The Global Times, a hawkish official mouthpiece, has denounced the Clinton visit. “China has no resistance towards Myanmar seeking improved relationships with the West but it will not accept this while seeing its interests stamped on”.

The South East Asian dance of the giants takes another turn. And India – which shares a border with Burma – hasn’t even joined in yet. Interesting times ahead.

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Investing in UK infrastructure – some important lessons from China

30 Nov

In George Osborne‘s autumn statement yesterday he promised £30bn for infrastructure building, and a National Infrastructure Plan identifying over 500 projects for the next decade. Tens of thousands of jobs are expected to be created, and a long-term boost to the British economy established. All good news, perhaps, but there are two very important lessons from China that he needs to heed if this plan is to end in success.

British roads: spending holes aplenty

Commentators have been forthcoming in their support for Osborne’s announcement. John Cridland, Confederation of British Industry (CBI) Director General, said that “we particularly welcome the new emphasis on capital spending, and the measures to leverage private sector investment on infrastructure for roads and energy”.

UK institutional investors were reportedly enthusiastic about contributing £20bn to the fund. Joanne Segars, chief executive of the National Association of Pension Funds, said earlier this week that savers’ money would be secure, as big infrastructure projects tend to be long-term, inflation-linked investments that pay out a guaranteed return.

Some saw the benefits of Osborne’s plan being more for the present than the future. ‘Certainly in terms of staving off a recession, the increase in expenditure on infrastructure will probably help,’ said Philip Shaw, economist at Investec.

It is not just Britain that recognises the national benefit of infrastructure investment. China is the current champion of large-scale projects designed to support the growth of its economy well into the current century. (See here a list of some of the more impressive Chinese investments, from huge airports to new megacities and the longest bridges in the world.)

There is no doubt that infrastructure investment is seen as a core element in China’s staggering economic growth over the past decades. “Infrastructure spending is an important way to boost consumption, and it also acts as a spur to economic growth. One need only look at China to see what can be achieved” noted Lou Jiwei, head of China’s $410bn sovereign wealth fund, China Investment Corporation (CIC), in a recent article for the FT. 

Lou continues: “In the wake of the 2008 financial crisis, the government introduced a 4tn yuan economic stimulus package, with a large part of the money directed into infrastructure. As a result China’s annual economic growth rose from 6.8% to more than 10% from late 2008 to the end of 2009.”

The problem though is that not all infrastructure projects are the same.

Simon Pilcher, head of fixed income at M&G fund managers, says: “Infrastructure as a class of assets has a massive variety of risk and return. Some are hugely geared to the economy – for example toll roads. Others, such as water and sewerage, should deliver regardless of the economic downturn, but returns should be low.”

Indeed, China has seen much variation in the returns from its national asset spending. There is in fact plenty of concern about the effectiveness and efficiency of China’s recent infrastructure programme. Many of these projects could turn out to be wealth destroyers rather than creators, white elephants that will never repay their massive debts. The new high-speed rail network – scene of a crash earlier this year that killed 40, and was blamed on the constructors cutting corners – could be one such example, as the BBC’s Damian Grammaticus notes.

Chinese infrastructure projects aren't all perfect

So here is the first Chinese lesson for the Chancellor: be careful about which infrastructure is invested in. The UK needs new assets that will add to the economy, not pet projects for vested interests that turn out to be a burden on Britain for years to come.

The second lesson concerns the issue of how to pay for it.

Despite their warm welcome for the plans, many British pension funds, the planned bedrock of this new investment, are not necessarily set up to invest in infrastructure projects. A specific type of expertise is required to fully understand the risks and to manage the investment of projects like these, and many UK funds simply do not have enough experience to be confident investors.

This means that there may be a funding shortfall for the Chancellor’s plans.

Into this breach may step foreign investors. Some of these, like Canadian and Australian pension funds, would be seen as friendly partners.

Other potential funders would not be seen in the same light, for example the Chinese Investment Corporation. On the face of it, CIC investment would be good news for Britain. China has built up good experience in infrastructure investment, and it has plenty of money to spend.

But there are concerns about China owning key UK infrastructure. Are we as a country really happy about a major foreign power owning assets that touch the lives of so many of our fellow citizens? National self-interest is paramount in Chinese politics, so how would their holding of British water structures, power plants or rail networks be affected if Sino-British relations were to sour? Add to this the fact that British and Western firms have great difficulty getting access to large-scale Chinese projects, and the imbalance and potential risks are plain to see.

Despite these risks, investment in British infrastructure should be seen as a good thing for the economy. A sound power, water and transport network will – if managed and funded correctly – provide new jobs in the short and long-term, and ensure Britain remains competitive for international business. And while we are unlikely to be able to afford some of the huge new Chinese assets, we can at least learn their lessons in how to do things correctly, and avoid the damaging pitfalls.

