Housing starts rise 9% in April
May 31, 2016
Housing starts in Japan achieved a ten months high in April, according to data released today by the Japanese Ministry of Land, Infrastructure, Transport and Tourism.
Japan’s housing starts increased by 9 percent year-on-year in April, the highest growth since June 2015. Economists had expected 4.1 percent growth after posting 8.4 percent increase in March.
Annualized housing starts rose to 995,000 from 993,000 a month ago. It was forecast to rise to 950,000.
Construction orders received by 50 big contractors declined 16.9 percent on a yearly basis in April after expanding for the first time in three months in March.
This was the biggest fall since last October. Orders had increased 19.8 percent annually in March.
Abe Poised to Delay Unpopular Tax Hike Before Japan Election
Prime minister to put off increase for 2 1/2 years, allies say
- About-face is blow to efforts to contain Japan’s debt burden
Japanese Prime Minister Shinzo Abe is poised to delay an increase in Japan’s sales tax until 2019, and may also outline plans for a new economic stimulus package, complicating the government’s efforts to tame the world’s largest debt burden.
Abe is expected to confirm at a press conference in Tokyo at 6 p.m. his decision to postpone for a second time an increase in the consumption tax to 10 percent from eight percent.
The tax decision will mark an about-face for Abe, who had previously said only an economic shock on the scale of the Lehman Brothers collapse or a major earthquake would prompt a delay. The ruling parties approved the postponement Tuesday, after some expressions of doubt from senior officials.
While putting off the increase in the unpopular tax may improve Abe’s prospects in the July election, the decision will fan doubts over the government’s ability to rein in a debt set to reach almost 2 1/2 times the size of the economy. Postponing the hike also will remove a source of funding for ballooning social security costs in one of the world’s most rapidly aging countries.
“Even though many people wanted the postponement, there were a lot of voices against it as well,” said Jun Okumura, a visiting scholar at the Meiji Institute for Global Affairs. “And people who were for the postponement would also realize that Abe was eating his words by deciding to postpone it.”
Abe laid the groundwork for the delay at Group of Seven summit in Japan last week. In a presentation to his fellow G-7 leaders, Abe put the case that the major economies needed to act to avert the danger of a major economic crisis. The G-7 leaders rejected his efforts to have language warning of the risk of a crisis included in the final communique of the meeting.
With economic growth tepid in Japan as consumers are reluctant to spend, Abe has opted to put off the increase before facing voters in an upper-house election in July. He had inherited the plan for the tax rise from the previous government.
The economy fell into recession when the tax was raised to 8 percent in 2014 in the first phase of the plan. The second increase initially was set for October 2015, before being delayed by Abe’s government.
“For Japan, the biggest problem is that private consumption hasn’t risen,” Finance Minister Taro Aso, who had previously opposed a delay, said Tuesday. “That’s 60 percent of GDP that isn’t increasing, and so to deal with that, now isn’t the time to raise the sales tax again.”
Aso added that Japan still must fix its finances and that there has been no change to the government’s target of achieving a primary balance surplus in the fiscal year starting April 2020. After being reported as saying last weekend that an election must also be called in the lower house to consult the people if the tax increase was delayed, Aso said Tuesday that election timing was entirely up to the prime minister.
Abe’s government is set to propose a stimulus package of 5-10 trillion yen ($45-$90 billion) in a special legislative session after the July election, the Nikkei newspaper reported Saturday.
Japan’s benchmark Topix index added 1 percent Tuesday to 1,379.80, its highest in a month, after Aso and other lawmakers confirmed the delay. It slid about 0.6 percent in early trade on Wednesday.
Almost two thirds of respondents to a poll published by the Nikkei newspaper Monday said they opposed the consumption tax increase.
Japan’s lower house rejected a no-confidence motion against Abe’s cabinet, submitted by opposition parties who said the Abenomics policy program had failed. Support for Abe’s cabinet rose to 56 percent in a poll published by the Nikkei newspaper Monday.
After Abe took office in 2012, drastic monetary easing weakened the yen, bolstering exporters’ profits and share prices, until the yen strengthened again in 2016. The economy has zigzagged between contraction and some growth, consumer spending is weak and inflation data last week showed that prices are falling again. Data released Tuesday showed a modest increase in factory output and a decline in household spending.
Shinzo Abe may have the two-thirds majority he needs to change the constitution. But fixing the economy is more urgent
Jul 16th 2016 | TOKYO | From the print edition
AS THE results of the election for the Diet’s upper house rolled in on July 10th, Japan’s prime minister, Shinzo Abe, beamed. And why not? This was his third sweeping election victory since he and his Liberal Democratic Party (LDP) returned to power in late 2012. It was won despite a sputtering economy and mounting doubts about how Mr. Abe might fix it. And it moves him a big step closer to achieving a lifelong political ambition: unshackling Japan from the constitution imposed by America on a defeated country after the second world war.
With its junior partner, Komeito, the LDP won 70 out of the 121 seats up for grabs (half the upper house), admittedly on a low turnout. It nevertheless gives the ruling coalition firm control over the upper house. And, with support from like-minded parties and independents, Mr. Abe can now claim a two-thirds majority in both upper and lower houses. That, in theory, gives him the long-coveted supermajorities to present constitutional changes to voters for approval by referendum.
First, though, Mr. Abe must turn to boosting the economy. For all the trumpeted “Abenomics” of the past three years, including monetary and fiscal stimulus, output is forecast to grow at just 0.9% this year. Business confidence is flat, wages are stagnant and, though jobs are easy enough to find, consumption is sluggish. Not for the first time, Abenomics needs a reboot.
In the circumstances, it is remarkable that the opposition Democratic Party (DP) landed so few punches. It lost 15 seats. Post-Brexit turmoil in Europe may have spurred voters to cling to the stability that the LDP represents. The DP’s tactical agreement to co-ordinate fielding candidates with three disparate opposition parties unsettled many voters. Gambling all on its opposition to constitutional change, the DP had few economic proposals.
Having postponed a planned rise in the consumption tax, Mr. Abe has instructed the finance ministry to draw up a “supplementary” budget to be passed in a special session of the Diet, expected in mid-September. The fresh stimulus may amount to as much as ¥10 trillion ($99 billion), or 2% of GDP—to be added to the current budget deficit and national debt of about 6% and 250% of GDP respectively. Mr. Abe remains wedded to the old LDP recipe of construction projects and high-speed trains. Some of the money will be raised through investment bonds which, like nearly all the finance ministry’s debt issuance these days, will be bought by the central bank, in a tight fiscal-monetary tango. There is also talk of direct cash transfers to boost consumption among targeted groups, notably the young, the working poor, women and pensioners—a variant on “helicopter money” that seems destined to be called “drone money”.
A cabinet reshuffle is likely in August, and any Buggins’-turn appointments will be presented as bringing in new reformist blood. It is possible that the finance minister, Taro Aso, will want to go. But Mr Abe knows he has to do more than change faces and push yet more stimulus. One measure hinted at for the autumn Diet session is to reform the labour market. The prime minister, his advisers say, has come to believe that the economy’s problems are structural and to do with a shrinking population and rigid work practices. Japan has a two-tier labour market of cosseted permanent staff and less-protected employees on non-regular contracts—many of them young.
That said, the political will for labour reform, or indeed much structural change of any sort, has eluded Mr Abe to date. And the Diet session has other urgent business, including passing legislation to join the Trans-Pacific Partnership, a free-trade deal that has yet to be passed by America’s Congress and is opposed by both presidential candidates (though Hillary Clinton’s precise views are hard to pin down).
The prime minister sees economic strength and his nationalist agenda to restore Japanese power and prestige as one combined objective. But for all the opposition’s efforts, Mr Abe ducked the debate on constitutional change during the campaign—for good reason. A pre-election survey by NHK, the public broadcaster, found only 11% of respondents thought the constitution of greater concern to them than bread-and-butter issues.
With victory in the bag, he has now called for a debate on changing the constitution, saying it is his “duty” as president of his party. Setsu Kobayashi, a constitutional scholar at Keio University in Tokyo, says that on security and constitutional matters, Mr Abe has form in pushing ahead with unpopular measures, such as a controversial law that now allows Japan to take part in collective defense with allies.
An LDP draft for a revised constitution calls for, among other things, rewriting Article 9, which renounces war, to recast the country’s “self-defense forces” as regular armed forces. Getting that draft passed will require the “art of politics”, Mr. Abe said this week. China may yet prove his best ally: it reacted furiously to an international ruling on July 12th dismissing its territorial claims in the South China Sea (see page 47), while its navy and air force have increased their probing of the waters and air space around Japan. At present, though, the hurdles to constitutional change remain high. Natsuo Yamaguchi, Komeito’s leader, for one, has warned against tampering with the constitution’s pacifist clause.
