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.

China, economy tests for Taiwan presidential winner Tsai

Visitors look at souvenir plates bearing images of Chinese President Xi Jinping and his wife Peng Liyuan on display for sale at a shop near Tiananmen Square in Beijing, Sunday, Jan. 17, 2016. Tsai Ying-wen's enjoys a broad mandate from her commanding victory in Taiwan's presidential election and her independence-leaning party's new legislative majority, but managing the island's delicate relations with China will be tricky. Already, Beijing has responded with statements following her Saturday night victory warning that it will not budge on its bottom line that Taiwan's leader must agree that the communist mainland and self-governing island democracy are part of a single Chinese nation. (AP Photo/Andy Wong)

TAIPEI, Taiwan — Taiwan’s presidential election victor Tsai Ying-wen will enjoy a broad mandate from her commanding victory and her independence-leaning party’s new legislative majority, but managing the island’s delicate relations with China will be tricky.

Already, Beijing warned following her Saturday night victory that it will not budge on its bottom line that Taiwan’s leader must agree that the communist mainland and self-governing island democracy are part of a single Chinese nation. The sides could be in for a lengthy wait as China assesses whether it feels it can trust Tsai.

“To handle cross-Taiwan Strait relations after Tsai’s election will be difficult, not just for Taiwan but also for mainland China,” said Huang Jing, a China expert at Singapore National University’s Lee Kuan Yew School of Public Policy.

Tsai, who will be Taiwan’s first female president, won by 56 percent of the vote to 31 percent for her closest rival Eric Chu of the China-friendly Nationalist Party, which has held the presidency for the last eight years. Her Democratic Progressive Party won 68 of 113 parliamentary seats, giving it its first majority in the assembly long-dominated by the Nationalists.

“I wasn’t surprised a bit by the outcome. The Nationalists had to go. Now Tsai just needs to focus on the economy so I don’t expect she’ll do anything to rile up China,” Taipei tour bus driver Tan Kuang-jung said as a constant drizzle fell over the capital Sunday.

The reasons for the massive win were many.

Outgoing President Ma Ying-jeou had been growing increasingly unpopular among Taiwan’s 23 million people, largely due to perceptions that his push for closer economic ties with China was benefiting just a few and the futures of young Taiwanese who have seen wages stagnate and good full-time jobs harder to find.

Fearful of their original candidate’s poor reception among voters, the Nationalists dumped her in favor of Chu, but even he proved unable to raise their prospects. He resigned as party chairman immediately after Saturday’s defeat.

Newly politicized young people had coalesced in opposing yet another trade agreement with China and are believed to have voted heavily for the DPP.

A further backlash against the party’s pro-China stance was prompted by a viral video of 16-year-old Taiwanese entertainer Chou Tzu-yu bowing in apology for waiving the Taiwanese flag on television. Her apology was triggered by her South Korean management company’s fears that China would cancel appearances and endorsement deals.

“What happened surrounding Chou Tzu-yu, that whole controversy, made it almost a given (Tsai) would get over the 50 percent mark,” said Raymond Wu, managing director of Taipei-based political risk consultancy e-telligence.

“It’s an indication that someone would continue to bully Taiwan, at all different levels, even a 16-year-old who’s trying to make a name for herself in the entertainment field. This is something most Taiwanese find unacceptable,” Chou said.

The size of the win could also put additional pressure on Tsai and the DPP, said Larry Diamond, a senior fellow at the Hoover Institution who closely follows Taiwanese politics.

“When you do as well, as decisively as the DPP has done, there are no excuses” for failure, Diamond said.

While China had largely refrained on commenting about the election beforehand, its Taiwan Affairs Office responded swiftly to the result with a statement reiterating that it would deal only with those who agree that the “two sides of the strait belong to one China.”

That was followed by another statement from the Foreign Ministry stating that “China’s sovereignty and territorial integrity brook no division. The result of the election in Taiwan will not change the basic fact and the consensus of the international community.”

“On such a major issue as safeguarding state sovereignty and territorial integrity, the Chinese government has rock-solid determination and never tolerates any separatist activities aiming at ‘Taiwan independence,’” said the statement, quoting ministry spokesman Hong Lei.

Taiwan was a Japanese colony from 1895 to 1945, and split from the mainland amid the Chinese civil war in 1949, when leader Chiang Kai-shek moved his Nationalist government to the island.

Reflecting public opinion on Taiwan and mindful of U.S. and other countries’ concerns about cross-strait tensions, Tsai has pledged to maintain the status-quo of de-facto independence without taking steps that might provoke China. In her remarks Saturday, she referred to Taiwan by its formal name, the Republic of China.

However, unlike Ma, she has refused to endorse Beijing’s “one China principle” — although she hasn’t publicly repudiated it either — and told supporters Saturday night that she would work to strengthen Taiwan’s status abroad.

Deprived of formal diplomatic relations with the world’s major nations, Taiwan relies on its stable of 22 allies, mostly small, poor states in the Pacific, Africa and Central America and the Caribbean. Chinese pressure has barred Taiwan from the United Nations and Beijing strictly limits the island’s participation in other groups or requires it to participate only under the name Chinese Taipei.

Depending on how it interprets Tsai’s actions, Beijing could ratchet up the pressure by luring away Taiwan’s remaining diplomatic allies or further shutting it out of international organizations. It could also seek to exact economic costs, possibly by limiting Chinese tourism to the island or reducing Taiwanese imports.

Far less likely is that it would resort to military intimidation despite its threat to invade if Taiwan opts for a formal declaration of independence. Although such tough talk plays well with the Chinese public, past attempts have backfired by generating even more support for pro-independence politicians.

