Is 'China crisis' disproportionately overblown?

RAINY DAYS AHEAD. Chinese leaders Xi Jinping and Li Keqiang are now bracing a stormy weather as the economy is growing at its slowest pace in more than 25 years, a situation that has incited serious concerns among international observers.

(Photo courtesy of Andy Wong / Associated Press)

China is on top of minds of international media and economic policymakers recently as its equity markets nosedived and its currency fluctuated wildly. The world's second-largest economy is estimated to record only 6.9 percent of gross domestic product (GDP) growth throughout 2015, the slowest annual expansion in more than twenty years, and investors' major fear factor is that China could record another deeper-than-expected slowdown this year. 

Stock indices around the world saw massive sell-offs on fears the collapse of China may take the whole world with it. Market speculator George Soros cautioned that recent China-triggered volatility might mean the 2008 global financial crisis is bound to repeat. 

But, as the world is on edge over possible crash in China, citizens living in the Mainland now might be wondering perplexingly: Where's the crisis? 

Here in Beijing, consumer spending is as strong as ever as people are still flocking into shopping centers. malls and supermarkets remain crowded despite the recent boom of e-commerce businesses, which encouraged more people to turn to internet startups such as Taobao (China's version of Amazon) to buy online their necessities from food, clothes, to detergent.

My friend who is working in a global consumer goods company admitted that her company noticed declining sales throughout China, but noted that it was caused by fiercer competition due to strong growth of local Chinese brands, not by weaker demand. 

Outside the capital, local tourists still passionately flocked into sightseeing spots. The last time I traveled outside the city with a high-speed train, whose tickets are considered generally expensive for the standards of Chinese locals, it was full and there wasn't any single vacant seat as far as my eyes could see.

Unlike in 2008. when the stock and housing market crash in the US rippled to its real sector through rampant layoffs and morgage closures in a zap, optimism among the Chinese people remains intact despite the slowdown and the constant, worrying drop in stock markets in Shanghai and Shenzhen since mid-2015.

Most importantly, the phases of "economic crisis" or "market crash" were never mentioned by my economics professors in Peking University, a campus that is known for a culture of being critical towards the Chinese government. They just showed no gestures of worry at all. 

One of my professors cooly explained that Chinese policymakers might have decelerated growth by purpose, as the too fast economic growth predisposed the country into overheating. This is why, despite the lingering slowdown, China's fiscal and monetary policy stances were still set in a rather "tight" setting, not expansionary. 

The no-big deal viewpoint of my professors is shared by most Chinese: Their country is growing slower, but it is far from falling into an economic destruction. In short, the nation is just experiencing a rational slowdown needed to steer the economy into a healthier and sustainable growth path, which would mean more efficient utilization of resources and less pollution. 

Over the two decades, annual GDP growth in China has averaged around an impressive 10 percent, underpinned by mostly investments, as well as exports. 

As China's reliance over investments grows, its efficiency also falls, hence the long-run unsustainability of this growth model. As capital accumulates, the output-capital will trend lower, meaning that China would need higher and higher level of capital if it wants to record the same level of growth. 

For China to stubbornly rely on investments will only lead to piling up of debts, inefficient usage of resources and overexploitation of environment. This is why China wants to shift its growth driver away from investments, which now account for 46 percent of its GDP, to household consumption, which fills 36 percent of GDP (that's a meager level of consumption for the world's most populous country with 1.3 billion of population). 

Some of China's leading economic indicators, such as manufacturing index and factory output, are indeed slowing. However, those readings are sensible in a country where its government is now aggressively shutting down many factories and enacting various regulations to force industries to adopt cleaner, more efficient technology, in response to China's serious pollution problem. 

Chinese underperforming provinces that became the biggest laggards to national growth, for example, are either exposed to dirty commodities, or are known for their inefficient and polluting factories that make them soft targets of the government's environmental crackdowns.

For example, annual GDP growth fell to 2.7 percent in the first half this year in Shanxi, which is the country's top coal producer. Other Chinese provinces that also experienced sharp growth slowdowns were Inner Mongolia, which provides around one-third of China's coal supply; Hebei, a leading steel producer; and Heilongjiang, a manufacturing base with substantial oil production. 

