Posts Tagged ‘infrastructure projects’

Southeast Asian economies get a lift from China. Later, they may get the bill

September 8, 2017

By Marius Zaharia

HONG KONG (Reuters) – Southeast Asia appears to be on a roll.

The Philippines is boasting the second-fastest growing economy in Asia, Malaysia has posted its best growth figures in more than two years and Thailand in more than four.

The growth is being fuelled by China, whose expanding economic presence is propping up fundamental weaknesses around Southeast Asia. It also underlines China’s dominance in a region that will be under increasing pressure to follow Beijing’s lead.

Even as the rest of the world feels the pinch of Beijing’s clampdown on outbound capital, China is ploughing money into Southeast Asia – much of it into infrastructure projects related to President Xi Jinping’s signature Belt and Road initiative.

Chinese tourists are also flocking to beaches, temples and shopping malls around the region. And trade is surging.

Exports to China from Indonesia and Malaysia grew more than 40 percent in the first half of the year; from Thailand and Singapore it was almost 30 percent, and more than 20 percent from the Philippines, according to Reuters calculations.

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Malaysia — China’s Forest City development is the biggest by a Chinese property developer

China has been investing heavily in infrastructure and property in the region and buying commodities such as rice, palm oil, rubber and coal. It is also buying electronic components and equipment from countries like Malaysia, Thailand and Singapore.

Going the other way is everything from cheap T-shirts to high-end telecommunications systems.

Welcome as all this economic activity is to the region, it could also present political problems, as countries confront China over issues such as its claims in the South China Sea, as both Vietnam and the Philippines have found.

And it raises the risk that China could apply economic pressure to get its way.

“The large rise in ASEAN’s exports to China have increased potential vulnerabilities to geopolitical risks,” said Rajiv Biswas, Asia Pacific chief economist for IHS Markit.

SOUTH KOREA‘S EXPERIENCE

For a glimpse of how that feels, Southeast Asian countries could look at South Korea’s experience.

The deployment in South Korea of a U.S. anti-missile defence system that China opposed resulted in a sharp decline in Chinese tourists. South Korean companies doing business in China, like Lotte Group and Hyundai have also been hit in the diplomatic fallout.

“The South Korea example is a highlight of how the geopolitical vulnerability to China can increase as the bilateral economic relationship expands,” Biswas said.

The Philippines found itself subject to a Chinese ban on its fruit in 2012 after challenging China’s maritime claims. The ban was only lifted last year as President Rodrigo Duterte adopted a friendlier stance towards Beijing.

“Any sector that you have with a big exposure – tourism inbound like Thailand, bananas outbound like the Philippines, coal from Indonesia – is vulnerable,” said Dane Chamorro, senior partner and head of South East Asia at Control Risks, a global risk consultancy. “You can imagine how that would be pretty easy for China to stop or hinder.”

Leaders of Malaysia’s ruling party last year voiced concerns after Prime Minister Najib Razak secured deals worth $34 billion on a trip to Beijing, saying it opened the door for a more direct Chinese influence on Malaysia’s affairs, besides saddling the country with billions of dollars in debt.

A planned $5.5 billion rail link through Thailand to southern China also hit resistance, with Thai critics targeting what they said were Beijing’s excessive demands and unfavourable financing. However, Thailand’s cabinet in July approved construction of the first phase of the project.

Image result for chinese tourists in Thailand, Photos

Chinese tourists pose for photos as they visit Thailand

CHECKS AND BALANCES

There has also been popular opposition to such deals around the region, raising the stakes for leaders.

In Myanmar, a $10 billion Chinese oil pipeline linked to the Belt and Road project sparked angry protests in May. Three years ago, the deployment of a Chinese oil rig in disputed waters in the South China Sea triggered anti-Chinese riots in Vietnam.

“The next level from here is you can see more social outcry,” said Sanchita Basu Das, lead researcher for economic affairs at the ASEAN Studies Center at ISEAS-Yusof Ishak Institute in Singapore.

“These are the checks and balances for some of these countries, especially those where leaders are elected for a specific number of years,” she said. “China will be mindful of that as well.”

GROWING DEPENDENCE The growing economic dependence on China is another concern for countries in the region with underlying vulnerabilities.

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Singapore’s skyline is seen June 17, 2017. REUTERS/Thomas White/Files

Consumption growth has been lagging in countries like Indonesia and Philippines, which are dependent on domestic demand, even as they posted growth figures of 5 percent and 6.5 percent in the second quarter. And investment from sources other than China is slowing, as are portfolio inflows.

Indonesia, which has been lagging its regional peers, cut interest rates last month.

In Thailand, where the economy grew 3.7 percent in the second quarter, the baht THB= has been surging in recent months, putting pressure on exporters, while the Philippine peso PHP= has been weakening on concerns over the country’s shrinking current account surplus.

If there was a downturn in China, it could have serious ripple effects in export-reliant countries like Thailand and Malaysia. Malaysia grew 5.8 percent in April-June.

“Southeast Asian countries are becoming more dependent on China,” said Jean-Charles Sambor, deputy head of EM fixed income, BNP Paribas Asset Management. An event like a sharp slowdown in China could have “a very significant spillover,” he said, citing exports, financing and investment.

For the moment, the Chinese economy remains strong and it appears that Southeast Asia is weathering a crackdown by Beijing on overseas acquisitions.

Data from China’s Ministry of Commerce shows outbound direct investment globally nearly halved in the first half of the year. But data from the American Enterprise Institute shows Chinese investments and construction contracts of $13.46 billion in the period, almost unchanged from a year earlier.

The initial stages of a rail line on Malaysia’s east coast, in which China Communications Construction Company has already invested $2 billion, according to the data, is one of the most high-profile investments.

Other investments, many of which are tied to the Belt and Road initiative, include energy projects in Laos, Cambodia and Philippines, another large railway investment in Indonesia and real estate purchases across the region.

This week, Thailand signed contracts worth 5.2 billion baht ($157 million) with Chinese state enterprises for a high-speed rail project with China.

“Notwithstanding the recent introduction of restrictions on outbound investment, Chinese investment in Southeast Asia is likely to remain strong over the coming years,” said Stephen Smith, lead partner at Deloitte Access Economics.

“Chinese authorities appear to remain strongly committed to investment in projects tied to the Belt and Road Initiative.”

Graphic – Southeast Asia’s export growth in key markets: tmsnrt.rs/2g7DKWN

Additional reporting by Joseph Sipalan in Kuala Lumpur; Editing by Philip McClellan

See also:

11 PROJECTS THAT SHOW CHINA’S INFLUENCE OVER MALAYSIA – AND COULD INFLUENCE ITS ELECTION

http://www.scmp.com/week-asia/politics/article/2105440/11-projects-show-chinas-influence-over-malaysia-and-could

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Hong Kong firms join forces to make deals under Silk Road plan

June 19, 2017

Companies will draw on their experience to initially establish infrastructure projects and industrial parks in Thailand and Vietnam

By Josh Ye
South China Morning Post

Monday, June 19, 2017, 8:48pm

Hong Kong companies will form a consortium to build infrastructure projects and industrial parks in Thailand and Vietnam under mainland China’s Silk Road project, the Trade Development Council says.

Council president Vincent Lo Hong-sui said over 40 business leaders from Hong Kong and Shanghai formed a delegation while visiting the two countries last month and met both prime ministers.

He added that this was one of many steps in further involving Hong Kong companies with the “One Belt, One Road” initiative.

