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Decoupling from China – easier said than done

Decoupling from China – easier said than done

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3 years ago

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Investment has kept flowing into China from abroad. This is despite the recent escalation of Sino-US tensions and the pandemic that may have prompted many countries and international companies to consider cutting their exposure to China. Any decoupling from the world’s second-largest economy is likely to be a protracted process.

Beijing has been trying to juggle between fighting a trade war while maintaining China as a benign destination for foreign investment. So far, Beijing has refrained from retaliating against US trade war tactics and the continuation of inflows of foreign direct investment (FDI) appears to show that this balancing act is working.

Decoupling, not yet

Balance of payments (BoP) data shows continued inflows, although the flow has slowed recently[1] (see Exhibit 1). This likely reflects foreign companies restructuring their supply chains in response to

  • Rising cost in China
  • Higher tariffs on Chinese exports due to the trade war
  • Rising geopolitical risk
  • The risk of China shutting down due to the pandemic.

FDI utilisation data (BoP data minus foreign firms’ undistributed and unremitted profits) shows the same trend. However, the narrowing gap between the BoP and the utilisation data (see Exhibit 2) suggests foreign firms have been repatriating profits rather than reinvesting their earnings, or withdrawing investment, from China.

Financial market integration has deepened

Despite the US tariff battles and investment restrictions on China, China-US financial integration has deepened rather than being reversed. This has been a result of China accelerating financial liberalisation, prompted in part by US pressure.

Formerly, foreign financial firms in China were allowed only to operate joint ventures with minority ownership stakes. The liberalisation since 2019 has led to a sharp increase in the number of majority or wholly foreign-owned financial institutions. They include large US firms such as PayPal, Goldman Sachs, JP Morgan, American Express, Fitch Ratings and S&P Global.[2]

Meanwhile, China has been integrated further into the global financial markets: foreign portfolio inflows into onshore stocks and bonds have risen sharply. Inflows have not abated (although equity inflows are more volatile than bond inflows) despite the trade war and the pandemic. They are set to grow as Chinese assets are added to international benchmarks, prompting global investors to increase the weighting of these assets in their portfolios.

Supply chains’ incentive to decouple

Nevertheless, the risks of a prolonged Sino-US trade war and the pandemic have prompted countries and companies to consider moving supply chains away from China to diversify risks. As an example, the Japanese government set up a JPY 243.5 billion fund to assist Japanese companies to leave China[3]. Although the amount is small (about 3.5% of estimated total Japanese investment in China), the signal and incentive are loud and clear. 

President Donald Trump’s threat to decouple from China[4] may turn out to be a long-term US foreign policy because if there is one thing Democrats and Republicans agree on, it is that they both want to check the rise of China, and decoupling from China is seen as a means to that end. Indeed, US companies including Apple, Google and Microsoft have recently moved production to Asian countries such as Vietnam and Thailand and are considering further moves to India and Mexico.

It is all interconnected

However, the world’s integrated supply chains are centred on China and much of the foreign investment is targeting China’s domestic market.[5] A 2019 survey found that 95% of US companies invested in China for its domestic market and 87% had no intention of leaving.[6] Although views may change, decoupling is not an imminent and quick process, as the experiences of some countries can attest.

Japan, South Korea and Taiwan have tried to reduce concentration risk in China and increase investment in southeast Asia. However, their stock of FDI in China has remained large. Furthermore, southeast Asia is deeply integrated into the global supply chains that depend on China, so relocating productions there does not benefit diversification. China’s lockdown during the COVID-19 outbreak hit Japan, South Korea and Taiwan’s production lines directly and indirectly as supply chains in southeast Asia which rely on Chinese inputs for production shut.

De-globalisation means decoupling

Arguably, decoupling from China is part of the de-globalisation trend that has been unfolding for some time. International trade was stagnating before the pandemic, and global FDI had fallen by 31% in 2019 from its peak in 2007. COVID-19 sped up the reshoring as a risk management measure, especially for the production of strategic goods.

