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A misguided ‘fear of China’ threatens Malaysia’s economy

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Author: Tham Siew Yean, ISEAS-Yusof Ishak Institute

China was Malaysia’s largest trading partner for the tenth consecutive year in 2018, with bilateral trade increasing by 15 per cent from US$63.6 billion in 2017 to US$77.7 billion in 2018. But is Malaysia becoming too dependent on China to drive its economic growth?

Chinese Foreign Minister Wang Yi shakes hands with Malaysian Foreign Minister Dato' Saifuddin Abdullah during the meeting at the Diaoyutai State Guesthouse, Beijing, China, 12 September 2019 (Photo: Reuters/Andrea Verdelli). That is a question being posed by a general public that is increasingly wary of the growing presence of China in the country, especially with the spike in Chinese investments after the announcement of the Belt and Road Initiative (BRI) in late 2013.

Media reports are fuelling a simmering unease with a constant focus on troubled BRI projects and the apparent pervasive use of Chinese workers in the country. China’s investments in high-end real estate, such as the Forest City project in Johor, also attracted negative publicity since it was targeted primarily at buyers from China.

The opposition party also used the controversial BRI projects and the Forest City project as the basis of hostile anti-China rhetoric during the campaign trail for the 14th General Elections in 2018. Even within the business community, the small and medium enterprises are voicing unhappiness on the lack of spillover from Chinese investments while competitive threats have intensified.

It is therefore unsurprising that the improved bilateral trade performance in 2018 is not viewed positively by all segments of the Malaysian public. There is instead growing trepidation that the increase in bilateral trade is yet another indicator of Malaysia’s perceived mounting dependence on China. This negative public opinion may subsequently impinge on Malaysia’s economic growth should the bilateral trade between the two countries falter in the future as a consequence.

The fact that Malaysia’s trade with China is mainly concentrated in its two primary export goods — electronics and palm oil — further compounds the fear of overdependence on China. The additional fact that there is a trade deficit with China is used by mercantilist supporters to spur a ‘fear of China’.

But these fears are unfounded because Malaysia’s trade partners are quite diversified while the drivers of growth are becoming less dependent on international trade. Malaysia, being a small open economy, is definitely affected by the economic growth of its main trading partners. But there are other important trading partners besides China. ASEAN nations, for example, contribute up to 27.1 per cent of Malaysia’s total trade while China contributes 16.7 per cent.

Even though Singapore is the largest of the ASEAN trade partners, the data in 2018 shows an increase in exports to other ASEAN member states such as Thailand, Vietnam and the Philippines. Besides ASEAN, the other major trade partners include the United States (8.3 per cent) and Japan (7.1 per cent).

Still, Malaysia’s trade as a percentage of the Gross Domestic Product (GDP) is relatively high, reaching a peak of 220.4 per cent in 2000. Is trade then the main driver of growth in the country? Far from it. Deconstructing the drivers of growth in Malaysia’s GDP, the Central Bank of Malaysia’s estimates show that it is domestic demand that has become an increasingly important driver of growth over time.

Private consumption contributed 51 per cent of the country’s GDP in 2012. This grew further to 55.5 per cent in 2018. Net exports contributed a mere 9 per cent in 2012 and it shrank further to 8.4 per cent in 2018. Trade as a percentage of GDP has fallen steadily since 2000 and it currently stands at 132.3 per cent in 2018.

Private consumption is, in part, powered by escalating household debt. Malaysia’s household debt to GDP ratio is one of the highest in Asia at 83 per cent in 2018 having approximately doubled from 43 per cent in 1997. Despite this, the Central Bank maintains that default is unlikely to occur at the current interest rates as household assets are four times household debts. The Central Bank is also progressively using macro-prudential policies to rein in private consumption.

Other factors that are contributing to strong growth in private consumption include relatively stable labour market conditions as unemployment remained around 3 per cent to 3.4 per cent of the total labour force for 2010–2018. Real wages per worker have also grown steadily over time. Government initiatives to support private consumption include, among others, the price ceiling on retail fuel prices as well as cash transfers.

Still, Malaysia should continue its efforts to diversify export destinations and export products in light of the ongoing US–China trade war to reduce the impact of a deteriorating global trade environment. In this regard, Malaysia should ratify the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) as soon as possible to expand trade opportunities.

More importantly, Malaysia should continue to push for a conclusion of the Regional Comprehensive Economic Partnership (RCEP) for the same reason. Continual support for World Trade Organization reforms will help to reinstate the importance of the multilateral trading system, which is especially critical for small open economies like Malaysia. Domestically, the country should continue to focus on enhancing domestic competitiveness by improving productivity to boost future growth.

Tham Siew Yean is Senior Fellow at the ISEAS-Yusof Ishak Institute, Singapore.



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ASIAN (H)

South Korea is back in political turmoil

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Author: Hyung-A Kim, ANU

South Korea’s self-righteous politics is reaching a new level of chaos following President Moon Jae-in’s appointment of the new Justice Minister Cho Kuk. The appointment came in spite of Cho’s wife having been indicted on 6 September 2019 for forging an academic award in her daughter’s medical school application. Cho’s family is also being investigated for dubious investments in a private equity fund.

South Korea's new Justice Minister Cho Kuk attends his inauguration ceremony at the main office of the ministry in Gwacheon, South Korea on September (Photo: Reuters/AFLO).

This political chaos exposes not only Cho and his family’s abuse of their high-profile social status amid the worsening class divisions in today’s South Korean society, but also the self-righteous politics of Moon’s ‘candlelight government’. A survey by pollster Korea Research International reveals that the country is split — 57.1 per cent said Cho’s appointment was wrong while 36.3 per cent approved.