Lo said the statutory body was now forming “a consortium of local companies” to help them enter these developing markets as a collective force.

“We are looking to build infrastructure projects and industrial parks in countries under the belt and road initiative.”

The initiative was launched by Beijing in 2013 to promote the building of railways, roads, power plants and other infrastructure projects in 60 countries from Asia to Europe on its old Silk Road to promote trade and economic growth.

The council has identified eight countries out of the 65 under the scheme as the initial destinations for Hong Kong investment – Vietnam, Thailand, Indonesia, Saudi Arabia, United Arab Emirates, Poland, Hungary and the Czech Republic.

Nicholas Kwan, research director at the council, said Hong Kong investors were seasoned in managing supply chain systems across countries.

 Vincent Lo says numerous multibillion-dollar deals will be closed this year. Photo: Sam Tsang

Lo said the development level of many of the belt and road countries reminded him of mainland China three decades ago.

“Hong Kong investors have garnered a lot of practical experience in developing mainland China,” he said. “This experience is unique and will definitely benefit other countries.”

He said the council aimed to close several deals this year and estimated some projects were worth more than US$10 billion.

Lo added that chief executive-elect Carrie Lam Cheng Yuet-ngor had told him the next administration would fully support the council in furthering deals with countries linked to the trade initiative.

The council also announced that it would host its second belt and road summit in September, which looked to introduce more concrete plans for local firms to enter relevant countries.

http://www.scmp.com/news/hong-kong/economy/article/2099050/hong-kong-firms-join-forces-make-deals-under-silk-road-plan

Kenya: Is China’s Railroad A “Debt Trap”? — Kenya is expected to repay — Will All “Belt and Road” Participants Find Themselves Saddled with Debt Owed to China?

June 10, 2017

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Kenya’s Madaraka Express railway — Built by China for Mombasa to Nairobi traffic

Kenya on Wednesday launched a new railway line call he Madaraka (Freedom) Express, linking Kenya’s Port of Mombasa on the India Ocean to the capital city Nairobi. The word “Madaraka” commemorates the day that Kenya became independent in 1963.

The new 380-mile Standard Gauge Railway (SGR) line is expected to be good for business. Cargo charges from the Port of Mombasa to Nairobi will cost about $500 per container and take 8 hours transit time. This is a significant saving over transit by road, which costs $900, and requires 24 hours. The train can carry 1,260 passengers.

The new railway replaces “The Lunatic Express,” a rail link built in the late 1800s by British money and colonists. The Lunatic Express was increasingly shaky, with old tracks and locomotives that were increasingly difficult to service.

The new SGR was built with Chinese money and Chinese workers. China’s state-owned Export-Import Bank loaned Kenya $3.6 billion for the project, which Kenya is expected to repay out of revenues. However, some analysts are raising concerns that the SGR will be a “white elephant,” leaving Kenya with enormous unpayable debts, as has already happened in Sri Lanka.

Even worse, the cost to build the Kenya railroad has been extremely expensive even by regional standards. The cost of the railway was roughly twice as great as another China-built railway, the Djibouti-Ethiopia train, suggesting the possibility of corruption.

Perhaps Djibouti and Ethiopia were able to drive a harder bargain with the Chinese, because China is also building a naval and air base on the strategic Red Sea port in Djibouti, and the railway connects that port to Ethiopia’s capital city, Addis Ababa. The site of the Chinese base is about 6 miles from an existing US base in Djibouti. China has defended the base construction, citing evacuations of Chinese nationals from nearby Yemen and Libya during recent conflicts.

In launching the new railway, Kenya’s president Uhuru Kenyatta said:

A history that was first started 122 years ago when the British, who had colonized this nation, kicked off the train to nowhere… it was then dubbed the ‘Lunatic Express’…

Today 122 years later, despite again a lot of criticism, we now celebrate, not the Lunatic Express but the Madaraka Express, that will begin to reshape the story of Kenya for the next 100 years. I am proud to be associated with this day…

The drop in cost of freight and fares will make Kenya a more attractive investment destination. More investors will lead to more jobs and growth in our economy.

Another issue related to the railway is that it crosses Kenya’s Nairobi National Park. Built by British settlers in 1946, this is a wild animal park on the fringes of Nairobi, and is a leading tourist attraction, and is responsible for a significant amount of Nairobi’s income.

However, wild animals occasionally migrate out of the part into nearby homes and farms. With the SGR right through the middle of the park, these visits by wild animals have increased. Earlier this year, two lions escaped from the park and had to be shot, as they were threatening humans. This has raised an outcry from environmentalists, who are demanding a number of changes, including raising the railway above the park, so that animals can move freely. The Shanghaiist and Radio France Internationale and African Business Magazine (5-May) and UPI (18-April) and Huffington Post

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China accused of a policy of ‘debt trap diplomacy’ in infrastructure projects

There is no economic or financial case for the railway, according to a World Bank report. There’s a very realistic fear that the SGR will generate far less income than is necessary to repay the China’s $3.6 billion loan.

We have already seen exactly these problems in Sri Lanka. In 2009, China invested $1.2 billion in Sri Lanka’s Hambantota seaport. Sri Lanka had expected to repay the debt through profits earned by the port, but the slowdown in trade throughout the entire region in the last few years has meant that Sri Lanka has been unable to repay the debt, and now China has essentially taken over the port in lieu of repayment of the debt, resulting in violent protests by Sri Lanka’s Buddhist monks and anti-government protesters. China will own a significant piece of Sri Lankan real estate, and there will be a large Chinese community that will be in Sri Lanka forever.

Professor Samuel Nyandemo of the University of Nairobi’s School of Economics refers to China’s projects as “debt trap diplomacy”:

Extending loans for infrastructure projects is a good thing. But look at the projects being funded. Most of them are meant to open markets for Chinese goods in strategically-located countries and increase their access to natural resources.

If there is one thing China is truly good at, it is using its economic assets to advance its geostrategic interests, which has left countries snared in a debt trap that makes them vulnerable to Chinese influence.

In fact, however much revenue the new SGR railway generates, it will have a significant negative economic impact on Kenya. That’s because there is an existing Nairobi-Mombasa railway run by Rift Valley Railways (RVR). Amazingly, Kenyan authorities are now requiring that a minimum of 40% of the cargo traveling between Nairobi and Mombasa must be taken by the new SGR. This is presumably going to be a financial disaster for RVR, but it also means that Kenya will have little or no revenue gain from the new railway, since it will be taking much of its business from the old railway.

When Kenya’s president Uhuru Kenyatta recently visited the One Belt One Road (OBOR) forum in Beijing, he signed a contract borrowing another $3.5 billion from China for an extension to the SGR that was just launched. Critics say that thanks to the president, Kenyans will have to labor for China for years to come. Kenya Standard Media (28-May) and Times of India and African Business Magazine (23-May)

Related Articles

KEYS: Generational Dynamics, Kenya, Uhuru Kenyatta, Mombasa, Nairobi, China, Export-Import Bank, Madaraka Express, Standard Gauge Railway, SGR, Lunatic Express, Djibouti, Ethiopia, Red Sea, Addis Ababa, Nairobi National Park, Samuel Nyandemo, debt trap diplomacy, Sri Lanka, Hambantota seaport, Rift Valley Railways, RVR, One Belt One Road, OBOR
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Commodities Slump Fueled by Softening Demand From China

May 5, 2017

By Jenny W. Hsu and Yifan Xie
The Wall Street Journal

May 5, 2017

01:37pm CEST

A global commodities slump deepened Friday, with oil and iron ore hitting their lowest levels since November on continuing worries about an excess of world-wide supply, as well as concerns over weakening demand in the key China market.

