Monday, 18 June 2018

US-China trade war escalates, tariff list aims to hinder China’s high-tech development: expert

https://youtu.be/vK4ADxuvIgk https://youtu.be/HdADW3ZpFNs

China will impose 25 percent in tariffs on 659 US goods worth $50 billion, including soybeans, cars and seafood.

The move came as a tit-for-tat response to the tariffs announced by the Trump administration Friday morning. An expert said the US decision does not aim to tackle the trade deficit with China but to block the Chinese government's efforts in high-tech development.

Tariffs on 545 US goods worth $34 billion will take effect on July 6, involving agricultural products, car parts and seafood, according to a statement released by China's Ministry of Commerce (MOFCOM) on Saturday morning. Soybeans, which are China's biggest import from the US in value, are on the list.

Chemicals, medical equipment and energy products from the US will also be subject to 25 percent tariffs, which will be announced at a later date.

The revised list is longer and involves more categories of products than a preliminary list of 106 US goods published by the ministry in April, but the total value of the products remains at $50 billion.

A Chinese commerce expert found that aircraft were removed from China's new list, which is noteworthy.

"We need aircraft [from the US]. We have to consider the costs of the countermeasures we plan to take," Bai Ming, deputy director of the Ministry of Commerce's International Market Research Institute, said on Saturday soon after the Chinese tariffs were announced.

It's like acting as a soccer referee who will not call out the offenses and let the play continue when the game still benefits the attacking team even though an attacking player is fouled, Bai further explained.

China is one of the fastest-growing civil aviation markets in the world, and 15 to 20 percent of Boeing's aircraft deliveries are projected to end in the Chinese market over the next two decades, according to Morgan Stanley.

The US has kept changing their mind and ignited a trade war, which China does not want and will firmly oppose, a spokesperson of the MOFCOM said immediately after US took trade measures on China. "This move not only hurts bilateral interests, but also undermines the world trade order."

"China and the US still have hopes of negotiating and reaching an agreement, as both the tariffs announced by the two countries will not take into effect until next month," said Wang Jun, deputy director of the Department of Information at the China Center for International Economic Exchanges.

Wang told the Global Times that the removal of aircraft from the new list can be a signal that China still wants to talk, and also aircraft can be a valuable chip in the next round of trade negotiations.

Meanwhile, Wang said the Trump administration's newly published list is not so much a solution for the trade deficit problem with China as efforts to hinder China's technology development.

US President Donald Trump on Friday announced 25 percent tariffs on $50 billion in Chinese goods, containing industrially significant technologies related to China's "Made In China 2025" strategy.

According to a list published by the office of the US Trade Representative, the tariffs will be applied on more than 1,000 types of Chinese goods, including aircraft engine parts, bulldozers, nuclear reactors and industrial and agricultural machinery.

American industry also opposed Trump's decision.

"Imposing tariffs places the cost of China's unfair trade practices squarely on the shoulders of American consumers, manufacturers, farmers, and ranchers. This is not the right approach," US Chamber of Commerce President and CEO Thomas J. Donohue said in a statement posted on the chamber's website on Friday.

By Zhang Ye Source:Global Times

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Sunday, 17 June 2018

Looking East policy with a twist to China ?

Japan may have led Malaysia's Look East policy of yore, but the stakes are heavily tipped in China's favour now as the leader of the new world order.

PRIME Minister Tun Dr Mahathir Mohamad (pic) has announced that Malaysia is renewing, or to be more precise, upgrading the Look East policy he adopted as a foreign policy 30 years ago.

It was unveiled after he came to power in 1981 and now, as the premier for the second time, he has picked up the pieces of his past and repackaged it.

His inclination to Japan then was understandable since the country was the rising star of Asia.

Although Look East included South Korea and Taiwan, it basically meant Japan.

There were sound reasons to why Dr Mahathir wanted Malaysia to emulate some of the East Asian characteristics, both economically and ethically.

