Briefing MONTHLY #11 | October 2018
Asia Briefing LIVE Special Edition | Plus: Japan’s yen for Australia and China’s population fiasco
BACK TO THE FUTURE
It is just over a century since the pioneer of Australian business in Asia, David Burns, outlined a sweeping plan for the new Commonwealth to take over development of the South Pacific from Britain, France, Germany, and Japan. He said this was the natural destiny of the Pacific islands although the responsibility would require substantial investment by Australian business and government. Better late than never, but there is now a new bipartisan commitment to Australia taking on this sort of role in the Pacific — albeit with more politically sensitive language than Burns used. Prime Minister Scott Morrison used his first foreign policy speech delivered to Asia Briefing LIVE on November 1 to declare the Pacific to be one of his highest foreign policy priorities because “this is where we live.” He flagged more infrastructure development like the Papua New Guinea/Solomon Islands internet cable taken over from Chinese construction and closer work with Pacific countries on climate change and disaster recovery. But he also said Australia wanted to work with China in the Pacific in an effort to avoid upsetting the improvement in bilateral relations which now seems underway. He revealed to the audience he was meeting PNG Prime Minister Peter O’Neill straight after the speech to announce the joint redevelopment of the Manus Island naval base and increased Australian Federal Police involvement in PNG on the back of the Australian police involvement in next week’s Asia Pacific Economic Cooperation (APEC) conference. Morrison’s speech came three days after Opposition Leader Bill Shorten used a similar speech to the Lowy Institute to back a special infrastructure investment bank for the Pacific and a return to a minister for the Pacific (see: Labor’s Asia below). Shorten notably defended the Pacific worker mobility scheme at a time when unions are pressing the Opposition Leader to tighten labour import rules in trade agreements.
Prime Minister Morrison also used his speech to:
- Reveal a special informal meeting with South-East Asian leaders in Singapore later this month to maintain momentum from the March ASEAN leaders’ summit in Sydney.
- Express confidence the Indonesian bilateral trade deal was still on track and that he expected to see President Joko Widodo soon. But he made no reference to the tensions over Australia’s Israeli embassy location review.
- Foreshadow an announcement on a new Indian economic engagement strategy when President Ram Nath Kovind visits Australia later this month.
- Describe his approach to foreign affairs as one in which he would be “speaking with an Australian voice.”
GEOPOLITICS: TIME TO PICK SIDES
California-based China expert Minxin Pei set the tone for the opening session with a declaration that China’s rising assertiveness really predates President Xi Jinping and so was now forcing other countries to pick sides. He said the US had spent a decade pursuing a high-level dialogue with China to broker a compromise but had now decided (beyond the Trump Administration) that 40 years of China engagement had simply not worked. He outlined a scenario in which Japan, Australia, and Taiwan were the regional US allies, former allies South Korea and the Philippines were becoming hedgers, and India and Vietnam were becoming quasi-allies. And he said the last 40 years had been distinguished by the economically driven integration in the Asia-Pacific region but the next decade would be about fragmentation with the loss of the economic benefits of integration. But Australian National University economist Jane Golley said the world had to be realistic about China and not persist with a rose-tinted view about it evolving into a textbook western-style economy. China had relied on its state-owned enterprises to lead its globalisation from the beginning and it was not realistic to expect this would end as it became the world’s largest economy. And she argued the apparent creation of the Indo-Pacific to play down China’s hegemonic role in the region was simply “wishful thinking.” The Department of Foreign Affairs and Trade senior Indo-Pacific official Richard Maude suggested Australia’s response to these more binary views was to work with other smaller countries to find ways to promote security through more formal and informal regional groups. He pointed out that while the Quadrilateral Security Initiative (the US, Japan, India and Australia) gets a lot of attention, Australia was focussed on a much wider range of so-called mini-laterals. The latest of these is a meeting of officials from Australia, India, and Indonesia to discuss issues of common interest. He noted that the Quad had only had two meetings so far and would “evolve fairly slowly and carefully.” (See: ASEAN and the Quad below) Singapore’s High Commissioner Kwok Fook Seng said that while the emergence of new powers would always create anxiety, the region had demonstrated a much greater ability to sit down and talk about the anxiety. But South Korea’s ambassador Lee Baeksoon was more sceptical saying the Indo-Pacific was not well defined yet. And he warned that there was too much talk about the Quad as a form of alliance for selected countries when there should be more focus on it as a regional cooperation concept. And to emphasise the difference (and perhaps Pei’s point about South Korea hedging), Lee said any country should be able to join a regional cooperation forum.