Market jitters pushed crude futures down more than a $1 a barrel, or 3%, in the space of 10 minutes in early Asia trading, although prices recovered to trade slightly higher by midmorning in Europe. The slide briefly took oil prices down 10% for the week, the kind of drop last seen in January 2016, when global markets were plummeting on concern about the health of China’s economy.

The price of iron-ore futures, seen as an indicator of demand for the key steelmaking ingredient, fell 7.5% Friday on China’s Dalian Commodity Exchange, following an 8% tumble to their trading limit the previous day. Iron-ore futures are now at their lowest levels since November and down 31% from the two-and-half-year high hit in February. Futures prices for a pair of steel products traded in Shanghai fell as much as 8% for the week.

To be sure, some of the wild swings were on Chinese markets, which are notorious for speculative trading and roller-coaster moves. And investors aren’t nearly as skeptical about the outlook for China’s economy as they were during the commodities- and global-equities meltdown early last year.

But analysts say concerns over softening demand in China for construction materials such as steel are once again a big factor in the falling prices. Those concerns have been fed by weaker manufacturing data and recent moves by Chinese regulators that could curb growth in areas such as housing and infrastructure construction.

Inventories of imported iron ore at China’s 45 major ports hit a record high of more than 130 million yuan at the end of March, and climbed to more than 135 million tons this week, according to the China Iron and Steel Industry Association.

“There has been a visible shift of sentiment in the financial market,” said Sun Yonggang, an analyst at Chaos Ternary Futures Co. “Over 80% of the steel traders we talked with were upbeat about the outlook in the first quarter. But now they have all turned pessimistic.”

The fall in oil prices on Friday took crude to its lowest intraday level since mid-November, a few weeks before the Organization of the Petroleum Exporting Countries and other oil producers such as Russia supported the market by announcing a six-month agreement to cut production.

A decision on whether to extend and possibly increase those cuts is due later this month. But traders in recent days have lost faith that the current production caps are doing much to reduce the global oil glut that has pressured prices since 2014. Global oil inventories are still robust. And American shale-oil producers are producing even more than many analysts had expected in the wake of the OPEC cuts.

Moreover, some estimates show that despite the November deal, OPEC’s total production is still above the agreed cap. That could be confirmed by the cartel’s production report for April, which is due next week.

“OPEC’s failure to raise oil prices is fundamentally linked to their failure to bring down petroleum inventories,” Bernstein Research said in a report Friday.

Another factor depressing oil prices is that China–whose average 7.7 million barrels a day in crude imports were an important prop for the global market last year–could be buying less than previously expected. That is because of a new rule, announced last week, that the country will no longer accept applications from privately owned refineries, known as “teapots,” for the right to import crude. The rule doesn’t apply to 21 refiners that have already been issued the necessary permits.

Industry watchers had already anticipated that Chinese crude-import growth this year wouldn’t match 2016’s 14% increase because of slowing demand from teapots.

Government curbs on property purchases in China have weakened construction demand from the real-estate sector, a pillar industry that feeds appetite for steel-related commodities.

On Wednesday, concern mounted that China’s construction of infrastructure projects may also be curtailed, after authorities pledged to rein in risky local funding for bridges and dams.

The tough-worded pledge was the latest in a string of government policies aimed at stopping asset bubbles in China’s markets, in which speculative funds flowed through stocks, bonds and commodities.

Jenny W. Hsu and Yifan Xie

Related:

China starts $21.8 billion offshore fund amid currency concerns, new Silk Road initiative

December 7, 2016

Reuters

China’s central government has launched a 150 billion yuan ($21.79 billion) fund designed to support investments offshore by Chinese companies as well as the country’s so-called new Silk Road initiative.

The first phase of the Guotong Fund, capitalized at 70 billion yuan, was registered on Nov. 25 in Hangzhou, according to a statement posted Wednesday on the website of the State-owned Assets Supervision and Administration Commission (SASAC).

The statement cited equipment manufacturing as one type of offshore investment the fund might support, and said the new vehicle might take a role in mergers.

Announcement of the fund comes as Chinese regulators tighten restrictions on foreign exchange transactions and outflows amid growing concern that offshore currency movement is adding pressure on the weakening yuan currency.

On Tuesday, officials from the National Development and Reform Commission, the Ministry of Commerce, the People’s Bank of China, and the State Administration of Foreign Exchange said that authorities will prevent risks from outbound investment to help maintain a balance in international payments, according to the official Xinhua News Agency.

China Reform Holdings Corp., an investment firm established by the State Council under the supervision of SASAC, is managing the fund, according to the statement.

It said China Reform, along with 10 central state-owned enterprises, China Postal Savings Bank (1658.HK), five other financial institutions and Zhejiang State-owned Assets Management Co, established the Guotong Fund.

China’s new Silk Road initiative, also known as the “One Belt, One Road” program, aims to open new trade and investment markets for firms as the domestic market slows.

The program aims to invest in infrastructure projects including railways and power grids in central, west and southern Asia, as well as Africa and Europe.

(Reporting by Matthew Miller; Editing by Richard Borsuk)

China, Philippines Ink Trade, Anti-Drugs Deals — China promises billions for infrastructure projects in the Philippines — Philippine President Rodrigo Duterte reviews Chinese troops

October 20, 2016

The Associated Press

Philippine President Rodrigo Duterte, right, shakes hands with Chinese President Xi Jinping before a welcome ceremony outside the Great Hall of the People in Beijing, China, Thursday, Oct. 20, 2016.AP/Ng Han Guan

BEIJING — The Latest on Philippine President Rodrigo Duterte’s meetings with top officials in China as part of a charm offensive (all times local):

3 p.m.

After Philippine President Rodrigo Duterte and his Chinese counterpart Xi Jinping wrapped up their talks, the two leaders oversaw the signing of 13 documents.

The documents covered cooperation in economic, cultural, tourism, trade, anti-narcotics and maritime affairs, including the setting up of a joint committee between their coast guards.

Vice Foreign Minister Liu Zhenmin also says the two sides are restoring diplomatic and “defense security” discussions, without elaborating.

Officials signed a memorandum of understanding on a number of infrastructure projects for which China would provide financing. No details were provided.

___

2 p.m.

A senior Chinese diplomat says his country and the Philippines have agreed to resume a bilateral dialogue on their dispute over the South China Sea, in what appears to be a diplomatic victory for Beijing several months after being handed a defeat by an international tribunal.

Chinese Vice Foreign Minister Liu Zhenmin told reporters: “Both sides agreed that the South China Sea issue is not the sum total of the bilateral relationship.”

He adds that the leaders only touched on the topic briefly during their talks.

Liu says the two sides agreed to return to the approach used five years ago of seeking a settlement through bilateral dialogue.

Such an approach had been suspended after China seized control of the Scarborough Shoal and the Philippines launched the tribunal arbitration process.

___

1:05 p.m.

Philippine President Rodrigo Duterte has hailed a warming of relations with China as “springtime” as he thanked Chinese leader Xi Jinping for his country’s hospitality and said relations between the countries go back centuries.

Duterte says: “China has been a friend of the Philippines and the roots of our bonds are very deep and not easily severed.”

“Even as we arrive in Beijing, close to winter, this is a springtime of our relationship.”

Xi and Duterte’s talks began after the Southeast Asian leader was greeted by Xi with full military honors at the Great Hall of the People, the seat of the ceremonial legislature in the heart of Beijing.

