Growing Chinese influence in Asia

The new economic framework of United States was intended to counter China’s influence in the Indo-Pacific region. But the increasingly inward-looking Washington is no longer a champion of free trade, says S Rajaratnam School of International Studies’ Kevin Chen.

Three of the four Indo-Pacific Economic Framework (IPEF) pillars may have been completed, but the inability of United States to see through the trade deal aimed at countering China’s economic influence is a strategic failure.

Hopes of an agreement were dashed last week at the Asia-Pacific Economic Cooperation (APEC) forum, even before former US president Donald Trump threatened to knock out the initiative if he were to return to power.

The IPEF was supposed to fill the policy gap left by the Trump administration’s withdrawal from the Trans-Pacific Partnership (TPP) in 2017.

It was styled as a novel economic agreement that provides a template for future economic engagement after years of rudderless drifting in the Indo-Pacific.

“You can count on the United States,” said Joe Biden at APEC. At its most basic level, the IPEF aimed to reassure America’s partners that it is still interested in a meaningful economic relationship with them. However, it has ostensibly fallen short of even that.

Southeast Asian observers should recognize that for domestic political reasons, Washington is no longer a champion of free trade. While they should continue engaging with the US on security issues, they should also be mindful that their region’s economic agenda is increasingly diverging from that of Washington’s.

The IPEF was challenging to negotiate from the outset, its demands and constraints a product of US domestic politics.

The lack of access to the US market removed a key incentive from the American negotiating toolkit. It was an effort to avoid a sensitive political issue: American public opinion has become generally less supportive of free trade due to the perception that cheap foreign goods are displacing American products, especially in key swing states and unions.

Believing that deep trade liberalization failed to protect American jobs and capacity, Biden’s administration bucked decades of free trade promotion to aggressively subsidise favoured industries in its competition with China. US$39 billion in manufacturing incentives was allocated under the CHIPS Act alongside US$370 billion in investments for clean energy under the Inflation Reduction Act to grow the US industrial base.

Meanwhile, labour and environmental standards were always a hard sell to partners such as Vietnam and Indonesia. These US demands tapped on these growing sentiments against free trade.

A common rallying call was that trade deals need to ensure strong labour and anti-dumping standards so American workers can compete on a level playing field – not just with Chinese workers, but with supply chains linked to China as well.

Yet, the IPEF was still vulnerable to the domestic forces it sought to appease. As a White House initiative, the IPEF was unlikely to garner financial support from a split Congress and could also be cancelled with a simple executive order by a future president.

Negotiators likely understood that the odds were stacked against them. The timeframe to complete IPEF negotiations was also relatively short at two years, compared to seven years for the TPP.

 

Hydropolitics: A new term coined in Asia

Most of Asia's major rivers originate in China and flow into countries like India, Bangladesh and Vietnam. China has earned the title of "upstream superpower," but concerns over the weaponization of water, the responses of nations downstream, and climate change are stirring up water politics and stoking tensions.

The visually rich three-part Nikkei Asia series titled Asia's Age of Hydropolitics explores the effects that the actions of upstream nations -- exacerbated by climate change -- have on countries downstream.

The first story focuses on Asia's rivers that originate in the Indo-Tibetan plateau in China. They flow into 18 other nations, delivering water to a quarter of the world's population.

As China gets ambitious about managing its own water shortages by drawing on these rivers -- and allows its foreign policy to dictate its actions upstream -- many nations downstream are feeling its presence.

The second story frames Bangladesh -- and the geopolitically significant Brahmaputra River -- as a proxy of Sino-Indian conflict. The story follows the Brahmaputra as it enters India through the disputed border with China, and explores the effects of dams and upstream politics on the region's most disenfranchised.

As the Brahmaputra makes its way into Bangladesh, the lowest riparian country in the region finds itself at the center of China-India hydropolitical hostility.

The third and final piece in the series focuses on the Mekong -- one of the world's longest and most biodiverse rivers. Dams being built upstream, 22 by China alone, combined with climate change and human activity, have contributed to the sinking of the Mekong Delta. Half of the river-strewn region could be underwater before the century is through.

But locals are adapting -- and emerging innovative strategies offer hope of mitigating the worst.