Young South Koreans are particularly outraged by Cho’s daughter’s unlawful academic privileges. As a high school student, Cho’s daughter was credited as the lead author of a medical research paper published in the Korea Journal of Pathology in 2009. The paper was submitted as part of her application to the prestigious Korea University, where she obtained her undergraduate degree. As a medical student at Pusan National University, she also received scholarships totalling 12 million South Korean won (US$10,000) despite having twice failed her exams.

Student councils at Seoul National University and Korea University, among others, staged candlelight vigils in protest against Cho’s appointment, declaring that for a man with allegations of misconduct and corruption to become Justice Minister is ‘a complete betrayal of equality and justice’. A newly formed group of 4366 former and current professors from 299 academic institutions signed their public statement — declared for the second time, in front of the Blue House, on 27 September — demanding ‘a new appointment, instead of Cho, who can establish social justice and morality’.

Separately, more than 2000 medical doctors and some 800 lawyers also signed a petition urging Cho’s resignation, affecting Moon’s approval ratings. According to a recent Gallop Korea poll, this rating dipped to 40 per cent — the lowest since he took office.

Cho is arguably South Korea’s most outspoken left-wing intellectual turned political elite, having built his reputation as a crusader of progressive values — particularly through his criticism of ‘unfair customs of society and the establishment’. When he was senior secretary to the President for civil affairs, Cho led the Moon administration’s anti-corruption reform of the so-called ‘accumulated old evils’ by helping to ensure the imprisonment of two former presidents, Park Geun-hye and Lee Myung-bak, and the investigation of 120 former officials.

Cho also played a significant role in popularising anti-conservative public sentiment, especially through promoting the phrase Hell Joseon (Hell Korea) to which he equated the youth exploitation system of modern South Korea’s winner-take-all society where the majority of young people struggle against their collective sense of hopelessness. The popular notion of ‘Hell Korea’, especially endemic among the young people, helped trigger the candlelight protests against Park whose ousting on charges of corruption and abuse of power opened the door for Moon’s rise to the presidency in 2017.

Ironically, the popular protest slogan, ‘Is this called a country?’ that originally mocked the right-wing conservative Park administration is now being pointed at the left-wing progressive Moon and his ruling Democratic Party. Moon appears to listen to no one but his inner circle, ignoring outcries. In announcing Cho’s appointment, Moon said, ‘the more reform-minded a candidate, the more he or she faces a tough time in the confirmation hearings’, suggesting that anyone who opposes Cho’s appointment is also against his reform drive.

The problem with Moon’s unilateralism, as shown in Cho’s appointment, is that it not only contradicts his government’s core values of what Moon himself called equal opportunities, fair process and just outcomes, but also accelerates a new level of self-righteous politics in his administration. Lee Hae-chan, leader of the ruling Democratic Party, condemned the prosecutor’s investigation of the Cho Kuk scandals as ‘disturbing the nation’. Other lawmakers within the party accused the investigation of being ‘an undemocratic act to restrict presidential authority’ and ‘misjudged behaviour by the politically motivated prosecution to protect its vested interests’.

Tensions between Moon’s Blue House together with Cho’s Ministry of Justice (MOJ) on the one hand and the prosecution on the other appeared to have reached a critical point. Two senior MOJ officials reportedly attempted to obstruct Prosecutor General Yoon Seok-youl’s investigation into the Cho scandals by proposing the exclusion of Yoon from the investigation. The probe into the Cho family’s dubious investments in a private equity fund have nevertheless resulted in the arrest of Cho’s nephew, as well as a raid on Cho’s home in an unprecedented move to uncover evidence of the involvement of Cho’s wife — herself a professor.

Given that Moon and the Democratic Party’s political survival depends on the outcome of the April 2020 general elections, a push for judiciary reform through Cho may have been a calculated strategy. But Moon, like many members of his ruling Party who have publicly shown their approval for Cho, now needs to seriously worry about declining approval.

Ironically, Moon’s public warning to the prosecution over its ‘excessive’ probe into corruption allegations involving Cho and his family shows how his out of touch connection with the public closely resembles characteristics of Park Guen-hye in the last phase of her presidency. The political chaos brought about by Cho’s appointment inevitably further weakens Moon’s already feeble national management.

Hyung-A Kim is Associate Professor of Korean politics at the School of Culture, History and Language, The Australian National University.



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ASIAN (H)

Taiwan’s Pacific losses

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Author: Michael Mazza, AEI

In late September 2019, Solomon Islands and Kiribati severed their diplomatic relations with the Republic of China (Taiwan). The moves are, at once, largely insignificant and of great importance to Taiwan’s national security interests.

Taiwan Foreign Minister Joseph Wu attends a news conference announcing Taiwan's decision to terminate diplomatic ties with the Pacific island nation of Kiribati, in Taipei, Taiwan, 20 September 2019 (Photo: Reuters/I-Hwa Cheng).

They are insignificant because Solomon Islands and Kiribati are small countries with little international heft. Taiwan has far more important relationships with unofficial partners, namely with the United States, Japan, the European Union, Australia and India. All are among Taiwan’s top 15 trading partners.

The United States has long held a national security interest in the Taiwan Strait. These interests are laid out in the Taiwan Relations Act and evidenced by major arms sales to Taiwan and the island’s designation as a major non-NATO ally.