Duterte has walked a tightrope in trying to mend damaged relations with China while defending his country’s claims in the disputed South China Sea.

___

12:30 p.m.

Chinese President Xi Jinping, in meeting with Philippine President Rodrigo Duterte, remarked that this was the first meeting between the two leaders since ties began improving following Duterte’s election.

Xi says: “This truly has milestone significance for China-Philippine relations.”

In a reference to recent territorial tensions in the South China Sea, Xi said that “although we have weathered storms, the basis of our friendship and our desire for cooperation has not changed.”

Xi also extended his sympathies to Duterte over the destruction caused by Typhoon Haima, which has killed at least four people in the northern Philippines.

The two leaders are due to oversee the signing of a raft of agreements between their governments following their discussions.

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Duterte allows Xi to take lead on South China Sea issue

Philippine President Rodrigo Duterte, front, walks with Chinese President Xi Jinping during a welcome ceremony outside the Great Hall of the People in Beijing, China, Thursday, Oct. 20, 2016. AP/Ng Han Guan

MANILA, Philippines – President Rodrigo Duterte will not initiate and will instead let Chinese President Xi Jinping to take the lead on whether the ruling of the Permanent Court of Arbitration will be discussed in their meeting on Thursday.

In a press conference on Wednesday night with Beijing-based media, Duterte said, “As a friend, and I would say this now, if he (Xi) mentions it in passing I will just say, Mr. President I don’t want to make hardline position. I don’t want to ask you to do it now because there will be a time that we shall be doing it. But I have to wait for your president to mention it in passing for me to respond.”

Duterte said the talking points will be broad enough to accommodate all issues but out of courtesy, the “oriental way” he would wait for the right time. He said the general outline of the agenda was reached in the preliminary talks between Philippines Foreign Affairs Secretary Perfecto Yasay Jr. and his Chinese counterpart.

“It will not be in keeping with the courtesy and goodwill if I will be the one to open it because after all I didn’t come here to agree to talk about the South China Sea. If you ask, it will take a back seat, of course it will take a back seat, it is not the time,” Duterte said when asked if he will request China to respect international law, particularly the arbitration ruling.

He said that when the time comes that they are ready to talk about the arbitration ruling he knows they will be on different sides, but for now he just wants to enjoy the camaraderie out of his highest respect for the Chinese president and premiere and his highest love for the Chinese people.

Vera Files reported Wednesday, quoting a Malacañang source that Duterte “will take up the South China Sea issue “if raised” in his four-eyes meeting with Xi on October 20. He will not initiate to raise the issue of the arbitral ruling but will respond if mentioned. However, his key message on the matter of Scraborough shoal will be asserting the fishing rights of Filipinos there, but while this is his wish ‘he will listen and will not make any imposition on the Chinese side.’”

READ: Fishery accords during Duterte China visit way forward in South China Sea dispute

Duterte arrived in Beijing Tuesday night for a three-day visit that is seen to rekindle Philippines-China relations that was severely strained by the filing by the previous government of a suit against China before the Permanent Court of Arbitration in The Hague over the latter’s nine-dash line map, occupation of some features in the Spratlys and blocking of access of Filipino fishermen in Scarborough Shoal.

The Arbitral Court invalidated China’s nine-dash line map and declared Scarborough Shoal a traditional fishing ground for Filipino, Chinese, Vietnamese fishermen as well as those from other countries.

VERA Files is put out by veteran journalists taking a deeper look at current issues. Vera is Latin for “true.”

http://www.philstar.com/headlines/2016/10/20/1635570/duterte-allows-xi-take-lead-south-china-sea-issue

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‘China, Philippines returning to the right path of handling sea row’

Philippine President Rodrigo Duterte, right, prepares to leave from a shopping mall in Beijing, China, Wednesday, Oct. 19, 2016. This week’s visit to China by Duterte points toward a restoration of trust between the sides following recent tensions over their South China Sea territorial dispute, China’s official news agency said Tuesday. AP/Ng Han Guan

MANILA, Philippines — China and the Philippines are returning to the “right path” of resolving the South China Sea issue through bilateral dialogue, the Chinese Foreign Ministry said on Wednesday.

President Rodrigo Duterte is currently in Beijing for a four-day state visit. He is set to hold talks with Chinese President Xi Jinping and other Chinese leaders.

LIVE updates: Duterte’s state visit to China

Chinese Foreign Ministry spokesperson Hua Chunying noted that Duterte has said that he will come to China to make a “soft landing” for the issue.

“We hold a consistent and clear position concerning this, advocating and committing ourselves to properly resolving relevant issues with countries concerned through dialogue and consultation,” Hua said in a press briefing.

Hua also noted that Duterte sincerely trusts China and hopes to handle relevant issues and expand bilateral cooperation through his visit.

“Friendly neighbors are supposed to get along with each other in this way. For China, we have our own judgment about who is our friend and make our own decision on what issues should be addressed in a friend-to-friend way,” Hua said.

China is willing to play an active part in boosting the Philippines’ economic and social development, as well as its campaign against illegal drugs, Hua said.

“It is believed that the two sides will extend and deepen pragmatic cooperation across the board and realize common development as bilateral relationship gets better and better,” the Foreign Ministry spokesperson said.

Beijing also expressed its willingness to talk with Duterte regarding cooperation on drug control and fight against drug crimes.

“The anti-drug issue as you mentioned is indeed a major concern of President Duterte. China appreciates President Duterte’s efforts to crack down on drug crimes and improve social security with the fundamental interests and well-being of his country and people in mind,” Hua said.

Xi will hold a welcome ceremony and stage a welcome banquet for Duterte. The Philippine president will also meet with Premier Li Keqiang and Chairman Zhang Dejiang on separate occasions.

Duterte will also attend the opening ceremony of the China-Philippines economic and trade forum with Vice Premier Zhang Gaoli.

Around 400 delegates from the business sector accompanied Duterte to his state visit in China.

The Department of Foreign Affairs earlier said that the large business delegation shows the direction that Duterte wants to carry out in the Philippines’ bilateral relations with China.

RELATED: DFA: Business delegation shows Duterte’s plan in China ties

http://www.philstar.com/headlines/2016/10/20/1635563/china-philippines-returning-right-path-handling-sea-row

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Rodrigo Duterte of Philippines Meets With Xi Jinping in China

BEIJING — President Rodrigo Duterte of the Philippines was welcomed with full military honors at the Great Hall of the People here on Thursday, the official start of a state visit to China that the United States is watching closely for further signs of a warming relationship.

Mr. Duterte stood beside the Chinese leader, Xi Jinping, on a canopied podium with lines of Chinese ceremonial troops before them, as a 21-gun salute resounded around Tiananmen Square.

“Though we come to your country close to winter, it is the springtime of our relationship,” Mr. Duterte told Mr. Xi in talks immediately afterward, according to reporters who were allowed to observe part of their meeting. The talks were expected to result in Chinese economic support for the Philippines and signs of a calmer dialogue over the countries’ disputes in the South China Sea.

Arthur Yap, a Philippine congressman traveling with Mr. Duterte, said that the two leaders met alone for 30 minutes before appearing before the reporters, which he said was a positive sign.