Courtesy: Nikkei Asia

 

 

 

Iraq launches road and rail project to link Asia and Europe

Iraq has launched a US$17 billion project on Saturday to link a major commodities port on its southern coast by rail and roads to the border with Turkey, in a move designed to transform the country's economy after decades of war and crisis.

The Development Road aims to tie the Grand Faw Port in Iraq's oil-rich south to Turkey, turning the country into a transit hub by shortening travel time between Asia and Europe in a bid to rival the Suez Canal.

"The Development Road is not just a road to move goods or passengers. This road opens the door to development of vast areas of Iraq," Farhan al-Fartousi, director general of the General Company for Ports of Iraq, told Reuters.

Iraq's government envisions high-speed trains moving goods and passengers at up to 300 kilometres (186.41 miles) per hour, links to local industry hubs and an energy component that could include oil and gas pipelines.

It would mark a significant departure from the country's existing aged transport network.

Iraq's train service currently operates a handful of lines, including slow oil freight and a single overnight passenger train that trundles from Baghdad to Basra, taking 10 to 12 hours to cover 500 kilometres.

The Grand Faw Port, which was devised over a decade ago, is halfway to completion, Fartousi said.

Passenger transport between Iraq and Europe harkens back to grand plans at the turn of the 20th century to create a Baghdad to Berlin express.

"We will make this line active again and tie it to other countries," Fartousi said, noting plans to ferry tourists and pilgrims to Shiite holy sites in Iraq and Mecca in Saudi Arabia for the Haj pilgrimage.

The project was announced on Saturday at a conference aimed at courting Arab interest, including from Arab Gulf states, Syria and Jordan. A senior government aide said regional investment was on the table.

Promises of development are long-standing in Iraq but infrastructure remains decrepit even as the government of Prime Minister Mohammed Shia al-Sudani makes a push to rebuild roads and bridges.

But officials say the Development Road is based on something new: a period of relative stability since late last year that they hope can be maintained.

If work starts early next year, the project would be completed in 2029, Fartousi said.

"Even if Iraq was absent for a year or two or a decade or two, it must return one day or another. Hopefully these days are the beginning of the return of Iraq," he said.

Iran raises concerns over US biological labs in Ukraine

Iranian Foreign Ministry spokesman Nasser Kanaani has reacted to reports that the United States has established military biological labs in Ukraine, saying the labs are deeply worrying.

“Reports about the US military biological labs in Ukraine and some other countries are deeply worrying,” Kanaani said on Twitter. 

He added, “These activities are in breach of the US's commitments, especially the Biological Weapons Convention, and pose a threat to humanity, hence they need an impartial international investigation.”

A Russian state Duma committee has recently released a report saying that Washington is building biological weapons all over the world, according to IRNA. 

American-made biological weapons are able to destroy not only human beings, but also animals and even agricultural products to cause irreparable economic damage to the enemy. 

The Russian investigation committee called the possibility of covert use of biological weapons as completely peaceful industrial products alarming.

The Russian Duma assessed the American biological weapons program as the greatest threat to the biological security of the world. “In recent years, the US biological weapons program has not only not been limited, but has become more aggressive,” it said. 

The presence of American biological laboratories in Africa, Asia, the Caucasus, Kazakhstan and Ukraine has provided the basis for collecting information on the biological infrastructure of the host countries, according to the Russian state Duma. 

 

Asian LNG spot prices slip to 21 month low

Asian spot liquefied natural gas (LNG) prices remained flat this week at the lowest level since July 2021 on muted demand and solid inventories in China, Japan and Korea.

The average LNG price for May delivery into northeast Asia was US$12.50 per million British thermal units (mmBtu), unchanged from the previous week, industry sources estimated.

Prices have fallen 55% year-to-date and more than 82% from the August 2022 peak of US$70.50/mmBtu.

"North Asian demand drivers are still errant, even for off- season speculative cargos. Pricing seems to be driven by sentiment correlated with euro hub markers," said Toby Copson, global head of trading at Trident LNG.

"I expect we will trade in this narrow range while we sit in shoulder season - until some impetus emerges for utilities as Chinese and Korean storage seems topped up," he added.