The process of de-globalisation forcing supply chain restructuring and decoupling from China may well continue, but it will unfold only slowly. It may lead to the emergence of two competing trading (and technology) blocs in the long term, with one led by China and the other led by the US. Such an outcome will reshape the global trade and technology landscape and have far-reaching investment implications.

Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

[1] The sharp drop in net FDI flows to China in 2015 and 2016 was due to massive outward direct investment by Chinese firms in those years that put significant downward pressure on the renminbi and finally triggered Beijing’s capital control response at the end of 2016.

[2] Lardy, Nicholas and Tianlei Huang (2020), “Despite the Rhetoric, US-China Financial Decoupling Is Not Happening”, China Economic Watch, Peterson Institute for International Economics. July 2.

[3] Reynolds, Isabel and Emi Urabe (2020), “Japan to Fund Firms to Shift Production Out of China”, Bloomberg, April 9.

[4] Lawder, David (2020) “Trump Threat to ‘Decouple’ U.S. and China Hits Trade, Investment Reality”, Reuters Business News, June 24.

[5] See “Member Survey – US-China Business Council 2019”     https://www.uschina.org/sites/default/files/member_survey_2019_-_en_0.pdf , and “Most U.S. Firms Have No Plans to leave China Due To Coronavirus: Survey”, Reuters Business News   https://www.reuters.com/article/us-health-coronavirus-china-business/most-u-s-firms-have-no-plans-to-leave-china-due-to-coronavirus-survey-idUSKBN21Z08K

[6] A February 2020 survey of Japanese companies by Tokyo Shoko Research showed that only about 4% of Japanese companies were considering to exit China      https://www.tsr-net.co.jp/news/analysis/20200220_04.html

Writen by Chi Lo. The post Decoupling from China – easier said than done appeared first on Investors' Corner - The official blog of BNP Paribas Asset Management.

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Are Cold War Treaties Beginning To Crumble?

Are Cold War Treaties Beginning To Crumble?

Authored by RFE/RL Staff via OilPrice.com,

The CTBT, signed in 1996, aimed to reduce the threat…

Published

19 mins ago

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October 16, 2023

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Are Cold War Treaties Beginning To Crumble?

Authored by RFE/RL Staff via OilPrice.com,

  • The CTBT, signed in 1996, aimed to reduce the threat of nuclear war and the spread of radioactive material.

  • Despite the US not ratifying it, most signatories, including Russia and the US, have adhered to its terms.

  • Tensions and increased weapon development hint at Russia's potential decision to withdraw, further eroding international arms control frameworks.

The Anti-Ballistic Missile Treaty. The Intermediate-Range Nuclear Forces Treaty. The Treaty on Open Skies. New START.

For years, the pillars of international arms control have been crumbling: agreements signed by Washington, Moscow, and others during and after the Cold War aimed at reducing the threat of nuclear war, costly arms races, or overall military tensions.

The Comprehensive Nuclear-Test-Ban Treaty may be the next to go.

Signed in 1996, the treaty was a major step to preventing the spread of nuclear weapons technology and keeping a lid on the arsenals of the world's biggest nuclear powers. Along with earlier treaties, the agreement, known as the CTBT, also aimed to reduce the spread of radioactive material that was blasted into the atmosphere and the oceans during the frenzied days of the Cold War.

Here's the problem: The treaty never went into effect because a number of countries, including the United States, never ratified it.

Still, most signatories -- including Russia and the United States, whose arsenals are by far the biggest in the world -- have abided by the ban.

Now, however, Russia is making noises about backing out and "de-ratifying" the treaty.

Here's what you need to know about the CTBT and its potential unraveling:

How'd It Come About?

The United States and the Soviet Union, as well as Britain, conducted hundreds of nuclear tests between 1945, when the world's first atomic bomb was detonated in the U.S. state of New Mexico and 1961, when Soviet officials detonated the world's most powerful weapon, the Tsar Bomba. France joined the nuclear testing club in 1960; China, in 1964.