The 1997 US–Japan Defense Cooperation Guidelines outlined how the two countries might cooperate ‘in situations in areas surrounding Japan that will have an important influence on Japan’s peace and security’. This is widely understood to refer to potential developments in the Taiwan Strait (and on the Korean peninsula). The 2015 Guidelines further reinforce Japan’s interest in ‘regional’ security.

And Australia’s 2017 Foreign Policy White Paper noted ‘Australia is concerned about the potential for the use of force or coercion in the East China Sea and Taiwan Strait’.

The European Union may not have a unified view of its security interests in the Taiwan Strait, but important members like the United Kingdom and France have stepped up their defence activities in East Asia in ways that may benefit Taiwan. As for India, Delhi is likely to remain cautious in its approach to the Strait, but there is ongoing quiet cooperation with Taipei on non-traditional security issues with the potential for future growth.

Taiwan knows that its economic and national security interests lie in sustaining and deepening these ties. Although Solomon Islands’ and Kiribati’s decisions certainly are a blow to Taiwan’s diplomatic space, the severing of ties does free up some financial and human capital resources that could usefully be applied elsewhere.

Taipei might consider employing those resources in its New Southbound Policy (NSP), which President Tsai Ing-wen announced in 2016. The policy, which has four pillars — economic and trade collaboration, people-to-people exchanges, resource sharing, and the promotion of institutional links — seeks to deepen Taiwan’s unofficial relations in South Asia, Southeast Asia, and Australasia through ‘multifaceted cooperation and establishing mutual prosperity’. The NSP has been successful in expanding trade as well as societal and institutional links with target countries. Continuing to emphasise the effort, in part by backing it with a greater commitment of resources, will help ensure it continues to bear fruit in the years ahead.

China’s latest poaching of diplomatic allies could likewise give even greater impetus to already advancing US–Taiwan relations. Solomon Islands’ and Kiribati’s moves once again revealed the depth of US support for Taiwan, with many members of US Congress criticising China and the island nations, and calling on Washington to stand with Taipei.

Honiara’s and South Tarawa’s moves also mark setbacks for the United States, which has of late re-emphasised its Pacific island relationships in an effort to counter China’s growing influence in the region. Taiwan might well take advantage of this moment to accelerate efforts to move to a more normal relationship with the United States and to further deepen security cooperation.

Taiwan’s loss of diplomatic allies is unfortunate, but in the short term Taiwan will not suffer greatly — it can weather much as long as it has the United States (and, perhaps implicitly, US allies) standing by its side. But there may be significant implications for stability in the Taiwan Strait over the longer term.

Chinese state media has already threatened that Taiwan will lose all of its diplomatic allies if Tsai Ing-wen is re-elected in January. Whether that is a serious threat and whether Beijing has the wherewithal to carry it out are unclear, but it raises an interesting question. If Taiwan sees its formal diplomatic allies significantly reduced over time — or even entirely eliminated — does that make unification a more likely prospect for the People’s Republic?

Chinese President Xi Jinping might think so, but the opposite is in fact more likely. If one day Taiwan finds itself with few or no diplomatic allies, the door will be open to a reassessment of Taiwan’s existence as the Republic of China (ROC). Taiwan’s people might consider amending the ROC constitution or replacing it altogether, moving from de facto to de jure independence.

The people of Taiwan have every right to determine their own future. But China, ironically, might be pushing them in a direction that Beijing has long considered inimical to its own interests. The crisis that results will be one of China’s own making.

Michael Mazza is a Visiting Fellow at the American Enterprise Institute and a Senior Non-Resident Fellow at the Global Taiwan Institute.



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Foreign firms in China resist Trump’s trade war

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Author: Nicholas Lardy, PIIE

In defence of his trade war with China, US President Donald Trump has yet again let his Twitter fingers get ahead of reality. He tweeted in late August 2019 that ‘China wants to make a deal so badly’ and that ‘Thousands of companies are leaving because of the Tariffs’. This supposed exodus of foreign firms is another element informing his view that China is under increasing economic pressure and is anxious to accept US terms for a trade agreement.

The Tesla Shanghai Gigafactory under construction in Lingang, Shanghai, China, 23 March 2019 (Photo: Reuters/Dong Fang).

Yet the facts fail to support Trump’s view as is the case with his claim that US tariffs are slowing China’s economy and increasing its unemployment.

The trade war is not dampening foreign direct investment (FDI) into China. Non-financial FDI is currently running at almost US$140 billion annually, meaning that thousands of new foreign firms are established in China every month. Since the tariff war broke out in mid-2018 FDI has expanded at about 3 per cent annually, a similar pace to the previous five years. And the recent data does not include the massive new investments in chemical plants — China recently approved wholly foreign-owned investments by both ExxonMobil and BASF, each at a record US$10 billion.

Continued large inbound FDI flows are consistent with the expectations of member companies of the US–China Business Council. The Council’s recent member survey found that 97 per cent reported that their operations in China are profitable and 87 per cent said they had not relocated and had no plans to relocate any of their activities. In short, there is little support for the view that large numbers of foreign firms are fleeing China — the opposite seems to be the case.

A few foreign firms have recently left China but two points need to be kept in mind.

First, foreign firms have been moving out of China for decades. Some firms enter with business strategies that fail, leading to their exit. The best example is Occidental Petroleum. It entered China in 1983 with a flawed business strategy and was forced to write off its US$250 million investment when it withdrew in 1990. Other foreign firms, especially those exporting the most labour-intensive consumer goods, flourished in China for many years. But as local wages continued to rise, these firms eventually moved production to other countries with much lower wages such as Bangladesh.