Tobias Davis, head of LNG Asia at brokerage Tullett Prebon, said the market has seen fresh bouts of demand from Thailand's PTT which lifted around 10 cargoes at US$12-US$13/mmBtu and is tendering for more volumes for May-September, while the Philippines secured its first LNG import cargo from Vitol and Indian end-users continue to pick prompt volumes.

"Prices below US$13/mmBtu continue to deter China, which remains quiet and on the sidelines with opportunistic bids, while healthy storage in Japan and Korea continue to keep that all important end-user demand at bay," Davis added.

Europe is still a favourable destination for cargoes, despite a series of strikes in France that have reduced the country's LNG imports by around one million tons in March, as cargoes have been diverted to neighbouring terminals.

Ken Kiat Lee, senior analyst at consultancy firm FGE, said that despite Europe's colder start to the shoulder season - the months after winter and ahead of summer - prices have continued to trade sideways with most markets sitting on above-average gas inventories.

S&P Global Commodity Insights assessed its daily north-west Europe LNG Marker (NWM) price benchmark for cargoes delivered in March on an ex-ship (DES) basis at US$12.374/mmBtu on April 5, a US$1.90/mmBtu discount to the May gas price at the Dutch gas TTF hub, according to Allen Reed, managing editor of Atlantic LNG.

Reed said that the spread between European gas and LNG prices hit a multi-month high on April 04, at a US$2.20 discount to Dutch gas prices for May - and was largely driven by strikes at French LNG terminals.

LNG spot freight rates have fallen amid softer gas prices and potential sub-charters entering the market, with Atlantic rates at US$42,000/day on Thursday and Pacific rates at US$62,750/day, according to Edward Armitage, an analyst at Spark Commodities.

 

Biggest financial crises of last four decades

Markets have experienced massive upheaval in the last month, prompted in part by two of the three largest banking failures in US history while Swiss lender Credit Suisse was bought by rival UBS Group AG in a merger engineered by Swiss regulators.

Fears of banking contagion remain, and investors are worried that global economies will suffer if the effects of higher interest rates torpedo more lenders. Here is a rundown of some of the biggest financial crises in the last 40 years:

US SAVINGS AND LOAN CRISIS

Over 1,000 savings and loan (S&L) institutions were wiped out in the crisis that unfolded throughout the 1980s, resulting in up to US$124 billion in costs to taxpayers. The upheaval was rooted in the unsound real estate and commercial loans made by S&Ls after the United States removed interest-rate caps on their loans and deposits, which allowed them to take on more risk.

JUNK BOND CRASH

After nearly a decade of supercharged growth, the junk bond market slumped in the late 1980s following a series of interest rate hikes by the Federal Reserve. Michael Milken had helped popularize the financial instrument, with many using it as a way of funding leveraged buyouts. But supply eventually outpaced demand, and the market tanked. Milken was charged with securities and reporting violations. He paid a US$200 million fine and served a 22-month sentence in jail.

MEXICAN PESO CRISIS

In a surprise move in December 1994, Mexico devalued its currency, the peso, after the country's current account deficit grew and its international reserves declined. The country ended up getting external financial support from the International Monetary Fund and a US$50 billion bailout from the United States.

ASIAN CURRENCY CRISIS

A massive outflow of capital from Asian economies in the mid-to-late 1990s put pressure on the currencies in the region, necessitating government support. The crisis kicked off in Thailand, where authorities had to devalue the Thai baht after months of trying to defend the currency's peg to the dollar drained its forex reserves. The contagion soon spread to other markets in Asia including Indonesia, South Korea and Malaysia. Global bodies, including the International Monetary Fund and the World Bank, had to step in with rescue packages amounting to more than $100 billion for the economies.

LONG TERM CAPITAL MANAGEMENT (LTCM)

The highly leveraged US hedge fund lost more than US$4 billion in a span of a few months in 1998 following the Asian crisis and a subsequent financial crisis in Russia. The fund had a huge exposure to Russian government bonds, and took major losses after Russia defaulted on its debt and devalued its currency. The New York Federal Reserve Bank helped broker a US$3.5 billion private-sector bailout for LTCM and the Federal Reserve cut interest rates three times in successive months.

