It’s not often we get to say a government policy is the victim of its own success. But the contrasting fortunes of two recent cross border deals – Dalian Wanda’s failed $1 billion bid for Dick Clark Productions and Tencent’s $1.7 billion investment in Tesla – are evidence that this is the fate of China’s Going Global strategy. It is also the reason Beijing is shifting from its previously laid-back approach to the greater discipline of Going Global 2.0.
Going Global – also known as the Go Out policy - is the reason we see Chinese multinationals such as Tencent, owner of China’s most popular social network, WeChat, and property-based conglomerate Dalian Wanda operating in global markets in the first place. At the turn of the millennium, Beijing began to lift restrictions on outward foreign direct investment and urged homegrown businesses to buy abroad. China was keen to create multinational companies that were competitive on the global stage. Such companies would in turn contribute to China's economic competitiveness and growth. Although there had been state-led investments in sectors such as natural resources for decades, the first overseas commercial deal took place only in the early 2000s, with the purchase by TCL, an electronics business, of the TV and DVD division of Thomson Electronics of France. Outward FDI now exceeds $100 billion a year and China is a net capital exporter, investing more overseas than it takes in. But this flood of outbound investment headed increasingly to the US and Europe has become a macroeconomic problem. It is hampering China’s control of cross-border capital flows and its ability to maintain capital account restrictions while it reforms the state-dominated financial sector by opening it up to greater competition. If too much money leaves the country, that reduces China’s ability to manage the pegged exchange rate, for instance. It also whittles away the deposit base of the banking system. The capital controls are not the only shift in the policy. Beijing is increasingly strict about which sectors Chinese businesses may invest in. It is no longer enough for a deal to pursue the predilections of a particular tycoon; it must serve China’s economic goals. Dalian Wanda’s bid for the US company that produces the Golden Globes film and TV awards ceremony reflected the ambition of founder Wang Jianlin, one of China’s richest people, to expand his entertainment empire. He already owns America’s AMC cinema chain and has declared his intention to outflank Disney with his own amusement park complexes. Yet his acquisition of Dick Clark productions was reportedly nixed amid a regulatory clampdown on “irrational” investments - because he could not get $1 billion out of China. Buying an entertainment company does not comply with the goals of the Going Global 2.0 policy. So Beijing is using capital controls to scrutinise outward investment exceeding $1 billion - and to evaluate the economic benefits of those investments. After all, the Going Global policy was originally designed to not only create competitive multinationals but also to improve growth potential. That is increasingly important if China is to escape the middle-income trap, which is when growth in a developing economy slows before gross domestic product catches up with that of the west. Expanding the natural resources, services, technology and high-skilled sectors will be more use than snapping up entertainment companies. With the government increasingly concerned about external macroeconomic management, the days when the Going Global policy was applied in a relatively lax manner appear to be over. After all, Wang Jianlin had previously bought AMC Theatres in 2012. Tencent’s acquisition of 5% of Tesla fits the bill for Beijing. It might seem odd that a company known for a mobile messaging app is investing $1.7 billion in a business from a separate tech sector. But for big Chinese groups such as Tencent, the world's 10th largest company in the world in market capitalisation and the only non-US firm, tech is tech. Tencent has already invested in Shanghai-based electric car company Nio. It has taken stakes in Didi Chuxing, the Uber of China, and in Lyft, a US-based car service. Like other Chinese tech companies, it is growing so fast that diversification into a wide range of fields is more common than elsewhere. So for Pony Ma Huateng, the Tencent chief executive who co-founded the company 20 years ago, this is not an unusual move. Jack Ma’s Alibaba, the e-commerce company best known as the Amazon of China, has also invested in Didi and Lyft. Not to be left out, the third big Chinese tech company, search engine Baidu, headed by Robin Li, has also invested in Nio. All three billionaires, who frequently compete with one another at home and abroad, are eyeing the potential of driverless cars in China. Tesla might gain a foothold in the Chinese market with a Chinese partner. For Tencent, which has a market capitalization of $275 billion - dwarfing Tesla’s $45 billion – this is a relatively affordable way to steal a march on its domestic rivals. The tech tycoons’ sprawling spending habits are a good fit with the aims of Going Global 2.0 – which means Tencent’s $1.7 billion investment in Tesla and similar deals are agreeable to Beijing. So -- in this iteration, at least -- we should expect more Beijing-approved tie-ups from different parts of the tech sector and far less prestigious but macroeconomically useless trophy hunting. We need to keep in mind that trade takes place under WTO rules. China is the U.S.’s biggest trading partner, despite no free trade agreement being in place. Of course, if Trump were to pull out of the WTO, then that would be a game changer. But, globalisation, especially e-commerce and the Internet linking markets and people, will mean that trade is likely to continue across borders as it’s hard to see a significant roll-back Costs of trade, of course, are another issue to be focused on.