Second, China has over a half million foreign-invested firms. Anecdotes of a handful of firms leaving China do not confirm a broad trend.

While some foreign firms report that they are considering alternatives to producing in China, it remains to be seen how many will actually leave and how many of those that leave will relocate to the United States. A large share of foreign firms in China, especially US firms, are there primarily to produce goods to sell on China’s still rapidly growing domestic market. These firms have no incentive to relocate within Asia, much less to the United States.

Caterpillar, for example, has more than 30 plants in China to make construction equipment that is mostly sold on the domestic market. The high costs of shipping relative to value make it infeasible to make heavy machinery in the United States and then export it to China. Caterpillar, like other foreign producers of capital goods in China, is very unlikely to relocate any of its production.

And relocating production out of China is easier said than done. Foreign affiliates operating in China draw on an extensive local supply chain that has been built up over decades and employ about 25 million Chinese workers, a significant share of which are skilled engineers and managers. Vietnam is commonly suggested as an alternative but it could only absorb a tiny fraction of production by foreign enterprises now operating in China. Vietnam’s total non-farm employment is only 44 million and foreign firms operating there already report shortages of skilled engineers and managers.

Relocating a significant number of foreign firms from China to Vietnam would put further upward pressure on Vietnam’s already rising wages, intensify existing skilled labour shortages and stretch its limited logistical capacity to breaking point.

Apple contracted Taiwanese manufacturer Foxconn to produce 220 million iPhones in China in 2018. Foxconn would face a number of difficulties if Apple asked the firm to relocate from China as Foxconn employs hundreds of thousands of factory workers and tens of thousands of skilled engineers and managers in China and draws on a network of more than 1500 local suppliers.

It appears that multinational firms, including those based in the United States, continue to find China an attractive environment for new investment despite US tariffs on China’s exports to the United States. Trump’s claim that an exodus of foreign firms will force China to capitulate to US demands to settle the trade war is wishful thinking at best.

Few US multinationals operating in China are likely to shift their production back to the United States. Trump’s claim that his tariffs on Chinese goods will reverse the decades-long decline in the share of US employment in manufacturing will very likely also go unfulfilled.

Nicholas R Lardy is the Anthony M Solomon Senior Fellow at the Peterson Institute for International Economics, Washington.

A version of this article was first published here by PIIE.



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ASIAN (H)

Navigating global uncertainties in Australia’s region

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Author: Martin Parkinson, PM&C

The strategic landscape, especially the US–China dynamic, is having a significant impact on the economies in the region, altering the context and environment in which governments, businesses and citizens make decisions. Three aspects of regional economics are of interest here: great power competition, technology and how Australia can position itself for advantage.

The Sydney Harbour Bridge can be seen over Sydney Harbour and in front of the Sydney Opera House as it is lit by the setting sun, on a summer day in Australia, 24 November 2018 (Photo: Reuters/David Gray).Late last year, former US treasury secretary Hank Paulson warned of an ‘economic iron curtain’ descending that could divide the world if the United States and China failed to manage their strategic differences. Since that speech, the curtain has descended further.

Great power competition disrupts regional growth. The region’s business and trading model fundamentally depends on fostering a stable policy environment and being open with one other. There is now great uncertainty over supply chains and the export-led growth model in East Asia that underpinned the economic development of many of Australia’s key trading partners is under threat. Only 9 years ago China was experiencing double-digit growth in GDP — this year it hit 6.2 per cent and growth will continue to fall over time as the economy matures.

Australia and the region have much to lose from a concerted attempt to decouple the US and Chinese economies — possibly even more than the damage that would be done to both of those countries.

There are two necessary conditions for avoiding what Paulson has called a ‘long winter’.

First, China needs to continue the reforms it started in the 1970s, paying particular attention to those areas where the United States has legitimate concerns. Ironically, and despite the rhetoric, this will make China stronger, not weaker. Second, international trade rules need to be improved, not discarded. As the Australian Prime Minister Scott Morrison said recently, ‘the rules based-order is in need of urgent repair’. This should be a priority for all countries that understand the fundamental importance of a trading system that supports ‘right, not might’. The answer to unacceptable trade practices is more effective rules, not throwing out the rules.

These two conditions can reduce trade tensions, but they cannot prevent the geopolitical competition in the region — competition that seems likely to define the region’s future. Even if the United States and China drop all recently imposed tariffs, confidence in the economic rules-based order has already been damaged.

Rapid technological change poses another challenge, but quite a different one, especially for low-income workers. Export-led growth has been the main path to development for emerging economies in the region and manufacturing has been the backbone of that growth model. But new technology may be reducing the development benefits from manufacturing industries. A key global trend worth keeping an eye on is how fast manufacturing productivity is improving relative to services.

Nowadays you simply do not need as much capital to deliver the same output in manufacturing as in the past. This may be one reason why global interest rates are so low — investment is historically low because businesses can now get more out of their capital than ever before. This means more and more economies in the region will become like Australia more quickly with services being an increasing share of their economies. While it is difficult to impose tariffs on services, the shift to a service economy risks an easy slip into protectionism. ‘Behind the border barriers’ are often easier to disguise and have fewer international rules to limit them than tariffs.

Technology may even be one reason why western countries are finding it difficult to lift inflation. Many see a flattening of the Phillips curve, and a shift to lower levels of unemployment consistent with stable inflation, as in part due to technology making the supply side of the economy more responsive.

New technologies deliver benefits that transform society. But they also raise important policy issues. Large online platforms are posing new economic problems, including in the areas of cross-border data flows, data privacy, artificial intelligence, competition policy and taxation. Like great power competition, these questions are likely to be around for a long time.