GLOBAL FINANCIAL CRISIS OF 2008

The biggest financial crisis since the Great Depression was rooted in risky loans to shaky borrowers, which started to lose value after central banks raised interest rates in the period leading up to the crisis. Many companies had taken big positions in highly leveraged mortgage bonds that had proliferated in previous years. The crisis led to the collapse of some storied Wall Street giants including Bear Stearns and Lehman Brothers, both of whom had large positions in mortgage securities. The debacle also engulfed insurance giant American International Group, which needed a US$180 billion bailout. The US government closed Washington Mutual, in what was largest-ever failure of a US bank. The "Great Recession" that resulted was the worst economic downturn in 70 years.

EUROPEAN DEBT CRISIS

Spurred by the 2008 financial crisis, surging debt at some of the major European economies led to a loss of confidence in the region's businesses. Greece was among the hardest hit as its primary industries of shipping and tourism were economically sensitive. It was the first to be bailed out by other euro zone economies. Portugal, Ireland and Cyprus also were rescued from default, and unemployment surged, particularly in the countries bordering the Mediterranean Sea.

 

 

 

 

 

Europe: Mild winter shifts LNG trades

LNG markets continue to surprise. At the beginning of 2023, the big themes were that European imports would continue to drive seaborne ton-miles higher, supplemented by a resumption of imports into China as economic activity resumes.

In a mid-January webinar presentation by Kristen Holmquist, the lead data analyst at shipbroker and LNG consultancy Poten & Partners, these observations were buttressed by deep underlying analytics.

Any predictions of what might happen are highly nuanced, and subject to a variety of “what-if?” considerations. But Poten’s analytical team suggests that overall seaborne LNG tonnages might rise to around 415 million tons in 2023, up around 20 million tons from 2022.

A major contributor to this uptick will be the US, with the damaged Freeport LNG facility, in the US Gulf (capable of exporting 1.0 - 1.3 million tons/month), to come back online during Q12023, Poten expects. Others are more cautious; Rystad Energy said that a full ramp-up might not occur until mid-2023.

The big demand-side driver of all these numbers is Europe; in Holmquist’s words, “Europe is expected to be in good shape at the end of the winter.” So far, the 2022-23 Winter has been warmer than anticipated, leading to lower gas import demand.

However, pipeline imports from Russia have been down dramatically, with further decreases anticipated during 2023. A big part of the demand picture is driven by imports of LNG in advance of the Winter season.

Holmquist said that the storage buildup during 2022 “…was higher than we expected…” and she added that, so far during the warmer than normal winter months, the levels of gas in storage “…have come down by less than we expected.” The result is that storage is at historically high levels.

China’s economic activity is expected to rebound in 2023, and so the country is also expected to account for 6 million tons of additional demand in 2023 as compared to 2022, though it was noted that anticipated seaborn import levels are still 9.5 million tons below 2021’s 80 million tons.

What does all this mean for LNG shipping? Seaborne rate dynamics were not covered explicitly in the Poten webinar, but it’s possible to offer some demand-side observations on this question. Though much of the gas coming out of the US is sold under term contracts, US exports are often shipped on an “FOB” basis- meaning that purchasers can direct cargoes to either Europe or Asia.

One important feature of the markets has been the sharp drop in European prices as measured by the TTF indicator; after seeing elevated levels for much of 2022, they are now below the Asian JKM numeraire.  

So, at least for this increment of LNG shipping, with the US anticipated to export up to 90 million tons in 2023, we may see a ton-mile increase. With higher prices in Asia, more cargo flows to Asia might balance what may be a lower demand for cargoes bound for Europe with its reduced need to fill up storage in advance of the 2023-24 gas season”, which starts in October.

Anecdotally, analysts at Rystad said that US exports to Asia rose 38% in the first half of January, while gas shipments to Europe slid by 22% during the same time period. They add, “While we do not anticipate an immediate diversion of cargoes towards Asia, with the expected rebound of China gas demand during the year, Europe and Asia markets will undoubtedly see increased competition for available LNG supplies.”

Courtesy Seatrade Maritime News

 

Chinese sale of fighter jet to Pakistan attracts other markets with ambitious plans but thin wallets

In December 2021, Pakistan Air Force (PAF) announced that it would soon acquire 25 Chinese-made J-10C combat aircraft. This purchase was a long time coming. Speculation that the PAF would acquire the J-10 goes back at least a decade.

