Tag Archives: United States

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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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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Why the West is losing to the rest

7 Nov

 

It comes to something when Europe is asking China to bail it out. But that is exactly what is happening.

Let’s just think about this for a moment. Europe, or more precisely the 17 Eurozone states, has a population of 331 million and a combined (2010) GDP of $12.7 trillion. China has an over-population of 1.3 billion and a (2010) GDP of $5.8 trillion. Yet it is Europe – the supposedly more advanced, civilised part of the world - that is asking for help.

This beggers two questions. First, why does Europe need economic assistance from a country that until 3o years ago had an economy half the size of Italy? And second, how did the Eurozone – and more broadly, the West – end up losing its preeminence?

Dig a little deeper into the Eurozone’s finances and you will see that all is clearly not well. China beats it in almost every economic indicator: in unemployment (4.2% versus 10.2%); in public debt (17.5% of GDP against 80%); in GDP growth (9.5% to 0.2% for 2011 Q2).

Sarkozy and Hu: an equal relationship?

In economic terms, China is the new tiger; the Eurozone the new mouse. In 1981, three years after its economic reforms began, China had a GDP of $168 billion, $23 billion less than Australia: this has obviously reversed. The average German was roughly 15 times wealthier than the average Chinese; this ratio is down to 3:1 and closing fast.  And the US is not in any better shape; many serious commentators, like the Economist, reckon that China will overtake America as the world’s largest economy by 2020.

Why, you might ask, is this relevant? The fact is, it is economic power, not social justice or any other indicator, that matters to a nation, for it allows the world to be shaped to its benefit, thus further expanding its own inherent advantage. So this data comparison is very important indeed.

They made us strong

This shift in economic power was not caused by a few reckless bankers, whatever the St Paul’s protestors might say. It is reflective of a serious economic rebalancing between West and East, and part of a trend that will utterly change the world in a single lifetime. So what has happened to the West? Why has it lost its lead?

Niall Ferguson, the historian, has recently published a book that takes a look at the reasons behind this shift in power. His starting point is to understand why the West has been so dominant over the last 500 years in comparison to the rest of the world. Six  powerful innovations – what Ferguson calls his ‘killer apps’ – are identified as having given the West the lead:

1.  Competition. Europe was politically fragmented into multiple countries. These were in turn internally divided into competing corporate entities, among them the ancestors of modern business corporations. China in comparison was a single, monolithic empire without internal competition to stimulate the whole.

Sir Isaac Newton: a strong foundation for the West

2. The Scientific Revolution. This was an entirely Western European phenomenon, leading to all the major 17th century breakthroughs in mathematics, astronomy, physics, chemistry and biology. Sir Isaac Newton and his fellow scientists laid the foundation for rapid industrial development.

3. The rule of law and representative government. An optimal system of social and political order emerged in the English-speaking world, based on private-property rights and the representation of property owners in elected legislatures.

4. Modern medicine. Nearly all the major 19th- and 20th-century breakthroughs in healthcare were made by Western Europeans and North Americans. This substantially increased life expectancy with all its benefits to the individual and society.

5. The consumer society. There is no point making goods if there is no market for them. The Industrial Revolution took place where there was both a supply of productivity-enhancing technologies and a demand for more, better and cheaper goods, beginning with cotton garments.

6. The work ethic. Westerners were the first people in the world to combine more extensive and intensive labor with higher savings rates, permitting sustained capital accumulation. This used to be closely associated with one religion, Protestantism, but it spread widely across the West.

Decline and fall?

With such advantages, what went wrong? Ferguson argues that it is simply that other nations, starting with the Japanese, realised that these apps could be downloaded and installed in non-Western operating systems. At the same time, and to make matters worse, the West has deliberately deleted many of its advantages.

Take a look at work ethic. It may be fallacious to suggest that the amount of hours worked in a day is the primary indicator of economic output, but it is significant. Malcolm Gladwell, in his recent book Outliers, shows how Chinese and other rice farmers have historically had to work harder than their wheat farming cousins. Eastern countries are now bringing this agricultural work ethic into the school, the office and the factory. The average South Korean works about 39% more hours per week than the average American. And when Bob Crowe, the leader of Britain’s RMT, the combative rail union, complains that underground rail drivers work too  much at 6 hours a day, you know that there is more divergence to come.