Much of the post-war order that is being contested was created by the United States out of a desire to never again see tragedies like the Great Depression and Second World War. The post-war period was unique in constraining the exercise of power by countries in Australia’s region. Intensifying great power rivalry — or at least a rivalry unconstrained by rules — now poses a risk to that prosperity. This is a region that has weathered significant storms in the past. But it means countries in our region stepping up to ensure collective leadership.

Australia is well-placed to manage the challenges and use its position to its advantage. The region is likely to remain fast-growing and dynamic, even if global growth slows. The region continues to supply around three-quarters of annual world GDP growth and constitutes well over half of global GDP.

Australia has demonstrated willingness to work closely with partners in the region to reinforce market-based systems. Trade deals expand trade opportunities, rather than diverting them, and reinforce the rules, rather than abrogating them. Australia has entered into 11 free trade agreements, including the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (TPP-11) and an agreement with ASEAN, and are working with others to deliver the Regional Comprehensive Economic Partnership (RCEP) this year.

The region faces significant challenges. Competition between the great powers is intensifying. Technology is transforming regional dynamics, creating immense benefits and raising significant questions. Despite the challenging outlook, future growth in the region and the role Australia will play in shaping global rules is cause for optimism.

Dr Martin Parkinson AC PSM is the former secretary of the Department of the Prime Minister and Cabinet, the Australian Government.

This article has been adapted from a speech delivered at the Economy and Business Session of Asia Briefing LIVE in Sydney in August 2019.



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ASIAN (H)

China’s achievement grounded in reform and openness

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Author: Editorial Board, ANU

The revolution that saw the birth of the People’s Republic of China (PRC) seventy years ago has now come to define the parameters of most of the big economic and political choices in the world today. But that would never have been so had the PRC remained the convulsed, inward-looking communist state that tried to find its way without the rest of the world — including eventually its old ideological bedfellow, the Soviet Union. In its first three decades modern China had little impact on the world economy and was largely closed to global trade.

Workers make Chinese flags at a factory ahead of the 70th founding anniversary of People's Republic of China, in Jiaxing, Zhejiang province, China, 25 September 2019 (Photo: Reuters/Stringer).

Certainly national coherence through the founding of the communist state also made the remarkable economic and social achievements of the past four decades possible. But China’s influence and power in the world and importance to Australia and countries throughout the world today are significantly a product of its initially tentative but strategic choice to reform, adopt capitalist markets and open up to the world.

China’s choice to go market, to sanction private property and to open up was bound to embrace Australia economically more than almost any other country in the world. The deep complementary in economic structures between the two countries, like that with Japan and our other Northeast Asian partners before, made that inevitable. Even before opening up after 1979, Australia’s critical wheat and steal trade around all the diplomatic barriers was a harbinger of deep complementarity in trade.

In 1938, John Crawford, architect of Australia’s economic rapprochement with Japan after the Second World War, proclaimed that Singapore provided no defence for Australia against the threat of Japanese invasion. The future of Australia as a Pacific power would depend, he argued, on the political security that opening trade with our northern neighbours could provide through underwriting economic security in the modernisation of Japan and China.

This grand bargain, built eventually within the post war multilateral trade regime that permitted realisation of these complementarities and the huge growth of interdependence in Asian trade and economic relations, remains the core foundation of Australia’s economic and political security in Asia today.

Another foundation, of course, is the US alliance framework. Both in fact were born out of the February 1942 Mutual Aid Agreement between Canberra and Washington that secured wartime supplies in exchange for Australian sign-on to the multilateral trade regime. It is the transformation of Asia’s economy, the impact it’s had on the structure of world power, and the multilateral framework on which it was built that must be top Australian security priorities right now.

Openness to international trade and investment since 1979 has been integral to Chinese economic transformation over the past four decades. Australia’s leadership played a not-unimportant role in helping to shape that course with China’s top leadership at crucial choice-points in the past: in working through the development of China’s huge resource trade dependence in the mid-eighties and in extending unwavering political support and technical assistance along the road to WTO accession.

China’s achievement in lifting 800 million people of poverty in a relatively short time was the result of China’s profoundly changing the way it engaged with the rest of the world through these initiatives. Its reforms were propelled and deepened by the international rules that it signed on to and has substantially adhered to since accession to the WTO, the protocols of which were in fact far more demanding than those of other developing countries and even developed members at that time.

As Wang Gungwu argues in the first of this week’s lead essays, the rise of China that these reforms have enabled will not be easily turned back. ’This stems’, says Wang, ‘from the people’s belief in progress and their ability to combine the new with what was best in their past traditions. By being willing to learn so much from the modern West, China today is undergoing a totally different experience of rising again after a great fall’.

The development of domestic markets — a key element of Chinese reform that has not changed despite consolidation of the political control of the state — was entrenched by integration into international markets via trade, investment flows, technology transfers, people-to-people exchanges and the spread of knowledge. Last year 134 million Chinese travelled abroad, including the continuing stream of Chinese students who choose to study overseas.

‘Celebration of the seventieth anniversary of the PRC provides a chance’ as Yiping Huang argues in our second lead essay, ‘to reflect on its economic policy choices today. China’s experiment with the central planning system largely failed but adoption of the reform and open-door policies delivered an ‘economic miracle’ of unprecedented scale. The Chinese economy is at another important turning point. If the government can pragmatically adopt higher quality reform and open-door policies, it is highly likely that, by 2049, China’s GDP per capita would reach two-thirds of that of the United States, although its GDP growth might moderate considerable to 2.7–4.2 per cent’.