Close advisers suggest that Mr Abe will not push for early change. Brexit, they say, has come as a stark reminder to him of how, without laying the groundwork, a referendum can divide a country and produce an unexpected and “wrong” outcome. Besides, no consensus exists on what the changes should be. While some would-be amenders (including in the DP) care about Article 9, others are more concerned with enshrining human rights or simply revamping the procedures for amending the constitution. Still others talk of a new amendment giving the prime minister and self-defense forces emergency powers after a natural disaster.
So no immediate drive for constitutional reform, perhaps. All the more reason, then, to judge Mr. Abe by his promise to transform the economy.
What Japan’s economic experiment can teach the rest of the world
Jul 30th 2016 | From the print edition
IN THE 1980s Japan was a closely studied example of economic dynamism. In the decades since, it has commanded attention largely for its economic stagnation. After years of falling prices and fitful growth, Japan’s nominal GDP was roughly the same in 2015 as it was 20 years earlier. America’s grew by 134% in the same time period; even Italy’s went up by two-thirds. Now Japan is in the spotlight for a different reason: its attempts at economic resuscitation.
To reflate Japan and reform it, Shinzo Abe, prime minister since December 2012, proposed the three “arrows” of what has become known as Abenomics: monetary stimulus, fiscal “flexibility” and structural reform. The first arrow would mobilize Japan’s productive powers and the third would expand them, allowing the second arrow to hit an ambitious fiscal target. The prevailing view is that none has hit home. Headline inflation was negative in the year to May. Japan’s public debt looks as bad as ever. In areas such as labour-market reform, nowhere near enough has been done.
Compared with its own grand promises, Abenomics has indeed been a disappointment. But compared with what preceded it, it deserves a sympathetic hearing (see article). And as a guide to what other countries, particularly in Europe, should do to cope with a greying population, stagnant demand and stubborn debts, Japan again repays close attention.
This arrow points up
Take monetary policy. The lesson many are quick to draw from Abenomics is that the weapons deployed by the Bank of Japan (BoJ)—and, by extension, other central banks—since the financial crisis do not work. The BoJ has more than doubled the size of its balance-sheet since April 2013 and imposed a sub-zero interest rate in February; still more easing may be on the way (the BoJ was meeting as The Economist went to press). Yet its 2% inflation target remains a distant dream.
The naysayers have it wrong. Unlike other countries, Japan includes energy prices in its core inflation figure. Excluding them, core consumer prices have risen, albeit modestly, for 32 months in a row. Before Abenomics, Japan’s prices had fallen with few interruptions for over ten years; they are now about 5% higher than they would have been had that trend continued. Japan has increased inflation while it has fallen in Australia, Britain, France, Germany, Italy and Spain.
If central banks have more sway than some pundits allow, Abenomics also shows the limits of their power. The BoJ has buoyed financial assets, but it has failed to drum up a similar eagerness on the part of consumers or companies to buy real assets or consumer goods. Household deposits are high. And despite bumper corporate profits, firms doubt such plenty will persist. They have been happy to raise prices but less eager to lift investment or base pay (which are harder to reverse). Japan’s non-financial firms now hold more than ¥1 quadrillion ($9.5 trillion) of financial assets, including cash.
Herein lies another lesson of Abenomics: monetary policy is less powerful when corporate governance is lax and competition muted. Mr Abe has handed shareholders greater power. In 2012 only 40% of leading companies had any independent directors; now nearly all of them do. But if Japan’s equity culture were more assertive still, shareholders might demand more of the corporate cash hoard back—to spend or invest elsewhere. And if barriers to entry were lower, rival firms might expand into newly profitable industries and compete away these riches. They might also pay more. In theory, reflating an economy should be relatively popular, because wage rises should precede price increases. In reality, the price rises came first and pay has lagged behind. That is why the IMF has pushed for Japan to adopt an incomes policy that spurs firms to raise wages.
Someone must spend
If companies are determined to spend far less than they earn, some other part of the economy will be forced to do the opposite. In Japan that role has fallen to the government, which has run budget deficits for over 20 years. Mr Abe set out intending to rein in the public finances. But after a rise in a consumption tax in 2014 tipped Japan into recession, he has backed away from raising the tax again. This week he signaled a large new fiscal-stimulus package worth ¥28 trillion, or 6% of GDP (although it was unclear how much of that money will be new).
Abenomics has not only demonstrated how self-defeating fiscal austerity can be, particularly when it comes in the form of a tax on all consumers. It has also shown that, in Japanese conditions, sustained fiscal expansion is affordable. Without any private borrowers to crowd out, even a government as indebted as Japan’s will find it cheap to borrow. Japan’s net interest payments, as a share of GDP, are still the lowest in the G7. Politicians in Europe make fiscal rectitude a priority. Abenomics shows that public thrift and private austerity do not mix.
Many people argue that Mr Abe’s monetary and fiscal stimulus has served only as an analgesic, masking the need for radical structural reform. To be sure, greater boldness is needed—to encourage more foreign workers into the country, for example, and to enable firms to hire and fire more easily. But a revival in demand has encouraged supply-side improvement, not simply substituted for it. Stronger demand for labour has drawn more people into the workforce, despite the decline in Japan’s working-age population. The increased presence of women in the labour force has prompted the government to create 200,000 extra places in nurseries, and to make life harder for employers who discriminate against pregnant employees. In recognizing that reflation and reform go hand in hand, Abenomics is an unusually coherent economic strategy.
Abenomics has fallen short of its targets and its overblown rhetoric. That makes it easy to dismiss as a failure. In fact, it has shown that central banks and governments do have the capacity to stir a torpid economy. And in some senses, the hype was needed. Japan’s stagnation had become a self-fulfilling prophecy; Abenomics could succeed only if enough people believed it would. This is a final lesson that Japan’s economic experiment can impart to the rest of the world. Aim high.
July 13, 2016 11:57 am
Fitch lowers outlook on Japan
Fitch Ratings on Monday lowered its outlook on the world’s most indebted country to negative, saying it doubted Japan’s commitment to fixing the public finances.
The decision makes Fitch the first credit rating agency to change its position on Japan following prime minister Shinzo Abe’s decision to delay a rise in consumption tax that was scheduled for April next year.
Fitch’s move highlights a fierce debate about how to interpret the tax delay. Some analysts say Mr. Abe has given up on balancing the budget while others argue the delay will help Japan escape deflation, and so boost its finances in the long run.
“The outlook revision primarily reflects Fitch’s decreased confidence in the Japanese authorities’ commitment to fiscal consolidation,” the agency said.
“Fitch no longer expects the consumption tax to rise in its base case,” it said, predicting that the ratio of government debt to gross domestic product will now keep rising by 1 or 2 percentage points a year until 2024, instead of peaking at 247 per cent in 2020 as it previously forecast.
Mr Abe delayed the rise in consumption tax from 8 per cent to 10 per cent by two and a half years until October 2019, warning that raising it could prompt a “relapse in domestic demand” and a slide back into deflation.
Fitch’s credit rating for Japan remains A, its sixth-highest level and lower than that of Malta, Estonia or China. A negative outlook indicates Fitch is likely to cut Japan’s rating in the next year or two.
Japan presents an extreme test of methodology for the rating agencies. On the one hand, its growth prospects are weak and gross public debt is the largest in the world at about 240 per cent of GDP.
On the other, Japan is one of the world’s richest and most productive economies, most of its debt is held domestically and all of it is denominated in yen — which Tokyo could print if it ever needed to.
Moody’s, which rates Japan one notch higher than Fitch at A1, took a similar view but has not changed its outlook so far.
“The combined move is credit negative as it raises further questions over the government’s ability and willingness to meet its stated fiscal consolidation goals,” Moody’s said after the consumption tax move was announced.
By contrast, Standard & Poor’s was more upbeat. “The postponement of the consumption tax hike increases household disposable income next year, and is therefore positive for near-term expenditure and growth,” said Paul Gruenwald, the agency’s Asia-Pacific chief economist.
Fixing Japan’s chronic budget deficits is one of the main goals of Abenomics, the prime minister’s signature economic programme.
However, a previous rise in consumption tax from 5 per cent to 8 per cent in 2014 plunged the economy into recession, prompting Mr Abe’s caution about the further rise scheduled for next year.
May 22, 2016 12:17 pm
South Korea economy pays price for China slowdown and cheap oil
South Korea’s Busan port: the global trade slowdown has hit the country’s exports
When Park Geu-yen, South Korea’s president, visited Tehran this month, the size of the commercial delegation was a sign of the importance of winning business for her country’s moribund economy.