Meanwhile, in the capital or other China's emerging provinces, growth remained robust, thanks to the booming service sector. GDP growth in Beijing, which has a population of 22 million, or twice Jakarta's, is expected to hit at least 7 percent throughout last year. Where in the world a crisis-threatened country still sees its capital growing by 7 percent?

Another possible reason why some provinces have reported lower growth than in recent years could also be related to the clampdown performed by the Chinese central government to regional leaders who are suspected to "inflate" their statistics (I've read reports saying output or investment figures in some provinces could be inflated by more than 20 percent).

This is because in China, regional leaders are appointed by the central government, not elected, and promotion or demotion will depend largely on their performance of managing their areas, which is indicated by economics statistics. Now, they might have to settle with reporting lower, but more credible, growth figures. 

China's economy has its defects, namely the lack of policy oversight, rampant corruption and the underdevelopment of its financial sector, among others. However, I see many fears about China were overblown as foreign media and economists take a too simplistic view by labeling its policy implementation inefficient, its economic future risky; just because China is a non-democratic country with an idiosyncratic policymaking approach. 

Quite the reverse, China's centrally planned economy, where all economic organs could be flawlessly steered to a specific direction, actually made it extremely efficient. The well-coordinated, communist-style implementation of fiscal stimulus in the aftermath of the 2008 global financial crisis was the reason why China could return to 10 percent growth only two years after the crisis - an economic recovery that is faster than any countries in the world.

For Indonesia, China is its largest trading partner and every economic developments in the Mainland would have a significant impact outlook for Indonesia's exports, economic growth and even its rupiah. The two countries were so heavily linked that the International Monetary Fund (IMF) has estimated that every 1 percent of slowdown in China could trim down Indonesia's growth up to 0.5 percent. 

Nevertheless, the situation in China might not be as scary as global policymakers imagine. Indonesia and the rest of the emerging markets world just have to deal with the "new normal" of global growth as the Asian giant seeks a slower, but more sustainable, economic expansion. 

The article was published in The Jakarta Post on Friday, January 15 2016  

The ore export ban: What would Soekarno do?

THE HELL WITH YOUR AID. Soekarno jokingly pinches a nose of a foreign journalist on the sidelines of a press conference. The first president of Indonesia was known for his ultra-nationalist policies and for his excessive hatred towards foreign firms, notably those coming from the West. 

(photo courtesy of Life)

If Soekarno still lives and leads the country now, perhaps he will have banged table in a Cabinet meeting in fury, screaming his frustration right on the face of his ministers on how they had been so weak and bowed to pressure exerted by foreign mining firms in the new mining law.

The law, which will ban exports of raw mineral ores starting Jan. 12 next year, was initially introduced to help Indonesia to curtail the dependency towards raw natural resources through promoting the development of value-added industry, at the same time stopping the country’s highly-priced raw minerals to be “exploited” by foreign mining giants.

The 2014 raw ore export ban has been on the table for years, long enough for foreign mining firms operating here to prepare themselves, yet they have been kicking the can down the road, crying foul over the obligation to build mineral-processing smelters because such an idea, in their view, was not commercially feasible.

Truthfully speaking, the foreign mining firms have taken the issue lightly. Perhaps the perception that all Indonesian bylaws are negotiable, that all government officials would be easy to persuade, that this country might need foreign investors more than the other way around, have made them to think that such a ban might be no more than a bluff.

So when the deadline is due and the House of Representatives shown their seriousness to enforce the law, the foreign mining firms were shocked. They then did everything from lobbying top economic ministers, to giving counterbluffs in the media over the potential layoffs and huge economic losses that could materialize if the ban of raw minerals took place.

What foreign mining companies like Freeport-McMoran Copper & Gold Inc. forget is that an Indonesian law is still a law. No matter how seemingly weak the country and its officials who enforce it, and now matter how powerful and influential your company is, an Indonesian law is something that all firms operating in this country’s soil must comply to.

Imagine that today the 21^st century Soekarno surfed the internet through his gadget and unexpectedly bumped into the news published by Bloomberg newswire on Dec. 17, titling “Indonesia’s Cabinet to Discuss Ore Ban Amid Freeport Queries”.

What will Indonesia’s first president say to Coordinating Economic Minister Hatta Rajasa, Energy and Mineral Resources Minister Jero Wacik, Industry Minister MS Hidayat and Finance Minister Chatib Basri?

