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Economy

The Ticking Time Bomb: The Chinese Economy

Luis Durani

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While President Obama continues to gloat that the US economy (and by extension the global economy) was rectified and on the path to growth thanks to his intervention, he must not be paying attention to what is going on in China.

Thanks to the market interventionist policies of the US, EU, Japan, and China, the 2008 economic crisis was never fully remedied instead a bandage solution was used to cover the symptoms. While analysts and pundits continue to rave about the rise of the Chinese Dragon and how future global economic prosperity lies in China, they are missing the emergence of a new bubble. This bubble is on the verge of popping and when, not if, it pops, the entire global system will feel the ripple effect. The crisis that will emerge due to the Chinese economy collapse will make the 2008 economic crisis pale in comparison.

The Chinese Banking System

Since the opening of China’s market to the US by Deng Xiaoping and Richard Nixon, China has experienced unprecedented growth for the past thirty (30) years. Even during global economic slowdowns such as the 2008 crisis, China’s economy still grew. While in the past, growth had been centered on manufacturing, with the new found wealth and increased living standard, the Chinese economy sees itself shifting to a service-based economy. With the global economic system in malaise, this shift can hurt China.

China’s system of government is not democratic rather a one-party authoritarian system that derives legitimacy from the sole basis of being able to provide employment and food to its massive population. This implied social contract between the people and the government has proceeded thus far relatively stable. But in the recent decade, China finds itself at odds with its ability to sustain employment and a strong economy versus market forces dictating otherwise. In order to preempt such detrimental forces, China has intervened in the markets by propping up difference sectors or devaluing its currency in the hope of buoying its economy.

Estimates of the 2008 financial crisis put US economic losses around $900 billion while the global losses were around $15-20 trillion. Based on the current trajectory, the losses due to the Chinese banking bubble will surpass the 2008 crisis by leaps and bounds. In the past decade economic growth has slowed down, as a result the government has dumped money into the real estate sector in the hopes of propping things as well as the stock market. All these efforts did little to perturb the downward trajectory . To help decelerate their downturn, the Chinese devalued the Yuan in the hopes of exporting goods cheaply. The problem with that approach has been that the entire global economic system is still reeling from the 2008 crash, hence demand has slowed down. The culminations of all these factors are now laying the groundwork for the Chinese banking sector bubble to pop. But unlike the downturn in the real estate and stock market, the effects of this collapse will cause upset around the globe. A review of the Chinese banking sector will help one gain a better insight into the Chinese bubble.

chinagrowth

This graph illustrates the number of loans made by Chinese banks from 2003 to 2014. The loans were used by people for real estate, businesses, and other means of investments. The returns from these different investment vehicles would be used to pay back the loans. These loans have grown from approximately $4 trillion (2003) to over $30 trillion dollars today. In addition, the graph depicts the banking assets as a percentage of GDP. Unfortunately, the growth in the percentage of loans has greatly outpaced the economic growth in the same time frame. The current trajectory of the banking assets represents a system that is unsustainable and on the path of crashing.

It is reported that almost half of all new Chinese loans are undertaken just to pay the interest on the existing loans. While official Chinese government reports put the nonperforming or bad loans at 2-5%, in reality, it is believed to be closer to 15%. With such a large amount of toxic loans, one can safely assume the next bubble is around the corner.  

While the larger victim from this fallout will be China, the world will not go unscathed. Aside from being the second largest economy in the world, economic globalization has created an interconnected system that when one giant sneezes the rest of the world feels it. The crash of the Chinese banking sector can be the black swan event that will cause the entire global system into depression and in a much worse position than the 2008 crash.    

Conclusion

While analysts and pundits continue their endless admiration and fascination with the Chinese rise, their adoration has caused them to become blind to the growing bubble. This bubble can only be neglected for so long before it comes due and takes everything down with it. When it does, the 2008 crisis will all be but forgotten due to how relatively dire the impact of this crisis will be.