The fallout, literal and figurative, from the testing led to a partial ban on atmospheric, oceanic, and space tests in 1963; underground tests continued to be allowed.

In 1974, India tested its first nuclear device, further expanding the nuclear club. A 1980 test by China became the last atmospheric test by any country anywhere.

Moscow's final test -- underground -- occurred in October 1990 on the remote Arctic archipelago called Novaya Zemlya. Britain, the United States, France, and China all conducted their final tests in the years that followed, prior to 1996, mainly underground.

What's It Do?

The CTBT basically bans all tests that result in a fission chain reaction, essentially a nuclear explosion.

Signed in 1996, the treaty was sent out to 187 signatory countries for ratification, but it has never come into effect because of a group of holdout countries.

Russia signed and ratified the treaty in 2000. The United States signed, but the U.S. Senate refused to ratify, citing concerns about verifying other countries' compliance with the ban. Despite nonratification, the United States has complied with the moratorium. China signed but didn't ratify.

Neither India, nor Pakistan, nor North Korea -- all of which have conducted open nuclear tests since 1996 -- is a member.

The treaty does allow for states to conduct subcritical, or zero-yield tests. Those involve explosives and nuclear materials but do not result in a fission reaction, the reaction that gives atomic weapons their terrible power. Both the United States and Russia are known to have conducted such tests.

Despite not ratifying the treaty, the United States does provide $33 million annually in funding for a system set up to monitor possible nuclear tests, as well as the Vienna-based organization charged with overseeing it.

What's The Problem Now?

As relations between Washington and Moscow have worsened, major treaties between them have also frayed or collapsed entirely.

Washington unilaterally pulled out of the Anti-Ballistic Missile (ABM) treaty in 2002, angering Moscow. Washington for years accused Moscow of trying to cheat on the Intermediate-Range Nuclear Forces (INF) treaty until it effectively collapsed in 2019. In 2021, Russia withdrew from the Treaty on Open Skies, which allows countries to conduct surveillance flights over one another's territories in order to observe weapons and military sites.

Both countries have adhered to New START, which capped the number of warheads and "delivery vehicles" each could possess.

New START's extension, by both Russia and the United States in early 2021, was a lone bright spot in the continuing erosion of arms control.

But the agreement expires in 2026 and cannot be extended. Unless a successor treaty can be agreed upon and ratified, there will be no limits on the countries' arsenals after that year. Tensions over Ukraine have kept the two sides from even sending inspectors to one another's countries, as stipulated for in New START.

Both countries have also moved to modernize and upgrade their arsenals. But in a sign of deepening distrust, the U.S. State Department suggested in a 2022 report that Russia had not adhered to the standard of "zero-yield" testing.

So Russia Wants To Pull Out Then?

For more than a decade, the Kremlin has increased spending not only on conventional weapons and force strength but also on modernizing and expanding its strategic arsenal.

In 2018, Putin boasted that Russia was developing new weapons like an unmanned, nuclear-capable, underwater torpedo, and a hypersonic "glide" missile. He also bragged of the development of a nuclear-powered cruise missile -- the Burevestnik, which has had major problems.

In recent years, researchers have been monitoring a surge of activity on the Novaya Zemlya archipelago: satellite imagery showing an uptick of construction at one or possibly two settlements that researchers had identified as sites for a possible test of a nuclear device or the trouble-plagued Burevestnik.

A top Russian nuclear researcher called for Russia to resume testing, and on October 5 Putin announced a successful test of the Burevestnik, though he provided no details.

Putin also opened to the door to Russia resuming nuclear testing, saying it could "de-ratify" the CTBT. A week later, on October 12, the speaker of the State Duma, the lower house of parliament, introduced legislation to withdraw ratification.

The prospect of Russia withdrawing prompted alarm bells, including from the CTBTO, the Vienna-based organization charged with monitoring compliance.