Source: http://www.nytimes.com/2016/10/21/world/asia/rodrigo-duterte-philippines-china-xi-jinping.html?&moduleDetail=section-news-1&action=click&contentCollection=Asia%20Pacific&region=Footer&module=MoreInSection&version=WhatsNext&contentID=WhatsNext&pgtype=article

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An Era in Hong Kong Is Ending, Thanks to China’s Tight Embrace

September 23, 2016

Beijing is pressing the territory to mold itself in the mainland’s image, quickening the demise of its prized autonomy and openness

Sept. 23, 2016 12:11 p.m. ET

HONG KONG—The integration of Hong Kong with mainland China was preordained in handover talks the U.K. held with Beijing in the 1980s. The year 2047 was the due date.

It is coming ahead of schedule.

Hong Kong, long an outpost of free trade and reliable courts beside Communist China, is coming under increasing pressure from Beijing and local leaders to mold itself in the mainland’s image. That is despite Beijing’s pledges to keep the city largely autonomous for half a century after the handover in 1997.

Legislators, publishers and journalists say freedom of expression is being restricted. Several candidates for Hong Kong’s legislative elections recently were disqualified from running because they advocated independence from China. Hong Kong authorities have issued warnings to educators to rein in young people’s interest in independence.

The tidal pull of China’s giant economy is making Hong Kong more dependent on the mainland than ever. Mainland tycoons and state-owned enterprises are snapping up Hong Kong assets, including its leading English-language newspaper and choice real estate.

New public-infrastructure projects, including a multibillion-dollar bridge spanning the Pearl River Delta and a high-speed rail link to the mainland, promise to physically tie the city to southern China as never before.

 

Infrastructure projects such as a bridge spanning the Pearl River Delta will tie Hong Kong to southern China as never before.
Infrastructure projects such as a bridge spanning the Pearl River Delta will tie Hong Kong to southern China as never before. PHOTO: SIPA/ZUMA PRESS

 
“Many Hong Kong people used to feel more superior than mainlanders because of the rule of law and freedom of speech” that characterized the city, said Yeung Ke-cheong, 35 years old, a candidate disqualified from recent elections for Hong Kong’s 70-member Legislative Council. Nearly half its seats are reserved for constituencies that represent largely pro-Beijing and business interests. “Hong Kongers are more like second-class citizens” in China now, he said.

Zhang Dejiang, the Communist Party’s no. 3 official, has said that Hong Kong has unique advantages that can’t be replicated by other Chinese cities and criticized “a very small minority of people” for advocating independence.

Keeping Hong Kong in line is a major test for President Xi Jinping, the country’s most powerful leader in decades, as he consolidates control amid factional opposition. In Beijing’s view, China faces threats along its perimeter, from Uighur militants in the far western Xinjiang region, separatists in Tibet and Taiwanese leery of the mainland’s embrace. Allowing Hong Kongers to push for independence would set a troubling precedent and possibly inspire more calls for autonomy or political reform elsewhere. It could embolden Mr. Xi’s opponents within the Communist Party, which next year anoints a new leadership that Mr. Xi wants to dominate.
Anson Chan, a former Hong Kong chief secretary—the city’s No. 2 official—said in a recent speech that challenges to Hong Kong’s rule of law and civil liberties are coming “so thick and fast they no longer even seem to cause surprise.”

She cited threats to academic freedom at local universities, a series of violent attacks on local journalists and the disappearances of several book publishers who reappeared in the custody of mainland authorities.

Frustrated by a lack of progress on what they saw as Beijing’s promise that Hong Kong’s chief would be elected by popular vote, not selected by a 1,200-member committee stacked with Beijing loyalists and business people as it is currently done, some young people now advocate independence. That is a leap from 2014, when student-led protesters occupied central Hong Kong and demanded democracy but not an outright break with China. Several candidates calling for more self-determination, including a 23-year-old college student who helped lead the protests, won seats in the Sept. 4 elections amid record turnout.

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A market in Hong Kong sells Mao and other Chinese paraphernalia.PHOTOS: PHILIPP ENGELHORN FOR THE WALL STREET JOURNAL

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The Chinese government’s Hong Kong and Macau Affairs Office warned after the vote that independence violates China’s constitution and Hong Kong laws and harms the territory’s “prosperity and stability.” It said it supports the Hong Kong government in legally punishing “‘Hong Kong independence’ activities.”

China denies any stepped-up pressure on Hong Kong. Mainland officials routinely call for strict adherence to the Basic Law, Hong Kong’s post-handover constitution, and to the principle of “One Country, Two Systems,” which guarantees Hong Kong’s different way of life.

Hong Kong’s leaders say the territory continues to enjoy a high degree of autonomy. It remains a bastion of freedom compared with the mainland, with street protests, open access to the internet and some newspapers that can be critical of mainland policies. China’s attempt to introduce an antisedition law in Hong Kong was shelved in 2003 after a half-million people took to the streets in protest.

Hong Kong was hardly a model of democracy under British rule, and China has provided benefits. Strapped to the rocket ship of China’s economy, the city’s gross domestic product has grown substantially since the handover.

Yet Hong Kong’s role in the Chinese economy has diminished. In 1997, its GDP was 18.5% of China’s. In 2015, it was just 2.9%. Hong Kong now overwhelmingly relies on China for its food supply, and 80% of tourism spending there in 2015 was by mainlanders.

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Formerly known as the Prince of Wales Building, this landmark 1970s edifice now houses the offices of the Chinese military. PHOTOS: PHILIPP ENGELHORN FOR THE WALL STREET JOURNAL
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The city’s status as a “special administrative region cannot last forever—this is impractical,” said Kingsley Sit, who directs a research office for the Heung Yee Kuk, an advisory group that represents rural interests outside central Hong Kong and has long backed Beijing. “The major trend is gradual integration into China. If Hong Kong became independent, how feasible would that be? Let’s do something wise.”

In a sign of worries in the territory, the film “Ten Years,” a collection of vignettes that envisioned a politically circumscribed Hong Kong one decade from now, was a surprise success over the past year. In one vignette, mainland officials stage an assassination attempt to spur passage of a national-security law in Hong Kong. In another, a taxi driver who can’t speak Mandarin struggles to find business as the city’s native Cantonese language is relegated to second-class status.

Banned in the mainland, the movie won best film at the Hong Kong Film Awards. Many Hong Kong cinemas either didn’t screen it or didn’t add showings to meet demand. State broadcaster CCTV and Tencent Holdings Ltd. , the Chinese internet firm, pulled out of agreements to broadcast the awards in the mainland. CCTV, Tencent and the award organizers didn’t respond to requests for comment.

The worries about Beijing interference coincide with questions about Hong Kong’s viability as a top financial, business and trading center. Hong Kong’s container port, the world’s busiest as recently as a decade ago, slid to No. 5 last year as mainland ports such as Shanghai expand.HSBC Holdings PLC decided this year not to relocate its London headquarters to Hong Kong, citing London’s talent pool and international status.

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Hong Kong has been a bone of contention as far back as the 1840s, when an insubordinate British captain took possession of the island in the First Opium War. The colony, with low taxes, free-market policies and Western rule of law, later bloomed into a major trade entrepôt and financial center and is now home to more than seven million people.

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The Court of Final Appeal building, now surrounded by skyscrapers, was built in the early 1900s by the British colonial government.PHOTOS: GEORGE RINHART/CORBIS/GETTY IMAGES; PHILIPP ENGELHORN FOR THE WALL STREET JOURNAL
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In the 1980s, London and Beijing negotiated a handover deal that gave China control of foreign affairs and defense. Hong Kong kept the right to maintain its own judiciary, manage its currency and set social policies for another 50 years.