Luis Durani is currently employed in the oil and gas industry. He previously worked in the nuclear energy industry. He has a M.A. in international affairs with a focus on Chinese foreign policy and the South China Sea, MBA, M.S. in nuclear engineering, B.S. in mechanical engineering and B.A. in political science. He is also author of "Afghanistan: It’s No Nebraska – How to do Deal with a Tribal State" and "China and the South China Sea: The Emergence of the Huaqing Doctrine." Follow him for other articles on Instagram: @Luis_Durani

Economy

Doing Business Report 2020: Soaring Changes with Soaring Doubts

Sisir Devkota

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As Narendra Modi brands his government of making new leaps; similarly, the World Bank’s annually published report, “Doing Business” has largely become a tool to evaluate economies. Both Mr. Modi and the institution have things in common. Upon his election in 2014, the Prime Minister made it clear that India was going to climb the rankings under the same report. This year’s report insists that many countries, including India, have made good leaps. Amidst such table success, there are many questions over the serviceability of the report itself. For a start: consider why the subtitle of Doing Business 2020 is “Comparing Business Regulation in 190 Economies”.

Nevertheless, many leaders like Mr. Modi are lurking towards performing the charts. Perhaps, a psychological competition engulfs bigger nations like India. Kosovo and Cyprus are ahead of Mr. Modi’s people in terms of the ease of doing business. Adding fuel to the insecurities, the report also highlights a fact-based decrease in the cost of starting new businesses in developing countries. Unquestionably, nation states are in a race. Whether investors investigate such results is an altogether different case.

One example is how the report has defined entrepreneurial ease to tackle obstacles. The 2020 report claims that more than fifty-five economies have eliminated the need to pay minimum capital amount to start a new business. Such rate of change will raise eyebrows; history suggests that often, openings like that are a result of financial desperation. Clearly, there is a lack of something in the stated fifty-five economies; investors will hope that it is not market demand. Retrospectively, besides how institutions like the World Bank or the charming speeches of leaders like Modi would imply otherwise; investors will be careful of such data. After all, there is a huge difference between an easy business environment without any scope and a conducive environment with healthy competition. Because the report also suggests that many nations instead reduced the cost of capital launch; economists will be doubtful in even trying to handle such information. It will be left to seen whether the report will also affect the nature of successful markets and goods.

Similarly, 40% of low and middle-income nations now prohibit the use of fixed-term contracts for permanent jobs. The staggering changes this year is a news that is too good to be true. Assumedly, as the report claims, if there are more nations relaxing business operations with such contract policies, investors will be smelling early blood. If anything, a logical analysis only implies that there is wishful thinking in the academics of the report to transfer wealth into hungry mouths. Pragmatically, the huge numbers do not present opportunities. Instead, it is calling for a discomforting nature of risk in many countries.

For some amount of comforting information, the 2020 Doing Business report, maintains ease of government contractas an indicator of looking at the bigger picture. As much as the knowledge of how long it would take to acquire government contracts in Chile would be useful for aspiring Chinese companies; it misses the main point. How would investors weigh their decisions in nations with contradictory results along different indicators? The lack of comprehending such result for economic decisions, is a liability than a tool. New Zealand has been a consistent performer for years, and, for 2020, it is also ranked as the best place on earth for doing business. Somalia, on the other hand totters at the end. It has been tottering for many years now. A strange movement of middle rankers become sensational news. Like Mr. Modi, many leaders are not looking to upset high ranking nations, instead, in the most explicit form of political accomplishment, lies the aimless ambition. Narendra Modi will be most excited, he knows that another addition of electrical grids in rural India will soar the rankings again, next year.

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Economy

BRICS acts as a collective will to safeguard global multilateralism

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Authors: Zhou Dong chen &Francis Kwesi Kyirewiah*

On November 13-14, the 11th BRICS Summit was held in Brasilia, capital of Brazil, where Chinese President Xi Jinping alongside the leaders of Russia, India, South Africa and the host country—Brazil—met and discussed the issues of global and regional dimensions. According to the data in 2018, the BRICS member states have already accounted for 23.6% of the world economy (GDP) and nearly 20% of all world trade, in addition to contributing more than half of all global economic growth. Now, as it enters the second decade of cooperation, BRICS aims to enhance intra-bloc cooperation covering all economic, political and security cooperation as well as cultural and people-to-people exchanges. Can the BRICS members stand together in international affairs?

The concept of the “BRIC” came to the limelight in 2001. Since then, it is argued that the relative size and share of those countries in the world economy has risen exponentially, and most likely it would gradually imply that the G7’s economic hegemony would be rearranged. Scholars like Dominic Wilson further echoed this in his study on “Dreaming with BRICS: The Path to 2050”. He put it that, in all likelihood, by 2025 the BRICS could account for over half of the size of the G7 in terms of GDP. And in less than 40 years the BRICS’ economies together could be larger than the G7.