If one had to take one leading indicator for the increasing economic power of the East at the expense of the West it would surely be quality of education. Asian children, like their parents, on the whole work far harder at school than their Western counterparts. The American school year is, on average, 180 days long; the South Korean school year is 220 days long. The Japanese school year lasts for 243 days, a massive 35% longer than in the US.

Korean schools: less Grange Hill than you might think

Many teachers and education experts in the West dismiss these figures, saying that children need time to play and rest in order to grow up well-adjusted. But there are two reasons why this is not relevant.

First, the bulk of the difference in academic year days for British, French, and Western schools in general is the long summer holidays. This is in place because of the harvest season: when public education took off in the 19th century, most Western children were needed to work the fields over the summer. This long break is therefore not a compassionate act to allow kids to grow up more balanced, but a quirk left over from the days when compulsory education was founded.

Second, because the hard data coming out of international educational comparisons shows that Western children are falling way behind their Asian peers in the amount of learning they are actually doing. As Malcolm Gladwell reveals in Outliers, international maths comparisons place students from Japan, South Korea, Hong Kong, Singapore and Japan at around the 98th percentile. Children from the US, UK, France, Germany and other Western nations cluster at somewhere between the 26th and 36th percentile. That is a big difference. And when you consider that numerous studies have shown that better proficiency in maths has a direct correlation with better wealth creation, then it is plain that Asian nations are building a solid platform for economic prosperity through their education system.

Very much linked to this is scientific leadership. Here the West is already being completely dominated by Asia. In 2010, according to the World Intellectual Property Organisation, the top ten countries by patent application included Japan, China and South Korea, plus the US, Russia and five Western European nations. But the three Asian nations combined had 24% more patent applications than the other seven countries put together. This represents a huge shift in the global balance of science power, with all that it entails regarding economic development.

Better science is also linked to better healthcare. Anyone that has been to a hospital in Hong Kong, Singapore, or even upmarket Manilla knows that the standard of healthcare is as good or even better than that found in many Western hospitals. True, universal healthcare is not established in most Eastern nations, but health spending is increasing, and quickly: Taiwan now spends 6.5% of its GDP on healthcare, almost the same as Luxembourg.

It is though not completely game over for the West. There are certain things where Asia has to improve itself.

One of these is the rule of law, although there are challenges ahead for the West here. The latest World Economic Forum Executive Opinion Survey shows that on no fewer than 15 of 16 different issues relating to property rights and governance, the United States fares worse than Hong Kong. However, despite progress here from numerous countries – China is at last starting to clamp down on intellectual property theft – it is still fair to say that governance, regulation and anti-corruption measures are superior still in the West. But for how much longer?

Switzerland: the West's last hope?

Economic competitiveness is another area that the West still leads the rest of the world. The Global Competitiveness Report, as compiled every year by the World Economic Forum, “assesses the ability of countries to provide high levels of prosperity to their citizens. This in turn depends on how productively a country uses available resources. Therefore, the Global Competitiveness Index measures the set of institutions, policies, and factors that set the sustainable current and medium-term levels of economic prosperity”.

The good news is that the US, the UK and Germany are all in the top ten, with Switzerland way out in front with a score of 5.74. But the West cannot rest on its laurels. For a start, the US has been declining for the last few years, its three-year score knocked from 5.74 to 5.43 by the effects of the credit crunch and subsequent global downturn. By contrast, China is improving year on year, its score increasing from 4.7 to 4.9 in the last three years, to put it in 27th place. With only eleven non-Western nations in the top 30, there is still significant room for the rest to improve. And it would be very surprising if they didn’t.

They think it’s all over…it is soon

Overall, the East is eclipsing the West – but not yet eclipsed. There are still areas that the West leads, and will for some years to come. The consumer society for example, although making great headway outside of Europe and America, is yet to take hold as completely as it has there. But the East will, in the not too distant future, be the new West.

The sad part of all this, from a Western perspective, is that soon – if not already - it will no longer be possible for Western leaders to shape the world to give its children an advantage in life. Future generations will grow up with Asia at the centre of the world, with natural advantages conferred upon them: in language, in culture, in politics, and of course in access to the biggest markets. The current and recent leaders of the West have been so intent on ignoring what made their nations great in the first place that they have betrayed their children’s future. The countries of the East will be sure not to follow suit.

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