Exactly what happens in 2047 wasn’t spelled out. Many locals hoped China would democratize and that its political system would converge with Hong Kong’s over time, rather than the other way around, although China’s crackdown on Tiananmen Square protests in 1989 damped those expectations.

Beijing, by contrast, thought that pulling Hong Kong closer into China’s economic orbit would win people over. It offered preferential treatment on the mainland for Hong Kong businesses, encouraged Chinese companies to invest in the territory and allowed millions of Chinese to travel there, creating a boom for Hong Kong hotels and shops. China made Hong Kong the key international center of trading for its currency, the yuan.

In many ways, the strategy backfired. Some middle-class Hong Kong residents complained about overcrowding from mainlanders and worried that locals were being squeezed by higher real-estate prices. Amid the tourism boom, some Hong Kongers began calling mainlanders “locusts” who swarm the city and drain its resources.

Faced with mounting opposition, Beijing decided that doling out economic favors had run its course and that it had to get more visibly involved in Hong Kong, Chinese political scholars say.

“They gave out a lot of candy, a lot of sugar,” said Ding Xueliang, a social scientist at the Hong Kong University of Science and Technology. “Finally they realized they’d given so much, and they still hadn’t fixed things. So they have to take stronger measures.”

Beijing issued a policy paper in 2014 emphasizing limits to Hong Kong’s autonomy. It has brought Hong Kong legislators to Shenzhenfor talks on the territory’s political system, led by high-level mainland officials. During the mass street protests of 2014, Shenzhen became a command center, run by security and political officials from Beijing.

Mr. Ding estimates that China likely has more than 100,000 people in Hong Kong who help it monitor the city.

An official at the central Chinese government’s liaison office in Hong Kong declined to comment for this article.

Hong Kongers are sensitive about encroachment by mainland law enforcement. Last year, several Hong Kong booksellers disappeared after publishing thinly sourced, salacious tell-alls about China’s leaders. They turned up later in detention in mainland China.

In a June press conference after his release, one of the booksellers, Lam Wing-kee, alleged that he was abducted at a Shenzhen border crossing and held by a special task force of the central Chinese government for eight months, without charges. Previous statements that Mr. Lam and four similarly detained colleagues had made from China were scripted and made under duress, he said.

Mr. Lam said one colleague, Lee Bo, was spirited away directly from Hong Kong, even though Chinese law enforcement is prohibited from operating there under the city’s autonomy arrangement.

Hong Kong’s top official, Chief Executive Leung Chun-ying, said he would write a letter to the mainland government to express concern and called for tweaks to the system for notifying the government when a Hong Kong resident is detained in the mainland—gestures pro-democracy lawmakers and activists criticized as underwhelming.

The Chinese Ministry of Public Security acknowledged “inadequacy” in the notification mechanism between Hong Kong and China.

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Mr. Lee has said he visited the mainland of his own free will to aid in an investigation. He couldn’t be reached for comment.

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Women dance to mainland Chinese music during the evening in Hong Kong’s Sun Yat Sen Park.
Women dance to mainland Chinese music during the evening in Hong Kong’s Sun Yat Sen Park. PHOTO: PHILIPP ENGELHORN FOR THE WALL STREET JOURNAL
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The Chinese government or mainland corporations now have direct control or stakes in eight of Hong Kong’s 26 mainstream media outlets, according to the Hong Kong Journalists Association. That has contributed to a steady erosion of press freedom, the association said.

It cited the purchase of the South China Morning Post by Chinese internet giant Alibaba Group Holding Ltd. late last year. Alibaba Executive Vice Chairman Joseph Tsai said editorial independence would be respected.

He also said in an interview with a Hong Kong news website that coverage of China was “neither complete nor healthy” because newspapers tended to “carry the Western angle.” The Post, he said, would put out “another angle.”

Mainland Chinese companies such as China Mobile Ltd. and Tencent dominate Hong Kong’s Hang Seng Index. At the time of the handover, the top 10 listed companies by market capitalization were almost all old-line British colonial firms such as HSBC or conglomerates owned by local tycoons.

Chinese developers, many with government backing, are outbidding Hong Kong counterparts for public land, which is sold periodically by Hong Kong’s government. In one instance, an arm of China Minmetals Corp. bid 4 billion Hong Kong dollars ($515 million), far exceeding market expectations, to win a 10,530-square-meter waterfront plot in Hong Kong’s Kowloon section for luxury housing.

Mainlanders now make up 12% of the students in Hong Kong’s university system, compared with less than 1% in the 1996-97 school year.

In August, Hong Kong’s education department said that secondary-school teachers advocating Hong Kong independence could have their licenses revoked. Mr. Leung, the Hong Kong chief executive, compared teenagers’ interest in independence to drug use.

Many of Hong Kong’s newly elected legislators disagree.

“We Hong Kong people need to seize the opportunity to decide our own future,” said 25-year-old Yau Wai-ching, one of the new legislators, suggesting the tension is unlikely to dissipate soon. “Self-determination is our inherent right.”

Write to Ned Levin at ned.levin@wsj.com and Chester Yung atchester.yung@wsj.com

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Britain’s Nuclear Hinkley C finally gets green light after ‘revised agreement’ with EDF

September 15, 2016

Hinkley point — A computer generated image (CGI) of the French energy producer’s proposed two nuclear reactors. Credit AFP, Getty Images

By Telegraph Reporters
15 September 2016 • 8:13am

The Hinkley Point C nuclear power station will go ahead following a “new agreement” with EDF, the Government has confirmed.

Ministers said they had imposed “significant new safeguards” for future foreign investment from China in critical infrastructure.

A statement said: “Following a comprehensive review of the Hinkley Point C project, and a revised agreement with EDF, the Government has decided to proceed with the first new nuclear power station for a generation.

“However, ministers will impose a new legal framework for future foreign investment in Britain’s critical infrastructure, which will include nuclear energy and apply after Hinkley.”

Greg Clark, Secretary of State for Business, Energy and Industrial Strategy, said: “Having thoroughly reviewed the proposal for Hinkley Point C, we will introduce a series of measures to enhance security and will ensure Hinkley cannot change hands without the Government’s agreement.

“Consequently, we have decided to proceed with the first new nuclear power station for a generation.

“This decision is unlikely to be the grand finale to this summer’s political soap opera. There are still huge outstanding financial, legal and technical obstacles that can’t be brushed under the carpet.”
John Sauven, Greenpeace

“Britain needs to upgrade its supplies of energy and we have always been clear that nuclear is an important part of ensuring our future low-carbon energy security.”

Ministers said the agreement “in principle” with EDF means that the Government will be able to prevent the sale of the French firm’s controlling stake before completion of construction, without the prior notification and agreement of ministers.

The agreement will be confirmed in an exchange of letters between the Government and EDF.

“Existing legal powers, and the new legal framework, will mean that the Government is able to intervene in the sale of EDF’s stake once Hinkley is operational,” the Government statement added.

“The new legal framework for future foreign investment in British critical infrastructure will mean that after Hinkley, the British Government will take a special share in all future nuclear new build projects.

Animation: How Hinkley Point power plant will be built Animation: How Hinkley Point power plant will be built Play! 02:30

“This will ensure that significant stakes cannot be sold without the Government’s knowledge or consent.

“The Office for Nuclear Regulation (ONR) will be directed to require notice from developers or operators of nuclear sites of any change of ownership or part-ownership.

“This will allow the Government to advise or direct the ONR to take action to protect national security as a result of a change in ownership.”

Unions welcomed the announcement, saying 25,000 jobs will be created by the project.