What Happens Next?

Even if "de-ratification" ends up happening, as is likely in the Kremlin-controlled parliament, that does not necessarily mean Russia will start blowing up uranium or plutonium again, on Novaya Zemlya or otherwise.

"I think that withdrawal of ratification is a strictly political step -- leveling status with the U.S.," said Nikolai Sokov, a former Russian Foreign Ministry official and arms control expert.

"I think the main motive is the perception that 'Russia tried too hard in the past and made too many concessions' and now 'We're not interested in arms control more than other countries.'"

Leonid Slutsky, head of the Duma's foreign affairs committee, emphasized that Russia would not be withdrawing its signature under the treaty or "withdrawing from the voluntary moratorium on nuclear testing."

"We are withdrawing the ratification, thus restoring legislative parity with the U.S. Congress," he told the newspaper Kommersant.

"It was especially important for [the CTBTO] to hear that revoking ratification does not mean that Russia intends to resume nuclear tests and implies that Russia will continue to fully participate in the work being done for the Treaty's entry into force," Mikhail Ulyanov, Russia's ambassador in Vienna, told the state news agency RIA Novosti.

Still, it's not a good sign, experts say -- all the more so, given the demise of other treaties.

Russia or any major nuclear power backing out of the CTBT "would be a huge blow to the [global nonproliferation] regime and would undoubtedly lead to a cascade of nuke testing by other states," Lynn Rusten, a former U.S. arms control negotiator, told RFE/RL.

There could also be other nonproliferation or arms control treaties that are at risk, since, according to Sokov, the Kremlin has initiated a review of all similar agreements.

One strong candidate for "de-ratification" or a downgrading of Russia's involvement, he said, is the 1992 Chemical Weapons Convention, which obligates members to destroy their stocks of chemical weapons.

Russia's compliance with that treaty has been in question since the near-fatal poisonings of former Russian intelligence agent Sergei Skripal in England in 2018 and opposition activist Aleksei Navalny in Siberia in 2020.

In both cases, Western scientists identified a powerful Soviet-era nerve agent and suggested that Russia had maintained a secret, undeclared chemical weapons program.

Tyler Durden Mon, 10/16/2023 - 02:00

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CHF/JPY further potential up move reinforced by CHF safe haven status

CHF was the top-performing currency among the USD pairs in the past five days. An uptick in geopolitical risk premium has reinforced CHF’s safe haven…

Published

2 hours ago

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October 16, 2023

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  • CHF was the top-performing currency among the USD pairs in the past five days.
  • An uptick in geopolitical risk premium has reinforced CHF’s safe haven status.
  • CHF/JPY short-term and major uptrend phases remain intact with the next intermediate resistance coming in at 167.90/168.30.

This is a follow-up analysis of our prior report, “CHF/JPY Technical: Continuation of potential bullish impulsive up move” published on 10 October 2023. Click here for a recap.

The CHF/JPY has staged the expected impulsive up move sequence and met the 165.20/165.60 intermediate resistance zone as highlighted in our previous analysis; the cross-pair printed an intraday high of 166.12 last Friday, US session, 13 October.

The current short-term uptrend phase in place since the 3 October 2023 low of 160.01 has been driven by the momentum factor supporting the CHF/JPY’s major uptrend phase since the 13 January 2023 low of 137.44.

Also, the rising geopolitical risk premium trigged by the current Israel-Hamas conflict has not abated, and now with the latest attacks orchestrated over the weekend by Hezbollah, a militant group backed by Iran on Israeli army posts in the north may have caused a further rift among key stakeholders in the Middle East region which in turn can further escalate the turmoil in the current “fragile state” of international relations affairs.

