Tag Archives: China

Can P3 Help Tackle Asia’s Corruption Problems?

By Henry Teitelbaum, P3 Planet

(A version of this story previously appeared on Aon One Brief)

The Big Picture

Economic growth, supported by huge flows of foreign capital, has expanded prosperity in many countries across the South and East Asian region, leading to declines both in poverty and political risk.

But now, as China’s growth engine for the region subsides, regional competition for capital is likely to increase. While economic challenges in the short term create uncertainty, a renewed focus on anti-corruption efforts in the region could help states remain preferred destinations for foreign investment over the long-term.

The impact of anti-corruption campaigns in China, India, Indonesia and Malaysia are already being felt, according to the 2016 findings of Aon’s annual Political Risk Map. Across the Asia-Pacific region, tackling corrupt practices in both public and private sectors could not only reduce political risk, but also economic inefficiency. This in turn should support resilience in individual Asian economies at a time when emerging economies remain under intense pressure, helping them to more effectively address their growing infrastructure needs.

The challenge is very real. Urbanization and population growth is driving huge demand for basic essentials such as water, sanitation, transportation and electricity. This will place a clear focus on inclusive, sustainable development, that will reduce the already significant impact of development projects on the environment. At the same time, public financial resources are stretched and existing multilateral bank funding is insufficient.

New multi-lateral lenders, including the Asia Infrastructure Investment Bank (AIIB) may help to attract private investment to meet the region’s infrastructure needs. But ensuring this foreign capital remains for the long-term may also depend on progress in anti-corruption efforts. Clearer legal and regulatory frameworks and more transparent procurement structures could become important ways to accomplish both goals.

Deep Dive

Developing countries in Asia – including India, China, Indonesia, Malaysia, South Korea, Taiwan, Thailand and the Philippines – have achieved great success in generating prosperity, alleviating poverty, and encouraging political stability over the past 20 years. Much of this has been due to their ability to attract foreign investment through skilled labor, low wages, pro-market policies and political stability.

Political and economic risks in many Asian countries have also declined as stable currencies, and in some countries the adoption of pro-market policies the spread of democracy have expanded prosperity and created middle classes. But now, the physical infrastructure that is needed to keep apace with the demands of growing and increasingly urbanized populations is proving inadequate to the task. Asia’s infrastructure market is set to grow to 60% of global demand by 2025, according to PwC’s Capital project and infrastructure spending: Outlook to 2025.

Balancing Reform, Growth and Uncertainty

Nevertheless, as the Political Risk Map reported, countries such as China may face uncertainties in economic policy as their governments try to strike a balance between implementing reform and managing growth. In China, President Xi Jinping continues to consolidate power through his anti-corruption campaign – the economic outcomes of which are likely to be positive – while in India, Indonesia and Malaysia measures to counter corruption are expected to improve political and economic resilience.

“Anti-corruption campaigns may rebalance concerns regarding a stalling Chinese economy, but improvements in political risk do not necessarily translate into economic gains,” says Karl Hennessy, President of Aon Broking and CEO of the Global Broking Centre in London.

“Macroeconomic drivers are behind the current slowdown in China,” Hennessy continues. “While a war on graft is likely to have a positive, long-term impact on China, it may also reflect efforts to stabilize an economy going through an unprecedented deceleration. Following stock market uncertainties earlier in the year and a slide in GDP, Beijing may be turning to additional levers to instill greater confidence in its future economic program.”

The Rise Of Institutional And Private Funding

Outside of China, public funding resources for investing in this infrastructure are largely not up to the task. This is especially the case in poorer countries, where scarce government funding is needed to care for poor, largely rural populations. In countries such as India, this leaves little discretionary public funding available to support investments that would allow public infrastructure to keep pace with growing demands for better schools, healthcare facilities, care for the elderly, water, waste, electricity, broadband and other basic requirements.

As long-term investors in developed countries seek ways to diversify globally, opportunities to attract private investment from abroad to help meet this demand are increasing. However, competition for capital from other countries in the region also means that foreign investors will be weighing the relative risks more carefully than ever.
Existing multi-lateral lenders such as the Asia Development Bank (ADB) are inadequately funded to meet expanding demand for infrastructure, bureaucratic and slow. New multi-lateral lenders, such as the Asia Infrastructure Investment Bank (AIIB) and possible increased in capital flows from regional trade agreements like the Trans-Pacific Partnership (TPP) may help to attract private investment to meet infrastructure needs.

The robustness of legal, regulatory and market structures are important factors for determining where this private capital will gravitate. But corruption, in addition being a drain on public finances, is a major risk factor for both public and private investors and is a key determinant in their choice of where to invest.

In China, where state-controlled enterprises, including infrastructure developers, absorb a huge proportion of the country’s financial resources, the government’s current anti-corruption drive is a central part of its goals to make the state more efficient, thereby freeing up capital in the more efficient private sector.

Some Asian countries, notably India, have significant Public-Private Partnership (P3) programs underway to help tackle their infrastructure needs. When they work well, the competitive bidding and need for transparency involved in P3 tendering can itself help to reduce or eliminate corrupt influences. At the same time, the contract forces greater accountability on to the private sector by specifying penalties for inadequate delivery or maintenance of the asset.

Partnership structures such as these can also bring stability to foreign investment flows into the country, create local jobs, encourage the development of a domestic investor base and even respect for the rule of law. At the same time, foreign institutional investors gain investment and currency diversification and the potential to earn strong returns on investment.