ECONOMICS: PREPARE FOR A TRADE WAR
Indian Business Standard chairman and columnist TN Ninan cut a somewhat lonely figure at the economists panel with his prediction that the US-China trade showdown would have little impact on his country. Meanwhile JP Morgan chief economist Sally Auld, Australian Super chair Heather Ridout and Labor shadow treasurer Chris Bowen all expressed rising concern about a trade war and its impact on Australia. Noting that business expectations were starting to decline amid the trade tensions Auld said: “The forward signs for Asia are a bit more shaky than we would like them to be.” Forecasting a mild US recession in 12–18 months due to Federal Reserve Board monetary tightening, Ridout said: “A trade war is going to make things worse than they might have been.” Both Auld and Ridout said it was alarming the world was so dependent on US growth that faced higher rates. Auld said Australia had more room for economic stimulus to ward off a downturn than most countries but would not have the benefit of a huge Chinese fiscal stimulus similar to what occurred in the 2008 global crisis. She said this time it “will probably feel pretty nasty.” The economics panel also paved the way for the next business panel discussion about Australian business in Asia with Ridout declaring that business was pulling back from the region in several areas leaving Australia with an inadequate high profile corporate presence. She said it would be harder to take risks in Asia aid with a more unpredictable geo-political climate in the next few years. Bowen said Australian business had no option but expand into Asia if it wanted to keep growing. But with major regional economies shifting from investment to consumption, Australia could no longer rely on its comparative advantage in resources. In the new era Australia had to compete on “quality, engagement and literacy and at the moment we are not, frankly,” he said. Ninan opened the economics session with an explanation of how the Modi government’s GST, bankruptcy, and inflation management changes had shaken up India’s product market. But now the challenge was to open up factor markets for labour and land. He played down the idea of India overtaking the Chinese economy saying it was on a different growth trajectory with less reliance on a manufacturing culture. But in a warning for the Australian farm export sector, he said India was already doing well as an agriculture exporter and would get stronger.
BUSINESS: SUCCESS TAKES TIME IN ASIA
Australian business interest in South-East Asia appears to be growing in the months since the ASEAN-Australia summit in March, according to an executive familiar with business forward planning. Export Finance Insurance Corporation (EFIC) chief executive Swati Dave said she had seen more business activity focussed on ASEAN since the summit and was quite positive about the outlook. HSBC Australia chief executive Martin Tricaud also said he was optimistic about prospects in the ASEAN region noting his bank was particularly bullish about Malaysia, Indonesia, and Vietnam. But an audience poll conducted during the panel showed China was still regarded as offering the best prospects in Asia for Australian business followed by India and Indonesia. Not surprisingly the business panel spent considerable time debating why Australian businesses were not more engaged in Asia. Dave said EFIC’s small to medium sized business clients were often daunted by the diversity of Asian countries and lacked the resources to do due diligence amid this diversity. Queensland Investment Corporation senior portfolio manager and research strategist Steve Holmes said China would remain a highly regulated economy for the rest of his career, but it was still on a liberalising track. He said to be successful foreign business had to understand what Chinese regulation was trying to achieve and develop informal communications networks to understand how it could change. ANZ Group Executive Institutional Mark Whelan said that while the opportunities in Asia were clear it would still take many Australian businesses some time to access them. “This is a slow burn for the country but an important one,” he said acknowledging his bank had experienced its own challenges pursuing an Asian strategy through changing regulations and market cycles. He said it remained very difficult to get support from Australian investors and boards for an Asian business strategy that could require up to ten years to work well. But as a relative newcomer, Tricaud said he thought Australian business was very well placed to make progress in the region given the country’s network of trade agreements with so many neighbours. To read more about Asia Briefing LIVE, view the photo gallery and watch the Prime Minister’s address, visit our website.