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Asian Rise: the round-up 28 November 2011

28 Nov

In this week’s edition:

  • Burma, the new crossroads of the East
  • China to patrol the Mekong River: the start of something new?
  • Hedgefunds in Asia: making the tricky move
  • True Chinese dog, fake British hound

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Burma, the new crossroads of the East

Burma, pariah nation and home of the military junta that brutally suppressed the 2007 Saffron Revolution, is having a makeover. President Obama has recently announced that Hillary Clinton will be making the first Secretary of State’s visit to Burma in 50 years.

To make matters even better for Burma’s rulers, the country has been given the support of its neighbours to chair the Association of South East Asian Nations in 2014, which commentators believe is a major step in the country being welcomed back into the regional fold after years of bitter arguments over human rights and international posturing.

The official reason for the US visit is to  kindle “flickers of progress” in the nation given the return to politics of democracy activist Aung San Suu Kyi after decades of persecution.

Aung San Suu Kyi: right place, right time?

Yet as with the re-admittance of Libya onto the international stage in 2004, there is more to this than meets the eye. Pushing democracy may be important to the US, but so is the containment of China.

Indeed, Beijing feels that this move by America is just another attempt by the superpower to restrict China’s room for strategic growth. China has until now been Burma’s main international sponsor, and its second largest trading partner after Thailand. The military connection between the two countries is deep too, with Burma receiving equipment and training over a sustained period of time. In return, China gets access to a deep water port in the Bay of Bengal, where it is able to keep an eye on its main local rival, India.

But it appears that Burma’s leaders are at last waking up to their importance on the geopolitical scene, and realising that having all their diplomatic eggs in one basket is not a sensible thing to do. By realigning away from sole reliance on China for support, Burma will lead itself less open to manipulation and perhaps be able to capitalise on its strategically important location, at the crossroads between two giant nations.

An indication of this change in foreign affairs came last month when the Burmese government suspended China’s construction of a $3.6 billion dam on the Irrawaddy River. Officially this was due to local residents’ concern about the human, environmental impact and perceived benefits: most of the power generated will be exported to Yunnan province in China and local residents claimed the lack of community feedback in the planning process.

Yet in reality, it would be unlikely that a tightly controlled Government like Burma’s  - and one which does not have a tradition of putting villagers’ interests first – would not have timed this to fit in with the American and Aung San Suu Kyi announcements.

Beijing will interpret any move by Burma to realign its international position as a direct threat to its future. Other regional players will see this as China being out-manoeuvred by America yet again, following on from the Trans-Pacific Partnership and the Australia military deployment earlier this month.

So it will be interesting to see how much more China will take before it starts its own strategic moves. And with Europe verging on bankruptcy, and in America’s own backyard, where better place to start?

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China to patrol the Mekong River: the start of something new?

Beijing is not going to give up South East Asia without a struggle. It was announced recently that China will be sending 1,000 police to start joint patrols with Thai, Laotian and Burmese Vietnamese forces along the Mekong River.

Shipping has been suspended since thirteen Chinese sailors were killed there in October, and the Chinese deployment is officially aimed at protecting trade along the river.

Many local commentators – and more importantly, local public opinion – believe that this is just a front by China to extend its influence in the countries. The police patrols for instance will certainly be Chinese run: the headquarters for the initiative will be founded in China and there will be a coordination office in each of the other three countries, the China Daily reports.

There is some worry that this will set a precedent for China to send its forces to protect its commercial interests,This would be less of an issue if these investments weren’t seen as being of asymmetric benefit to China. 

Take for example a huge new project to transform a piece of land once home to drug-makers and warlords. The communist government of Laos granted to the Chinese firm King Romans Group a 99 year lease of 10,000 hectares in the province of Boke, to create a modern tourist resort. The idea was to transform the Golden Triangle – once famed for being the world centre of heroin production – into a legitimate traveller destination, with great benefit to the local economy.

Chinese casinos in Laos: not for the locals

The problem is that of the 4,500 jobs being created, 4,000 of them would be for Chinese people moved over to Laos. This is on top of an estimated 300,000 Chinese workers that have already been moved to the tiny country – population 6.5 million – over the last few years to build Beijing-sponsored infrastructure.

It is therefore not a surprise that many in Laos – and Burma and Thailand too – fear the Mekong deployment to be the start of something far wider ranging, namely Chinese colonisation of the region backed up by military force.

Do not be surprised if Burma’s move to internationalise its foreign affairs is quickly followed by Laos. The Mekong patrol may be the thin end of a wedge, and the local governments know it.

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Hedgefunds in Asia: making the tricky move

With returns in the West severely depressed, it is not unusual for financiers to be looking to invest in different parts of the world. High growth and  maturing equity and credit markets should mean Asia offering a host of opportunities.

