Global Developments and Analysis: Weekly Monitor, 12 October- 18 October

Economic

US considers adding China's Ant Group to trade blacklist

The U.S. State Department has submitted a proposal for the Trump administration to add China's Ant Group to a trade blacklist, according to two people familiar with the matter, before the financial technology firm is slated to go public. It was not immediately clear when the U.S. government agencies that decide whether to add a company to the so-called Entity List would review the matter. The move comes as China hardliners in the Trump administration are seeking to send a message to deter U.S. investors from taking part in the initial public offering for Ant Group. The dual listing in Shanghai and Hong Kong could be worth up to a record $35 billion. State Department did not immediately respond to a request for comment. Ant, an affiliate of e-commerce giant Alibaba Group Holding Ltd, declined to comment but in a recent statement to Reuters emphasized that only 5% of the company's business is outside China. Click here to read... [2]

The debt bubble legacy of economists Modigliani and Miller

Half a century ago, two starlets of economics argued that whether companies funded themselves with debt or equity was irrelevant. One legacy of that insight is becoming clearer in the wreckage of corporate failures mounting in the wake of the pandemic. Franco Modigliani and Merton Miller both later won the Nobel Prize in economics, partly thanks to their groundbreaking work on what became known as the “M & M theorem”. Until then most companies had assumed that too much debt would affect the value of the firm, so their paper was a counterintuitive bombshell. Their initial findings only held in a world without “frictions” — such as taxes, imperfect information and inefficient markets. But a later revisitation that incorporated the tax-deductibility enjoyed by interest payments showed that the value of an indebted company is actually higher than that of an unleveraged one. It eventually helped lay the intellectual groundwork for a dramatic erosion of corporate creditworthiness. Click here to read... [3]

Japan expands 'China exit' subsidies for moves to Southeast Asia

Japan will significantly ramp up a program encouraging businesses to build production sites in Southeast Asia to diversify supply chains that are too dependent on China. Prime Minister Yoshihide Suga will announce the plan during his visit to Vietnam this month, further underscoring the importance of Southeast Asia on his first official trip overseas as Japan's leader. Japan's first supplementary budget for fiscal 2020 earmarked 23.5 billion yen ($223 million) to help businesses move production to Southeast Asia to broaden their supply networks. The government approved 30 projects in the first round of applications that ended in June.But the program is less well known than a similar but much larger initiative to promote manufacturing at home. That has received over 1,700 applications worth more than 10 times the $2 billion budget, of which 57 projects totalling $544 million have been approved. Click here to read... [4]

Samsung, LG cooperate in fostering local suppliers

Earlier this month, Samsung Display and LG Display jointly launched a consultative body consisting of 30 display businesses targeting mutual growth for them and their local SME suppliers. Fostering local suppliers is the key to ensuring technological advances by the country's exporting companies. That's why the government, aiming to strengthen the nation's global value chain (GVC) competitiveness, announced a set of measures in August 2019 to induce further growth of local materials, components and equipment businesses through tax benefits and other incentives. The government announced a set of policies that included investing 5 trillion won by 2022 in over 338 key components companies, while 1.5 trillion won has been assigned in tax benefits and subsidies for local businesses. In addition, companies that "reshore" their overseas factories will also get various incentives. Click here to read... [5]

Shenzhen's success overshadows China's other special economic zones

China's southern city of Shenzhen came under the spotlight this past week as it celebrated its 40th anniversary as the first of four special economic zones in the country, an occasion that was marked with an address by President Xi Jinping. Shenzhen's economic success is certainly impressive, but it also raises a question regarding the other special economic zones: Zhuhai, Shantou and Xiamen. Given the preferential status granted to Shenzhen, which borders Hong Kong, the gap between it and the other three could continue to widen in the coming years. Shenzhen has received nearly $300 billion in foreign direct investment and more than 90,000 foreign enterprises have been established since the reform period started in the late 1970s. The majority of investment from outside of mainland China comes from Hong Kong. A government report in August showed that 56% of all registered foreign enterprises in Shenzhen at the end of 2018 -- the most recent figures available -- were from Hong Kong. Click here to read... [6]