CHF maintains safe haven status but not JPY

Fig 1:  USD major pairs rolling 5-day performance as of 16 Oct 2023 (Source: TradingView, click to enlarge chart)

In in state of rising geopolitical tensions, the safe-haven proxy currencies, the Japanese yen (JPY) and Swiss franc (CHF) tend to be the likely outperformers in the foreign exchange market. Based on a five-day rolling performance basis as of 16 October 2023, the CHF has indeed climbed up against the US dollar where the USD/CHF rate is the worst performer among the US dollar major pairs that recorded a loss of -0.48% at this time of the writing.

However, the JPY has lost its safe haven status this time round as the USD/JPY rate has been firmed above 148.25 (the intermediate support in place since 5 October 2023) due to a “hesitant” Bank of Japan (BoJ) that does not give any clear indication of bringing forward its plans in the removal of negative interest rates policy.

Major uptrend supported by bullish momentum

Fig 2:  CHF/JPY major & medium-term trends as of 16 Oct 2023 (Source: TradingView, click to enlarge chart)

After the appearance of the weekly bullish reversal “Hammer” candlestick sighted for the week ended 6 October 2023, the price actions of the CHF/JPY had a positive follow-through that led to the formation of a weekly bullish long-bodied candlestick that ended on 13 October that surpassed the highs of the prior weekly candlesticks seen in the past three weeks.

These observations coupled with an uptick seen in the daily RSI momentum indicator that has yet to reach its overbought zone (above the 70 level) suggest that medium-term bullish momentum remains intact and has increased the odds of a clearance above the 166.60 intermediate resistance (22/30 August 2023 swing highs).

164.75 is the key support to watch in the short-term

Fig 3:  CHF/JPY minor short-term trend as of 16 Oct 2023 (Source: TradingView, click to enlarge chart)

Watch the 164.75 key short-term pivotal support (also the 50-day moving) on the 1-hour chart of CHF/JPY to maintain its current bullish impulsive up move sequence within its short-term uptrend phase in place since the 3 October 2023 low.

A clearance above 166.60 sees the next intermediate resistance coming in at 167.90/168.30 (a Fibonacci extension cluster).

However, a break below 164.75 negates the bullish tone for a deeper pull-back towards the next support of 163.60 (20-day moving average, 9 October 2023 minor swing low & 38.2% Fibonacci retracement of the current up move from 3 October 2023 low to 13 October 2023 high).

 

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International

Wolf protection in Europe has become deeply political – Spain’s experience tells us why

Some European countries view wolf protection differently to others. A look at Spain’s experience may explain why.

Published

2 hours ago

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October 16, 2023

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Wolves are making a comeback throughout Europe – but not everyone's happy. Ramon Carretero/Shutterstock

Wolves are staging a comeback in many areas of Europe after centuries of persecution. Over the past decade alone, they have expanded their range on the continent by more than 25%.

This resurgence was brought into sharp focus in September 2023 following a controversial statement by Ursula von der Leyen, president of the European Commission. She said: “The concentration of wolf packs in some European regions has become a real danger for livestock and potentially also for humans. I urge local and national authorities to take action where necessary.”

But what is the right action to take? Recent decisions by EU member states do not reflect a consensus on the matter.

The Swiss senate has voted to ease restrictions on culling their roughly 200 wolves to safeguard livestock that roam freely in the Alps. Spain, which is home to more than 2,000 wolves and boasts extensive livestock grazing systems, has adopted a contrasting stance.

In 2021, the Spanish government declared wolves strictly protected. It aims to increase the wolf population by 18% and encourage farmers to implement livestock protection measures like installing fences or keeping guard dogs.

An examination of Spain’s motivations for protection may provide some insight into what motivates countries to adopt such different approaches to coexistence.

Ursula von der Leyen giving a statement to the press.
President of the European Commission, Ursula von der Leyen. Alexandros Michailidis/Shutterstock

What does coexistence mean?

In new research that I carried out with several colleagues, we investigated how people in Spain interpret and experience coexistence with wolves. Our findings revealed three distinct and, to some extent, conflicting views of what coexistence means and how it should be achieved.