“I, together with the other founding fathers, sacrificed soul and blood for the independence of Indonesia…but now you lads allow this country to be dictated and steered by a US company like Freeport,” Soekarno might say. “What kind of ‘independent’ nation is this?”

In many cases during his presidency, Soekarno might be known for his overindulgence nationalism and excessive hatred towards foreign firms (especially to the US, he was legendary for his “go to hell with your aid” remark).

However, Soekarno’s nationalistic viewpoint couldn’t be more relevant to be applied today. This is because in the case of the new mining law, many foreign mining firms have crafted strong propaganda of how their contribution to the economy was so immense, and that Indonesia needs them more than they need us and our natural resources – while in reality, it may be the other way around.

Nationalism can breed both bad and good policies. For instance, nationalistic sentimentthat threatens to impede the plan to revise negative investments’ list (DNI) can be seen as bad, as it could limit the foreign direct investments inflows that Indonesia needs for a strong, sustainable economic growth in the long run.

But, the nationalistic plan to ban raw mineral exports next year is a good policy, as it could help Indonesia to climb up the supply chain by exporting more value-added goods, which eventually would lead to higher export earnings in the long-run, followed by other positive multiplier effects to the economy, such as higher absorption of skilled labor in the mining sector.

Of course, there shall be short-term pains if the law really proceeds. A potential loss from the implementation of the export ban would be $6 billion, which would add the country’s current account deficit by at least 0.6 percent of gross domestic product (GDP) next year, according to the World Bank.

But even the US-based organization acknowledged that the mineral exports ban would be beneficial for Indonesia in the long-run.

“From 2015, the ban would result in a relatively neutral impact on the trade balance, relative to the baseline, as..[..]..gains from higher value processed exports begin to offset the loss unprocessed mineral exports arising from the ban,” the World Bank wrote in its quarterly economic report released this week.

In other words, the implementation of the raw ore exports ban to Indonesia will be like a medicine injected within the body: it is bitter and painful in the near-term, but will turn out to be very beneficial for us in years to come.

Indonesia’s economy has stagnated in the middle-income level for a really long time, and critics have pointed out that only bold, out-of-the-box policymaking mindset could help this country to jump up to the manufacturing level and thus avoid the “middle-income trap”. For our policymakers, now may be the right time to do just that.

If mining firms complain that smelters to process raw minerals cannot be completed until 2016 or 2017, then it’s their fault for underestimating the issue – Indonesia has given them enough time, now it’s the need for them to think on how to expedite the smelter’s building process, if they want to avoid incurring bigger economic losses.

It is important for government officials to maintain credibility in its policymaking and law formulating process, because what’s at stake here is our country’s reputation in the eyes of foreign investors.

Were Soekarno still live, there’s no doubt that he would have shouted to his ministers to go ahead with the law, and then motivating the people to rally behind the government. 

Afterwards, the whole international community shall know that a law in this country is non-negotiable and Indonesia can get really tough on that – hence, they will never take any issues with the government lightly again in the future.

This article was published in The Jakarta Post on Monday, December 23 2013

Bank Indonesia is too late to save rupiah

For the local market players, the rupiah rate of 10,000 per US dollar is a sacred and crucial psychological threshold.

And that’s what Bank Indonesia (BI), the central bank, has failed to protect. The rupiah has ultimately hit the five-digit this week, a situation that some define as a perception of crisis. It happened mostly because BI apparently underestimated the magnitude of rupiah’s pressure in June, a period when the demand for dollars is usually at its heights due to surging companies’ earnings repatriation and foreign debt payments.

In April, the US-based JPMorgan Chase, a major player in foreign exchange (forex) business here, already reprimanded BI that foreign investors were beginning to become nervous about the availabilityof dollars in the upcoming months.

 In May, newly-appointed Finance Minister Chatib Basri warned that uncertainty over fuel subsidies could trigger massivecapital outflow, which could put pressure to the rupiah.

But BI stood still, keeping its monetary stance unchanged. The fruit of such negligence might be seen today, when both the aforementioned warnings become reality, with the rupiah’s sharp downswing already sending jitters to the market and prospective investors.

Under the leadership of Darmin Nasution, the central bank actually succeeded in coping with the escalating pressure of the rupiah in January, when BI was forced to heavily intervene in the market, splashing $4 billion of its forex reserves to prevent the rupiah from breaching the 10,000 barrier. The rupiah might already break the psychological level without the intervention, economists say.