U.S. to Offer Loans to Lure Developing Countries Away From Chinese Telecom Gear

The U.S. is ready to offer loans and other financing, potentially worth billions of dollars in total, to countries to buy hardware from suppliers in democratic countries rather than from China, said Bonnie Glick, the deputy administrator at the U.S. Agency for International Development, which is spearheading the effort. The U.S. effort to curb China’s tech ambitions has grown into a multiagency effort. The Commerce Department has imposed export controls on some U.S. technology to China needed to make advanced telecom equipment and semiconductors. The State Department has instructed its diplomats to lobby allies to shun Huawei and ZTE gear. USAID this month signed an agreement with the Federal Communications Commission to jointly counter 5G deployments using Chinese equipment in developing countries, combining the FCC’s technical and policy expertise and the aid agency’s network of some 10,000 employees in about 100 countries. Click here to read... [7]

China’s Economic Squeeze on Australia Extends to Cotton

China’s top economic-planning body is targeting Australian cotton, Australian industry groups say; the latest escalation in a diplomatic and trade row between the countries. “It has become clear to our industry that the National Development Reform Commission in China has recently been discouraging their country’s spinning mills from using Australian cotton,” said a joint statement on Oct 16 from the growers’ organization Cotton Australia and the Australian Cotton Shippers Association. China buys around 65% of Australia’s cotton crop, according to industry figures, a trade worth some $600 million a year. The cotton concerns come on the heels of similar suspicions that China is discouraging use of Australian coal. China is Australia’s biggest two-way trade partner and top export destination, but tensions between them have reached new heights in recent months. Click here to read... [8]

Turkey says 'miracle' Black Sea gas field larger than first estimated

A massive gas field off the Turkish coast in the Black Sea contains 85 billion cubic meters more natural gas than originally estimated, Turkish President Recep Tayyip Erdogan announced on Oct 17 aboard the drilling vessel Fatih. The Sakarya gas field, discovered in August off the coast of the town of Eregli, was initially estimated to contain 320 billion cubic meters (11.3 trillion cubic feet). The find was Turkey's largest-ever natural gas discovery, and Ankara hailed it as a "miracle," while claiming Turkey could become a net exporter of natural gas. Turkey is increasing its maritime exploration for hydrocarbon energy, as it relies heavily on expensive imports, with Russia as the main supplier. Last year, Turkey imported 45 billion cubic meters of natural gas, according to S&P Global Platts. This week, Turkey sparked a diplomatic row with the European Unionby resuming natural gas exploration in waters contested by Greece and Cyprus. Click here to read... [9]

OPEC+ says it will ensure oil prices do not plunge again

The OPEC+ alliance will ensure oil prices do not plunge steeply again when it meets to set policy at the end of November, OPEC’s secretary general said on Oct 12, adding that demand has been recovering more slowly than expected. “I want to assure you that the OPEC, non-OPEC partnership will continue to do what it knows best, by ensuring that we don’t relapse into this almost historic plunge that we saw,” Mohammad Barkindo said. Barkindo was answering a question at the Energy Intelligence Forum on whether there was room for a planned increase in oil output from January by OPEC+, a grouping that includes OPEC states, Russia and other allies. Countries such as Iraq, Nigeria and the UAE, which had fallen short of their commitments, have been asked to make additional cuts until the end of the year to compensate for the shortfalls. Barkindo said the compensation scheme was working well. Click here to read... [10]

China’s export control laws to be used to break US ‘long-arm’ jurisdiction: analyst