Luckily, the Trump administration hasn’t honed in on e-commerce, which is good news for procurement and supply chains. Currently, one in ten transactions are already undertaken via e-commerce, and this figure will continue to grow. Trump may have moved quickly to sign the TPP withdrawal order on his first day in office, but that wasn’t a formal agreement. Extricating the United States from NAFTA for instance will require renegotiation time and then a period of notice before that free trade agreement would end. Even then, most trade agreements include implementation periods, so a “cliff edge” is unlikely which gives businesses time to plan. Therefore, there’s no need to panic or overhaul your supply chain immediately. But, of course, forward planning and following economic policies would be wise. Also, take Brexit as an example – if Britain succeeds in triggering Article 50 in March 2017, then the UK is scheduled to leave the EU by the end of March 2019 – almost three full years after the people’s vote. And even there, the Prime Minister has indicated that there may be an implementation period to allow more time for businesses to adjust to leaving the Single Market. Things to watch 1) U.S. border taxes – recently, Trump threatened BMW with a 35 per cent border tax on foreign-built cars imported to the U.S. market. This isn’t an isolated incident and American companies are under even more pressure to produce in the U.S.. Congress is also considering a similar tax, so that is worth bearing in mind as that would have the force of legislation. 2) U.K. Tariffs – one of the consequences of a “hard” Brexit where the UK leaves the EU without any preferential trade deal, which would include no agreement on the Single Market, Customs Union, is the re-emergence of customs for EU trade. Right now, significant customs procedures only apply to non-EU shipments. But, with around half of UK exports going to the EU, taking leave of Britain’s membership in the EU with no deal would means the end of free movement of goods. More customs declarations and duties would raise costs, slow down supply chains and certainly add time at border checks. A potential ‘hard border’ would be a particular issue for Ireland. 3) Resourcing Brexit – the UK Government also needs to think about the resourcing challenges involved in ramping up staff as well as IT systems to cope with the doubling of customs checks on the UK border. 4) NAFTA – As mentioned earlier, Trump has also flagged that the North American Free Trade Agreement (between Canada, Mexico and the U.S.) is up for renegotiation. If you’re a U.S. company, you need to start making plans now about how these changes will affect you. The same applies to any other of America’s free trade deals with 20 countries that Trump would have the authority to re-examine. 5) China? – Globalisation has helped China become a manufacturing powerhouse, but with numerous closed markets.However, there are very good reasons to continue to do business with China. Wages may be rising but that helps businesses to think about China as a market as well as one production locale in a supply chain. Plus, with growing protectionism in America, China’s President has signalled that China may take more of a lead in globalisation. There’s a lot to watch for. 2017 is likely to be a bumpy year for the global economy, with major economies facing political uncertainty too. The American economy will be led by a new president who faces a backlash against globalisation that could stymie trade deals. Even though it’s unlikely that globalisation will be rolled back, the lack of progress on opening markets and rising protectionist sentiment may contribute to prolonging the stagnant trade growth of the past year. China, the world’s second biggest economy, continues to be plagued by concerns over its slowing growth and rising levels of debt and could also see its president consolidating more power, which adds another level of uncertainty. The Chinese government is likely to continue to use fiscal stimulus to boost growth in 2017, despite concerns over how investment adds to debt. Finally, France, Germany and others all have elections or a referendum in 2017 that could see changes in government at a crucial time for the Eurozone, and the UK plans to formally trigger Brexit talks by March 2017. For all these nations, political headwinds may well be as important as economic reform plans in 2017.
