Chinese Mainland
China’s New Silk Road Initiative
By IAI Working Papers
The European Council has mandated the High Representative of the Union for Foreign Affairs and Security Policy, Federica Mogherini, to draft a Global Strategy by June 2016. Given Europe’s status as a global power, such a strategy must respond to Europe’s own challenges as well as to the new grand strategies of other major players in world politics, like China. To better understand the central tenets of the Chinese leadership’s strategic thinking, two keywords are most important – the “Four Comprehensives” and the “One Belt and One Road” (OBOR). As an initiative mainly focusing on promoting Eurasian integration and reshaping Chinese geoeconomic advantages, the OBOR is highly consequential to China’s interactions with Europe and the rest of the world at large in the decades to come. How to take advantage of the OBOR, create new EU-China synergies, and tackle relevant challenges are questions the EU leaders should be attentive to.
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One Belt One Road: Insights for Finland
Prepared for Tekes by Enright, Scott & Associates
“One Belt One Road” is a Chinese initiative to connect more than 60 countries (64 at present) with physical, commercial, cultural, and other links. These countries have a combined population on the order of 4.4 billion. The “One Belt” refers to the “Silk Road Economic Belt,” a recreation of the old land-based Silk Road trade routes from China through Central Asia and on to the Middle East and Europe. This is also called the “Modern Silk Road.”……
Finally, we stress once again that Finland and Finnish companies should not be passive. China’s leaders have not fully defined the OBOR initiative or the full range of OBOR projects. Many countries and companies will wait until there is more definition before engaging. The trouble is that by the time projects are defined, they are often allocated. The best way to obtain business associated with the OBOR initiative is to help define the projects. According to Chinese officials, the OBOR initiative is supposed to be open and participative. Finland and Finnish companies should try to identify projects that they are well suited for and that are consistent with the OBOR initiative to present to Chinese counterparts.
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Kazakhstan Welcomes China’s Belt and Road Initiative
Rafis Abazov (RA), visiting professor at Al Farabi Kazakh National University in Kazakhstan, tells HKTDC Deputy Research Director Pansy Yau (PY) Chinese investments in the region are both timely and welcome.
Pansy Yau (PY): China proposed building the Silk Road Economic Belt with a view to boosting economic cooperation with Kazakhstan and other Central Asian countries. But traditionally Russia, Turkey and countries in the west have much stronger economic ties and influence in the region than China. Will the Belt and Road Initiative change the landscape of regional cooperation in Central Asia?
Rafis Abazov (RA): Everything is changing in light of the current international political and economic situation. For example, just a couple of years ago, the west (effectively Russia, Eastern Europe and Western Europe, for Kazakhstan) was the main economic and political partner of the region, accounting up to 60-70% of the international trade for Central Asia. However, today, Central Asia including Kazakhstan is more involved in trade and collaboration with China and East Asia and there is small but steady decline in trade with Russia, Turkey and Western Europe.
A couple of factors have contributed to the significant changes in recent years. These are (1) the collapse of oil, energy and commodity prices in the international market, and (2) the trouble between Russia and the western European partners, which has affected all relationships between the west and the east.
In view of these economic and political difficulties, the One Belt One Road Initiative from China is very timely. This is because it offers new opportunities for trade and investment. For example, because of economic difficulties, Russia is now not readily able to invest in Kazakhstan. Western Europe and the US are also facing all kinds of challenges and not investing much. So, at this time, China being willing to come and invest in different projects is very welcome.
Pansy Yau (PY): How do you think the Eurasian integration project (the Eurasian Economic Union) and China’s Belt and Road Initiative (BRI) will complement each other to build closer economic relations in the region?
Rafis Abazov (RA): As mentioned, some will think that Kazakhstan and Central Asia will be more involved with Eastern Europe, but others will think that China will offer more new opportunities to Central Asia under the BRI. Probably both are correct.
Though we are still a close partner to Russia and Eastern Europe, the BRI program will open a door for Kazakhstan to the east. I believe Kazakhstan businesses and the Kazakhstan government are now more open in dealing with Chinese companies and collaborating with the Chinese. Five to ten years ago, when Kazakhstan still had a lot of investment offers from different players such as Russia, Western Europe and the US, China was only one of many players. Very often Kazakhstan would choose western players as its partners. For example, according to official statistics by www.invest.gov.kz, Kazakhstan received about US$28.8 billion of the FDIs in 2012, however, the investments decline almost by half in 2015. Now Kazakhstan has less opportunities and offers, so they would act differently. They are more open in dealing with the eastern partner, i.e. with China.