The contingent comprised 236 executives, including heads of major conglomerates such as SK, GS and KT, keen to tap opportunities in Iran following the recent lifting of western sanctions — and hopeful that the three-day visit would provide a breakthrough for South Korea’s slowing economy.
About Won42tn ($35bn) worth of preliminary deals were signed during the visit, but such non-binding agreements will not be enough to jump-start South Korea’s export-driven economy in the absence of a global pick-up.
China’s growing dominance threatens to squeeze other emerging markets
Economic growth halved in the first quarter this year compared with the previous quarter, with exports falling for 16 consecutive months — the longest such decline on record. Exports were down 13.3 per cent in the first four months of 2016, following an 8 per cent fall last year, amid weak global demand and low commodity prices.
A slowing China and cheap oil — which has slashed the spending power of South Korea’s major emerging markets customers — are taking a toll on an economy seen as a bellwether for global trade given its heavy reliance on imports of raw materials and exports of goods ranging from electronics and cars to ships and petrochemicals.
“Korea is a critical part of the global supply chain. Its performance reflects the global state of play, which is still weak,” says Raymond Yeung at ANZ Research.
China is the main source of Seoul’s latest trade woes on two fronts. It is South Korea’s biggest trading partner, taking a quarter of its overseas shipments, but South Korea’s exports to its large neighbor fell 15.8 per cent in January-April. In addition, China’s slowdown has hit many commodity exporting nations that rely on Chinese demand and which buy Korean products.
“What Korea’s economy is experiencing is actually a global problem. Korea’s economy is very sensitive to global trends,” says Frederic Neumann at HSBC. “The problem of the global economy today is that commodity exporters are no longer spending.”
Exports account for about half of South Korea’s gross domestic product. Nearly 60 per cent head to emerging markets, where the country’s shipments dropped 15 per cent this year after a 9 per cent fall last year.
“The overall picture seems to be worsening this year as falling exports to emerging markets outweigh any positive effects [on Korea as a crude importer] from cheaper oil,” says Kwon Young-sun at Nomura.
South Korean shipbuilders and shipping companies have been at the forefront of the global trade downturn.
The country is home to the world’s three biggest shipbuilders — Hyundai Heavy Industries, Daewoo Shipbuilding & Marine Engineering and Samsung Heavy Industries — which suffered billions of dollars of net losses last year and have seen few new orders this year. South Korea’s two biggest shippers — Hanjin Shipping and Hyundai Merchant Marine — are under creditor-led debt restructuring programmes.
“It is difficult to win new orders amid slowing global trade,” says a Hyundai Heavy spokesman. “Things are unlikely to get any better this year with the global economy still in the doldrums.”
Exports of electrical goods and electronics, which account for a third of the country’s outbound shipments, dropped 11 per cent in January-April as US consumers cut hardware purchases, while auto exports plunged 15.7 per cent on slowing demand from China and other emerging markets.
Hyundai Motor reported its lowest annual profits in five years last year and saw sales fall 22.3 per cent in the first three months of this year from the previous quarter.
The carmaker’s weak performance has also hurt domestic parts suppliers.
“Sales are falling further this year not because we are doing something wrong but because the global economy is bad. So there is not much we can do about it,” says Choi Moon-suk, director at Korea Auto Industries Coop Association.
South Korea’s exports to China are mostly composed of intermediate capital goods, so China’s economic rebalancing away from investment towards domestic spending has dimmed Korea’s export outlook. Meanwhile, the rapid rise of Chinese manufacturers in the global value chain bodes ill for Korean exporters.
“China is working off excess capacity in manufacturing and becoming more vertically specialized. Both effects decrease demand for Korea’s mix of exports in particular,” says Tom Byrne, president of the Korea Society and former sovereign risk manager for Asia Pacific at Moody’s.
Experts say a more vibrant and productive services sector could help offset such downward pressure and that global exporters such as South Korea, faced with the growing competitiveness of China’s manufacturers, and should focus on tapping into rising Chinese demand for services.
“Korea faces the same challenges as other OECD economies. . . [We] need to learn how we can sell more brands into China, how we can tap into tourism, how we can expand software expertise, how we can expand leisure and entertainment,” says Mr Neumann.
“The problem is [Chinese demand for services is] not big enough yet to carry the Korean economy. Probably the trend is going towards more sophisticated technologies just to stay ahead of Chinese competitors.”
June 8, 2016 10:08 am
Seoul in $9.5bn effort to calm shipping sector storm
Song Jung-a in Seoul
South Korea will pump $9.5bn into state-run policy lenders reeling from huge losses on loans made to the beleaguered shipbuilding and shipping sectors to help them deal with further corporate distress.
Corporate restructuring has emerged as the top priority of President Park Geun-hye’s administration as losses balloon in major export industries and the country’s industrial titans struggle to stay afloat under mountains of debt and amid slowing economic growth.
The government and the Bank of Korea will set up a Won11tn fund to buy hybrid bonds issued by two policy lenders — Korea Development Bank and Export Import Bank of Korea, which have played a key role in funding troubled companies. The banks have combined exposure of $47bn to shipbuilders and shippers.
“Our key industries, like shipping and shipbuilding, are being aggressively caught up by countries such as China and management conditions have worsened due to weak global trade,” finance minister Yoo Il-ho told reporters.
Shipbuilding, a key plank of the country’s $1.38tn economy and a sector that employs about 200,000 people, is suffering globally from overcapacity and waning trade flows. South Korea, home to the world’s three biggest shipbuilders, has been further buffeted by costly restructuring and legacy issues. An accounting scandal has emerged at third-ranked Daewoo Shipbuilding & Marine Engineering in recent months.
Prosecutors raided the offices of Daewoo Shipbuilding on Wednesday after the shipbuilder restated its earnings from 2013 on its auditors’ advice to better reflect write-offs from lossmaking overseas energy projects in its financial statement.
The country’s three largest shipbuilders — Hyundai Heavy Industries, Samsung Heavy Industries and Daewoo, which together once controlled nearly 70 per cent of the global market, suffered combined net losses of $4.9bn last year as demand was crushed by oil prices that have halved in the past two years. They plan to raise a combined $7.3bn through asset sales and job cuts as they suffer from a liquidity crunch amid a dearth of new orders.
“The economy needs help. Shipbuilders and their lenders are most impacted by a subdued global trade cycle,” Trinh Nguyen, economist at Natixis, said in a report on Wednesday. “While this is not a Korean specific story, this is no respite as their real debt is rising as orders wane. And their underperformance is impacting other sectors such as banking.”
The country’s state-run lenders have already injected billions of dollars into some beleaguered shipbuilders, including Daewoo, that are deemed too big to fail.
South Korea is one of a handful of economies where corporate debt has continued to pile up since the global financial crisis, even as most other developed countries have deleveraged. Generous government subsidies have kept ailing companies in business as Seoul has delayed restructuring, fearful of denting economic growth and of the expected job losses.
Shares of Korea’s two biggest container lines — Hanjin Shipping and Hyundai Merchant Marine — fell sharply on Wednesday on worries about likely debt-for-equity swaps. The government said Hyundai Merchant was likely to complete talks with global ship owners this week to cut charter rates.
28, 2016 8:05 am
South Korea plans stimulus boost in wake of Brexit
Song Jung-a in Seoul
A Seoul shopping mall. The extra stimulus comes amid sluggish consumption
The government has faced growing calls for stimulus measures, with the corporate restructuring in the shipbuilding and shipping industries expected to spark many lay-offs and the Brexit referendum increasing market volatility this week.
“Unrest in global financial markets has been growing from Brexit,” President Park Geun-hye told economic officials and lawmakers on Tuesday. “Uncertainties over the Chinese economy and geopolitical risks from North Korea are still pressuring our economy.”
“The economic situation inside and outside our country is more serious than ever,” she added. “If we do not take extraordinary measures there are concerns growth and employment will contract in the second half of the year.”
Seoul’s finance ministry cut its growth outlook for this year to 2.8 per cent from its December forecast of 3.1 per cent. It also lowered its projections for inflation from 1.5 per cent to 1.1 per cent, well below the Bank of Korea’s 2 per cent target.
The country’s economic growth fell by nearly half to 0.5 per cent in the first quarter as exports declined amid waning global trade and the commodity slump, while domestic consumption has been held back by high household debt.
The country’s exports, which account for about half the country’s $1.38tn gross domestic product, fell for a 17th consecutive month in May. The government forecasts a 4.7 per cent decline this year compared with 2015.
Seoul expects the stimulus package to boost GDP growth this year by 0.2-0.3 percentage points. It includes measures to spur domestic consumption such as tax benefits for replacing older diesel cars and rebates on purchasing home appliances.