China's newly passed export control law, which authorizes the Chinese government to take countermeasures against any country or region that abuses export-control measures and poses a threat to China's national security and interests, could be used to break up the US "long-arm" jurisdiction on a growing list of Chinese companies in an increasingly brutal face-off between China and the US. In particular, analysts highlighted, the new law could pave the way for state-sanctioned export bans on rare-earth metals, in what they described as a "no chips, no rare earths" tactic, with reference to the US' export control abuses against Chinese technology company Huawei Technologies Co. Zhou Shijian, a senior research fellow at the Center for US-China Relations at Tsinghua University, said: "It makes no sense for the Trump administration to use chips made with rare-earth metals from China to suffocate some of the best Chinese companies," Zhou said. "The US fifth-generation joint strike fight F-35 uses 500 kilograms of rare-earth metals per plane... that should be stopped, too,” Zhou said, adding that Chinese rare-earth metal exporters implementing such bans could recuperate their losses from an insurance scheme citing the force majeure clause. Click here to read... [11]

Report: Most exporters do little to prevent foreign bribery

An anti-corruption watchdog on Oct 13 ranked the United States and United Kingdom as the largest exporters most active at enforcing rules meant to prohibit companies from paying bribes in foreign markets, but said many others are doing next to nothing. Berlin-based Transparency International said only four of 47 countries -- the U.S., U.K., Switzerland and Israel, making up 16.5% of global exports -- were actively enforcing legislation against foreign bribery in 2019. That's down from seven countries, making up 27% of exports that were conducting active enforcement in 2018. "Our research shows that many countries are barely investigating foreign bribery," said Gillian Dell, the lead author of the Transparency report. "Unfortunately, it's all too common for businesses in wealthy countries to export corruption to poorer countries, undermining institutions and development."The 1997 Organization for Economic Cooperation and Development convention prohibits bribes to win contracts and licenses, or to dodge taxes and local laws. Click here to read... [12]

Strategic

US urges think tanks to disclose foreign funding

The U.S. State Department wants think tanks to disclose any funding from foreign governments "prominently on their websites" if they wish to engage with the agency, ostensibly in an effort to counter influence from China and Russia. The department's staff will "be mindful of whether disclosure has been made and of specific funding sources that are disclosed when determining whether and how to engage," Secretary of State Mike Pompeo said in a statement on Oct 13. Such disclosure is a request, however, and not a requirement. Neither China nor Russia is among the top 20 foreign donors to American think tanks, according to a Foreign Influence Transparency Initiative report published in January by the Center for International Policy. Japan and Taiwan rank 11th and 15th, respectively, on that list, with other big funders hailing mostly from Europe and the Middle East. Click here to read... [13]

Suga in push to forge closer ties with ASEAN to counter China

Prime Minister Yoshihide Suga arrived in Vietnam on Oct. 18 as part of a trip that will also take him to Indonesia to bolster ties with ASEAN nations to counter an increasingly assertive China. The tour, Suga's first official visit overseas, is aimed at maintaining and developing Japan’s presence and influence in a region where China is exerting growing maritime and economic clout. “The ASEAN nations are extremely important partners (for Japan) to realize a ‘Free and Open Indo-Pacific (FOIP),’” Suga told reporters before departing from Tokyo's Haneda Airport. “I want to demonstrate Japan's determination to contribute to the region’s peace and prosperity, both at home and abroad,” he said. Japan plans to sign an agreement allowing it to export defense equipment and technology to Vietnam. In 2013, Abe chose the two countries as destinations for his first overseas trip after he became prime minister for a second time. Click here to read... [14]

Japan PM Suga sends offering to Yasukuni Shrine for war dead

Japanese Prime Minister Yoshihide Suga has sent an offering to the controversial Yasukuni Shrine for war dead to coincide with its autumn festival, public broadcaster NHK reported on Oct 17. It would be Suga's first such offering to the shrine since taking office last month. His predecessor, Shinzo Abe, had also regularly sent offerings via an aide on the anniversary of Japan's surrender in World War Two and during the shrine's spring and autumn festivals, refraining from visiting in person to avoid angering China and South Korea. Suga made a visit to the shrine in August 2011, according to a post on his official blog, well before becoming the Abe government's chief cabinet secretary in December 2012. Click here to read... [15]