I think any Malaysian who has visited Japan can vouch for the people’s work ethic, honesty, orderliness, politeness, punctuality, cleanliness, precision, dedication to excellence, innovation and good manners.

Malaysians in Japan feel safe – they rarely get cheated despite being tourists, which is more than can be said for many countries.

Personally, Japan remains my No. 1 holiday destination. Like Dr Mahathir, I have the highest admiration for the Japanese. They are certainly exemplary, and that is indisputable.

Dr Mahathir has continued to have high regard for the Japanese and history seems to be repeating itself.

His Look East Policy shocked and confused the Malaysian foreign ministry, with many officials viewing it as undefined and vague.

The Ministry being left in the dark about the Prime Minister’s move led to it being unaware of how to implement the policy.

Fast forward to 2018. It’s likely that his new batch of ministers were also caught off guard with the revival of the Look East policy, more so when the Foreign Minister has yet to be installed.

Without doubt, Japan is an important partner to Malaysia because we have more than six decades’ ties with the country.

In 2016, Japan ranked Malaysia as its fourth-largest trading partner with bilateral trade standing at RM120bil.The strong trade and investment relations between the nations are also underpinned by the Malaysia-Japan Economic Partnership Agreement.

The latest Malaysia-Japan collaboration includes the Bukit Bintang City Centre project, which has managed to attract the leading real estate group in the Land of the Rising Sun, Mitsui Fudisan Co Ltd, to invest in what will be the mega project’s RM1.6bil retail mall.

But Dr Mahathir’s choice of his first foreign visit to Japan as PM has raised many eyebrows. Perhaps it was just the coincidental timing of the annual Nikkei Conference, which he attends without fail.

I was told that his office had informed the Chinese Embassy here, as a matter of courtesy, to avoid reading into the matter, given the long, bitter rivalry between the two nations.

Dr Mahathir was also visiting Japan after a series of announcements, calling for the review, if not cancellation or postponement, of several mega Chinese-driven projects in Malaysia.

The method of repayments with China, involving huge amounts of money, has, of course, been called into question and condemned. One critic even described the terms as “strange.”

It’s apparent the situation is delicate now, and we need to tread carefully because we are dealing with a global leader.

Powerful alliance

The PM admitted that his government was “dealing with a very powerful country. As such, matters affecting both parties will require friendly discussions”.

Former finance minister Tun Daim Zainuddin also said that Malaysia will carefully handle business contracts with China made by the previous administration.

In an interview with The Star, Daim admitted that the economic superpower is a friend to Malaysia.

“China is very important to us,” the Council of Eminent Persons spokesman said.

“We enjoy very close relations, but unfortunately, under the previous administration, a lot of China contracts are tainted, difficult to understand and the terms are one-sided,” said Daim.

There is plenty at stake here. The world has also changed, and Malaysia needs to be mindful of its diplomatic move. These are sensitive times, and to the Chinese, the issue of “face” is an important one.

Whether we like it or not, the whole world is looking towards China because this is where the fundamental building blocks of a future global digital economic model is being curated and built.

Japan’s economy, on the other hand, has been in regression over the last two decades, and open data is easily available to prove this point. Just google it.

That aside, China is Malaysia’s largest trading partner in Asean, especially after Malaysia-China bilateral transactions rose as much as 28% to RM139.2bil in 2017’s first half.

The Chinese government has been very positive with bilateral relations with Malaysia over the years, and this great foundation is what we must build on. It doesn’t matter who the Malaysian Prime Minister is now.

With Ali Baba and Tencent coming to Malaysia, SMEs – which comprise more than 95% of Malaysian business entities – exporting to China will be a huge foreign trade opportunity.

Of all the Asean nations, Malaysia has the largest pool of businessmen who speak the relevant Chinese dialects and understand the culture. But it’s not just the Malaysian Chinese businessmen who stand to benefit, but other races too.