Earlier plans to buy up several dozen J-10s were scuttled by a lack of funding, but India’s decision to purchase 36 highly advanced, French-made Rafale fighter jets apparently pushed Pakistan to move forward with their own buy of modern fighters.

Beijing has not had much luck lately exporting its fighter jets. It has tried to flog some of its less capable combat aircraft on the global market but with little success.

During the 1990s and 2000s, China offered export versions of two domestically-built fighter jets, the JH-7 (designated the FBC-1 Flying Leopard) and the F-8IIM (a heavily upgraded MiG-21, a plane that first flew in the 1950s). Neither of these planes secured an overseas sale.

Until now, China’s best result has been a handful of sales of its JF-17 to Burma (Myanmar) and Nigeria. The JF-17 is a rather basic lightweight fighter jet built explicitly for export. Pakistan has been its biggest buyer, with intentions of acquiring up to 200 planes. At the same time, these JF-17s will be manufactured in Pakistan and equipped with Western radar and Russian engines. There is very little Chinese about this aircraft.

Not surprisingly, the Chinese have pinned a lot of hope on the J-10 when it comes to overseas sales. The J-10 was China’s first “fourth-generation-plus” combat aircraft. It is an agile, single-engine fighter jet roughly in the same class as the US F-16C. It features fly-by-wire flight controls and a “glass cockpit,” meaning that it utilizes several multi-function flat-panel displays, as opposed to traditional analog instruments.

The J-10 has had its share of teething problems. Although its development was initiated in the mid-1980s, it didn’t fly until 1998, and it was nearly 20 years before it entered operational service with China’s People’s Liberation Army Air Force (PLAAF). Even now, it is equipped with a Russian turbofan engine—underscoring China’s ongoing difficulties with developing a usable jet engine.

The latest variant, the J-10C—the version being exported to Pakistan—is considered to be a relatively advanced fighter. The J-10C features highly advanced active electronically scanned array (AESA) radar and is capable of firing long-range missiles, meaning that it could engage enemy aircraft as far away as 124 miles.

One report claims that the J-10C is comparable to the most advanced versions of the F-16 (the so-called “Block 60/70” version).

China, despite being consistently among the top 10 arms exporting nations, is still essentially a niche supplier of weapons systems. According to the Stockholm International Peace Research Institute (SIPRI), Chinese arms exports in 2020 consisted mainly of tactical missile systems (such as anti-tank weapons or anti-ship cruise missiles) and armed drones. After that come artillery systems, mortars, and lightly armored vehicles.

Sales of big-ticket items, such as warships, submarines, main battle tanks, and fighter jets, were few and far between—the major exceptions being the sale of Yuan-class submarines to Pakistan and Thailand, and offshore patrol vessels to Malaysia.

In fact, in 2020 China slipped to number eight on SIPRI’s list of leading arms exporters, behind France, German, and even Spain. Its arms sales for the period 2016–2020 were less than one-sixth those of the United States, the world’s leading arms exporter.

Armed drones, in fact, are China’s main exception to the rule of exporting rather prosaic weapons systems. As noted in an earlier article, Beijing has had great success selling armed drones.

According to SIPRI, China has exported armed drones to at least 16 countries on three continents, including Egypt, Indonesia, Iraq, Jordan, Nigeria, Saudi Arabia, Serbia, and the United Arab Emirates (UAE). These deals have earned Beijing more than US$700 million in export sales.

China has quickly become the developing world’s go-to source for armed drones, and Chinese drones are being used regularly in combat. While perhaps not as advanced as their competitors, Chinese drones are filling a critical—and lucrative—market niche.

Countries may not be lining up to buy most Chinese weapons, but armed drones are a segment where Beijing has several advantages over its competitors: a “good-enough” product—at a relatively low price—to just about anyone who has the cash, and with few or no questions asked.

Will Beijing be able to duplicate its success with exporting the J-10 that is has had with armed drones? It is probably too soon to say. Certainly, China faces a lot of competition in the global fighter business and, therefore, prospects for overseas sales of the J-10 remain dim.

Nevertheless, a successful sale of the J-10 to Pakistan raises the prospects that China could flood the global arms market with a relatively cheap and yet quite capable fighter jet. In particular, the J-10 could appeal to African, Asian, and Latin American air forces with ambitious plans and thin wallets.