Unrest in global financial markets has been growing from Brexit. Uncertainties over the Chinese economy and geopolitical risks from North Korea are still pressuring our economy
– Park Geun-hye, South Korea president
Kwon Young-sun, an economist at Nomura, said that while the Won10tn extra budget plan fell short of market expectations of Won15tn, the stimulus package should boost domestic consumption and the job market. However, he still expected the country’s economic growth to slow to 2.2 per cent this year from 2.6 per cent in 2015 because of flagging exports and weak business investment amid the Brexit fallout.
He expects the Bank of Korea to make two more 25 basis point interest rate cuts this year to 0.75 per cent, after cutting it to a record low of 1.25 per cent this month. The government has said it will have spent almost 60 per cent of the 2016 budget in the first half of the year.
Buoyed by the stimulus plans, South Korean shares rebounded on Tuesday with the Kospi benchmark index up 0.5 per cent and the Korean won gaining 0.8 per cent against the dollar.
June 14, 2016 11:02 pm
China rows back on state-sector reforms
Lucy Hornby in Beijing
Xi Jinping’s anti-corruption drive has decimated the management of SOEs such as Petro China
China’s Communist party is moving to tighten its grip on state-owned enterprises, reversing nearly two decades of attempts to remodel them along the lines of western corporations.
The new push, outlined in recent state media articles and party documents, comes amid a tightening of controls over civil society, the military and media as President Xi Jinping seeks to consolidate power within the party.
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By giving greater power to the party cells within every SOE, the new direction undermines efforts to establish boards of directors to push SOEs to make decisions based on market conditions, profitability and hard budget constraints.
It flies in the face of policies aired as recently as September to make SOEs more efficient and market-oriented. On Tuesday the International Monetary Fund recommended China create a task force that would help restructure debt-laden SOEs, in line with a government drive this spring to recognize and address industrial overcapacity.
“All the major decisions of the company must be studied and suggested by the party committees,” according to an article by the State-owned Assets Supervision and Administration Commission in the influential party magazine Qiushi, or Seeking Truth. “Major operational management arrangements involving macro-control, national strategy and national security must be studied and discussed by the party committees before any decision by the board of directors or company management.”
“It’s effectively returning to the pre-reform times,” says Hu Xingdou, economics professor at Beijing Institute of Technology, arguing that the move violates Chinese corporate law.
“It’s the institutionalization of non-institutional politics,” another Chinese political observer added.
China’s state sector dates from the early-1950s, when private businesses as well as any infrastructure that survived the previous decades of war were nationalized by the Communist party under Soviet tutelage.
In the 1980s and 1990s local factories, steel mills, oil refineries and power plants were spun off from powerful ministries while most consumer-oriented state groups were privatized or went bankrupt.
After reforms in the late-1990s to purge the most inefficient and debt-laden state groups, the companies that remained in “pillar industries” were reassembled into national champions. Those businesses tried to look and act like large multinational competitors, adopting corporate logos, shiny new headquarters in Beijing and listing on international and domestic stock exchanges.
The International Monetary Fund has issued its sternest warning to date on the risk from China’s rising debt burden, urged more aggressive action to curb credit growth and subject state-owned enterprises to the discipline of the market.
Mr. Xi’s more than three-year anti-corruption drive has decimated the management of those national SOEs, especially oil company Petro China. Zhou Yongkang, the now-disgraced oil and security tsar who backed Mr. Xi’s political rival Bo Xilai, had built a patronage network within the state oil and resources firms that drew on their financial and international clout.
Almost all executives at SOEs are party members. Within the Chinese system, their corporate status gives them a rank equivalent to the government officials who regulate them. The heads of the largest SOEs also enjoy senior party ranking.
China’s SOE sector officially makes money — but a 2012 study by the Unirule Institute of Economics estimated that the most powerful national, provincial and local SOEs lost money from 2001 to 2009, when their reported profits were offset by subsidies received.
More recently, the SOEs binged on debt during a Beijing-backed stimulus program in the wake of the global financial crisis.
Leftist critics argue the privatization of Chinese business stripped assets from the state and deprived workers of the cradle-to-grave security known in China as the “iron rice bowl”.
“In the past few decades, the authorities have failed to constrain the capitalists and yet they dare not allow the masses the power of supervision,” says Zhang Hongliang, economics professor at the Central University for Nationalities in Beijing.
Nonetheless, SOEs have continued to advance the state’s interest. SOEs make up local government funding gaps, keep workers on the books to reduce unemployment and project Chinese power abroad, for instance by drilling for oil in disputed waters.
Additional reporting by Gabriel Wildau and Luna Lin
China’s middle class
225m reasons for China’s leaders to worry
The Communist Party tied its fortunes to mass affluence. That may now threaten its survival
Jul 9th 2016 | From the print edition
BEFORE the late 1990s China barely had a middle class. In 2000, 5m households made between $11,500 and $43,000 a year in current dollars; today 225m do. By 2020 the ranks of the Chinese middle class may well outnumber Europeans. This stunning development has boosted growth around the world and transformed China. Paddy fields have given way to skyscrapers, bicycles to traffic jams. An inward-looking nation has grown more cosmopolitan: last year Chinese people took 120m trips abroad, a fourfold rise in a decade. A vast Chinese chattering class has sprung up on social media.
However, something is missing. In other authoritarian countries that grew rich, the new middle classes demanded political change. In South Korea student-led protests in the 1980s helped end military rule. In Taiwan in the 1990s middle-class demands for democracy led an authoritarian government to allow free elections.
Many pundits believe that China is an exception to this pattern. Plenty of Chinese cities are now as rich as South Korea and Taiwan were when they began to change. Yet, since tanks crushed protests in Tiananmen Square in 1989, China has seen no big rallies for democracy. China’s president, Xi Jinping, has shown nothing but contempt for democratic politics.
There is evidence that this approach works. The hardline Mr Xi is widely admired in China as a strongman and a fighter against corruption. Few middle-class Chinese people say they want democracy, and not just because speaking up might get them into trouble. Many look at the chaos that followed the Arab spring, and recoil. Some see Britain’s decision to leave the European Union as a sign that ordinary voters cannot be trusted to resolve complex political questions. The Chinese government may be ruthless towards its critics, but at least it lets its people make money. So long as they keep out of politics, they can say and do pretty much what they want.
Scratch the surface, however, and China’s middle class is far from content (see our special report in this issue). Its members are prosperous, but they feel insecure. They worry about who will look after them when they grow old; most couples have only one child, and the public safety-net is rudimentary. They fret that, if they fall ill, hospital bills may wipe out their wealth. If they own a home, as 80% of them do, they fear losing it; property rights in China can be overturned at the whim of a greedy official. They worry about their savings, too; banks offer derisory interest rates and alternative investments are regulated badly or not at all. No Ponzi scheme in history ensnared more investors than the one that collapsed in China in January.
Many middle-class Chinese are also angry. Plenty scoff when they are force-fed Marxism. Even more rage about corruption, which blights every industry and activity, and about nepotism, which rewards connections over talent and hard work. Nearly all fume about pollution, which clogs their lungs, shortens their lives and harms their children. They cannot help noticing that some polluters with important friends foul the air, soil and water with impunity.
And some feel frustrated. China has well over 2m non-governmental organizations. Many of those working for them are middle-class people trying to make their society better, independently of the party. Some are agitating for a cleaner environment, for fairer treatment of workers, or for an end to discrimination against women, or gay people, or migrants. None of these groups openly challenges the party’s monopoly of power, but they often object to the way it wields it.
The party understands that the middle class, which includes many of its 88m members, is the bedrock of its support. When Mr Xi came to power in 2012, he echoed America with inspiring pro-middle-class talk of a “Chinese dream”. The party gauges public opinion in an attempt to respond to expectations and relieve social pressures.
Even so, it is hard to imagine China’s problems being solved without more transparent, accountable government. Without the rule of law—which Mr Xi professes to believe in—no individual’s property or person can truly be safe. Without a more open system of government, corruption cannot systematically be detected and stamped out. And without freedom of speech, the NGOs will not bring about change.
The middle rages
After thousands of years of tumultuous history and more recent memories of the bloody Cultural Revolution of the 1960s, the Chinese often say that they have a deeply ingrained fear of chaos. But nearly half of all people living in cities are under 35. They know little about Mao-era anarchy. When they feel the government is not listening, some are willing to stand up and complain. Take the thousands of middle-class people in the southern Chinese town of Lubu, who protested on July 3rd over plans to build a waste-incinerator there. They battled with police and tried to storm government offices.