Let’s not forget that China will be under steady stewardship for the coming decade since Xi Jinping has strengthened his position as the premier. And with Dr Mahathir rightfully announcing that Malaysia will be a neutral country, this will mean a stable foreign policy which is crucial for the rules of engagement.

The same can’t be said of Japan, though, as it has a history of turbulent domestic politics, with frequent changes in leadership.

Truth be told, China has outperformed Japan. The republic has become a model of socio-economic reform that connects, not only the past with the present, but more importantly, can rewrite the history of human development into our common future.

The One Belt, One Road initiative is the future. It was also reported that China has overtaken Japan in global patent applications filed in 2017 and is closing in on the United States, the long-standing leader, the World Intellectual Property Organization said in a report.

With 48,882 filings, up 13.4% from a year earlier, Chinese entities came closer to their American counterparts, which filed 56,624 applications. Japanese applicants ranked third with 48,208 demands for patents, up 6.6% from a year ago, the report, released Wednesday, revealed. According to the Geneva-based institution, China will likely overtake the US as the world’s largest patent applicant within three years.

“This rapid rise in Chinese use of the international patent system shows that innovators there are increasingly looking outward, seeking to spread their original ideas into new markets as the Chinese economy continues its rapid transformation,” WIPO director-general Francis Gurry said.

The overall filings in 2017 were 243,500, up 4.5% from a year earlier.

Data indicates that China and Japan were key drivers of the surge in applications.

“This is part of a larger shift in the geography of innovation, with half of all international patent applications now originating in East Asia,” Gurry reportedly said.

Two Chinese firms topped the list, led by Huawei Technologies Co with 4,024 patent applications and ZTE Corp with 2,965 submissions. Intel Corp of the United States is placed third with 2,637 filings, followed by Mitsubishi Electric Corp with 2,521.

China has also declared its ambition to equal the US in its AI capability by 2020 and to be number one in the world by 2030.

If there is a single country to take a cue from, then it can only be China. Look at its growth since 1957, 1967, 1987, 1997 and 2017, and see the strides it has made in the shortest time. Remember, China was once poor and backwards. Many Malaysian Chinese used to send money back to their families in China, especially in 1950s and 1960s, and even 1970s. But look where the country is now.

Malaysia is in pole position to take advantage since our neighbour Singapore has always been perceived to be too US-centric. It will be a waste if we let politics get in the way, as no one can dispute that China now plays a respected and vital role.

Anyone can tell that China will reshape the new world order. It is the new Middle Kingdom and is the country to look to.

And Dr Mahathir should pick up on this because at the end of his trip to Japan, the press bombarded him with the predictable and nagging question – when will he be visiting China?

By Wong Chun Wai On The Beat

Wong Chun Wai began his career as a journalist in Penang, and has served The Star for over 27 years in various capacities and roles. He is now the group's managing director/chief executive officer and formerly the group chief editor.

On The Beat made its debut on Feb 23 1997 and Chun Wai has penned the column weekly without a break, except for the occasional press holiday when the paper was not published. In May 2011, a compilation of selected articles of On The Beat was published as a book and launched in conjunction with his 50th birthday. Chun Wai also comments on current issues in The Star.

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Friday, 15 June 2018

US Federal Reserve rate rise, Malaysia and regional equity markets in the red

Fed’s big balance-sheet unwind could be coming to an early end

NEW YORK: The Federal Reserve’s balance sheet may not have that much further to shrink.

An unexpected rise in overnight interest rates is pulling forward a key debate among US central bankers over how much liquidity they should keep in the financial system. The outcome will determine the ultimate size of the balance sheet, which they are slowly winding down, with key implications for US monetary policy.

One consequence was visible on Wednesday. The Fed raised the target range for its benchmark rate by a quarter point to 1.75% to 2%, but only increased the rate it pays banks on cash held with it overnight to 1.95%. The step was designed to keep the federal funds rate from rising above the target range. Previously, the Fed set the rate of interest on reserves at the top of the target range.