Pakistan politicians fear losing strategic islands to China

Pakistan's federal government has triggered a political uproar after taking direct control of two islands previously under the regional government of Sindh province. President Arif Alvi signed the Pakistan Islands Development Authority (PIDA) ordinance last month to facilitate reclamation and urban planning on Bundal and Bhuddo islands, which are located south of Karachi. Both islands are some eight kilometres across, and the largest along Sindh's coast. Government officials say PIDA has been created to develop the islands as commercial zones. Imran Ismail, Sindh's governor, has claimed that Bundal on its own can take on Dubai and attract investment of $50 billion -- equal to the amount already tagged for the China-Pakistan Economic Corridor (CPEC), a key component in President Xi Jinping's Belt and Road Initiative (BRI). The ordinance gained public attention in early October after drawing political flak in Sindh and Balochistan provinces. Click here to read... [16]

Chinese military beefs up coastal forces as it prepares for possible invasion of Taiwan

Beijing is stepping up the militarisation of its southeast coast as it prepares for a possible invasion of Taiwan, military observers and sources have said. The People's Liberation Army has been upgrading its missile bases, and one Beijing-based military source said it has deployed its most advanced hypersonic missile the DF-17 to the area. The deployment of missiles on the coasts of Fujian and Zhejiang provinces previously peaked during the presidency of Tsai's DPP predecessor Chen Shui-ban. Ties have come under further strain this year as Taipei moved closer to the United States and signed a series of arms deals, including for Patriot missiles and an upgrade to its F-16 Viper jets. Satellite images show that both the Marine Corps and Rocket Force bases in Fujian and Guangdong provinces have expanded in recent years, according to Andrei Chang, editor-in-chief of the Canada-based Kanwa Defence Review. Click here to read... [17]

Thailand’s Protests Shift Tactics, Influenced by Hong Kong

Thailand’s protest movement—which sustained a steady pace for months—has taken on a different tone in recent days as it steps up calls for Prime Minister Prayuth Chan-ocha’s resignation. Earlier protests typically began with smaller marches to central meeting points where young activists gave rousing speeches on a diversity of issues. They have morphed into larger, hours long occupations of prominent public spaces with participants prepared for police action. Thailand’s protests have echoed some of the tactics seen during Hong Kong’s movement against Beijing’s influence over the city that evolved without an identified leader and used fluid and diffuse strategies to confound authorities. Young organizers in Thailand, for instance, didn’t disclose the sites of Oct 18’s rallies until mid-afternoon, instead asking fellow demonstrators to head toward mass-transit stations and await further instructions. As crowds streamed in, volunteers gave them a crash course in what to do in the event of a clash with police: open your umbrella, don’t resist and don’t use violence. They rehearsed the use of hand signals to direct food, water and protective gear through the ranks. Click here to read... [18]

NATO plans new space center in Ramstein, Germany

Defense ministers from the 30 NATO member states plan to announce the building of a new space center on Oct 15, news agency dpa and the Süddeutsche Zeitung have reported. According to the reports, the base would join with the NATO air force high command in Ramstein, in the German state of Rhineland-Palatinate, and would serve above all as a coordination center for space observation. NATO Secretary General Jens Stoltenberg told the Süddeutsche Zeitung newspaper that he expected member states to agree to the plan before the meeting on Oct 15. He also warned against a "militarization of space," following up on similar comments late last year. While NATO had "no intention to put weapons in space," Stoltenberg had said: "We need to ensure our missions and operations have the right support." According to information acquired by dpa, NATO is also planning on developing a type of think tank for space activities. Two possible locations for this institution are the German town of Kalkar, in North Rhine-Westphalia, or Toulouse in France. Click here to read... [19]