Such protests are common. There were 180,000 in 2010, according to Tsinghua University, since when there have been no good estimates. When growth was rapid, stability followed, but as the economy slows, unrest is likely to spread, especially as the party must make hard choices like shutting factories, restructuring state-owned enterprises and curbing pollution.
Ultimately the fate of middle-class protests is likely to depend on the party elite. The pro-democracy movement of 1989 took off because some of its members also favoured reform. There is no sign of another Tiananmen, but there are tensions within the leadership. Mr. Xi has made enemies with his anti-corruption purges, which seem to hit rivals harder than allies (a recent target is a former chief aide to Hu Jintao, his predecessor—see article). Mr. Xi’s colleagues are jockeying for power.
The party may fend off challenges for many years. China’s vast state-security apparatus moves quickly to crush unrest. Yet to rely on repression alone would be a mistake. China’s middle class will grow and so, too, will its demands for change. The party must start to meet those demands, or the world’s biggest middle class may yet destroy it.
China’s middle class is larger, richer and more vocal than ever before. That threatens the Communist Party, says Rosie Blau
Jul 9th 2016 | From the print edition
WHEN 13-YEAR-OLD Xiao Kang began to feel lethargic and his breathing grew wheezy last autumn, his parents assumed he was working too hard at school. Then his fellow classmates at Changzhou Foreign Languages Middle School started complaining too. The private school in a wealthy city on China’s eastern seaboard had moved to a smart new campus in September 2015, close to a site formerly occupied by three chemical factories. Tests showed the soil and water to have concentrations of pollutants tens of thousands of times the legal limits, and over 100 pupils have been diagnosed with growths on their thyroid and lymph glands. Yet the school denies responsibility, and the local authority has put pressure on parents to keep their children in attendance and stopped them from protesting. The toxic school remains open.
Xiao Kang and his family are beneficiaries of China’s rise. His forebears were farmers and more recently factory workers, but he attends the “best” school in the city (meaning it gets the highest university entrance scores). His father hopes he will become an architect or a designer and may go to study abroad one day. As with many of his generation, all the financial and emotional resources of the boy’s two parents and four grandparents are concentrated on this single child. The family is shocked that the government is so heedless of the youngster’s fate. If a school in any other country was found to be built on poisoned ground, it would immediately be shut, says the boy’s father. Why not in China?
For most of China’s modern history, its people have concentrated on building a materially comfortable existence. Since 1978 more than 700m people have been lifted out of poverty. For the past four decades almost everyone could be confident that their children’s lives would be better than their own. But the future looks less certain, particularly for the group that appears to be China’s greatest success: the middle class. Millions of middle-income Chinese families like Xiao Kang’s are well fed, well housed and well educated. They have good jobs and plenty of choices in life. But they are now confronting the dark side of China’s 35 years of dazzling growth.
This special report will lay out the desires and aspirations of this fast-expanding group. Many Chinese today are individualistic, empowered and keen to shape society around them. Through social media, they are changing China’s intellectual landscape. They are investing in new experiences of all kinds. But discontent over corruption, inequality, tainted food and a foul environment is sharp and deep; many worry that their hard-fought gains are ill-protected. For decades the Communist Party has kept control over a population that now numbers 1.4 billion by exceeding people’s expectations. Their lives have improved faster than most of them could have dreamt. Though the state has used coercion and repression, it has also relieved many pressure points. Now it is finding it increasingly hard to manage the complex and competing demands of the middle class; yet to suppress them risks holding back many of the most productive members of society.
When the Communist Party seized power in 1949, China’s bourgeoisie was tiny. In the Cultural Revolution two decades later, wealth, education and a taste for foreign culture were punished. But after housing was privatized in the 1990s, the government tied its fortunes to this rapidly expanding sector of society, encouraging it to strive for the material trappings of its rich-world peers.
For the first time in China’s history a huge middle class now sits between the ruling elite and the masses. McKinsey, a consultancy, estimates its size at around 225m households, compared with just 5m in 2000, using an annual income of 75,000-280,000 yuan ($11,500-43,000) as a yardstick. It predicts that between now and 2020 another 50m households will join its ranks. They are spread across the country, but are highly concentrated in urban areas (see map); around 80% of them own property; and they include many of the Communist Party’s 88m members.
- East, west, home’s best
- A nation of individuals
- Keeping up with the Wangs
- Crowd control
- Daring to think, daring to act
- The long march abroad
- The writing on the wall
Though China’s population as a whole is ageing, the middle class is getting younger. Nearly half of all people living in cities are under 35: they are eight times more likely than country-dwellers to be university graduates; and most are treasured and entitled only children, with no memory of a time when their country was poor. The internet has expanded their horizons, even if the government shuts out many foreign websites and quashes dissenting voices. Today’s young Chinese tend to do what they want, not what society expects—a profound and very recent shift. Most of these young people exercise their autonomy by choosing their own marriage partners or shelling out for a new car. But many have an appetite for civic engagement too: they are the foot-soldiers of China’s non-government organisations, a vast, though often politically sensitive, array of groups seeking to improve society in a variety of ways.
Pressures on the middle class are growing. Some feel that no matter how able they are, the only way they can succeed is by having the right connections. Housing has been a driver of economic growth, yet property rights are shaky, and the government encourages private investment without adequately regulating financial products. As more people go to university, returns to education are falling and graduate jobs are harder to come by. Many fret that their children may not see the progressive improvements in material well-being they themselves have enjoyed, and more youngsters are going abroad.
Political scientists have long argued that once individuals reach a certain level of affluence they become interested in non-material values, including political choice. Average income per person in China’s biggest cities is now at roughly the same level as in Taiwan and South Korea when those countries became democracies. When China opened up its markets in the 1980s, democratic demands were widely expected to follow. They did, but were savagely silenced in Tiananmen Square in 1989. Since then, a mixture of political repression, fear of chaos, pride in China’s advance and a huge rise in living standards has kept the country steady.
China’s middle classes increasingly look and behave like their rich-world peers, but they do not necessarily think like them. Intellectuals privately express a sense of despair that since becoming party chief in 2012, Xi Jinping has shuttered free expression and ramped up ideology. Yet most of the population at large seems unconcerned. If an election were held tomorrow, Mr. Xi would very probably win by a large majority—and not just because there is no viable opposition.
However, although few people in China are demanding a vote, many are becoming more and more frustrated by the lack of political accountability and transparency, even if they rarely label them as such. The party is clearly worried. In an internal document in 2013 it listed “seven things that should not be discussed”: universal values, press freedom, civil society, economic liberalism, historical mistakes made by the party, Western constitutional democracy and questioning the nature of socialism with Chinese characteristics. Recently these have often become flashpoints between the middle class and the government.
No wonder that political trust in China is declining. A series of nationwide surveys from 2003 to the present, commissioned by Anthony Saich of Harvard University, show that the wealthy think less of the government than poorer folk do. Other polls show that richer and better-educated people are more likely to support the rule of law, market allocation of resources and greater individual autonomy; the less-well-off often favour traditional values and authoritarian rule.
Wang Zhengxu of the University of Nottingham in Britain and You Yu of Xiamen University in China go further. They observe a clear decline in trust in legal institutions, the police and local government between 2002 and 2011, despite a consistently good economic performance and rising social benefits, and reckon that “the era of critical citizens” has arrived in China.
Many wondered how the party could ever survive after it brutally crushed pro-democracy demonstrators in 1989. Its solution was to make people rich very quickly. Since 1990 the blistering pace of economic growth has been the party’s most important source of legitimacy, delivering its overriding priority: stability. For a while these goals meshed well with each other and with people’s personal aspirations: under an unspoken agreement, people could amass wealth so long as they did not try to amass political power too. The recent slowdown in growth puts a question mark over that compact.
Kingdom in the middle
Looking ahead, in a host of areas from taxation to industrial overcapacity to the environment, the party must make an invidious choice: introduce unpopular reforms now and risk short-term instability, or delay reform and jeopardize the country’s future. On present form, stability is likely to win: the mighty party is terrified of its own people.
The middle class is not the only source of potential instability. In the western province of Xinjiang, repression of ethnic minorities has aggravated an incipient insurgency. Tibet is simmering too. And across China millions of workers in declining industrial sectors risk losing their livelihoods. Many migrants from rural areas working in cities feel rootless and marginalized, denied access to facilities such as health care and education. Divisions within the party elite are also a potential problem. And although dissidents have been silenced for now, they could find their voice again.
China’s Communist Party has shown extraordinary resilience to destabilizing forces and an impressive ability to recreate itself. It has ditched most of its founding principles and tied itself to the middle-class wealth-creators, expanding its membership to include the very group it once suppressed. Since the 1990s the Chinese model has proved so flexible that it appeared to break the democratic world’s monopoly on economic progress. To some it seemed to offer a credible alternative to democracy.