Pansy Yau (PY): What benefits can the BRI bring to the development of Kazakhstan and what are the likely opportunities for investment?
Rafis Abazov (RA): The Belt and Road Initiative is viewed as an opportunity to build a bridge between the east and the west, where Kazakhstan and Central Asia have been playing this role as a bridge for many centuries on the Silk Road.
A route from China will go to Europe via Central Asia, via Kazakhstan. It requires a lot of investment in infrastructure. According to the UN data, the quality of infrastructure of Kazakhstan is not very good, its highways rank 170th in the world, its seaports rank 158th in the world. From another statistical source, only 5% of the highways in Kazakhstan are class A according to international standards, while 17% of its roads are below class 3 standard. All these indicators suggest that Kazakhstan, as a developing country, needs a lot of investment into its infrastructure, including roads, railways, airports and so forth, to bring them up to international standard. Some experts estimate that the country needs up to US$100 billion of investments into infrastructure in the next few years and it needs expertise to manage these large inflow of projects.
Surrounding this transportation infrastructure development, there are other opportunities. Nowadays people talk about the concept of dry ports – logistic centres on the land that handle goods and containers carried by trucks and railways. Kazakhstan has started building at least five dry ports, and of our neighbours Kyrgyzstan has indicated it needs to build two, Uzbekistan two or three, and Tajikistan five. This means they need the entire infrastructure including construction of terminals, storage space and other facilities to handle the goods.
And of course when we are talking about international travel, with more business people coming to Kazakhstan, there is also a need for construction of office buildings of international standard to meet the demand. So Kazakhstan is emerging and developing and it has a whole list of things to develop to international standard.
Pansy Yau (PY): Will there be opportunities in services and manufacturing? What plans does Kazakhstan have for its future development?
Rafis Abazov (RA): The Kazakhstan government introduced several ambitious programs including Kazakhstan Strategy 2050 and Nurly Zhol (Bright Road) in order to address economic and social challenges of becoming a member of the club of 30 most prosperous countries. I would like to highlight three areas for international collaboration.
Firstly its ambition to build a new “Hong Kong” in Central Asia as for almost five years now, has been striving to build Almaty as a financial centre for central Europe and Eurasia. Our government has always looked up to the regional roles of London and Hong Kong to build a strong banking sector to handle all kinds of financial operations and transactions. While more than a dozen of the banks in Kazakhstan are now privatised, they still need to work hard to ensure these institutions can function well. They want their banks to be well designed, well developed, well capitalised and to work according to international standards. So in the financial and banking sector, they will need a lot of collaboration with international players who have experience and expertise.
Secondly, for the manufacturing sector, the Kazakhstan government is not very happy with just exporting commodities such as oil, gas, metal and coal to the international market. They would like to process at least some of these commodities in their own territory to have more added value. They would like to export more in the forms of manufactured or semi-manufactured goods. Therefore they need to build industrial and manufacturing infrastructure. The current infrastructure was built in the 20th century. They were good before, but most technologies have become outdated. To modernise the manufacturing sector, the government needs not just to renovate what they had from the past, but basically to build many things from scratch.
Thirdly, Kazakhstan is a huge country with a lot of land for agricultural purposes. Actually the government is willing to develop agriculture as a third major sector besides finance and manufacturing. They would like to produce agricultural products according to international standards and international demand. Right now, organic fruits, organic meat and organic vegetables are very fashionable and command a premium. The Kazakh government would like to tap into this particular market. But again, Kazakhstan had a strong agricultural sector by 1991. However, agricultural production today has different requirements, different standards and different market demands, so Kazakhstan need to regenerate the whole sector with better planning in farming, introducing knowledge-intensive technologies into agricultural sector and into food-processing to meet demand in the international market and domestically. China is just next door – so, if China decides to import more organic food such as milk, eggs, meat, etc., there would be much greater demand for produce from Kazakhstan that has no contamination, no chemicals and no genetic modification.
Pansy Yau (PY): For foreign investors who are not familiar with Kazakhstan, what are the major challenges in doing business?
Rafis Abazov (RA): There are three main areas that investors have to be careful about.
(1) Regulation
The Kazakh government is quite strict in enforcing regulation now. This is because in the 90s, when Kazakhstan was a newly independent country, there were no proper rules and requirements for a lot of investment projects. As a result, they missed out a lot of things like regulation of industrial pollution, enforcement in project development and financial arrangement, etc. Now, the regulatory system and requirements are quite established and the government will seriously enforce the regulations.