International markets presented China with opportunities greater than those available during Japan’s and South Korea’s periods of extraordinary growth. China’s seizing of these opportunities has enhanced global interdependence to a degree the world has never seen before, though that’s now under threat.

The emergence and the impact of the strategic resource trade relationship with Australia that assisted China’s successful industrialisation was one important consequence. Like Japan before it, China now has high trade shares with Australia. Australia–China goods trade topped AU$192 billion (US$130 billion) in 2018, having grown more than five times as fast as the world average in the last five years. China’s shares in total Australian trade last year at 30 per cent and for exports at 34 per cent, are running at 32 per cent and 38 per cent so far this year.

It’s properly functioning markets that have delivered these strong Australia–China trade results. Australia’s largest trade relationship is one that is interdependent with (not dependent on) China, which already draws 60 per cent of all its iron ore imports and a quarter of its imports of strategic raw materials from Australia, a proportion that continues to grow.

The impressive diversification of trade in goods and services following ChAFTA, over a five-year period of difficulty in the political relationship, is a measure of the power of international markets in continuing to shape the two countries’ bilateral economic relations.

The resilience of the Australia–China trade relationship depends fundamentally on both partners’ commitment to the international market system and the rules under which it has flourished. That system is the core of economic and political security in Asia, a system currently under threat.

Australia and China have common cause with their partners in the region in dealing with this threat. At the same time the political anxieties caused by China’s rise, partly but not wholly because of its different political system, have to be confronted frankly in Australia’s dialogue with China.

The core task is to enunciate the substantial strategic interests that both countries have come to share over the past 40 year, in a time of great change. That requires the boldness and vision that the leaderships of both countries have shown at critical turning points in the past. This task will be on-going. But the celebration of the anniversary of the establishment of the modern Chinese state might be a good time to begin.

The EAF Editorial Board is located in the Crawford School of Public Policy, College of Asia and the Pacific, The Australian National University.



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ASIAN (H)

After 70 years, it’s time to upgrade China’s economic reforms

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Author: Yiping Huang, PKU

The seventy year history of the People’s Republic of China (PRC) can be divided into two periods in economic policy strategy. The first three decades were governed by the centrally planned system and the next four saw major market-oriented reform. In the pre-reform year, there was important progress in the form of infrastructure development, urban industrialization and human capital accumulation. But the achievement of catching up with the world’s most advanced economies largely delivered during the second period when China’s annual GDP growth recorded an average of 9.2 per cent.

The lighting-up of a group of buildings to celebrate the 70th anniversary of the founding of a nation in Shenzhen, Guangdong, China on 27 September 2019 (Photo: Reuters/The Yomiuri Shimbun).

The turning point occurred after December 1978 when the leaders decided to shift the policy focus from political struggle to economic construction. Then, China was one of the poorest countries in the world. Today, it is the world’s second largest economy, the largest goods exporter and the number one industrial producer, with a high middle-income level — though its per capita income is still just 18 per cent that of Australia. This dramatic improvement was mainly attributable to the reform and open-door policy and departure from the central planning model.

The exact role played by the state in China’s recent economic success, however, remains controversial, both at home and abroad. This issue is at the centre of the current trade war between China and the United States. So-called ‘state capitalism’, however, needs to be evaluated from a more pragmatic not an ideological standpoint.

On one hand, many Chinese policy interventions were initially introduced to ensure a smooth transition from the central planning system to a free market economy. Therefore they were, and some still are, transitional phenomena, not a permanent feature of the Chinese economic system. On the other hand, some policy interventions actually bring more social benefit by helping overcome the problems of market failure.

Take the financial sector for example. The government still intervenes quite extensively in financial markets, in the determination of interest rates and exchange rates, and in credit allocation and cross-border capital flows. Empirical analyses suggest that these repressive financial policies actually boosted economic growth during the early decades of economic reform by effectively converting savings into investment and underpinning financial stability. The counterfactual analysis reveals that, were China to have completely liberalised the financial system in 1978, its GDP growth in the 1980s would have been reduced by about 0.8 percentage points a year.

Because it takes time for the market mechanisms to take root, it’s unwise to advise the government to immediately abandon all of interventions as it undertakes large-scale economic reforms. It’s equally wrong to perpetuate these policy interventions as the Chinese economic system transitions to efficient marketisation. The same analysis finds that more aggressive financial liberalisation would have increased China’s GDP growth in the 2000s. These imply that it should now be beneficial to push ahead market-oriented financial reform more decisively.

In 2012 the Chinese leadership reiterated the two Centennial Goals. The first is to double the 2010 GDP and per capita income for both urban and rural residents by 2021, the year when the Chinese Communist Party (CCP) celebrates its centenary. The second is to build China into a fully developed country that is prosperous, powerful, democratic, culturally advanced and harmonious by 2049, the year when the PRC celebrates its centenary. It looks like China is on track to achieve the first Centennial Goal as real GDP grew by an average of 7.4 per cent from 2010–2018. Achieving the second Centennial Goal will be more challenging as the country has lost its low-cost advantage in the international marketplace, is experiencing dramatic population ageing and faces anti-globalisation externally.

The only way to sustain robust economic growth over the coming three decades is to pursue higher quality reform and open-door policies. Higher quality reform means that China should complete its transition to the free market system, although the trajectory of the transition needs to remain pragmatic. Policy discrimination against the private enterprises, for instance, did not prevent China from achieving rapid economic growth in the past, but now it is a major hurdle to rapid growth because private enterprises account for 70 per cent of domestic patents and 80 per cent of urban employment. The government should now consider ending the ‘dual-track reform strategy’ so as to achieve competitive neutrality between private firms and the state and to let market forces play the decisive role in national resource allocation.