Now China is beginning to reach the limits of growth without reform. The complexity of middle-class demands, the rush of unintended consequences of economic growth and now a slowing economy are challenging the party’s hold. It has to find new ways to try to appease a population far more vocal and more individualistic than previous generations.
Russian lumber exports drop 10% in Q1/2016
May 31, 2016
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Lumber exports from Russia have fallen for two consecutive quarters, with the 1Q/16 shipments being almost ten percent lower than in the 3Q/15. Most of the decline has been in shipments to the CIS countries, including Uzbekistan, Azerbaijan and Tajikistan, but trade with Egypt and some European countries were also down. Of the major trading partners, it was only Japan (+33%) and China (+10%) that increased their importation of Russian lumber. However, the first quarter shipments this year were higher than they were in the 1Q/15.
According to Wood Resource Quarterly, Russian exportation of softwood lumber has trended upward for over 15 years to reach a record high of over 23 million m3 in 2015 (as compared to seven million m3 in 2000). The dramatic change in shipments has mainly been the increase in demand for lumber in the Chinese market. From 2005 to 2015, exports from Russia to China were up from less than one million m3 to almost ten million m3, a majority of which was pine lumber from sawmills in Siberia and Russia’s Far East.
Europe has become a less important market for the Russian lumber industry over the past ten years. Not only has the European slice of the total export pie diminished, but the total Russian export volumes the past few years have also been lower than in the past. In 2005, one-third of Russian lumber export volumes were destined for Europe (mainly the UK, Germany and Estonia), while only 12 percent of the total exports entered the European market in 2015.
Export prices have fallen quite substantially in US dollar terms the past two years at the same time as values in Ruble terms were close to record high levels in the 1Q/16. The past two years, export prices have declined 36% in US dollars, while they have gone up by about the same percentage in Ruble terms, according to the WRQ.
The price range for exported lumber in the 1Q/16 was quite wide with prices for higher-grade pine lumber destined for Japan being close to $250/m3, while lower-grade lumber shipped to China averaging only $92/m3.
May 31, 2016 6:03 pm
Faster growing India confirmed as most dynamic emerging market
Victor Mallet in New Delhi
India’s economic growth accelerated to 7.9 per cent in the first quarter, widening its lead over China and confirming the country’s status as the world’s fastest expanding large economy and the most dynamic emerging market.
Although doubts linger about the reliability of India’s new gross domestic product data, the Central Statistics Office said growth in the three months to the end of March rose from 7.2 per cent in the previous quarter.
Annual expansion in the 2015-16 financial year reached 7.6 per cent, up from 7.2 per cent the previous year. While China’s economy is much larger than India’s, growth there slowed to 6.7 per cent in the first quarter of 2016 — the lowest since the depths of the financial crisis seven years ago.
Ministers in the government of Narendra Modi say the prime minister has introduced important economic reforms and laid the foundations for sustainable growth, while Chandrajit Banerjee, head of the Confederation of Indian Industry, called the figures “a cause for cheer”.
The CII said the data supported its prognosis that the economy would grow at close to 8 per cent in the current financial year, “riding on the crest of strong macroeconomic fundamentals, positive business sentiment and pro-growth monetary and fiscal policies”.
However, some economists and business leaders remain sceptical about the robustness of Indian growth. They say indicators other than GDP — including bank credit and business confidence — are lacklustre, although investors are hoping for a good monsoon to boost rural consumption after two relatively poor seasons of rainfall.
Shilan Shah, India economist from Capital Economics, said: “There is some evidence that India’s economy has picked up speed recently but today’s remarkably strong GDP data are hard to believe.
India’s real economy presents a more mixed picture than the bare GDP data suggest, with some of the voters who handed Mr Modi the biggest election victory of a generation in 2014 complaining that he has failed to create jobs for the 1m young Indians who enter the workforce each month.
Resistance to change from bureaucrats, elections and a tax law have held back the PM’s ambitions
Business leaders, meanwhile, are frustrated that the governing BJP has been blocked from enacting a nationwide goods and services tax — which would turn India’s 29 states into a single market and boost GDP — because of the opposition stranglehold on the upper house of parliament.
Even some apparently beneficial reforms have had perverse effects in the short term. Ambit Capital, the Mumbai-based brokerage, said the Modi government’s drive against corruption and so-called “black money” had hobbled the property market where such money was previously laundered and had led to a decline in the use of banks.
“[This] has driven up the cost of debt capital in the economy as banks deal with the consequences of record low deposit growth,” Ambit said.
Investors are also watching to see whether the government will renew Raghuram Rajan’s mandate as central bank governor when his current term ends in September.
Mr. Rajan, a former chief economist of the International Monetary Fund, is respected at home and abroad but has been criticised by indebted tycoons for demanding the repayment of their debts to the banks and by a prominent BJP member of parliament for keeping interest rates high.
Subramanian Swamy, an Indian politician, has accused Mr. Rajan of a “willful and apparently deliberate attempt. . . to wreck the Indian economy”.
July 7, 2016 3:27 am
India considers moving financial year to spur growth
Amy Kazmin in New Delhi
The Indian government has set up a committee to assess whether the current April-to-March financial year should be changed, as Prime Minister Narendra Modi seeks new ways to accelerate economic growth and make it easier to do business.
The creation of the committee to study “the desirability and feasibility of a having new financial year” revives a question that has been debated in New Delhi’s corridors of power for decades: whether India’s current fiscal year — a legacy of British colonial rule — best serves the country’s interests.
The committee was revealed on Wednesday night and will be chaired by Shankar Acharya, the government’s former chief economic adviser. It has been asked to recommend the most suitable fiscal year for India, taking into account the government’s budget process, the agricultural cycle, private business and data and statistics.
It also has been asked to lay out detailed transition plan for any change it proposes, including the timing and a transition period, as well as any changes in tax laws and other legal amendments that might be required.
The government’s new initiative comes amid changes in India’s top economic team, with Raghuram Rajan, the respected central bank governor credited with helping to restore macroeconomic stability, announcing last month that he would return to US academia when his term ends in September.
In a cabinet reshuffle on Tuesday, Mr. Modi also unexpectedly replaced Jayant Sinha, the market-friendly deputy finance minister who had been helping to push reforms of the ailing banking sector reform, with two grass roots politicians with strong roots in rural organizing.
The idea for a new fiscal year has been promoted by Bibek Debroy, an economist and member of Mr. Modi’s new National Institution for Transforming India, who said last year that India’s financial year should ideally begin on November 1.
“It’s a very interesting idea,” said Yamini Aiyar, director of the Accountability Initiative, which tracks government planning, budgeting and decision-making in the social sector. “The flow of government money could happen at a time when a lot more activity would happen on the ground.”
Government officials say that the current April start of the financial year means that funds for infrastructure and other development works tend to reach those charged with executing projects just at the start of the monsoon season, when construction work becomes impossible.
Work picks up again when the monsoon withdraws a few months later but the result is that most government spending is bunched up at the tail-end of the financial year.
Many say, too, that changing the country’s fiscal year to bring it in sync with the calendar year would benefit the Indian subsidiaries of global companies, by making it easier to reconcile their books with those of their parent organization.
Resistance to change from bureaucrats, elections and a tax law have held back the PM’s ambitions
Others argue that revealing the national budget just months before the most critical and variable event in India’s annual economic calendar — the monsoon — makes little sense, as it is impossible to make accurate forecasts for revenue or growth.
In 1984, the then-Congress government set up a committee under L.K. Jha, a top civil servant and former Reserve Bank of India governor, to study the potential advantages and disadvantages of a fiscal year starting either January 1, April 1, July 1 or October 1.
After exhaustive study, the committee finally advised synchronizing the fiscal year to the calendar year for the best long-term benefits. But the Congress government opted not to act as it felt the change would be too complicated and disruptive.
The new committee has been asked to submit its recommendations to Mr. Modi’s government by December 31.
Of banks and bureaucrats
Proposed reforms to India’s financial system are welcome but insufficient
Jun 4th 2016 | From the print edition
BANKS are usually reliable barometers of the health of the economies they help finance. So news in recent days that India’s lenders have lost over 200 billion rupees ($3 billion) in the most recent quarter sits oddly with zippy growth in GDP of 7.9%. A revving economy may help the banks overcome their weakness. Far likelier is the opposite outcome: that the Indian economy ends up being damaged by its lenders.