(2) Perception
Sometimes people would think Kazakhstan is a developed country as it is among the 50 most developed countries in the world, but sometimes they would think Kazakhstan is underdeveloped, with only desert and camels. Both are not true: Kazakhstan is not a very well developed economy, but at the same time it is not a very underdeveloped country. It is somewhere in the middle. Kazakhstan is now a lower middle income country. It means we have to understand the development level, and study the market, study the demand, study the requirements and initiatives from the government to decide where would be the opportunities and what kind of investment will get support from the government.
(3) Business culture
It is important to understand the business culture in Kazakhstan, which is very different from others. For example, unlike the Germans, who are very on time and disciplined, Kazakh people will have a different concept of time and a different concept of business relations which moves in much slower speed compare to many other countries. This is not because they are bad – it’s just due to having a different culture. Therefore it is important to understand how they think and how they act to build the relationship and built the expectation.
Pansy Yau (PY): So far we have been talking about foreign investors going into Kazakhstan. How about Kazakh companies investing in other countries? Hong Kong is an international financial centre. Will Kazakh businesses use Hong Kong as a platform to raise funds and seek development opportunities? How would you compare Hong Kong and London?
Rafis Abazov (RA): During the good days when oil and other commodity prices were high, Kazakh banks and sovereign funds invested a lot in different international projects. They invested in Russian businesses, Ukrainian businesses, Georgian businesses, etc. They invested in Eastern Europe and all the way to Africa, but they did not pay much attention to Asia. Basically, Kazakh investors were not very aware of Asia. Hong Kong can visit Kazakhstan to promote its advantages, such as its position as a door to Asia and Southeast Asia, its abilities and expertise to help Kazakh banks, sovereign funds and pension funds do better, and the possibilities for the financial sector to explore new opportunities and directions for investment. For example, I have heard that pension funds in Kazakhstan have for several years got an annual return on investment just above zero in real terms. So if any Hong Kong companies can offer them expertise to do better, there would be opportunities. The sovereign fund is also adopting this strategy: they would look for better investment directions with higher returns. As of today, of course, the sovereign funds of Kazakhstan are not the largest in the world, but they are among the big international players. Especially when oil and other commodity prices come back to a higher level than today, the sovereign funds will grow and need to look for new investment opportunities with good, safe returns.
Comparing Hong Kong and London, I can observe that some shifts have taken place. For example, London was the star in the past where many businesses and people from Kazakhstan would look at. They would send their children there for education, invested their money in properties and other businesses there, and London would handle the IPOs of Kazakh companies. London was a centre for all financial products, but now Kazakh businesses and people are ready to discover the eastern direction of Hong Kong. I don’t think Kazakh people will either choose London or Hong Kong – probably both would be attractive to them. It is now important for Hong Kong to show its competitive advantage, what it can offer, and what it can do, then it may be able to attract more attention, more business deals and opportunities from Kazakhstan.
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22 Apr 2016
OTG: ASEAN – Lining up the Bulls and the Bears
By Standard Chartered Bank
Summary
The Standard Chartered Global Research team conducted annual briefings in five ASEAN cities in January. Besides presenting our 2016 outlook, we took the opportunity to poll our clients on their views and sentiment (refer to the Standard Chartered Research website for publications on individual country polling results).
A key takeaway is that growth expectations for ASEAN are mixed. Sanguine growth expectations for ASEAN appear almost out of place compared to global financial market sentiment. Although we believe ASEAN will not be insulated from a global slowdown, we think it will continue to outperform other regions such as Latam.
Client sentiment appears largely in line with our expectations. We expect ASEAN growth to be slightly better, but still below trend, this year, driven by domestic factors. Optimists outnumber pessimists in three ASEAN countries – Vietnam, Indonesia and the Philippines. Pessimists outnumber optimists in Thailand and Malaysia.
We expect stronger growth in Vietnam (2016: 6.9%; 2015: 6.7%) and Indonesia (2016: 5.2%; 2015: 4.8%), but a slightly worse, albeit still strong, year for the Philippines (2016: 5.7%; 2015: 5.8%). Our forecast for stronger growth in Thailand (4.0%; 2.9%) differs from negative client sentiment. We expect weaker growth in Malaysia (2016: 4.7%; 2015: 4.9%). We believe, however, that our clients are excessively bearish.