Europe's 'Three Seas Initiative' aims to curb Chinese influence

Twelve countries between the Baltic, Adriatic and Black seas want to jointly develop their infrastructure. The United States has offered its support, aiming to prevent China from penetrating further into Europe. In February 2020, US Secretary of State Mike Pompeo pledged $1 billion (€850 million) for the fund. Further funding measures are expected to be discussed at the initiative's fifth summit that will take place in the Estonian capital Tallinn next week. According to Kamil Zajaczkowski, director of the European Center at the University of Warsaw, Poland: "When the initiative came into being, China did not yet play such a major role; the member countries simply wanted to promote joint projects. Then the US discovered that the initiative could become an instrument in the fight against China's advance in this part of Europe," Zajaczkowski told DW. While most western European states are still deliberating over whether to grant Huawei access to their markets, many central and eastern European countries are going ahead with plans to distance themselves from China. Click here to read... [20]

Iran claims victory over US as UN arms embargo expires

Iran’s foreign ministry has declared the victory of “multilateralism, peace and security”, claiming the UN’s conventional arms embargo effectively expired on October 18, despite Washington's pressure to reimpose sanctions. “As of today, all restrictions on the transfer of arms, related activities and financial services to and from The Islamic Republic of Iran, and all prohibitions regarding the entry or transit through territories of the United Nations Member States previously imposed on a number of Iranian citizens and military officials, are all automatically terminated,” Iran’s Foreign Ministry said in a statement on midnight local time, October 18. “A momentous day for the international community, which— in defiance of malign US efforts—has protected UNSC Res. 2231 and JCPOA,” Foreign Minister Javad Zarif added in a tweet. While Tehran proclaimed it is now free to buy and export arms as it sees fit, it noted that the Islamic Republic’s defense industry is self-sustained and there will be no weapons “buying spree.” Click here to read... [21]

‘Putin’s proposal a non-starter’: White House rejects Russian call to extend nuclear arms control treaty

Washington has refused President Vladimir Putin's offer to extend New START, the last remaining arms control treaty between the US and Russia, for one year without any preconditions.“President Putin’s response today to extend New START… is a non-starter,” the US National Security Advisor Robert O’Brien said in response to Moscow’s offer, adding that Washington hopes Russia “will re-evaluate its position before a costly arms race ensues.” A failure to prolong the key arms reduction agreement, officially known as Strategic Arms Reduction Treaty, would leave the world “without any instruments to curb an arms race,” the Russian president told the nation’s security council earlier on Oct 16. Following America’s unilateral withdrawal from the Intermediate-Range Nuclear Forces (INF) treaty last year, the 2010 New START agreement remains the only active arms-control deal between the two nuclear powers. The treaty is due to expire in February 2021 and negotiations to extend it have so far been deadlocked. Click here to read... [22]

Largest prisoner swap in Yemen war: Over 1,000 people exchanged between Saudi-backed Yemen government and Houthi rebels

The Saudi-led military coalition in Yemen and the Iran-backed Houthi movement have kicked-off an operation that will see over 1,000 prisoners returning home, the International Committee of the Red Cross (ICRC) has confirmed. A total of 1,081 prisoners will be exchanged, in the largest swap deal since the UN-brokered peace talks in December 2018, which later stalled. The ICRC noted the process involves ICRC-operated flights into and out of several cities in Yemen and Saudi Arabia, in line with the accords reached last month in Switzerland. According to the ICRC, the release of 484 former detainees has already been accomplished, as at least five planes carried people between several Yemeni and Saudi airports throughout Oct 15. The massive prisoner-swap operation comes a day after two US hostages, and the remains of another one who died while held captive by Houthis, were released in exchange for 200 Yemenis stranded in Oman after receiving medical treatment there. Click here to read... [23]