For Asian economies to overcome the potential ripple effect of China’s current economic slowdown and secure sustainable long-term growth, increasing political stability can play a key part. While much progress has been made in recent years, as seen in the findings of Aon’s Political Risk Map, there is still work to be done – and political stability is only part of the story.

Our Fragile Markets, or Why China’s Your Daddy

By Henry Teitelbaum, Editor, P3 Planet

There seems to be very little western investors, governments or central banks can do to stem the tide of contagion from China’s collapsing stock markets.

While it’s tempting to dismiss this selloff as merely a correction in equity markets after they hit sky-high valuations, it’s troubling to see how quickly the wealth of millions of people has evaporated. Of greater fundamental concern for markets is that as China’s export-driven juggernaut slows, there are no real economic growth engines in the world to replace it. The fact is that our economies remain weak and vulnerable, and for that we have ourselves to blame.

During the past 20 years, when China’s booming economy was busy exporting goods and importing western technology and capital, governments in the US and Europe did very little to mobilize investment in the essentials of future growth at home. In Europe, the focus was on futile efforts to rein-in social spending, reform labor markets and keep jobs from disappearing, while in the US little attention was paid to economic fundamentals. Instead, successive governments, Democratic and Republican alike, threw everything behind politically popular efforts to expand home ownership to the millions.

Critically, nothing much happened at either the federal or state level to develop the public infrastructure that would be needed to support a thriving and productive 21st century economy. Whether it was upgrading roads and bridges, rail networks and airports, or building schools and public healthcare facilities, investment utterly failed to keep up with society’s needs. What we got instead was the biggest housing bubble in US history.

US Labor Productivity

Wrong-Headed Crisis Response

Even after that bubble burst, western leaders ignored or were thwarted from making these investments. Across the Euro-zone, governments focused on a self-defeating exercise in fiscal austerity, while in the US, an initial investment in fixing public roads was followed by political gridlock. Despite the opportunity to borrow long-term at historically low cost,  governments in both the US and Europe continually failed to make these urgently needed growth-generating investments.

The private sector has also failed us. Businesses across the US and Europe — rather than make bold investments in their flat-lining economies — have been sitting on their expanding piles of cash for years. Dividends to investors reached record levels while companies waited for that elusive economic turnaround that never seemed to take hold. Predictably, when the investment-starved turnaround finally did come, it was weak and woefully inadequate.

So here we are. The US, Europe and Japan are all still drowning in debt, either outright, or as a percentage of GDP. And investment spending, such as it is, isn’t anywhere near where it needs to be to allow economies to grow their way out of debt. So western economies, markets and indeed their financial systems are all looking very fragile indeed.

Investment Opportunities Ignored

It didn’t have to come to this. Investments in infrastructure create enormous value for economies that fully justify their cost. In the short-term, they generate jobs, which helps to put money into circulation in the economy through increased spending on goods and services. Whether it is public money, or private sector investment through Public Private Partnerships, the multiplier effect that follows quickly generates economic activity and tax revenue for the government.

Longer term, the completed asset supports better services for both the public and private sectors, leading to a more productive economy and a more attractive investment destination for both domestic and foreign businesses. The debt generated from building these public assets can also make for a safe, long-term  investment that can contribute to the stability of domestic markets in the face of turbulence elsewhere in the world.

Studies have repeatedly shown that infrastructure investments, particularly during times of economic bust, generate a much higher fiscal multiplier than other types of government investment, (http://www.frbsf.org/economic-research/publications/economic-letter/2012/november/highway-grants/).

In effect, they provide a Keynesian lift to aggregate demand at precisely the time when it is most needed. Further out in time, according to the Federal Reserve Bank of San Francisco, there’s a medium term boost to the economy when the asset, in their example a public road, increases the economy’s productive capacity.

The SF Fed concludes that combining these multiplier effects can mean that every $1 of government spending produces “at least” $2 of economic output.

China’s Treasury Bond Option

The colossal failure of western developed economies to adopt growth-oriented investment policies means their markets will remain extremely vulnerable to exogenous shocks such as the one China has generated. And it’s not just equities. Treasury yields could be in for a similar shock if China, now the biggest holder of US Treasurys ($1.27 trillion as of June 2015), decides to start selling off its holdings to support its markets.

In the absence of western leadership, what’s likely to happen in our fragile markets going forward will depend on how quickly and successfully China re-positions its economy towards domestic consumption. Let’s hope they decide they don’t need to sell their Treasury holdings to get there.

This blog has appeared in Medium and Business Daily.

Henry is available for freelance commissions and long-term assignments and is reachable at hthq@hotmail.com.

US Assails China’s Infrastructure Bank Plan Amid Muddled Policy At Home

by Henry Teitelbaum, Editor, P3Planet.com

In war, the way is to avoid what is strong, and strike at what is weak. Sun Tzu, The Art of War

SouthChinaSea

US opposition to China’s plan for a new pan-Asian infrastructure bank might some day be a case study for explaining why US efforts to contain China’s reach for regional power and influence failed.

The US and China have been locked in conflict on a range of issues for years. On the trade side, long-standing disputes simmer over access to markets, competition for resources, tariffs and the like. There is also conflict bordering on convert war over copyright theft and cyber-espionage, and in most instances the US is not winning. Continue reading US Assails China’s Infrastructure Bank Plan Amid Muddled Policy At Home