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The Challenges Facing China’s Belt And Road Initiative
By DIIS - Danish Institute for International Studies
China’s Belt and Road Initiative remains a grandiose and abstract wish list rather than a coherent blueprint of interconnected international investments. Once it is set into motion many of the infrastructure projects will encounter financial uncertainties as well as political and security risks.
China’s “Belt and Road Initiative” is President Xi Jinping’s signature foreign policy initiative. First announced in 2013, the land-based “Silk Road Economic Belt” and its maritime twin, the “21st Century Maritime Silk Road” are ambitious plans aimed at placing China at the heart of regional trade networks and restoring it to a prominent geopolitical position in Asia. The combined Belt and Road envisage new transport infrastructure, industrial corridors, power lines, railways, ports and trade routes that will enable a two-way flow of goods, people and ideas that stretches from China to the Middle East and Europe……
RECOMMENDATIONS
- Western governments should engage China on global issues in order to shape rules jointly, rather than attempting to socialize Beijing or fearing newly created institutions.
- Western governments should engage Beijing in specifying how the Belt and Road Initiative will advance the interests of potential foreign partners.
- China and the international community can draw lessons on political and security risk, and labor and environment issues, from Chinese overseas investments in the past two decades……
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OBOR: Will It Reboot the Chinese Economy?
By World Commerce Review
The Chinese President Xi Jinping mooted the idea of the New Silk Road and 21st Century Maritime Silk Road initiatives in 2013. Later, in November 2014, the One Belt, One Road (OBOR) concept was officially unveiled at the Asia Pacific Economic Cooperation (APEC) meet with the establishment of a $40 billion silk fund. The OBOR project has two parts. One Belt will be a land based economic corridor slated to run from Xian in Shaanxi province, China, traversing through Central Asia and Europe before terminating at Venice in Italy. The belt involves significant investments to develop road and rail infrastructure along this corridor along with other ancillary facilities like high speed fibre optic cables for better communication and energy pipelines.
The One Road, on the other hand, refers to the 21st Century Maritime Silk Road - a sea based route, originating from Quanzhou in Fujian province China, passing through the Strait of Malacca in order to reach Nairobi (Kenya), before merging with the land based route at Venice. Investments are likely to be undertaken in development of ports in the participant countries along with initiatives to simplify procedures of transporting goods across the borders……
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OTG: Sri Lanka – Subdued Outlook for 2016
By Standard Chartered Bank
Summary
We believe Sri Lanka’s economy will need to re-balance in 2016, as macro vulnerabilities have increased on a widening twin deficit, high public debt and low FX reserves. The government will therefore need to increase its monetary defences by raising interest rates gradually in 2016, bolstering FX reserves and lowering the current account deficit. It will also need to sharply cut expenditure (mostly public investment) to rein in the fiscal deficit and rising public debt given that a sharp increase in revenue collection is unlikely. We expect this to have a negative impact on growth.
We therefore lower our GDP growth forecast for 2016 to 5.5% (from 6%) on an expected slowdown in private consumption due to monetary tightening, higher inflation and a slowdown in remittances. We forecast a fiscal deficit of 6% of GDP for 2016. We expect the Central Bank of Sri Lanka (CBSL) to raise policy rates by 50bps in 2016 (two hikes of 25bps each) as it gradually tightens monetary policy.
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29 Apr 2016
OTG: Indonesia – Sustaining Growth Momentum
By Standard Chartered Bank
Summary
On 11 February, the Indonesian government revised its investment-negative list, the list of sectors closed to foreign investment or partly open with specific requirements, to attract more foreign investment to the country. 84 industries are now open for foreign investment, even up to 100% ownership. In addition to creating jobs and financing economic development, the government aims to promote more competition in highly concentrated industries that have been keeping the price of goods high. The policy is likely to prepare domestic industries to compete globally by acquiring new technologies and adopting industry best practices. We think the policy will attract more foreign direct investment (FDI) as the government opens foreign access to Indonesia’s lucrative industries, such as health-care, services, and distribution and warehousing, which are the beneficiaries of the country’s growing middle-income class and government infrastructure projects.
The latest data suggests that growth momentum remained upbeat in January. Private consumption and investment performed well, as indicated by improved consumer confidence and strong growth in cement demand. We maintain our 2016 GDP growth forecast of 5.2%, up from 4.8% in 2015, on a strong boost to investment.