Shrinking the balance sheet effectively constitutes a form of policy tightening by putting upward pressure on long-term borrowing costs, just as expanding it via bond purchases during the financial crisis made financial conditions easier. Since beginning the shrinking process in October, the Fed has trimmed its bond portfolio by around US$150bil to US$4.3 trillion, while remaining vague on how small it could become.

This reticence is partly because the Fed doesn’t know how much cash banks will want to hold at the central bank, which they need to do in order to satisfy post-crisis regulatory requirements.

Officials have said that, as they drain cash from the system by shrinking the balance sheet, a rise in the federal funds rate within their target range would be an important sign that liquidity is becoming scarce.

Now that the benchmark rate is rising, there is some skepticism. The increase appears to be mainly driven by another factor: the US Treasury ramped up issuance of short-term US government bills, which drove up yields on those and other competing assets, including in the overnight market.

“We are looking carefully at that, and the truth is, we don’t know with any precision,” Fed chairman Jerome Powell told reporters on Wednesday when asked about the increase. “Really, no one does. You can’t run experiments with one effect and not the other.”

“We’re just going to have to be watching and learning. And, frankly, we don’t have to know today,” he added.

But many also see increasingly scarce cash balances as at least a partial explanation for the upward drift of the funds rate, and as a result, several analysts are pulling forward their estimates of when the balance sheet shrinkage will end.

Mark Cabana, a Bank of America rates strategist, said in a report published June 5 that Fed officials may stop draining liquidity from the system in late 2019 or early 2020, leaving US$1 trillion of cash on bank balance sheets. That compares with an average of around US$2.1 trillion held in reserves at the Fed so far this year.

Cabana, who from 2007 to 2015 worked in the New York Fed’s markets group responsible for managing the balance sheet, even sees a risk that the unwind ends this year.

One reason why people may have underestimated bank demand for cash to meet the new rules is that Fed supervisors have been quietly telling banks they need more of it, according to William Nelson, chief economist at The Clearing House Association, a banking industry group.

The requirement, known as the Liquidity Coverage Ratio, says banks must hold a certain percentage of their assets either in the form of cash deposited at the Fed or in US Treasury securities, to ensure they have enough liquidity to deal with deposit outflows.

The Fed flooded the banking system with reserves as a byproduct of its crisis-era bond-buying programs, known as quantitative easing, to stimulate the economy. The money it paid investors to buy their bonds was deposited in banks, which the banks in turn hold as cash in reserve accounts at the Fed.

In theory, the unwind of the bond portfolio, which involves the reverse swap of assets between the Fed and investors, shouldn’t affect the total amount of Treasuries and reserves available to meet the requirement. The Fed destroys reserves by unwinding the portfolio, but releases an equivalent amount of Treasuries to the market in the process.

But if Fed supervisors are telling banks to prioritise reserves, that logic no longer applies. Nelson asked Randal Quarles, the Fed’s vice-chairman for supervision, if this was the Fed’s new policy. Quarles, who was taking part in a May 4 conference at Stanford University, said he knew that message had been communicated and is “being rethought”.

If Fed officials do opt for a bigger balance sheet and decide to continue telling banks to prioritise cash over Treasuries, it may mean lower long-term interest rates, according to Seth Carpenter, the New York-based chief US economist at UBS Securities.

“If reserves are scarce right now, and if the Fed does stop unwinding its balance sheet, the market is going to react to that, a lot,” said Carpenter, a former Fed economist. “Everyone anticipates a certain amount of extra Treasury supply coming to the market, and this would tell people, ‘Nope, it’s going to be less than you thought’.” — Bloomberg

Malaysia and regional equity markets in the red

In Malaysia, the selling streak has been ongoing for almost a month. As of June 8, the year to date outflow stands at RM3.02bil, which is still one of the lowest among its Asean peers. The FBM KLCI was down 1.79 points yesterday to 1,761.