NEIGHBOURHOOD WATCH
ABE AT HOME AND ABROAD
Japan’s Prime Minister Shinzo Abe has underlined his growing aptitude for high intensity diplomacy with back to back summits with China’s President Xi Jinping and India’s Prime Minister Narendra Modi. The visit to Beijing was the more significant as the first visit by a Japanese leader for seven years, signalling an easing in the tense relationship between the two countries since Abe and Xi came to power in 2012 as the scions of famous political families. A claimed US$18 billion in business agreements were signed during the visit underlining how Japanese investment has been flowing back to China this year with Chinese official encouragement. But the more significant development was the tentative agreement between China and Japan to cooperate on regional infrastructure development possibly ending the standoff over China’s Belt and Road Initiative. However, Abe managed a masterclass in hedging by returning to Japan straight into the summit with Modi — the 11th meeting the two leaders have held. Abe underlined the chumminess of this relationship (compared with Xi) by making Modi the first foreign leader to be invited to his holiday home. While infrastructure distinguished the China summit, Abe and Modi focussed more on how their countries could cooperate in technology development. But there are challenges ahead for both these relationships.
- Yoichi Funabashi says there is only so far Japan can go with China given their history.
- Rupakjyoti Borah says Japan and India could achieve much more and need to step up quickly.
ASEAN AND THE QUAD
The first survey of attitudes towards the Quadrilateral Security Dialogue (AKA the Quad) in South-East Asia has revealed a more diverse set of views than has generally been reported since the revival of the informal security group last year. The research by Australian Strategic Policy Institute researcher Huong Le Thu found majority support for the four nation (US, Japan, India, and Australia) group in some form, but little support for an expansion of the group to include South-East Asian countries. Views were fragmented across the ASEAN region with the strongest support in Vietnam and the Philippines and the weakest support in Indonesia and Singapore. Le Thu says the findings show the need for the existing four Quad members to better communicate their intentions.
NEW COUNTRIES
The rejection of independence in the New Caledonia referendum on November 4 has ensured France will remain deeply committed to Pacific security issues to the relief of an Australian government undertaking more of its own regional responsibilities. But the relatively narrow rejection of independence seems likely to mean the battle will go on with repeat referenda scheduled for 2020 and 2022, when the geo-politics of France and the Pacific region may well have changed. Meanwhile with one unpredictable potential new neighbour on hold, Australia will now need to turn its attention to the similar vote in Bougainville, probably next June, on whether it will split from Papua New Guinea.
ASIAN NATION
LABOR’S ASIA
Federal Labor is going to the next election with a detailed, pre-announced program that hearks back to the era of John Hewson’s Fightback — and this month it has been Asia’s turn. Building on the framework of FutureAsiaannounced last year, Opposition Leader Bill Shorten has promised an infrastructure investment bank to focus on the Pacific, the revival of a Pacific affairs and international development minister, better relations with Fiji, and a specific focus on South-East Asia. And on the key issue of China Shorten says: “The next Labor government will not deal with China purely through the prism of worst-case assumptions about its long-term ambitions. Pre-emptively framing China as a strategic threat isn’t a sufficient response to its role and increasing influence in our region. These kinds of false binaries take us nowhere.” It was interesting to see Shorten try to recover the Japan relationship from Liberal-National hands (the 1957 Commerce Agreement) by claiming the real bilateral political relationship began with the Nara Treaty driven by former prime minister Gough Whitlam. Meanwhile deputy leader Tanya Plibersek has promised $32 million for 100 Asian language teaching scholarships, Asian expertise training for principals, better language data collection, new Asian language take-up targets, and a regular meeting of Indo-Pacific education ministers. And rounding this out shadow foreign minister Penny Wong has promised four new Indo-Pacific diplomatic posts and a network of new embassy counsellors focussed on geo-economics.
VICTORIA BELTS UP
Just when China’s infrastructure building Belt and Road Initiative is facing heavy going in Asia’s democracies led by Malaysia (but also Indonesia, Pakistan, Sri Lanka, and the Maldives), Victoria has leapfrogged the federal government and signed its own MOU with China. It is intended to help Victorian companies get into BRI backed projects and follows a doubling of Victorian exports to China. But the details haven’t been released.