Most probably, Beijing will observe what Tsai does and says before she takes office in May.

“I think the tough will get tougher and the soft will get softer. Certainly they’re going to see from now till inauguration what Tsai says and who she puts in key offices,” Wu said. - AP

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Taiwan chooses Democratic Progressive Party Chairwoman, Tsai Ing-wen, not independence

Democratic Progressive Party (DPP) Chairman Tsai Ing-wen won by a landslide in Taiwan’s “presidential” elections on Saturday, and the DPP...

Taiwan chooses Democratic Progressive Party Chairwoman, Tsai Ing-wen, not independence

Democratic Progressive Party (DPP) Chairman Tsai Ing-wen won by a landslide in Taiwan’s “presidential” elections on Saturday, and the DPP she leads captured the majority of seats in the Legislative Yuan, with the Kuomintang once again becoming an opposition party.

Since KMT’s defeat in Taiwan’s nine-in-one local elections in 2014, it’s expected that the DPP will assume power again. To win the election, Tsai made prudent remarks and took an ambiguous attitude toward cross-Straits policies in the past year. She kept stressing maintaining the status quo of cross-Straits ties.

By circumventing the sensitive cross-Straits issue, Tsai had clearly drawn a lesson from her defeat four years ago. When “Taiwan’s path” was discussed in the “presidential” campaign this time around, the focus was not whether the island should seek “independence,” but how to boost the island's economy, address social inequality, and guarantee the future of younger generations.

The vote is not a gauge of cross-Straits relations. The DPP’s victory doesn’t mean the majority of Taiwanese support Taiwan independence. Tsai and her party are aware of this, so in her victory speech, she was evasive about the current issues between Taiwan and the mainland, only scrupulously stating that she will be engaged in a “consistent, predictable and sustainable cross-Straits relations.”

The past eight years have seen greater progress for cross-Straits relations. Such progress, which is hard to be reversed, will provide some restraint on the DPP’s mainland policy. Besides, the mainland has an asymmetrical edge over Taiwan in political, military and economic terms. The mainland firmly holds the initiative in cross-Straits relations, making Taiwan independence a completely impossible scenario.

The KMT’s eight-year administration has made contributions to the current stage of cross-Straits relations, a performance that merits recognition both in Taiwan and the mainland. After this power shift, the DPP should assume the responsibility of serving the best interests of Taiwanese society, avoiding creating trouble for cross-Straits relations like it did as an opposition party. If the DPP abandons the progress made by its predecessor in the past eight years, it will jeopardize its future as a ruling party. The lesson of Chen Shui-bian should be a long-lasting lesson.

The mainland should be more prudent toward the power shift in Taiwan. No matter which party takes power, the mainland should maintain a policy calling for peaceful development between the mainland and Taiwan, while it cannot waver in opposing any form of pro-independence movement in Taiwan.

Tsai hasn’t publicly accepted the “1992 consensus,” which casts a cloud over cross-Straits official communications after she assumes office. The mainland’s Taiwan Affairs Office on Saturday said that Beijing upholds the 1992 consensus and hasn’t shown any change toward Taiwan.

Regardless of its relationship with the mainland, it’s impossible for the DPP to reverse Taiwan’s stagnant economy. No matter what kind of political philosophy Tsai espouses, she has to face up to the reality. She should know she has limited options.

Tsai should keep in mind that if she revisits Chen’s dangerous path to cross the red line of cross-Straits relations, she will meet a dead end. We hope Tsai can lead the DPP out of the hallucinations of Taiwan independence, and contribute to the peaceful and common development between Taiwan and the mainland. - - Global Times

Tsai should prove sincerity about peace across Taiwan Straits

Now that the Democratic Progressive Party leader Tsai Ing-wen has won Taiwan's "presidential" election, she should waste no time to prove that she is sincere in maintaining peace and stability across the Taiwan Straits. She should work to make people in Taiwan feel safe, instead of creating anxieties with her ambiguous mainland policy.

Tsai has played the card of "maintaining the status quo" during her election campaigns. But she has never made it clear how she would approach the 1992 Consensus.

As the cornerstone of cross-Straits relations, the consensus insists there is only one China, of which both the mainland and Taiwan are a part, though the meaning of "one China" is open to interpretation by both sides.

For a Taiwan leader, whether to accept the consensus or not decides which direction he or she would lead the island in: peace and stability, or conflicts and tension. The issue bears no ambiguity.

Thanks to the consensus, cross-Straits relations have developed smoothly over the past eight years. A slew of agreements have been signed to boost trade and tourism, bringing benefits to people on both sides. The two sides' top leaders met last November, for the first time since 1949.

All this has not come by easily, and should not be taken for granted. It requires efforts from both sides to make sure the momentum will not be interrupted by a leadership change, or derailed by any political missteps and misjudgment. After all, peaceful development of cross-Straits relations conforms to the interests of both Taiwan and the mainland.

Tsai has reportedly expressed wishes that both sides could work together for peace across the Taiwan Straits. If she means what she says, and accepts the 1992 Consensus, prospects for cross-Straits relations will remain promising.

The mainland has kept the door to dialogue open with the DPP so long as it accepts that both the mainland and Taiwan belong to one China. The mainland has also taken a flexible approach when handling relations with the DPP. The channel of communication remains unblocked.

Many differences remain between the mainland and Taiwan, not only in lifestyle and social system, but also in how and when the two sides should be reunited. But under no circumstance should the differences be used as excuses to seek Taiwan independence, which means war, as the mainland's Anti-Secession Law suggests. The bottom line shall never be tested.

Any attempt to steer the island closer to independence will be a fool's errand. - China Daily