And there are still weakening threats from offshore speculators using the rupiah as their wager. In January, an investigation in Singapore concluded that the rupiah rates there were actually manipulated by some banks, which colluded before submitting their respective rates, in order to reap short-term profits.

Facing escalating pressure for the rupiah, BI took action by hiking its overnight deposit facility rate (Fasbi) rate by 25 basis points to 4.25 percent on Tuesday evening. Hiking the rate would support the rupiah as BI could absorb excess liquidity in the market, as higher Fasbi rate means that lenders now have more incentives to make overnight deposits in the central bank.

But, isn’t this a step that is taken too late? Since beginning of the year, economists have warned that the spread between Fasbi and BI rate (now 5.75 percent, unchanged for 15 consecutive months) might be too wide, expecting a swift adjustment to support the under-pressure rupiah.

In fact, if BI had hiked its Fasbi rate one or two weeks earlier, the pressure for the rupiah might be well anchored, hence a strong possibility that the currency might have been still safe at 9,700-9,800 level at the moment.

The weakening rupiah is a threat for future inflationary pressure, as imported goods would soon become more expensive. Besides, it is worth noting that BI will most likely fail to meet its annual inflation target of 5.5 percent, with the central bank already forecasting that inflation this year could top as high as 7.8 percent due to the impending fuel price hike.

Weak rupiah is also a deterrent for bonds investors, who might find investing in Indonesia's bonds market as no longer attractive as their profits shrunk due to currency loss.

 Nevertheless, it’s not fair to blame BI too much from the current situation. The central bank should not be the one holding the biggest responsibility for the recent mess – BI, in fact, has been carrying way too heavy burden of maintaining stability at times when the government’s stupidity continues to systematically cripple the economy.

The pressure to the rupiah stems from the persistently high current account deficit, which continues to widen because of soaring oil imports. President Susilo Bambang Yudhoyono actually could solve the situation by hiking fuel prices (he has the authority to adjust fuel price without parliamentary approval), yet he remained undecided on the issue.

At times when our economy is facing challenging moments like this, the President even reshuffled its economic team, replacing Darmin with new Governor Agus Martowardojo in May.

With rupiah now heading into vicious depreciation cycle, that decision turned to be a howler: looking at Darmin’sreputation as an astute economic forecaster, there is strong possibility that he would be able to manage the situation better compared to Agus, who is still adjusting with his new life in BI.

With deliberation of fuel price hike is still ongoing, the hardball lies not only in BI, but also in the hands of the President and his fellow politicians in the House of Representatives.

And this time, they had better not be late. The uncertainty must be ended very soon to safeguard our economic sustainability, looking at how foreign investors now running away from the country in such rapid, alarming pace.

Surely we do not want massive capital outflow and exchange rate overshooting to continue, wrecking the economic fundamentals that we have carefully built since the 1997 financial crisis destroyed them all. 

This article was published in The Jakarta Post on Thursday, June 12 2013

Why so pessimistic about Indonesia?

CONFIDENT VIEWS. Stalling reforms and rising political risks have not deterred foreign investors to pour money into Indonesia, although recent economic slowdown and widening budget deficit will pose notable challenges for government officials. (From left to right) Finance Minister M. Chatib Basri, Industry Minister M.S. Hidayat, Bank Indonesia Governor Agus Martowardojo, Coordinating Minister for Economics Affairs Hatta Rajasa.

(photo by Nurhayati for The Jakarta Post)

  
Soon after international ratings agencyStandard & Poor’s (S&P) downgraded the outlook for Indonesia’s economy from “positive” to “stable”, economists and market analysts were quick in uproar, arguing that the economy might be heading into downhill.

Having been reluctant to grant Indonesia an investment grade status for its sovereign debt papers, the S&P instead gave the prestigious rating upgrade to the Philippines, dealing severe blow for Indonesia and its mission to pump in more investments that have become the country’s major growth driver in the last few years.

Facing economic slowdown and soaring budget deficit, Indonesia may soon lose its charm as the darling of overseas investors, so went warnings uttered by some economists.
However, the stories that went unnoticed from the S&P’s downgrade was the persisting optimism among foreign investors towards Indonesia, despite the downgrade in its economic outlook.