ANU’S TRIFECTA
The Australian National University has always liked to style itself as the country’s Asia-focussed tertiary institution despite some longer history at other places. It has had a busy time over the past few weeks bolstering its status. The College of Asia & the Pacific signed a collaboration agreement with PwC Australia to share knowledge and provide student internships. The Crawford School launched a new public database tracking Chinese commercial investment in Australia. And it is revamping its Asian economic research into a new Asian Bureau of Economic Research with $3.9 million in funding from the Federal Treasury over the first five years to finance collaboration with institutions across the region.
CHINA BY THE NUMBERS (of studies)
Everybody knows China is our biggest trading partner ($175 billion a year) and biggest sources of tourists (1.4 million and counting), but perhaps we need a new index of thinktank studies about the country. The past month has been particularly busy, and here’s what made the cut.
- At the Australia China Relations Institute, James Laurenceson has looked exhaustively at what he calls the China Panic of the past year and says the underlying facts are far from convincing.
- At the Australian Strategic Policy Institute, Alex Joske has counted the number of Chinese military scientists studying at western institutions in the past decade and says the number coming to Australia is particularly notable.
- At China Matters, Andrew Chubb calls for more Australian cooperation with South-East Asian nations to manage Chinese claims on the South China Sea.
The Asia Society Policy Institute’s latest China Dashboard suggests that China is falling behind on economic reform as it faces growing trade pressure from the US.
DEALS AND DOLLARS
GOING LONG ON JAPAN
Cracked abalone shells and missing digits on a video display don’t have much in common. But they capture the essence of the challenge Australian businesses have taking advantage of the new opportunities in Japan beyond the resources trade which has dominated this bilateral relationship for half a century. Taking the long view was the theme of the latest annual joint conference of the Australia-Japan Business Cooperation Committee (AJBCC) in Sydney in October. Tim Rudge, from abalone producer Yumbah Aquaculture, illustrated the challenge this can present for an Australian company stepping into the Japan market which is a key part of Yumbah’s plan to double its Australian production. He said a cracked abalone shell was not a big issue in Australia but in Japan it was viewed as a disrespected product. “It’s taken us a long time to adjust our product and the way we deal with our product to Japanese standards,” he told the conference. “Japanese attention to detail is the highest in the world. A she’ll be right attitude won’t work.” This prompted Masato Tanaka, from healthcare company Teijin Pharma, to outline how it had taken a long time from its Australian medical equipment supplier Resmed to come to grips with Japanese consumer needs. He said the consumers would reject respiratory devices that were fully functional even if a single digit was missing on an LED screen. “From the Japan side, it is important to explain why things are required in this market,” he said. AJBCC chairman Rod Eddington says: “As Japanese and Australian companies collaborate more, one of the things we learn from our Japanese counterparts is the importance of having a long-term vision for our business. And how important it is to think through the implementation of a good idea carefully before you move to action. For a company based here in Australia, the learnings from Japan are very powerful.” One of the new focus sessions at this year’s conference was on long term planning for smart cities where there is a growing Japanese company interest in bringing their expertise to Australia’s infrastructure projects. NSW Premier Gladys Berejiklian later signed two agreements with Mitsubishi Heavy Industries and Sumitomo Mitsui Financial Group to establish a presence in the Western Sydney Aerotropolis.
YEN FOR AUSTRALIA
The Japanese appetite for Australian finance businesses has continued with Mitsubishi UFJ Financial Group buying Commonwealth Bank’s Colonial First State Global asset management arm for $4.1 billion. The deal follows Nippon Life Insurance buying MLC in 2015, Sony Life buying Clearview Wealth in 2016 and TAL Dai-ichi Life buying Suncorp Life in September.
HITTING THE GAS
The business links between Japan and Australia may be diversifying but the resources connection has been underlined by the first shipment of liquified natural gas from US$40 billion Ichthys project off Darwin just after the annual AJBCC conference. The project is Japan’s largest single overseas investment and the first operated by its largest hydrocarbon company Inpex. Inpex Australia president director Seiya Ito said: “The first cargo from Ichthys LNG is a historic moment for INPEX Japan and Australia. It demonstrates our commitment to being a safe, reliable long-term energy supplier.”