Although it was debatable, the key assumption behind all the discourse is that China and India have risen as the world’s principal suppliers of manufactured goods and services, while Brazil and Russia are already becoming equally dominant as suppliers of raw materials.In addition, what the BRICS have in common is that they all have an enormous potential consumer market, complemented by access to regional markets and to a large labor force. Wilson argues that three key issues the BRICs have to embrace for their partnership development are as follows: Inclusive growth, sustainable solutions and foreign policy consultations in the post-Western world. Echoing his discourse, Andrew Hurrell put it, “since all the BRICS nations are now members of the G20 which is a major symbol of the structure of global governance, the bargaining power of the BRICS vis-à-vis US-dominated global institutions is inevitably growing.”

It is quite coincident that during the 2017 G20 Summit in Germany, the leaders of the BRICS held an informal meeting reaching key agreements on building an open world economy and improving global economic governance. On the occasion, Chinese leader called on that the BRICS itself would establish an open economy, maintain a multilateral trade system and advance inclusive, balanced and win-win economic globalization with a view to making the fruits of economic growth accessible for all people. There is no doubt that the BRICS countries also have their own internal challenges and external divergences on many issues. Yet, the central point of the role of the BRICS in global affairs is not where the world order is now, but where it will be in the near future, say by 2050.Building on the common sense that “a shared voice is stronger than a single shout”, the emerging powers are well-aware of the closer cooperation among them and even beyond in order to push forward their own agenda.

Yet,  no matter which theory, realism or constructivism, is used to assess the BRICS, it is unlikely the bloc having moved to a geopolitical organization like NATO, but only a new-typed geo-economic forum that incorporates a strong component of people-to-people relations between institutions and individuals. Two of its main goals are as follows: to bring people closer together through socio-economic means, and to take a constructive part in settling geopolitical flashpoints. As such, the BRICs is generally regarded inclusive and its members are willing to cooperate with other countries or institutions that share their interest in making the world a fairer, and therefore a better place. In line with this spirit, the BRICS, though a grouping of five major emerging national economies, aims from its inception to establish an equitable, democratic and multilateralism-based world order.

If the first decade of the BRICS has formalized its existence and also represented many opportunities for the 21st century, the key concern remains how to turn the bloc into a functional grouping rather than just a global forum in the next decade. Strategically, it is vital for the BRICS to become a knowledge base for other developing countries, such as the areas of solar energy, ethanol products, urban landscape development, slum alleviation and biotechnology use, and share their best practices with southern countries. To that end, it is essential for the BRICS to act and talk differently from the G7 and other Western institutions, which are deemed to retain economic hegemony over the vast developing areas. Put it more bluntly, the BRICS should be committed to multilateralism, human development and social welfare in accordance with UN charters and the relevant resolutions.

Given this, looking ahead into the next decade, the BRICS is supposed to follow this line as proposed by Xi when he addressed the current global challenges such as unilateralism and protectionism, and he called on BRICS countries to champion and practice multilateralism. Thus he put three-point suggestions as follows: first, he urged the five members to safeguard peace and development for all, uphold fairness and justice and promote win-win results. Globally, it is vital for the BRICS to uphold the purposes and principles of the UN Charter and the UN-centered international system, which rejects any sort of hegemonic order and power politics and take a constructive part in settling geopolitical issues.

Second, the BRICS en bloc should pursue greater development prospects through openness and innovation. Therefore, it should uphold the WTO-centered multilateral trading system and increase the voice and influence of emerging markets and developing countries in international affairs. In addition, BRICS member states should prioritize development in the global macro policy framework, follow through the UN 2030 Agenda for Sustainable Development and the Paris Agreement on climate change. All in all, the BRICS makes all efforts to promote coordinated progress in the economic, social and environmental spheres. Third, in a long run, the BRICS needs to be more proactive in promoting mutual learning through people-to-people exchanges and take their people-to-people exchanges to greater breadth and depth. Xi did indeed appeal to other four partners that “BRICS Plus” should serve as a platform to increase dialogue with other countries and civilizations to win BRICS more friends and partners.

This is a truly strategic proposal. People agree that the next decade will see accelerating change in global patterns of economic growth, development, and governance. The BRICS can achieve a second golden decade if they can remain united and work together in the face of the challenges and opportunities to come. Although all BRICS members have no intention to challenge the status quo which is still dominated by the U.S.-led globalization system, the first decade of self-discovery of the BRICS has paved the way for the second decade of confident outreaches to other countries and institutions and will predictably see the new bloc becoming a powerful global platform for change by 2029.