Unite national officer for energy Kevin Coyne said: “Our members are shovel ready and dead keen to start work on the country’s first nuclear power station for a generation.

“It is excellent news that that the uncertainty caused by Theresa May’s decision to put Hinkley Point ‘on hold’ has now been dispelled and that the Government recognises the role of nuclear in a mixed energy economy.

“It means that the lights will remain on in the UK in the decades ahead and it heralds an economic renaissance for the West Country, with the accompanying creation of thousands of skilled jobs and the positive ripple effects to the supply chain across the UK.

“It is especially heartening that the new jobs will include 500 much-needed apprenticeships.

“This was the first big litmus test for big infrastructure projects, following June’s EU referendum and shows that there is the appetite for giving the green light for such projects that the UK so desperately needs for its future economic prosperity.”

“It will be a big relief for the 25,000 quality jobs which were put at risk by the latest delay, never mind the reputational damage inflicted on UK plc”
Justin Bowden, GMB

A state-backed Chinese firm has a third stake in Hinkley and is pressing to build other new nuclear power stations in the UK including Bradwell in Essex.

Justin Bowden, GMB National Secretary for Energy, said: “Giving the thumbs-up to Hinkley is vital to fill the growing hole in the UK’s energy supply needs.

“It will be a big relief for the 25,000 quality jobs which were put at risk by the latest delay, never mind the reputational damage inflicted on UK plc.

“GMB has always had reservations about linking Bradwell and Sizewell with the contract for Hinkley. The Government should never have allowed the country to be held over a Chinese barrel.”

Claire Jakobsson, Head of Climate & Environment Policy at EEF, the manufacturers’ organisation, said: “This announcement provides some positive news for industry.

“With Hinkley C being such a major part of the Government’s energy strategy it is a relief to finally see the project given the green light after months of delays and uncertainty. It is encouraging to see investment in major UK infrastructure projects continuing to go ahead.

“However, this project will clearly require a vast amount of support and it remains to be seen whether this deal is able to offer value for money. If new nuclear is to continue to play a major role we must see significant reductions in strike prices for future projects.”

Josh Hardie, CBI deputy director-general, said: “The final green light for Hinkley Point is good news for the UK’s energy future as well as supporting jobs and growth across the South West and the country.

“New nuclear energy will play an important role in supporting a diverse, low-carbon and secure energy supply, so it’s now time to push on with this key project.

“Investors are hungry for further signs from the Government that the UK is open for business. Pressing ahead with major infrastructure decisions – such as giving clarity around the next Contracts for Difference auction and the post-2020 Levy Control Framework, and expanding runway capacity in the South East – would give a real boost to their confidence in the UK in the long run.”

TUC general secretary Frances O’Grady said: “We are pleased ministers have ended the uncertainty over Hinkley Point. This project will create thousands of quality jobs and apprenticeships and bring much-needed investment to the South West.

“But the Government must not stop here. It is time to get the shovels out for a third runway at Heathrow, high-speed rail and new affordable homes.

“Now is the time for the Government to make the infrastructure investments our economy desperately needs.”

John Sauven, Greenpeace executive director said: “This decision is unlikely to be the grand finale to this summer’s political soap opera. There are still huge outstanding financial, legal and technical obstacles that can’t be brushed under the carpet.

“There might be months or even years of wrangling over these issues. That’s why the Government should start supporting renewable power that can come online quickly for a competitive price.

“Today’s decision hasn’t been made on the cold, hard facts that show Hinkley will not deliver competitively priced, low carbon energy any time soon. Instead it seems that Hinkley became too big to fail. The potential for political embarrassment for the new Prime Minister was too high.

“The new arrangement for a Government special share changes almost nothing on the Hinkley deal and time will tell what it means for Bradwell in Essex, which is due to use Chinese technology.”

http://www.telegraph.co.uk/news/2016/09/15/hinkley-c-finally-gets-green-light-after-revised-agreement-with/

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Egypt’s Abdel-Fattah el-Sissi Relies on His Army for Order, Food Distribution, Infrastructure Projects and More

July 8, 2016

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Egyptian President Abdel Fattah al-Sisi. Reuters photo

By HAMZA HENDAWI
The Associated Press
CAIRO — Jul 8, 2016, 3:49 AM ET

During two years in office, Egypt’s general-turned-president Abdel-Fattah el-Sissi has sought to impose a military-style discipline to end years of turmoil and has turned to the armed forces to help rebuild the deeply damaged economy to a degree unseen in more than 50 years.

The military has taken the lead in carrying out a string of major projects, from building roads and overseeing housing construction to providing cheap food to the public. That has provided a needed bit of stimulus and helped keep Egyptians going in hard times. But the flip side has been a heavy emphasis on secrecy, leaving observers unsure how el-Sissi plans to tackle an economy struggling under high inflation, unemployment and a tumbling currency.

El-Sissi has frequently sought to impose secrecy on politicians over issues that usually would be open for public discussion. In June, he said some of his planned projects cannot be announced, without explanation.

When his electricity minister said on live TV in May that the Aswan Dam was taken off the electricity grid temporarily, el-Sissi angrily cut him off, saying, “Let us not talk about these details.” When his oil minister, again on live television, showed a map of a proposed oil pipeline during a power point presentation, el-Sissi ordered the slide removed.

One of his most controversial decisions, to surrender two Red Sea islands to Saudi Arabia, was taken behind closed doors — intentionally, el-Sissi said, to prevent media attention. The move sparked a rare burst of street protests and angry criticism. In a televised meeting with politicians and editors, el-Sissi defended the decision and demanded no one discuss the subject again. He brusquely shut down one lawmaker who attempted to speak to him, saying “Excuse me, I did not give anyone permission to speak.”

“He wants to run the country like the military,” said Michael W. Hanna, an Egypt expert with the New York-based Century foundation. “In that world, it is a question of order and execution, it is not a place for discussion, transparency or politics. They don’t want politics.”

Egypt has had presidents who hailed from the military for all but two of the past 64 years since army officers seized power in a 1952 coup. Under longtime autocrat Hosni Mubarak, a former air force chief, the armed forces held its own economic empire, including factories, stores and companies. But private businessmen took the lead in the economy and investment projects in general, gaining a powerful say in politics and Mubarak’s ruling party — often to the military leadership’s dismay.

After Mubarak’s ouster in the 2011 pro-democracy uprising came a civilian president, Mohammed Morsi, an Islamist who won Egypt’s first post-Mubarak election.

Morsi elevated el-Sissi, the head of military intelligence, to chief of the armed forces and defense minister. But when massive protests spread against Morsi and his Muslim Brotherhood, el-Sissi led the military in ousting him in 2013. After a brief interim presidency by another civilian, el-Sissi was then elected president in 2014 in a landslide victory by Egyptians drawn to his promises of stability and prosperity.

Hisham Kassem, a veteran human rights advocate and political analyst, said el-Sissi initially sought the counsel of economic experts. But “he decided there was too much talk and little action, so he sought the help of the military.”

A convoy of army soldiers arrive to secure the funerals of security personnel killed in the Sinai city of al-Arish in front of Almaza military air-base where the funerals were held in Cairo Jan. 30, 2015. (Reuters)

El-Sissi argues he is racing against time and his style is the only way to bring Egypt out of turmoil, fix and expand dilapidated infrastructure and satisfy the needs of a population of 91 million.

He often calls on Egyptians to sacrifice. In an emotional speech Sunday, he said Egypt is crying out for its people to take care of it. “So, does that mean we don’t eat? Fine, we don’t eat. Does that mean we don’t sleep? Fine, we don’t sleep. Anything, so that Egypt can take its proper place.”