CBA EXITS INDONESIAN LIFE
The Commonwealth Bank has sold its Indonesian life insurance business to pan-Asian insurer FWD Group for $426 million in the latest Australian bank sell down in the region. But as part of the deal CBA Indonesian banking business will enter a 15 year life insurance distribution arrangement with FWD which may result in further payments to CBA over time. The sale is part of a general exit from life insurance for the bank including from BoComm Life in China.
CCA REVIEWING INDONESIA
Coco-Cola Amatil is reviewing the value of its Indonesian investment after its parent company wrote down the value of its stake in the same business by 29.4 per cent. CCA values its Indonesian and Papua New Guinea bottling business at $711 million in it 2017 annual report but says it doesn’t have to follow its parent’s lead because the timing of the investments in Indonesia was different. CCA has been running the Indonesian business since 1992 and it is one of the largest Australian investments in the country. The US parent said its write-off reflected revived earnings estimates and the weaker rupiah.
TAKING THE THAI ROAD
Car parts company Bapcor is pushing ahead with its strategy of selling Australian car parts in Thailand, the so-called Detroit of the East. The company opened a second Thai store in October with plans for three more in future months. Chairman Andrew Harrison told the annual general meeting there were challenges in the complex Thai market but the company still saw it as a “significant opportunity.”
DIPLOMATICALLY SPEAKING
“I have had a very constructive conversation with (Indonesian) Foreign Minister Marsudi, whom I’ve known for some time, and indicated to her the status of this process as a review and indicated to her that we would welcome hearing the views of both Foreign Minister Marsudi and her government.” Foreign Minister Marise Payne explaining the Israel embassy review in Senate estimates.
DATAWATCH
Indian Prime Minister Narendra Modi and Indonesian President Joko Widodo both promised to push their countries up the annual World Bank Ease of Doing Business ranking by the end of their first term in office next year. Modi targeted a number 50 ranking and Widodo aimed for number 40. In the latest rankingIndonesia is still in front (and up 47 places in four years) but India has made more progress (up 57 places).
WHAT WE’RE READING
ONE CHILD: LIFE, LOVE AND PARENTHOOD IN MODERN CHINAby MEI FONG (One World)
It is hard not to constantly recall that old rejoinder that something “is not rocket science,” while reading Mei Fong’s very personal account of China’s one child policy. At the end of the chaos wrought by the Cultural Revolution, it was only elite scientists (and specifically a rocket scientist) protected by the military who had the academic clout and — apparently — the analytical capability to come up with such a dramatic demographic change. Fong’s account of how a narrow technocratic elite could impose such a policy without really taking into account the human and economic consequences makes for bracing reading today. That’s because China is again trying to unravel other once single-minded policies — like pumping up the economy with increasingly inefficient state-backed debt. The one child policy was officially abandoned after more than three decades in 2015, following various efforts to soften its harsh edges by more humane economic reformers and pragmatic local officials. But Fong argues that once again economic planners are not up to predicting human behaviour. Despite the brutalisation wrought on Chinese people by the sterilisation, criminalisation and deceit associated with the one child policy, she says it has now been internalised by Chinese families. That leaves a country often lampooned for its sole child “Little Emperors” with the reality that those pampered individuals will eventually have to support two parents — and in some cases four grandparents.
ON THE HORIZON
SUMMIT SEASON
Fresh from presenting his foreign policy approach at Asia Briefing LIVE, Prime Minister Scott Morrison will be put to a practical test as the annual diplomatic summit season gets under way next week. First up is the East Asian Summit (EAS) in Singapore on November 14–15 where Morrison will have an informal summit with ASEAN leaders to follow up the Sydney ASEAN Summit in March. Then it is on to Port Moresby for the Asia Pacific Economic Cooperation (APEC) group summit which Australia has spent more than $100 million helping PNG host. At the end of the month the Group of 20 (G20) major economies will hold their annual summit in Buenos Aires. APEC used to be the biggest game on the Asian summit scene but has tended to be pushed aside by the EAS these days, while the G20 is struggling to regain the influence it had during the global financial crisis ten years ago.
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