PETALING JAYA: It was a sea of red for equity markets across the region after the Federal Reserve raised interest rates by a quarter percentage point to a range of 1.75% to 2% on Wednesday, and funds continued to move their money back to the US. This is the second time the Fed has raised interest rates this year.

In general, markets weren’t down by much, probably because the rate hike had mostly been anticipated. Furthermore for Asia, the withdrawal of funds has been taking place over the last 11 weeks, hence, the pace of selling was slowing.

The Nikkei 225 was down 0.99% to 22,738, the Hang Seng Index was down 0.93% to 30,440, the Shanghai Composite Index was down 0.08% to 3,047.34 while the Singapore Straits Times Index was down 1.05% to 3,356.73.

In Malaysia, the selling streak has been ongoing for almost a month. As of June 8, the year to date outflow stands at RM3.02bil, which is still one of the lowest among its Asean peers. The FBM KLCI was down 1.79 points yesterday to 1,761.

Meanwhile, the Fed is nine months into its plan to shrink its balance sheet which consists some US$4.5 trillion of bonds. The Fed has begun unwinding its balance sheet slowly by selling off US$10bil in assets a month. Eventually, it plans to increase sales to US$50bil per month.

With the economy of the United States showing it was strong enough to grow with higher borrowing costs, the Federal Reserve raised interest rates on Wednesday and signalled that two additional increases would be made this year.

Fed chairman Jerome H. Powell in a news conference on Wednesday said the economy had strengthened significantly since the 2008 financial crisis and was approaching a “normal” level that could allow the Fed to soon step back and play less of a hands-on role in encouraging economic activity.

Rate hikes basically mean higher borrowing costs for cars, home mortgages and credit cards over the years to come.

Wednesday’s rate increase was the second this year and the seventh since the end of the Great Recession and brings the Fed’s benchmark rate to a range of 1.75% to 2%. The last time the rate reached 2% was in late 2008, when the economy was contracting.

“With a slightly more aggressive plan to tighten monetary policy this year than had previously been projected by the Fed, it will narrow our closely watched gap between the yield rates of two-year and 10-year Treasury notes, which has recently been one of a strong predictor of recessions,” said Anthony Dass, chief economist in AmBank.

Dass expects the policy rate to normalise at 2.75% to 3%.

“Thus, we should potentially see the yield curve invert in the first half of 2019,” he said.

So what does higher interest rates mean for emerging markets?

It means a flight of capital back to the US, and many Asian countries will be forced to increase interest rates to defend their respective currencies.

Certainly, capital has been exiting emerging market economies. Data from the Institute of International Finance for May showed that emerging markets experienced a combined US$12.3bil of outflows from bonds and stocks last month.

With that sort of global capital outflow, countries such as India, Indonesia, the Philippines and Turkey, have hiked their domestic rates recently.

Data from Lipper, a unit of Thomson Reuters, shows that for the week ending June 6, US-based money market funds saw inflows of nearly US$34.9bil.

It makes sense for investors to be drawn to the US, where the economy is increasingly solid, coupled with higher yields and lower perceived risks.

Hong Kong for example is fighting an intense battle to fend off currency traders. Since April, Hong Kong has spent at least US$9bil defending its peg to the US dollar. Judging by the fact that two more rate hikes are on the way this year, more ammunition is going to be needed.

Hong Kong has the world’s largest per capita foreign exchange reserves – US$434bil more in firepower.

By right, the Hong Kong dollar should be surging. Nonetheless, the currency is sliding because of a massive “carry trade.”

Investors are borrowing cheaply in Hong Kong to buy higher-yielding assets in the US, where 10-year Treasury yields are near 3%.

From a contrarian’s perspective, global funds are now massively under-weighted Asia.

With Asian markets currently trading at 12.3 times forward price earnings ratio, this is a reasonable valuation at this matured stage of the market.

By Tee Lin Say StarBiz

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