For the decades under inflation-targeting, currencies were hardly mentioned for fear of moving the FX market. Along with the change in monetary policy regimes to include macroprudential regulation, currencies are no longer taboo to mention, though it still only occurs occasionally as central bankers are rightly concerned about igniting a currency war.
Exchange rate volatility or even a crisis has risen to the forefront of macro policy concerns. As with all such risks, whether a sufficient policy response exists matters a great deal. On this criteria, policymakers face a set of challenges. Top of the list is China. The RMB is one of the currencies that's generating the most concerns. Until recently when the ceiling on the benchmark deposit rate and the floor of the lending rate were lifted, there was no market-clearing interest rate. The gap between the two may have helped the net interest margin that raises revenue for the mostly state-owned commercial banks but it prevented the accurate pricing of risk and the efficient allocation of capital. And, it made it difficult, if not possible, to determine the long-run value of the exchange rate since currency movements are linked to the real interest rate. Now that the interest rate has been liberalised, the RMB is beginning to find its footing, helped by a stabilising current account balance even though global prices provide an ongoing challenge. More fundamentally, China's central bank hasn't relied a great on the interest rate to set monetary policy as a result so its gradual shift will bear watching. In the meanwhile, offshore currency traders are bring wrong-footed during this volatile period. Nearly $600 million worth of bets on the RMB weakening past 6.6 to the U.S. dollar, its low point during last year's surprise devaluation, have expired and become worthless. Currency trades are bilateral and not just over time. The other major global currencies are also being tugged and pulled by divergent monetary policies. Stimulative policies by the ECB and BOJ are juxtapositions against the normalisation of U.S. monetary policy to the Fed. The resultant weakening and strengthening of their respective currencies, the most traded in the world, is making it challenging for the rest of the global economy. In other words, most emerging markets have pegged their currencies to the dollar and also to the euro. Some Asian economies, due to the predominance of regional supply chains, keep a close eye on the RMB as well as the yen. Yet, the Fed has raised rates while the ECB has just unleashed a slew of loosening policies, including more cash injections or QE. In Asia, China is cutting rates now but it still is sufficiently above the zero bound for interest rates while Japan is deep in negative territory for rates. Such divergences among the dominant currencies add to global volatility because they lead to divergences among the economies that are pegged to them. So, some emerging economies are seeing their currencies rise while others are experiencing devaluation. For those central banks, their main monetary policy aim is targeting the exchange rate. So, this has become more challenging. It's especially the case for commodity exporters, who tend to be pegged to the dollar as the currency in which commodities are priced, and are seeing their exchange rate appreciate alongside the dollar when they could use a weaker currency. For what it's worth, it's even more challenging for major economies with free floating currencies. After all, the notion of a fully flexible exchange rate is that that there is no need to manage it. But, one of to members of the reserve currency club is now the RMB and there are those who worry about the Chinese currency's volatility as a risk to be managed when there really aren't many tools to do so. Still, exchange rates are also driven by financial flows, so the new macroprudential powers have an indirect effect, similar to interest rates. Still, central banks rightly remain reluctant to target currencies explicitly. It means that we should not be surprised that at a time of divergent monetary conditions and Chinese reforms that currencies are volatile and there is little that can be done by central banks. What are the strategic implications of President-elect Donald Trump’s decision to withdraw the U.S. from the Trans-Pacific Partnership (TPP)?