The building of a new leg of the Suez Canal typified el-Sissi’s approach. Originally projected to take 36 months to build, el-Sissi ordered it finished in a year. With the military’s help in the work, the timetable was met, with the new 45-mile length opening last August to great fanfare.

“We in the military have learned that when an order comes from the supreme commander or the presidency, we respond by saying ‘yes, sir’,” canal chairman Mohab Mamish, a retired navy admiral, recalled in a recent TV interview.

But the canal also demonstrated the downside from the lack of debate. Some economists questioned the immediate need for the $8.5 billion expansion, and despite officials’ promises that increased traffic would rake in millions in new revenue, canal revenues have remained about the same or dipped because of sluggishness in global trade.

In late February, el-Sissi said up to 6,000 kilometers (3,600 miles) of roads, 113 bridges and three airports were being built since he took office.

The military is taking the lead in a program with private companies to build housing for the poor. The armed forces’ engineering corps acts as trouble-shooters, using its resources when projects are behind schedule. When el-Sissi toured one of the latest housing complexes, a senior military engineering officer was by his side.

With inflation rising to 12.3 percent, the military expanded its network of outlets selling food at discount prices, currently running 400 across the country. The military has stepped up direct distribution of aid to the poor. It has upgraded hospitals and allowed civilians access to more military hospitals.

El-Sissi’s government has invested $16.5 billion in developing electricity and as a result, there have been few of the long power cuts Egypt previously suffered. El-Sissi also succeeded in partially lifting fuel subsidies without sparking unrest.

Military-led infrastructure projects provide the economy with stimulus and create jobs, say economists.

“The government took the lead at a time when the private sector saw risks,” said Mohammed Abu Basha, a senior economist with regional investment bank, Hermes.

But the impact has been limited given the heavy damage to Egypt’s economy. Tourism and remittances have plummeted; foreign investment dried up, though it is gradually returning. The Egyptian pound has slid dramatically. In March, the Central Bank devalued the pound by about 13 percent, but the rate remains lower on the black market, and economists say more devaluations or even free-floating of the pound is needed.

Large subsidies still weigh down the budget, but the government is wary of lifting them.

“No one is really dealing with the problem. They are dealing with a crisis here and a crisis there,” said a Cairo-based Western economist who agreed to discuss the economy in return for anonymity for fear of hurting relations with Egyptian officials.

“No one knows who is advising the president on the economy, and that’s a source of serious concern.”

Officials often justify the need for secrecy in terms of national security. El-Sissi talks cryptically of “evil people” plotting against Egypt. The country faces an Islamic militant insurgency, but at the same time the government has been cracking down hard on dissent, arresting thousands in crackdowns against Islamists and secular democracy advocates.

“As far as he is concerned, Egypt is facing a multitude of security threats that necessitates less discussion and more empowerment of the executive, whether society agrees or not,” said H.A. Hellyer, a senior fellow at the Atlantic Council and the Royal United Services Institute.

China’s Debt: China is walking its economy right into more trouble

June 11, 2016

By 

You’ve heard that China has a debt problem.

Likely without fail, every quarter you read an article about how the country’s debt-to-GDP ratio is rising to a dangerous level, now 284%, or has reached an unsustainable level. This, you read, is the beginning of the end. This is what will bring down the Chinese economy.

In a note on Thursday, Macquarie analyst Larry Hu took a helpful step back to remind us that there is a reason why that ratio keeps rising, and it’s that reason that will take China down. The debt is just a symptom – “State Capitalism,” he writes, is the problem:

China’s high debt is just a reflection of the problem instead of the problem itself. On the surface, China’s high debt is inevitable due to its high savings rate (47% of GDP) and low equity financing. But, at a deeper level, a high savings rate is the outcome of a system we call “State Capitalism”, under which the state extracts resources from the private sector through three channels: financial repression, SOE monopoly and land controls. As the result, the system suppresses consumption and thereby boosts savings. This is the root cause of China’s debt problem.

Here’s why understanding this is important. If you’re just watching China’s debt-to-GDP ratio climb and waiting for an explosive finish – like a banking-system collapse – you could be waiting forever. State Capitalism creates a specific kind of bad economy, a specific kind of stagnation, that you’re going to miss if you’re simply watching debt pile up.

As Hu says, what State Capitalism with Chinese characteristics can do is put the country’s economy in a trap.

The trap Hu is talking about is this: As more of China’s massive state-owned enterprises (SOEs) show signs of failing, the government bails them out by lowering their interest payments.

More from Hu:

For example, it could use debt-equity swaps in converting loans to equity. Over the process, most likely depositors would remain confident on the banking system which is backed by the state. Therefore, money would continue to flow into banks. So the system could still function if banks don’t have liquid funding problems.

For certain banks with liquid funding problems, most likely the government would issue bonds or simply print money to inject to them. Money printing might increase inflation or currency depreciation pressure. If so, the government needs to raise tax or sell assets. But it is not necessarily so. In Japan’s case, the Bank of Japan has monetized trillion dollars of government debt but inflation or depreciation pressure has yet remained muted.

We’ve talked about the “Japanification” of China before. China does not want to become Japan because it is not Japan. It is not rich. It has millions of people to lift out of poverty, and the government needs the economy to grow to fulfill that promise.

Direction

But we already see China heading in this direction. For one, the government has already bypassed regulation in order to engage in non-performing loan (NPL) debt to equity swaps. We highlighted a Bank of America note on why that can get messy back in March:

“[B]y giving banks more ‘flexibility’ in dealing with their NPLs, we suspect that it may cause a more rapid accumulation of bad debt,” the analysts wrote.

“This is using liquidity to paper over solvency issue in our view. As a result, we consider this unconfirmed new policy, if it comes to pass, to be a long term negative for the market, and particularly for banks and the Asset Management Companies (AMCs), aka the bad banks (due to reduced business scope). In the long term, we are also concerned about the potential forming of a banking-industrial complex in China.”

In other words, these swaps could create a money-sucking monster that kills growth and feeds on more debt. All of this will be backed by the state, allocating its resources to keep this going so that the system doesn’t have to collapse.

XiThat’s Chinese President Xi Jinping in the center. He’s a more control kind of guy, not less. Jim Bourg

The private sector could help, if it weren’t getting squashed by the government. Usually, even SOEs that do default are bailed out by local or state governments. Right now everyone is watching how unusually long it’s taking the state to get involved with Dongbei Special Steel, now on its fifth bond default since March, according to Deutsche Borse Group.

If the government does take a hard line on Dongbei’s debt, then it will be a surprise, but we’ll have to see many more powerful SOEs go down before we can declare that Xi Jinping’s government is committed to creating a real free market in the country.

There’s another way

None of this is to say that there’s no hope. Hu says that the government could reform the economy, but it would have to get out of its own way. It would have to reform the SOEs, sometimes letting them fail so other players can drive the market, and reform its system of local governments. It’s the local governments that fund China’s infamously endless infrastructure projects.

From Hu:

However, both are very difficult politically because these reforms need to take on SOEs and local governments, who are exactly the two most important players in the current State Capitalism. Over time, they have also become the most powerful vested interests in China.

And again, we’re not seeing it move in the right direction with any kind of gusto. The government has talked about taking more of a stake in SOEs, not less. It’s talked about taking a stake in China’s privately owned tech companies too.

So what will ultimately stand in the way here? The government’s own politics.

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