As the Economist reports, there is little by way of an asset-management industry in much of Asia. Investors’ portfolios mostly consist of just property and stocks, which leaves lots of room for hedge funds’ offerings. And there are vast numbers of millionaires to whom such offers can be made.

But hedgefunds have yet to make their mark here. As can be seen in the graph (below left), assets in Asia-focused hedge funds now stand at $130 billion, well below their 2007 peak, and account for less than 8% of the $1.8 trillion invested in hedge funds globally. They saw just $11 billion of net inflows in the past 12 months. The number of funds, once soaring, has in the past few years merely held steady.

There are several reasons why hedgefunds aren’t booming in Asia.

Hedgefunds in Asia – not so popular

Local culture is a big inhibitor to fund success. Property is considered to be a core investment, as anyone who has seen the construction boom in China will testify. Hong Kong has long been supported by property wealth, and it is unusual here to find local successes who haven’t made at least part of their fortune in buildings. So making money from funds is not something in the investment DNA. And with so much wealth already created by their own canny investments, why should Asian entrepreneurs pay 2% to Western hedgefund managers?

Regulation is also a problem for wannabe funds in Asia. Shanghai, the sixth largest equity market in the world, has tough restrictions.  Taiwan does not allow any offshore funds at all.

In addition, new SEC rules have made it tougher for lesser funds to raise money in the US: one of the region’s smaller players, Singapore-based Solaris, told the China Daily earlier this year that it does not plan to register with the SEC or raise money from US investors. The cost of complying with US rules would be “very high,” according to Thomas Tey, Solaris’ managing partner. As 45% of the hedge funds in Asia manage less than $25 million and 90% of fund assets come from either America or Europe, according to Singapore-based industry data tracker Eurekahedge, then it is easy to see why funds struggle to grow.

While a fund remains small then it remains out of reach of sovereign wealth funds and other large institutions that prefer to see detailed and costly reporting schemes. And hedge funds are not in principle the place for bullish bets on Asian growth. In a bull market hedges should diminish returns. Paul Smith of TripleA Partners, which advises foreigners on investing in Asian funds, says there is twice as much money looking for long-only funds as for hedge funds.

But this all may be about to change. Several governments and cities are looking to encourage funds. South Korea recently changed rules to allow onshore hedge funds for the first time. Hong Kong and Singapore are keen to become hedge-fund capitals to rival New York and London, and are working hard to craft regulatory regimes that will help. They require hedge funds to register, but aren’t as demanding as America and Europe. And, as the Economist points out,  income-tax rates for high earners in Hong Kong (17%) and Singapore (20%) are much lower than in Britain (50%). “That’s a powerful argument to a footloose trader” it notes.

Although Asian sovereign-wealth funds, including not just Singapore’s GIC and Temasek but also China’s CIC, have in the past couple of years started to funnel money into hedge funds, there still remains a problem of finding investors to actually make the funds work. And unfortunately for Western money-men, the core of this issue is the local investor mindset. Until the Asian millionaire can be convinced that a fund manager can create returns that he or she cannot make by just using traditional investment channels, then there will be a struggle for Asian funds to grow to their rightful level. The fishing might be better in the increasingly shallow waters of the West for many years to come.

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True Chinese dog, fake British hound

Every nation needs its myths. America was inspired by the Founding Fathers, the Liberty Bell and the Cowboy. France still harks back to the storming of the Bastille, despite the inconvenient fact that it housed only seven old men: four forgers, two lunatics and a deviant aristocrat. And Britain had the 19th century legend of Greyfriars Bobby, the Skye terrier that kept a 14 year vigil beside his late master’s Edinburgh grave.

Until now that is. The Chinese press is delighted to report that the Scottish hound was in fact a marketing scam to drum up tourist revenue. But lovers of anthropomorphic tales of fealty shouldn’t worry, because – naturally – there is a Chinese dog to step into the breach.

As with so many things invented or first documented in the West, it is actually China that got there first: according to the Chinese, at any rate. Golf, you might think, would be a classic example of Scottish invention. Not so – Chinese wall hangings from 1368 naturally prove the British origin a fairytale. And Colombus was the first to discover America? Of course not: a Chinese fleet arrived there first in 1421.

Greyfriars Bobby: faker

But with Greyfriars Bobby dropped in the dustbin of history, we are fortunate that the China Daily has uncovered a replacement for us. Simply known as ‘Loyal Dog’, he has been sitting at his late owner’s graveside for a few weeks now. Locals are feeding him and, no doubt inspired by the tourist pounds generated by the Scottish forebear, are building him a kennel.

And if it is a success, then surely we can look forward to many more faithful pets appearing at graveyards up and down the country.

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