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The EU in Central Asia: The regional context
By Michal Romanowski (Program Officer, German Marshall Fund of the United States, Poland, in association with PASOS, Policy Association for Open Society, Czech Republic)
(This paper was commissioned by the European Parliament's Committee on Foreign Affairs)
Central Asia, located at the centre of the Eurasian continent and straddling the borders of some of the world’s most pressing hot spots, offers economic opportunities and natural resources but also remains insecure and troublesome. For the European Union, the region is not a priority. It is too distant and Brussels experiences difficulties in executing its democratic and value-based agenda on the ground.
Regional dynamics have been significantly influenced by many players present in the region; Russia, China and the United States are the most significant. Russia’s position relies on a holistic approach, including military might and the more recent Eurasian narrative. China, pursuing its Silk Road ideas, has no equal in trade and energy. The US has partially retreated from Central Asia and is reviewing its security-centered strategy.
Under these circumstances, what should the EU regional approach look like? What are the shared interests and divergent objectives of the actors present in Central Asia? With what actors could the EU co-operate and with whom should it abstain from regional rapprochement? Finally, what options does the EU have to strengthen its posture in the region from a regional and geopolitical perspective? ……
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Asia Sourcing Southeast Asia APR 16
THE GARMENT AND FOOTWEAR SECTOR CONTINUES TO SHOW STRONG MOMENTUM
Despite rising wages, the country’ s garment and footwear sector continued to expand last year, with approved foreign investment reaching US$377 million, according to the Cambodian Garment and Footwear Sector Bulletin released by the International Labour Organisation (ILO) in March. The Chinese Mainland accounted for 34.6% of total approved investment in the sector in 2015, followed by the United Kingdom (29.5%), Taiwan (10.3%) and Hong Kong (10.0%).
During 2015, 75 new garment and footwear factories opened, while two factories closed. Of the net increase of 73 factories, 68 were garment and five were footwear. The number was less than that in 2014, when 98 net new factories opened.
The country recorded total garment and footwear exports of US$6.3 billion in 2015, up by 7.6% yoy. Of the US$5.7 billion garment exports, 31.4% went to the US market, while 44.7% destined to the EU market. Of the US$538 million footwear exports, the US accounted for 18.4% and the EU made up another 56.3%.
Figures from the Bulletin show that employment in the garment and footwear sector increased by 10.4% yoy in 2015. While the minimum wage for the sector was set at US$128 per month in 2015, the average monthly wage stood at US$175.
CAMBODIA PASSES TRADE UNION LAW AMID STRONG OPPOSITION
Cambodia’ s first trade union law, which sets rules for establishing, operating and dissolving labour unions and had been in the works since 2008, was passed by the National Assembly in early April in its original form, without amendments requested by unions, employers and labour rights groups.
The law was widely criticized by unions and labour rights groups for restricting a worker’s freedom of association and the right to strike. Critics said the law places onerous financial reporting requirements on unions and contains clauses that discriminate against union leaders. Registration requirement for forming a union, which sets a minimum threshold of 20% of workers in a factory, is considered overly strict compared to 10 people in many other countries.
In late March, the Office of the United Nations High Commissioner for Human Rights (OHCHR) in Cambodia released an analysis on the law, raising concerns that the draft law is not circulated widely enough before legislation and several provisions do not comply with the ILO conventions agreed by the country.
A government spokesman, however, defended the law by stating that it balances the concerns of both employers and employees, and complies with the Cambodian standards. Ken Loo, secretary-general of the Garment Manufacturers Association in Cambodia, said that after months of opposition against provisions in the law, employers would now turn their attention to how the law is implemented.
EUROCHAM SURVEY FINDS OBSTACLES TO DOING BUSINESS IN CAMBODIA
European Chamber of Commerce in Cambodia (EuroCham Cambodia) released in February the findings of its first Business Confidence Survey, which was conducted between September and October in 2015. The survey provides an overview of the advantages and challenges to doing business in Cambodia, as well as insights into the country’ s prospects over the coming years.
The 72 respondents to the survey, most of which were local small and medium-sized enterprises with foreign ownership, represented a total of 17 distinct sectors. 79% of the respondents identified the low cost of human resources as the country’ s major competitive advantage over other ASEAN countries, and low levels of taxation, which was chosen by 33% of the respondents, came the second. Besides, 45% of the respondents highlighted physical infrastructure as the most improved area over the past 12 months.
The majority of the respondents, however, perceived Cambodia to be less competitive than other investment destinations in ASEAN, saying that the country was held back by a skill gap in the workforce and a lack of transparency in processes and fees. Besides, 69% of the respondents said they had yet to experience any major improvements in the ease of doing business i n Cambodia over the past 12 months.
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