Higher quality open-door policy means that China should aim at adopting an external policy regime of ‘zero tariffs, zero barriers and zero subsidies’. China has been one of the main beneficiaries of globalisation during the past four decades. It has a very large stake in maintaining the open international economic system. Chinese efforts to continue to liberalise, even if unilaterally, will benefit the world economy as well as the Chinese economy.

China should consider giving up its ‘developing country’ status under international trade law. While China is still a developing country in fact, its size and its policies already have major global effects that shape the way the whole system now works. By giving up ‘developing country’ status, China would not only benefit greatly from further liberalisation itself but also assume a leadership role in supporting the open international economic system.

Celebration of the seventieth anniversary of the PRC provides a chance to reflect on its economic policy choices today. China’s experiment with the central planning system largely failed but adoption of the reform and open-door policies delivered an ‘economic miracle’ of unprecedented scale. The Chinese economy is at another important turning point. If the government can pragmatically adopt higher quality reform and open-door policies, it is highly likely that by 2049, China’s GDP per capita would reach two-thirds of that of the United States, although its GDP growth might moderate considerably to 2.7–4.2 percent. This would ensure that the country achieves its second Centennial Goal.

Yiping Huang is Professor of Economics and Finance at the National School of Development and Director of the Institute of Digital Finance, Peking University.



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ASIAN (H)

China’s rise this time is different

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Author: Wang Gungwu, NUS and ISEAS-Yusof Ishak Institute

On 1 October China will be celebrating the 70 years of unification that followed Mao Zedong’s victory over the Nationalist regime in 1949. Many thought that had brought about the rise that the Chinese peoples had been waiting for since the beginning of the 20th century. But it was not to be. After the Great Leap Forward and Great Proletarian Cultural Revolution had nearly destroyed all that Mao had established, there were doubts that China would ever rise.

A woman dressed as Chang'e performs in front a moon-like structure near an installation marking the 70th anniversary of the founding of People's Republic of China, on the eve of the Mid-Autumn Festival in Taierzhuang, Shandong province, China, 12 September 2019 (Photo: Reuters/Stringer).

Then came Deng Xiaoping’s reforms after 1978 and the opening of China to the free market economy. By twenty years later, China astonished the world with the way it was rising again. By one account, this was the fourth time that it had risen after a great fall.

The first rise was more than 2200 years ago when the Qin and Han empires united the country after 500 years of fighting among warring states.

The second was the reunification under the Sui and Tang dynasties after another 400 years of division.

After the 8th century there followed another 400 years of continual fighting between Chinese and northern tribal peoples, this time led by the Khitan, Tangut, Jurchen and Mongol that ended with Kublai Khan’s conquest of China. China fell to its lowest point in history when the whole country came under foreign rule. Thus, when the founder of the Ming dynasty was able to lead the Chinese to drive the Mongols out: that was China’s third rise. The Manchu who took over in 1644 built on the Ming system and made the empire even stronger. The Qing had consolidated the third rise so this did not represent a new rise.

The key point is that, in each case, the rise came after long periods of division and chaos and confirmed that China could recover from its falls and become stronger when it rose again.

Its newest challenge in the 19th century came from the industrial revolution in Europe backed by long-distance naval power. By 1900, China’s imperial system had collapsed and given way to frantic attempts to learn from Western models, beginning with a nationalist republic with capitalist characteristics. At stake was an undivided China with a resilient culture that was the pride of most Chinese.

During the 20th century, the China dream was to restore the country by acquiring the wealth and power that had made the West so dominant. The United States and Japan had demonstrated how quickly such power could be achieved. Germany and Soviet Russia also showed that there were other ways to challenge Anglo-French pre-eminence.

In the end, the major Chinese political parties chose between West One (liberal capitalist) and West Two (revolutionary communist) and, to the surprise of many, in 1949, West Two won out.

Now that the reforms have enabled China to learn everything it wanted from both West One and West Two, it is clear that the fourth rise is in progress and probably unstoppable.

Is this just another rise like the first three? This rise is different.

The first was a rise after centuries of efforts to establish central power from within. That rise was unchallenged for three centuries, but the original Han China was eventually destroyed by a series of tribal invasions from the north, northeast and northwest. In the end, the shock of external aggressions was absorbed and what was internalised laid the foundations for China’s second rise. By that time, the culture of the Han peoples was greatly enriched by the Buddhist ideas accepted from the Western Heaven (xitian) of India and Central Asia.

New continental enemies then became even more powerful and the Mongol conquest that reunified China gave the Chinese a new global outlook. Under the Ming, China’s synthesised Neo-Confucianism had become a defensive orthodoxy that inhibited learning from the ascendant West that emerged after the 16th century. For that, both Ming and Qing China paid a hefty price. When defeated in the 20th century, the country’s loss of orthodox legitimacy forced new generations of Chinese to confront the fact that their distinct civilisation was about to be destroyed — something they had not thought possible.

The determination to survive remained strong. That led them to learn everything they could from the modern world. But this readiness to learn was hampered by decades of political strife within and threats of invasion without.

After 40 years of consolidated central authority since 1949, there is renewed confidence. This stems from the people’s belief in progress and their ability to combine the new with what was best in their past traditions. By being willing to learn so much from the modern West, China today is undergoing a totally different experience of rising again after a great fall.