It would be the reverse of President Barack Obama's rationale for pursuing the TPP as part of his Asia Pivot, which is his wider foreign policy aim to re-orient America toward the fast growing economies in the region. President Obama pushed the TPP as a way of securing American influence in Asia and as a counter-weight to China, which was not part of the TPP. As President-elect Trump has now indicated that he will withdraw from the TPP on his first day in office, it opens up space for China to take the lead in establishing a free trade area in the Asia Pacific and increase its influence, both economic and geopolitical, in the region. Of course, much depends on what President-elect Trump chooses to do in Asia, as he is not indicating that he is withdrawing from the region – just from this free trade agreement. Explain the potential impact of the Regional Comprehensive Economic Partnership (RCEP) and Free Trade Area of the Asia Pacific (FTAAP). These China-led regional free trade agreements have the potential of cementing China's influence in the wider Asia Pacific region, including the nations of the Pacific Rim and Latin America. As a middle income country, as compared with the U.S. which is a rich nation, China's aims and goals will be different and geared more at opening up markets for technology, services, and high-end manufacturing. This may well benefit other emerging markets, and there has already been interest from countries like Peru in joining a FTAAP. As the "hub" of a free trade area, China would be strongly positioned to set the terms of trade negotiations. Indeed, it would replace America which had been behind not just the TPP but also a free trade agreement with the European Union known as Transatlantic Trade and Investment Partnership (TTIP) which also looks uncertain. With the U.S. presidential transition underway, identify three indicators of what a Trump trade policy approach might look like. President-elect Trump has said repeatedly that he will put "America First." It appears he is concerned about American jobs and also wages. Of course, there are a lot of reasons as to why median wages have been stagnant in the U.S. for decades, which include trade as one cause. Trade always entails "winners and losers" and those who have been left behind in this era of globalization are calling for reforms. When America trades with a poorer nation, there is more of a negative impact on wages in the traded sector. Manufacturing jobs come to mind, for instance. There are ways to address the distributional impact of trade, but those thus far have not been entirely satisfactory. So, Trump's trade policy may focus on pushing trade with comparably wealthy nations where there is less of a wage differential. For instance, during the campaign, Canada was less of an issue than Mexico in NAFTA [North America Free Trade Agreement]. Secondly, Trump is likely to use trade negotiations to address these distributional concerns, which is arguably better done through domestic fiscal policy. Third, Trump has more authority as President to withdraw or re-negotiate trade deals and impose tariffs than enter into new ones which requires Congressional approval. And he seems more focused on withdrawing than entering into new ones, so that may well be the priority in his trade policy. How might President Xi Jinping and President-elect Trump build a pragmatic and productive relationship? As the leaders of two economic superpowers, they surely must find a way. China has always been pragmatic in its economic reforms. Appealing to businessman President-elect Trump may go some way toward speaking a common language about how to build a working relationship between two major economies which need each other's markets to grow. Specifically, it is in no country's interest to end up in a trade war. That's damaging for not only the countries involved but also the rest of the world which looks to the U.S. and China as the engines of global economic growth. And in numerous respects, the Chinese currency which had been a sore point for many years is no longer as under-valued as before, for instance, as China becomes more consumption-oriented and a middle-income country. Of course, there are other flash points such as over-capacity in Chinese industry in sectors like steel which are exported overseas. It's certainly in the interest of both nations to try to resolve differences short of tit-for-tat trade measures. Identify three Asia-related economic and trade consequential challenges facing the Trump administration. The Trump administration needs to determine where Asia sits in its priorities. The U.S. has historically close ties with Japan, for instance, which go beyond economic interests. But, the U.S. also has a number of foreign policy challenges in other parts of the world, so where does Asia fit in? President Obama's Asia Pivot is most unlikely to be the way forward, so what is the new agenda? Second, does the U.S. wish to pursue trade agreements, including with nations in Asia as a collective? With global trade liberalization moving very slowing on a multilateral basis, other nations are pursuing regional trade deals. For instance, the ASEAN Economic Community (AEC) linking 10 Southeast Asian nations is a single market with a similar population to the European Union has just been established. Is Trump interested in a FTA on a regional basis with the AEC or just bilateral trade deals? Bilateral FTAs are of course also being pursued around the world, but those take time just like larger deals and also don't usually deliver the access to a huge market like the AEC or the EU, for instance. Third, given the focus on the impact on American wages and jobs, how interested is the Trump administration in negotiating trade deals with Asia which consists of a number of poor and still emerging nations? Will American attention shift more to the advanced nations in the region, such as Japan, Korea, and Australia? What about emerging markets like India? Since trade is increasingly via American companies establishing production and supply chains across borders, there may well be an impact on the competitiveness of U.S. multinationals who often locate low-end production in developing nations, including in Asia which dominates consumer goods production. |