Read more: How to live with large predators – lessons from Spanish wolf country

“Traditionalists” cared deeply about the landscapes, livelihoods and biodiversity that evolved together throughout millennia of free-range pastoralism. They saw people as a part of nature and interpreted coexistence as a state where the wolf was controlled to not disrupt pastoral activities.

“Protectionists” wanted to restore “wild” nature (with minimal human influence) and believed that the wolf would catalyse this process. They saw coexistence as a state where human activities were controlled so that wolves could roam free.

“Pragmatists” were less fixated on a certain type of nature and more on the relationships and context within each location. They regarded coexistence as a state where the needs of different groups (including wolves) were balanced.

Relaxing or increasing wolf protection has come to represent these different visions of the future. Each of these visions offers advantages to some people and wildlife and presents challenges for others. As a result, the topic has become deeply political.

The politics of wolf conservation

In Spain, the proposal to protect wolves was put forward by protectionists, and aligned with the agenda of the incumbent left-wing government. Podemos, one of the left coalition parties, submitted a proposition for strict wolf protection in 2016 (when they were in opposition) in collaboration with pro-wolf advocacy groups.

By contrast, Spain’s right-wing political parties were firmly opposed. These parties tend to target rural voters, for whom the return of carnivores has come to symbolise the demise of pastoral cultures.

The proposal was ultimately endorsed by the government based on wolves’ “scientific, ecological and cultural value” – largely subjective criteria. For instance, one could argue that the fox, which is not protected, possesses similar values. These criteria do not consider how stringent wolf protection measures might affect other cultural or ecological values, like pastoral farming systems.

Spain’s decision was also influenced by the protectionists’ view of the wolf’s conservation status. A species that is classified as having a “favourable” status (adequate to guarantee its long-term survival) in the EU Habitats Directive can, in some instances, be hunted. However, conservationists disagree about the criteria and data on which this status is based.

For example, an assessment submitted to the International Union for Conservation of Nature Red List in 2018 indicates that the Iberian wolf population is large, stable and slowly expanding. By contrast, a report published by a pro-wolf advocacy group in 2017 claimed that more wolves were killed than born in Spain during that year.

The latter has been accused of being biased and unscientific. However, it did not stop the Spanish Environment Ministry from using the report to reclassify the conservation status of wolves from “favourable” (as it was in previous reports) to “unfavourable”. In other words, information was interpreted, selected and presented in a way that justified increased protection.

The Swedish government, which has been led by a right-wing coalition since 2022, seeks to achieve the opposite. It has ordered the Environment Protection Agency to review if the established threshold for favourable status, set to a minimum of 300 in 2019, can be lowered to enable increased culling.

Free-roaming sheep in Spain.
Free-roaming sheep in the Picos de Europa National Park, Asturias, Spain. Hanna Pettersson, CC BY-NC-SA

This nature or that nature?

To bridge the political divide between protection and persecution, as well as between the restoration of “wild” versus pastoral landscapes, a reevaluation of how decisions are made and what evidence is considered is needed.

Science plays a crucial role in evaluating various policy options and their consequences, such as the effect of an increased wolf population on sheep or deer behaviour. But it cannot determine the “correct” course of action. That choice depends on what people, livestock and wildlife in a particular place need to live well. In other words: context matters.

In most cases, the question is not a matter of choosing between “this or that”, but rather, how we get “a little bit of everything”. Reconciling different interests and finding a way forward requires public participation and, usually, professional mediation. These are the actions that the European Commission should encourage among member states.

With this in mind, it is concerning that the pragmatic interpretation is largely overlooked in the debate. Ultimately, the sustainable coexistence of humans and wolves does not hinge on whether wolves are hunted or protected, or even on the size of the wolf population. Rather, it hinges on how these decisions are made.

Hanna Pettersson received funding from Leeds-York Natural Environment Research Council (NERC) Doctoral Training Partnership (DTP) SPHERES under grant NE/L002574/.

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