AIIB attracts nations from East, West, its fate connects to Chinese economy

AIIB’s fate connects to Chinese economy

The Asian Infrastructure Investment Bank (AIIB) officially opened for business on Saturday. In the past two years or so, the bank has been a subject of heated discussion as a symbol of change in the world order. However, its significance hinges on a number of factors in future, rather than the founding itself.

There are many advantages in terms of the bank's operation and management. Infrastructure construction in Asia, which the AIIB is centered on, is virgin territory that has huge potential to be tapped. There is ample scope for the bank to find its role.

With 57 countries as founding members, the starting point of the bank is high. Besides, China as the initiator has abundant capabilities of infrastructure construction, and its experience is applicable to developing countries.

Nonetheless, disadvantages also exist, among which the biggest is the adverse attitude of the US over the bank. It will be more costly for the AIIB to overcome problems than for the World Bank and the Asian Development Bank at critical moments. Therefore, the AIIB must be operated with superb management, leaving no room for any opponents.

The further development of the Chinese economy will provide indispensible strategic support for the AIIB to increase its heft.

The reason why the AIIB could be founded, despite obstructions from the US and Japan, is that the growth of the Chinese economy has shored up the confidence of the participants.

Since its founding, the AIIB has been connecting its destiny to the Chinese economy. The confidence the world has in the Chinese economy will be projected onto the AIIB.

The AIIB touches a nerve of major global powers of the US and Japan. Its inclusive nature enables its smooth start. China has its own interests, but it cannot put its interests above those of the other countries. We should avoid a zero-sum situation, but integrate Chinese interests with others', and make achieving a win-win result a goal rather than a slogan.

With the changing times, China can't expand its power through coercion. It must integrate into the world system and develop in a way that is acceptable to the majority of the world's states.

The AIIB represents China's taking of global responsibilities as a big power. The US, as the world No.1, can capriciously vandalize the rules it makes at some critical moments. But China cannot do so. It has to be well-disciplined in serving the world so as to be recognized and accepted as a rising power in the world. - Global Times

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Chinese economy expands 6.9% in 2015, slowest growth in 25 years

Video: http://t.cn/R4QD2R0 China’s economy posted a 6.9 percent GDP growth in 2015, which is within people’s expectations. Faced with susp...

Chinese economy expands 6.9% in 2015, slowest growth in 25 years

Video: http://t.cn/R4QD2R0China’s economy posted a 6.9 percent GDP growth in 2015, which is within people’s expectations. Faced with suspicions, the National Bureau of Statistics (NBS) emphasized that the figure – 6.9 percent – is real.

On the one hand, with an increasing number of “struggling” companies, the economic downturn has become a heated subject of public opinion. On the other hand, other fields, for instance, tourism, railways and online shopping, are seeing robust growth. So, taken together with the affirmation by the NBS, we can have confidence in the accuracy of the figure.

It is safe to say that people still have much confidence in the economy. Despite an economic downturn, people’s willingness to spend is witnessing an upward trend. Consumption is contributing more to GDP growth. Compared with some pessimistic comments, an increase in consumption can better reflect public confidence. In addition, citizens’ plans for their families and their futures are positive as a whole. Admittedly, the loss of confidence in the stock market has exerted negative effects. Society has varying degrees of confidence in the economy.

The 6.9-percent increase in GDP will not strike a blow to the confidence of Chinese society. Even if the figure were slightly lower, there is still a lot to sustain people’s confidence. In fact, different from Western society, politics carries some weight in how confident Chinese people feel.

There are a number of factors contributing to the public’s confidence in the economy. First of all, people believe in the government. As long as the government’s determination and confidence to develop the economy can be seen, the public will be reassured. The government has made many commitments regarding economic development and people's living standards. It is becoming increasingly honest about the difficulties as well. The government’s backbone is not weakening. Yet, there is increasing dissatisfaction with the laziness of some officials. This new phenomenon is worth paying attention to.

The Chinese people are confident about the country’s market potentials. They know that the country lags behind in many aspects and that great efforts are needed. People tend to believe that it will be an arduous task to narrow the gap of people’s livelihood between China and developed countries. Despite the long road ahead, few people believe the process will break down.

Since the Communist Party of China launched the anti-graft drive and pushed forward reforms, many people expected the country to make greater achievements. But China is in a full-fledged transitional period. Its 1.4 billion population is to China’s advantage.

Complaints can be heard in China, and many concerns are well grounded. Some people try to seek a sense of security by applying for a foreign green card and transferring their assets overseas. But China’s status as the world’s biggest emerging market and potential for opportunities is as significant as ever.

China has plenty of tasks. Many cities still lag behind in basic infrastructure. Many roads need to be rebuilt. The key for change is economic growth. In addition, medical care cannot meet public demand. Many parents have sent their children abroad due to the low quality of education. The Chinese people’s concept of consumption is changing fundamentally and people long for improved living standards. These will all serve as a robust foundation for sustainable economic growth.

There should not be any fear that the 6.9 percent growth will upset Chinese society. The Chinese people will remain confident. The government needs to achieve concrete results and need not rush to adjust its policies. Many problems will be solved as long as China is on the right path. - Global Times

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Era of financial vulnerability

  The stock market crash in China and around the world shows how developing countries like Malaysia are increasingly vulnerable to financial...