In summary, the huge potentials of the BRICS are far beyond the current five powers. In effect, Valdai Club, a Russia’s top think tank, once put it, the BRICS starts by bringing together the regional integration groups that each country is a part of (e.g. Russia, the Eurasian Economic Union, Brazil and Mercosur) through the BRICS+ framework in order to broaden its reach in the most realistic way possible without overextending itself. In view of its one-decade vicissitude, it can say that this visionary outlook is definitely doable since all the BRICS members certainly have the political will to pull it off, plus their combined economic power is attractive enough to naturally make their counterparts interested in cooperating. The BRICS could therefore transform into the core of a larger global reform structure bringing together non-Western countries and even those within the West that are dissatisfied with the U.S.-led status quo, which would then enable it to truly become a global force capable of carrying out meaningful development governance. It has actually exercised a positive impact on each of its five members, so it’s time to spread the benefits beyond the original five. Considering the second decade of its development, the BRICS would aim to make further reform in terms of the fairer governance.

*Francis Kwesi Kyirewiah, a PhD student in International Affairs, at SIPA, Jilin University, China.

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Economy

CHETRA Eyes Africa for Expansion

Kester Kenn Klomegah

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CHETRA is a Russian company that sells industrial equipment and spare parts under the brand “CHETRA” produced by the Promtractor plant, as well as supplies spare parts and components from the company. It uses a unique technique in the construction of production sites, seaports, development of natural resources and pipelines in 30 countries and in all climatic zones.

The goal is to provide its partners and customers with modern high-performance equipment for successful projects, even in areas with complex climatic and geological backgrounds. More than 3,000 units of equipment under the brand “CHETRA” are now in operation in the Russian Federation and beyond.

Executive Director Vladimir Antonov has been working in engineering industry for 19 years. He has successful experience in product export to the CIS countries and Ukraine, the Baltic States, Europe, Argentina, Africa and Cuba. He has been leading company as its Executive Director since 2018. During his leadership, the share of the company’s machinery in the Russian market has doubled.

In this snapshot interview, Vladimir Antonov talks about his company’s plans in the direction of Africa. Here are the interview excerpts:

Q:First, tell us briefly about tPlants previous working connection with Africa? What are your products and services, what African regions or countries are keen using products?

A:Our company has a long experience of cooperation with African countries which began in the Soviet times and continues today. Traditionally we collaborate in the African continent with such partner countries of Russia as Egypt, Algeria, Zimbabwe. About 50 units of CHETRA machines have been supplied to these countries over the last ten years. Our goal is to enlarge our footprint in the African continent. Nowadays, we are negotiating cooperation with potential partners in West Africa and the SADC region (Southern African Development Community, South Africa).

Q:Compared to other foreign players, how competitive is the African market? From the previous experience in the African regions, what key problems and challenges the company faces in Africa?

A:Today the market of mining and construction equipment in Africa is characterized by high competition, all our competitors work in the region, both from the West and from the East. This has led to the fact that the market applies high requirements to new products. For that reason today we do not just sell our machines to customers: we offer a range of services, which includes commissioning of the machines, training of local staff, organization of after-sales maintenance service at the customer’s site. The main challenge for us today when working in Africa is the need to find a local partner who has qualified staff, equipment, maintenance facilities and not bound by contracts with other manufacturers of similar machines.

Q:What kind of business perceptions and approach could be considered as impediments or stumbling blocks to business between Russia and Africa?

A:Another challenge for us when working in Africa is that many consumers have no free funds to purchase new machines. This often diverts our partner from the renewal of the fleet or makes them buy used machines on the after-market. We are trying to solve this problem by attracting Russian government agencies of export support, such as the Russian Export Center, in order to finance transactions. 

Q:Business needs vital information, knowledge about the investment climate and so forth. Do you think that there has been an information vacuum or gap between the two regions?

A:Taking into account the level of development of information technology today there are no particular problems in obtaining information about the investment level of any country or about business situation of a particular company. Besides that, we are in constant contact with Trade missions at the Embassies of the Russian Federation in the countries of our interest, which are also a good source of information about the conditions of the market.

Q:And now how would you envisage the level of investment and business engagement with Africa? Is Sochi an opportunity for expanding business to Africa?

A:In my opinion the Economic Forum in Sochi was organized at the highest level. A lot of guests from Africa visited it. We held a number of meetings with companies that are new to us, and I hope that these will lead to long-term cooperation and geographic growth of supplies of CHETRA machines in Africa.

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