Most of the trouble lies in India’s state-owned banks, a network of 27 listed but government-controlled entities that account for 70% of India’s banking system by assets (see article). Their share prices have tumbled ever since the Reserve Bank of India (RBI), the central bank and regulator, sensibly forced them to confess to past mistakes. A staggering 17% of the loans they made in a mini credit boom around 2011 have either had to be written off or are likely to be.
Corporate lending, particularly to powerful Indian conglomerates, is at the root of the problem. Some of the dodgy loans have soured because of bad luck: mining projects have been hit by slumping commodity prices. Some reflect bad judgment: loans to infrastructure developers have proved bankers to be wildly optimistic about the ability to get stuff built in bureaucratic India. And some reflect bad faith: politicians in the previous government leant shamelessly on public banks to supply money to their cronies in business.
To its credit, the government of Narendra Modi, in office since 2014, has cracked down on this kind of corruption. Along with Raghuram Rajan, governor of the RBI, it has been willing to air the financial system’s problems. A recently passed (but not yet operational) bankruptcy law will give banks power to foreclose on defaulting borrowers, many of them tycoons who have historically run rings around their bankers. The government even wants to consolidate the 27 banks into less than half that number, over the objection of trade unions.
It needs to be still bolder. The priority is to be more scrupulous about cleansing the financial system of sour loans. The option of setting up a “bad bank” to remove the dud assets from ailing lenders’ balance-sheets has been ruled out. The funds earmarked to recapitalize the banks, which now have the most threadbare equity cushions in Asia, are insufficient. Credit-rating agencies are warning that the banking miasma is a threat to India’s sovereign rating.
Muddling through is a tried-and-tested strategy when it comes to struggling banks. Europe is a past master at this approach and the result is a banking industry that has been unable to support growth. This ossification may be starting in India, where loans to industry are growing by a meagre 2% a year. By contrast, America forced recapitalizations on its banks after the 2007-08 financial crisis—a painful exercise for all sides, but one that was rewarded with a swift return to health. America is the example for India to follow. An early confirmation of a second three-year term for Mr. Rajan, who will otherwise depart in September, would send the right message.
Banks, not bureaucrats
A government that describes itself as “pro-market” should also lay out a path to the privatization of state-owned lenders. It is no coincidence that private-sector banks have experienced only a small fraction of the losses of state-backed rivals. Mr. Modi should also aim to scrap socialist-era rules that force all banks to make a fifth of their loans to support farming and that dictate where they can open branches. The government has made some welcome changes. But until it abandons its belief that a state-owned banking system is the right way to allocate credit, India’s banks will hold the economy back.
The ASEAN Economic Community: what you need to know
History in the making … a new phase of the ASEAN Economic Community begins this year
Image: REUTERS/Edgar Su
Wolfgang Lehmacher, Head of Supply Chain and Transport Industries, World Economic Forum
Tuesday 31 May 2016
Wolfgang Lehmacher Head of Supply Chain and Transport Industries, World Economic Forum
Tuesday 31 May 2016
Established in late 2015 by the Association of Southeast Asian Nations (itself founded in 1967), the AEC has been seen as a way to promote economic, political, social and cultural cooperation across the region. The idea was to move South-East Asia towards a globally competitive single market and production base, with a free flow of goods, services, labour, investments and capital across the 10 member states.
The AEC’s vision for the next nine years, laid out in the AEC Blueprint 2025, includes the following:
1. A highly integrated and cohesive economy
2. A competitive, innovative, and dynamic ASEAN
3. Enhanced connectivity and sectoral cooperation
4. A resilient, inclusive, people-oriented and people-centred region
5. A global ASEAN.
Although working within the confines of the AEC integration timetable has been a struggle for member states, their efforts have paid off: many companies have already approached ASEAN as one region. This has been helped by the ASEAN Single Window (ASW), a regional initiative to allow free movement of goods across borders. But progress is slow: the region can only proceed at the behest of national governments, and with every ASEAN country so different, a common vision can be hard to arrive at.
What has it achieved?
ASEAN is one of the success stories of modern economics. In 2014, the region was the seventh-largest economic power in the world. It was also the third-largest economy in Asia, with a combined GDP of US$2.6 trillion – higher than in India.
Between 2007 and 2014, ASEAN trade increased by a value of nearly $1 trillion. Most of that (24%) was trade within the region, followed by trade with China (14%), Europe (10%), Japan (9%) and the United States (8%). During the same period, foreign direct investment (FDI) rose from $85 billion to $136 billion, and in share to the world from 5% to 11%. With 622 million people ASEAN is the world’s third largest market, which behind China and India has the third largest labour force.
What’s the next steps for AEC?
The launch of the AEC needs to mark not the end but the beginning of another dynamic process. ASEAN has to boost intra-regional trade to reduce the vulnerability to external shocks. This requires a common regulatory framework to address infrastructure gaps and the simplification of administrative policies, regulations and rules. Only 50% of ASEAN businesses have utilized tariff reductions set out in the ASEAN’s regional free trade agreement (FTA). And although tariffs are in decline, non-tariff measures – health and safety regulations, licences and quotas – are on the rise and need to be addressed.
Provided the agreement is well managed over the next decade, the AEC could boost the region’s economies by 7.1% between now and 2025 – which is more than ASEAN’s growth of 5.4% of from 2004 to 2014. It could also generate 14 million additional jobs, according to a study by the International Labour Organization and Asian Development Bank.
How does it affect other trade deals?
The AEC is not the region’s only agreement. Three months before the kick-off of the ASEAN Community, four ASEAN countries (Brunei, Malaysia, Singapore and Vietnam) signed up to the Trans-Pacific Partnership (TPP). Five other countries (Cambodia, Indonesia, Laos, the Philippines and Thailand) are interested in joining.
The TPP is a binding agreement, connecting Asian countries to North American and Latin American economies. While countries with high export potential, such as Malaysia and Vietnam, are expected to benefit significantly from TPP, countries that did not sign the agreement risk losing out. This could have a disruptive effect on the region due to trade and investment diversion. Once all agreements are in action, Singapore and Vietnam would be the only two ASEAN countries with access to Europe (via a free trade agreement), the US (through TPP) and Asia (through the AEC and the Regional Comprehensive Economic Partnership).
But it’s not all bad news: ASEAN economies not currently included in the TPP might appreciate a supply chain that reaches beyond their own region through the ASEAN TPP signatories. However, the high standards required by the TPP pose challenges, pressuring members to enhance practices, the quality of production, rules and regulations.
Adding to the network of economic regions is China, the world’s second-largest economy and also not part of the TPP, which is in the process of forming its own economic bloc: the Regional Comprehensive Economic Partnership (RCEP). This will comprise ASEAN, Australia, China, India, Japan, South Korea and New Zealand.
What’s the future of the AEC?
The situation is not without complexities and uncertainties. Nevertheless, through the entry routes to different blocs, the AEC might eventually unleash significant unforeseen potential for the ASEAN countries – especially once the TPP and RCEP, with approximately 40% and 30% of global GDP respectively, come into force.
The World Economic Forum on ASEAN took place in Kuala Lumpur, Malaysia June 1st and 2nd.
The Panama Canal
What the expansion of Panama’s waterway means for world trade
Jun 18th 2016 | PANAMA CITY AND ROTTERDAM | From the print edition
WORKERS at a fish market in Panama City disagree on the benefits of the country’s newly widened canal. One optimistically hopes the government will have more funds to pay for air-conditioning in their broiling workplace. Another draws a finger across his throat and says, “The people will get nothing.” A third calls it “the biggest opportunity” in Panama. The last verdict is certainly true of the government’s take. The revenue it receives each year from the Panama Canal Authority (ACP) is expected to double to around $2 billion in 2021. This is a country that knows how to reap the benefits of its geography.
The ACP will be able to charge more for passage to bigger ships now that massive new locks have been built at both the Pacific and Atlantic ends of the canal and channels have been deepened and widened. The $5 billion venture will be inaugurated on June 26th when the first vessel officially sails through. The widening of the canal was initially mooted before the Second World War, but became more urgent as ever larger ships were unable to use it.
Over 960m cubic metres of cargo passed through the canal in 2015, a new record and an amount that Francisco Miguez of the ACP calls “the maximum we could do in the existing locks”. The expansion increases capacity to 1.7 billion cubic metres. The biggest container ships that could use the old canal, known as Panamaxes, can carry around 5,000 TEUs (20-foot equivalent units, or a standard shipping container). Neo-Panamaxes that will squeeze through the new locks can carry around 13,000 TEUs. Although the world’s largest ships have space for nearly 20,000 TEUs, the majority of the global fleet will now fit through the canal.