Era of financial vulnerability

 The stock market crash in China and around the world shows how developing countries like Malaysia are increasingly vulnerable to financial shocks, including outflows of foreign funds


THE year 2016 started with a big bang, but the kind we would rather avoid. The Chinese stock market plunged for several days, causing panic around the world, with the markets also falling in many countries, East and West.

This is another wake-up call to alert us that finance has become inter-connected, indeed much too inter-connected, globally.

Many developing countries like Malaysia have been drawn into the web of the global financial system in manifold ways, and that has made them more vulnerable to adverse developments and shocks.

We are now in an era of financial vulnerability, which easily turns into vulnerability in the real economy of GDP growth, trade and jobs.

An immediate issue is whether the rout in China’s stock market will affect its real economy, in which case there will be serious effects.

One view is that it would contribute to a “hard landing” as the Chinese economy already has many problems.

Another view, more realistic in my view, is that the spillover to the real economy will not be significant. A paper by Brookings-Tsing­hua Centre shows that the inter-connection between the stock market and the economy is limited in China.

In the United States, half the population own stocks and corporations rely heavily on funds raised in the stock market, but in China less than 7% of urban Chinese invest in the stock market and corporations rely much less than American companies on the stock market to raise funds.

Nevertheless, China’s economy is expected to slow down this year. Other factors also add to a pessimistic outlook for developing countries.

These include continuing weak conditions in Europe and Japan, that may offset the US’ more steady recovery; the expected interest rate rises in the US, which will draw portfolio funds out from developing countries; and weakening of commodity prices.

Already many developing countries are suffering on the trade front. In Malaysia, exports in November 2015 grew only 6.3% from a year earlier. More worrisome, Malaysia’s industrial production, also in November, grew by only 1.8% from a year earlier.

Other Asian countries fared worse. Korea’s exports for the whole of 2015 fell 8%. Taiwan’s exports are also expected to have fallen 10% last year and Singapore’s manufacturing sector declined 6% in the most recent quarter.

China’s exports in December fell 1.4% from a year earlier but imports fell more, by 7.6%, which is bad news for other countries as China has less demand for their exports.

But of equal if not more concern is how, in the financial area, emerging economies like Malaysia have in new ways become more dependent and vulnerable in recent years.

Foreign presence in these countries’ domestic credit, bond, equity and property markets has reached unprecedented high levels, and thus new channels have emerged for the transmission of financial shocks from global boom-bust cycles, according to a South Centre paper by its chief economist Yilmaz Akyuz. (http://www.southcentre.int/research-paper-60-january-2015/)

During a boom, there is a rush by yield-seeing investors to place their global funds in emerging economies. But when perceptions or conditions change, the same funds can exit quickly, often leaving acute problems and crises in their wake.

Malaysia is among the vulnerable countries. Firstly, the fall in the prices of oil (on Jan 12 reaching below US$30 a barrel) and other commodities has affected export earnings.

The balance-of payments current account used to enjoy a huge surplus, but this has been shrinking.

In 2010–13 there were very high inflows of foreign funds into Malay­sia, averaging over 10% of GDP. But by 2015 there was a sharp reversal, with foreign funds flowing out from the equity and bond markets.

Malaysia is vulnerable to large outflows as foreigners in recent years have built up a strong presence in the domestic bond and equity markets. Foreign holdings of bonds (public and private) peaked at RM257bil in July 2014. And the share of foreign holdings in the stock market was 23.5% at the end of 2014, indicating a foreign-holding value then of around RM400bil.

Many billions of ringgit of foreign-owned bond and equity funds have been leaving the country in the past couple of years, especially 2015.

Due partly to this, Malaysia’s foreign reserves have fallen from US$130 bil in September 2014 to US$95.3bil at end-December 2015.

Although the present reserves are adequate to cover imports and short-term external debt, they are also vulnerable to further outflows of foreign-owned funds in equity and bonds.

Debt held by Malaysians is also high compared to other countries, according to another paper by Akyuz. Debt by households was estimated at 86% of GDP in first quarter 2015 by Merrill Lynch. Public debt is near to 55% of GDP (compared to an average 40% for developing countries covered in a McKinsey report). And corporate debt is estimated to be about 90–96% of GDP.

The overall local debt is thus very high, probably exceeding 200% of GDP, one of the highest ratios among developing countries. Thus, the country has financial vulnerabilities at both the external and domestic fronts.

What the country faces is part of a trend among emerging economies that is likely to last for some time. Many other countries are in far worse shape than Malaysia.

In an article last week, Martin Wolf of the Financial Times highlighted the important shift in perception by investors of the prospects for emerging economies, that has resulted in capital flowing out.

Global investors withdrew US$52bil from emerging market equity and bond funds in the third quarter of 2015, the largest quarterly outflow on record. The most important reason for this is the realisation of the deteriorating performance of the emerging economies, according to Wolf.

Thus, developing countries are in for a tough time this year. Of course the vulnerabilities may not translate into actual adverse effects, if global or local conditions improve. But it is better to prepare for the probable difficulties ahead.

By Martin Khor Global Trends

Martin Khor (director@southcen tre.org) is executive director of the South Centre. The views expressed here are entirely his own.