In theory, a downgrade in credit rating should directly affect demand for the government’s sovereign debt papers among investors, who first looked towards the official recommendation of ratings agencies before putting their money in a certain country.

Strangely, investors remained stubbornly queuing to invest in Indonesia’s debt papers. A government bonds auction on May 6 – held only two working days after S&P downgraded its outlook on Indonesia’s sovereign – was more than two times oversubscribed, with total incoming bids for the rupiah-denominated debt papers topping Rp 20.1 trillion (US$2 billion), far higher than the indicative target of Rp 8 trillion.

The yields only rose slightly in the auction. Bid-to-cover ratio (an indication of bonds’ demand among investors) for debt papers that mature in 15 and 20 years was more than 1.5, an indication that investors still have strong faith towards Indonesia’s long-term economic fundamentals.

Meanwhile, in the stock market foreign investors seemingly took S&P’s outlook downgrade as a laughingstock. The Jakarta Composite Index (JCI), whose players are more than 50 percent foreigners, continued its bullish trend by hovering at around 5,089 – an all time high – only a week after S&P’s downgrade was made public.

Apparently, investors saw that there are more reasons to be optimistic, rather than be pessimistic, about Indonesia’s economy.

It is a blatant fact that Indonesia does not really deserve to be left out in the cold by S&P, which instead turned to the Philippines for its choice of a country that has investment grade credentials.

Indonesia is Southeast Asia’s largest economy, boasting 250 million citizens, higher than the Philippines’ 95 million. Both the two economies are consumption-driven, but Indonesia – with population and middle-class numbers that are around three times higher than the Philippines – certainly guarantee more lucrative business opportunities for foreign companies looking to invest in the emerging market economies.

Amidst the prevailing global uncertainties, Indonesia boasts the status as the world’s most stable economies, with its robust household consumption successfully cushioning the country from external shocks. The country grew by average of around 6 percent over the last decade, with its economic growth never falling below 4.5 percent since President Susilo Bambang Yudhoyono took helm in 2004.

Compare that with the Philippines, whose period of high economic growth (it recorded 6.5 percent growth last year, higher than Indonesia’s 6.2 percent) was beset with volatility. Its gross domestic product (GDP) growth slumped to 1.1 percent in 2009, a case that highlighted the Philippines economy’s vulnerability towards risks stemming from the external environment.

In addition, Indonesia also has more ample fiscal space to boost its economic expansion in the medium-run, as its debt-to-GDP ratio currently stood at 23 percent, compared to the Philippines’ 41 percent.

According to the ease of doing business ranking published by the World Bank, Indonesia was ranked 128 last year, climbing from 131 a year earlier. In the same timeframe, the Philippines dropped to 138 from 136.

Numbers of people living below poverty line in Indonesia is currently around 12 percent of total population; in Philippines it is 28 percent.

Realizing these facts, Philippines newswire Interaksyon.com even threw cynicism to S&P’s decision to favor its country to Indonesia for a rating upgrade. It argued that, although the Philippines possessed the prestigious investment grade status, Indonesia would eventually still be the country hogging foreign investments coming into the region, thanks to its healthy macroeconomic indicators.

“Jakarta no doubt would love to have our grade,” the newswire wrote in its editorial. “However, our neighbors to the south will just have to make do with all those darned investments.”

It is fair to say that Indonesia’s era as a darling of foreign investors is not yet over, as at present it remains as the world’s least unattractive country amidst the prevailing global economic uncertainties.

President Yudhoyono has always called for optimism, urging people to think from the positive point-of-view, which is why we all should respond towards S&P’s downgrade not with excessive glumness. 

Instead, the downgrade in our outlook should be utilized as a wake-up call to ensure that we would not become lulled with all the bright economic indicators that we have been enjoying for years.

And what can also be taken into account from S&P’s downgrade is that our government officials really have no room for complacency. The suggestion is actually a very relevant thing to say to President Yudhoyono, whose indecisiveness on several pressing economic issues has so far caused Indonesia’s economy to punch well below its weight.

Critics frequently pointed out that Indonesia would still grow by more than 6 percent, even if the government does nothing to assist the economy. My suggestion to you, Mr. President: heed S&P's warnings seriously and start undertaking necessary policies to propel our economy -- you only have a year left to show that the country is not being run in autopilot.



This article was published in The Jakarta Post on Tuesday, May 14 2013