Wang Gungwu is University Professor at the National University of Singapore (NUS) and Chairman of the ISEAS-Yusof Ishak Institute. He is also Emeritus Professor at the Australian National University.



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ASIAN (H)

Abe, Modi and Morrison woo Trump, but to what end?

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Author: Purnendra Jain, University of Adelaide

While many American commentators and politicians urge Congress to start the process of impeaching President Donald Trump, this has not deterred Indo-Pacific leaders from deepening their engagement with Trump. Japanese Prime Minister Shinzo Abe, Indian Prime Minister Narendra Modi and Australian Prime Minister Scott Morrison — the three key leaders of Indo-Pacific nations who together with the United States putatively form the ‘Quad’ — are all seeking ‘special’ relationships with Trump and, through him, with the United States.

US President Donald Trump and India's Prime Minister Narendra Modi shake hands as they participate in the "Howdy Modi" event in Houston, Texas, US, 22 September 2019 (Photo: REUTERS/Jonathan Ernst).

This extraordinary wooing of an American president may be a function of domestic circumstances. These three leaders are all conservatives and may see in Trump a great and powerful ally who endorses their views on issues such as strict border security, global terrorism, climate change and ‘a free and open Indo-Pacific’.

More importantly, they also find in Trump an uncompromising resolve to tackle a muscular China whose growing economic might and military assertiveness troubles these leaders greatly.

Despite Australia’s close economic links with China and repeated statements about the importance of China to Australia’s economy, Canberra has expressed great concerns about China’s rising influence in its domestic politics and harbours serious apprehension about its domestic security. Because of these apprehensions, it banned Huawei from the bidding process for 5G mobile networks.

India under Modi is unencumbered by alliance politics. Modi has emphasised ‘inclusiveness’ and engages China diplomatically. Yet, New Delhi is seriously wary of Beijing’s strategic designs. The China–Pakistan nexus worries India immensely and New Delhi feels frustrated by Beijing’s opposition to India’s membership in the Nuclear Suppliers Group, not to mention the lingering border disputes and the status of the Dalai Lama in India. One consequence has been to allow, if not encourage, vociferous anti-China feelings among the Indian press.

Like India and Australia, Japan also engages China diplomatically and unhesitatingly recognises the PRC’s importance for its economy through trade and tourism. Yet its relationship with China remains under serious stress and strain because of their unresolved territorial claims and history disputes.

Today, diplomacy and cooperation of these Indo-Pacific leaders is not just confined to conventional bilateral and multilateral formats. In personal interactions they now praise each other profusely, congratulate one another on their domestic electoral successes and closely work on cultivating personal relationships. They seek US endorsement of their domestic and foreign policies and try to create common ground — sometimes for bilateral purposes and on occasions against the ‘other’.

Diplomacy has clearly moved to a significant degree from the institutional arena to the personal where leaders now bend over backwards to align themselves with the interests of the most powerful and influential through one-on-one relationships.

Abe was the first to engage Trump after the US elections and their personal relationship has since then blossomed on a first-name basis. Yet, despite Abe’s wooing of Trump as no past prime minister of Japan has ever done for their American counterpart, Japan has yet to see any award.

On his state visit to Washington, Australia’s Morrison reminded Trump of Australia’s 100 years of ‘mateship’ and declared his visit as the beginning of another 100 years of friendship. Trump in turn called Morrison ‘a man of titanium’. Trump invited Morrison to a privileged state dinner and drew similarities between his own electoral successes and that of Morrison’s. Morrison endorsed Trump’s hard-line approach to US–China trade issues and even labelled China a ‘newly developed nation’, as well as reminding Beijing to step up its response to climate change.

In a rare opportunity provided by a host leader, Morrison attended a Trump rally in Wapakoneta, Ohio where the two leaders shared a stage and lauded each other with much praise. Morrison had presented evidence of Australia’s contribution to the American economy by inviting Trump to a new paper factory set up by Australian billionaire Anthony Pratt. Trump called Morrison ‘a great gentleman’ and said that ‘they love him in Australia and now they love him in the United States of America, too’. When asked whether he supports Trump for another term, Morrison’s response was, albeit indirect, a ‘yes’.

A direct endorsement for a second term for Trump came from Modi at an event in Houston, Texas, ‘Howdy, Modi!’, where over 50,000 Indian Americans assembled to listen to the Indian Prime Minister. Modi came to sell his domestic political and economic agenda to the Indian diaspora, including his government’s recent decision to change the status of the state of Jammu and Kashmir. Without naming Pakistan, Modi also ascribed the source of global terrorism from 9/11 to 26/11 to the country’s Muslim neighbour.

In attendance was Trump and many of his senior colleagues and members from both sides of politics. It was a rather unusual assembly for an event pitched at the Indian diaspora. Modi not only tried to convince his diasporic community of his economic policies and hard-line approach to global terrorism, he was also selling these policies to his American interlocutors, notably to Trump himself. Modi left out nothing while praising Trump and telling the audience how close their relationship was. Modi ended with the Hindi one-liner ‘abki baar, Trump Sarkar’ (‘another term for Trump’).

Modi, Abe and Morrison’s one-on-one engagement with Trump has been extraordinary but such engagement between world leaders has certainly not been isolated to these countries. Are these emerging, highly personalised relationships between world leaders ‘influence’ or even ‘interference’ in domestic politics? Are they an anomaly or a new normal for diplomacy? Personalised diplomacy can be a risky game as it may undermine institutions and even compromise the long-term national interests of countries. Time will tell.

Purnendra Jain is Professor at the Department of Asian Studies, the University of Adelaide.



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