Additional police operations under way over beheading of French teacher

More police operations were under way on Oct 19 in connection with the killing of a French teacher by a suspected Islamist, French Interior Minister Gerald Darmanin said.French history teacher Samuel Paty was beheaded on Oct 16 outside his school in Conflans-Sainte-Honorine, in the northern Paris suburbs, by an 18-year-old man who was subsequently shot dead by police. The killing sparked outrage in France and drew condemnation from President Emmanuel Macron and political parties. Interior Minister Gerald Darmanin said there were about 80 investigations under way into online hate speech in France and that he was looking into whether or not certain groups from the French Muslim community should be dissolved following accusations of promoting violence and hate. A police source told Reuters late on Oct 18 that France was preparing to expel 231 foreigners on a government watch list for suspected extremist religious beliefs. Click here to read... [24]

Medical

Europe Overtakes U.S. in New Cases of Covid-19

The 27 countries of the European Union and the U.K. recorded 78,000 cases a day on average over a seven-day period ending on Oct. 12, or 152 cases for every million residents. The U.S. recorded 49,000 a day on average over the same period, about 150 for every million residents. That is the first time Europe has outpaced the U.S. since the virus’s peak in the spring, when the disease was spreading largely undetected because of countries’ limited testing capacity. Europe continues to trail the U.S. in average daily deaths per capita. Over the same seven-day period, the U.S. recorded an average of 2 deaths a day per million residents, double the European average. Both sides of the Atlantic ramped up testing over the summer, allowing countries to uncover far more cases.Some health authorities say that this time around they are detecting cases earlier—when they are less severe—and hospitals are better prepared to treat them. Click here to read... [25]

Second Covid-19 Vaccine Approved by Russia

Russia approved a second Covid-19 vaccine and said it was closing in on a third as Moscow attempts to establish itself as a major player in the global race to end the coronavirus pandemic. Russian President Vladimir Putin said on Oct 14 that a vaccine developed by Vector State Virology and Biotechnology Center, a former Soviet bioweapons research lab, has received regulatory approval. Russian officials said that a third vaccine could be approved in December. Russia became the first country to approve a Covid-19 vaccine in August, despite skepticism from scientists and Western politicians over the speed with which it was developed. Sputnik V, as it was called, received conditional emergency approval after being tested on only 76 subjects. Russian scientists have since released positive data from early studies and embarked on large-scale trials, known as Phase 3, and Mr. Putin told a cabinet meeting that the country must now increase production of its first and second vaccines. Click here to read... [26]

Hard hit by virus, airlines push for tests over quarantines

International air traffic is down 92 percent this year as travellers worry about catching coronavirus disease (COVID-19) and government travel bans and quarantine rules make planning difficult. One thing airlines believe could help is to have rapid virus tests of all passengers before departure. While flying helped carry the virus around the world initially, airplanes themselves have so far not been proven to be super-spreader locations the way business conferences, and meat-packing plants have been. Initial trials focus on testing passengers before departure, either at the airport or remotely. Information about the test result could be documented through a smartphone app. Newer tests can give results in less than an hour. The IATA is calling for rapid, accurate and scalable testing for all passengers. After airline executives appealed for help on this from the EU and the White House’s COVID-19 task force, the issue appears to have moved to a UN forum, the International Civil Aviation Organization (ICAO) based in Montreal. Click here to read... [27]

China city finds no new cases after testing 11M

Qingdao, a coastal city in eastern China, has completed coronavirus testing for its 11 million residents following an outbreak and found no new infections so far. As of Oct 16, the 10.9 million samples came back negative. Xue Qingguo, Qingdao's deputy mayor, told state broadcaster CCTV that the risk of community transmission "is basically eliminated. "The citywide testing was ordered after 13 people were infected in China's first locally transmitted cases in over two months. The source of the outbreak was traced to two dock workers who had tested positive for the virus in September but did not exhibit any symptoms at first. They had visited a hospital in Qingdao and were sent to a CAT scan room, which was not disinfected properly afterward and led to the infection of other patients, according to health officials. Click here to read... [28]