The expansion will not only fill the coffers of the ACP and the Panamanian government. It will also change how freight moves around the world. Traffic could divert from the Suez Canal. Larger vessels, which currently ply that route between Asia and America’s east coast, now have the option of going through Panama. America’s east-coast ports should get busier. In the past, many containers heading from Asia to the eastern seaboard would arrive at west-coast ports, such as Los Angeles and Long Beach, and then travel to their destinations by road or rail. Bigger ships may now sail directly to ports in the Gulf of Mexico or the east coast, though shipping times will be longer. And vessels carrying liquefied natural gas from America’s shale beds will be able to pass through the locks for the first time, heading to Asia. They are expected to account for 20% of cargo by volume by 2020.
East-coast ports are preparing for the windfall, says Mika Vehvilainen of Cargotec, a maker of cargo-handling equipment. Ports in Baltimore, Charleston, Miami, New York and Savannah are updating facilities to accommodate the Neo-Panamaxes. The Port Authority of New York and New Jersey plans to spend $2.7 billion on enlarging its terminals and shipping lanes, and a further $1.3 billion to raise a bridge by 20 metres.
Shipping lines’ costs will also fall, in part through economies of scale but also because ports are automating facilities at the same time as preparing them for Neo-Panamaxes, says Kim Fejfer, boss of APM Terminals, the ports division of Denmark’s Maersk Group, the world’s biggest shipping firm. Ports in the Gulf of Mexico are already embracing these new technologies.
Customers may not, however, benefit much from the reduction in shipping costs. Rates have already fallen over the past two years—by up to 40% for containers on some routes, and slightly less for bulk commodities such as coal. The response, industry consolidation, may mute incentives to pass savings on. Earlier this year China’s two biggest shipping lines merged to form the world’s fourth-largest operator. Firms are also building alliances to manage capacity. In January 2015 Maersk and MSC, the world’s largest shippers, launched 2M, an alliance to share space on their vessels. In May this year, six other shipping lines with a global market share of 18% launched “The Alliance”. There are rumors of a huge tie-up between several medium-sized firms.
Widening the Panama Canal may not bring cool air to sweaty fishmongers. But it should certainly give some parts of the shipping industry a boost. Whether the benefits of lower costs trickle down to consumers will depend on the internal machinations of the shipping industry
Russia posts big increase in lumber exports to China as B.C.’s shipments slide
Published on: June 14, 2016 | Last Updated: June 14, 2016 4:42 PM PDT
Russia has experienced a surge in its lumber exports to China, an important market for Canadian forest products, at the same time B.C. has seen shipments wane. Handout / Vancouver Sun
Russian lumber exports to China have surged this year and include a staggering shipment of 1.5 million cubic metres in April alone, according to a new report from industry analyst Wood Markets Group.
In total, Russian exports to China since the start of the year are up 50 per cent over the same period in 2015 at the same time B.C.’s exports to China slipped by three per cent.
The surge into China was likely an adjustment by Russian producers to make up for a short-term disruption of their sales into the Middle East and North Africa, said Wood Markets president Russell Taylor.
However, the speed at which Russian companies were able to divert shipments to China was surprising and indicative of progress they have made in developing supply chains into Asia at the same time B.C. is attempting to improve its own inroads into the region.
“Two months of data don’t make a trend, but it’s a wake-up call, I guess, to those who thought the (lumber) supply base in China was pretty stable and well managed,” Taylor said. “Well, it is not.”
In April, B.C. shipped 575,000 cubic metres worth of lumber to China, down 16 per cent from April of 2015. Over the first four months of 2016, B.C.’s shipments add up to just under 2.2 million cubic metres, a three-per-cent decline from the same period last year.
For decades, B.C.’s lumber industry was dependent on exports into the U.S. housing market until it started courting China and other Asian markets in a bid to diversify sales.
That bid started paying off, with good timing, as B.C. producers started making big increases in sales to China starting around 2008, just as the U.S. housing construction market was collapsing.
Since then, China has become B.C.’s second-biggest market for lumber and a strong counterweight to the province’s dependence on the U.S. In 2015, B.C. producers exported 6.5 million cubic metres of lumber to China, versus 15.5 million cubic metres to the U.S.
However, Canadian exports to China haven’t grown much since 2011 due in part to supply issues on the Canadian side of the trade relationship, Taylor said.
At the same time, he has observed a buildup of the timber harvesting and processing industries on both sides of the China Russia border in the Siberian hinterlands.
“We’re seeing a lot of different things from Russia and China that we weren’t seeing even a year ago,” Taylor said. “That’s how fast things are changing.”
He added this dynamic might become a bigger issue to B.C. producers if negotiations between Canada and the U.S. over a new softwood lumber trade agreement fail and the U.S. Department of Commerce imposes new duties on Canadian lumber imports.
At that point, Taylor said Canadian lumber producers looking to divert more of their exports to China, they could find themselves squeezed out.
“We’re seeing now that Russians can divert huge volumes into markets that we participate in,” Taylor said.
Asia-Pacific Council Of American Chambers To Lobby Congress On TPP
June 21, 2016
Delegations from American chambers of commerce from 28 countries in the Asia-Pacific have kicked off their annual week-long lobbying campaign, which will include a push for the ratification of the Trans-Pacific Partnership this year, according to informed sources.
The Asia-Pacific Council Of American Chambers Of Commerce will lobby Congress for TPP passage on June 23 and raise other trade issues. On the following day, APCAC will meet with “the executive branch and political experts,” according to an agenda posted on the council’s website. Sources said they expected the discussions with the executive branch to include TPP as well.
APCACC is slated to meet with think tanks and “opinion leaders” on June 21 in addition to holding a board meeting. June 24 appears to be devoted to individual chamber meetings, as per the APCAC’s schedule.
The D.C. doorknocker is an annual affair for APCAC, but the timing of this year’s trip is significant given TPP’s uncertain fate in Congress and the White House stepping up its push for a vote this year, sources said.
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Market’s vote of confidence should allow further monetary easing before year end
A month on from the UK referendum, markets in developing Asia have proven surprisingly resilient; and rather more so than their emerging market peers in other regions, as Medley Global Advisors, a macro research service owned by the FT, predicted just after the vote.
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Policymakers have been appropriately cautious over the past few weeks in the face of a series of unexpected political shocks, from Brexit to the Turkish coup attempt to a series of terror attacks in Europe. Bank Indonesia (BI), for example, opted to keep interest rates on hold last Thursday when many in the market had been expecting a cut.
But with both Malaysia and Indonesia seeing strong portfolio inflows and their currencies making significant gains against the dollar, the former’s central bank continues to ease while the latter’s can signal that rate cuts are back on the agenda.
In Malaysia, the local bond market has shaken off not only global events but also local problems, including the fact that US and Singapore regulators are taking action over fraud claims connected to 1Malaysia Development Berhad, backed by Prime Minister Najib Rezak. So far, the search for yield has trumped political risk.
This is good news for government officials, who are worried both about the prospects for exports amid downgraded global growth forecasts and domestic demand, which has been humming along but could be hurt by the political scandal surrounding the premier.
Those officials were, therefore, pleased with Bank Negara Malaysia’s rate cut earlier this month — but believe further pre-emptive support is necessary to ensure stable growth momentum.
Some of the central bank’s staff think this is unnecessary, since the economy looks on track to hit the official growth estimate of 4-4.5 per cent for this year. However, Mr. Najib’s ability to shake off his critics so far is rooted in a strong economy and in keeping unemployment down, so the government will keep pushing for further rate cuts — and is likely to prevail before the end of the year.
In Indonesia, the central bank signalled that further interest rate cuts were possible after it held steady last Thursday, but noted that market rates have been responding to the 100 basis points worth of easing already undertaken this year.
While true, lending rates have not fallen enough to spur credit demand. Second-quarter growth is expected to be only marginally higher than the first quarter’s 4.9 per cent, a reflection of continued delays to some of the government’s key infrastructure projects. This suggests July’s pause will not last for long, as slow growth prompts the government to push for at least another 50bp of further monetary easing by year end.
The recent tax amnesty bill has helped improve investor sentiment, and certainly the law’s passage last month reflects progress for President Joko Widodo’s anti-corruption campaign. But the repatriated inflows may be smaller than anticipated, as many Indonesians remain wary of possible criminal prosecution over their ill-gotten gains. This may result in some fiscal drag later this year, should the government be forced to cut operating expenses.
BI, though, has the flexibility to deliver further easing before the US Federal Reserve raises interest rates again. Assuming the first realistic window for a Fed rise is December, that would give Indonesia the chance to push through two more rate cuts, along with another 25bp-50bp reduction in the required reserve ratio for commercial banks.
Dan Bogler is a commissioning editor at Medley Global Advisors.