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by EOS Intelligence EOS Intelligence No Comments

Europe Fights Back to Curb China’s Dominance

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Given the swiftness of China’s economic development in the past three decades, transitioning from an impoverished and insular country to one of the formidable economic powers of the world, it has taken some time for Europe to accept China’s growing power and influence. Not only does China sit on largest currency reserves worldwide, but it has also become a significant provider of foreign investments, including in EU nations. This has recently strengthened China’s influence over the EU, which has created a sense of caution amidst European policymakers.

How is Europe benefiting from China’s growing investments?

Europe-bound Chinese investments were six times higher than Chinese investments in the USA – in H1 2018, Chinese investments in Europe stood at US$ 12 billion as compared to US$ 2 billion in the USA. For some of the economically struggling EU countries, Chinese investments are critical for developing and upgrading infrastructure, including energy plants, railways, motorways, and airports.

China’s Belt and Road initiative, under which cross-border infrastructure will be developed, will reduce transportation costs across Europe and China, creating an opportunity to facilitate trade expansion, regional integration, and attract foreign investments.

Besides infrastructure development, the investments are likely to create job opportunities and enhance economic competitiveness across Europe.

Then why is China’s growing influence alarming Europe?

Europe now sees a range of threats that China’s rising dominance in the region could bring along. Recently, the European Commission labelled China as economic competitor seeking technological leadership and systemic rival encouraging alternative models of governance. Europe realizes that China pursuits to shape globalization to suit its own interests.

The EU is deeply concerned regarding China exercising divide and rule tactics to strengthen its relationship with individual member countries that are susceptible to pressure, which could eventually harm the European cohesion. Recently, Italy signed the Belt and Road initiative, a landmark move against the counsel of western European nations, such as France and Germany, thus, raising questions on cohesion of EU countries.

The other concern is China’s rising influence over key governments of EU nations, thus, empowering itself with political leverage across the continent. China has already yielded political returns by wearying EU unity, particularly, when it is related to European policy on international law and human rights. In 2017, Hungary broke EU’s consensus by refusing to sign letter on human right violation against China. During the same year, Greece blocked an EU statement, which condemned China’s human rights record, at the UN human rights council.

Besides politics, China has also spread wings across key sectors of economy such as infrastructure, high-end manufacturing (including critical segments such as electronics, semiconductors, automotive, etc.), and consumer services, among others – growing dominance of China across these sectors is another cause of worry for the EU.

Europe also condemns China’s discrimination against foreign businesses, rendering limited market access to European firms and employing a non-transparent bidding processes. European firms operating in China face several trade and investment barriers such as joint venture obligations and discriminatory technical requirements that entail forced data localization and technology transfers. On the other, European markets have been open to foreign investments leading to massive Chinese FDI. However, lack of reciprocity harms European interest and could lead to unfulfilled EU-China trade ties.

The EU also criticizes China’s Belt and Road project for its lack of respect for labor, environment, and human rights standards. Other concerns include non-transparent procurement procedures with majority of contracts being awarded to Chinese companies without issuing public tenders, meagre use of domestic labor and limited contractor participation from host country, and use of construction materials from China – all of which undermine Europe’s interests.

Europe Fights Back to Curb China’s Dominance

How is Europe responding to China’s actions?

Europe is adopting strategies to limit China’s influence and reach across Europe and beyond, in African and Pacific countries.

Development of EU-Asia Connectivity Strategy

The EU’s new initiative, EU-Asia Connectivity Strategy, is an implicit response to China’s Belt and Road initiative, signifying a crucial first step to promoting European priorities and interests in terms of connectivity. The initiative aims to improve connectivity between Europe and Asia through transport, digital, and energy networks, and simultaneously promote environmental and labor standards.

The EU’s initiative emphasizes sustainability, respect for labor rights, and not creating political or financial dependencies for the countries.

Robust FDI screening process

European nations have been increasingly alarmed due to state-owned Chinese companies acquiring too much control of critical technologies and sensitive infrastructure in the continent, while China shields its own economy.

For the same reason, EU parliament is developing an EU-level screening tool to vet foreign investments on grounds of security to protect strategic sectors and Europe’s interests. The regulation will protect key sectors such as energy, transport, communication, data, space, technology, and finance.

While the EU still remains open to FDI, the regulation will protect its essential interests. Nonetheless, stringent investment screening procedures are likely to limit foreign investments in the continent, particularly from China.

Tackling security threat posed by China

In March 2019, the EU Parliament passed resolution asking European institutions and member countries to take action on security threats arising from China’s rapidly rising technological presence in the continent.

The resolution is likely to impact the ongoing debate of whether to eliminate China’s Huawei Technologies from building European 5G networks. The EU is concerned that the Chinese 5G equipment could be used to access unauthorized data or sabotage critical infrastructure and communication systems in the continent.

To minimize dependence on Chinese technology firms (such as Huawei Technologies), EU countries would need to diversify procurement from different vendors or introduce multi-phase procurement processes.

EU countries expanding footprint to counter China’s reach

Since 2011, China has invested US$ 1.3 billion in concessionary loans and gifts across the Pacific region, and has established its supremacy by becoming the second largest donor. China has been trying to build its influence, as the Pacific is bestowed with vast expanse of resource-rich ocean and the regional countries have voting rights at international forums such as the United Nations.

To counter China’s reach and ambitions across the Pacific countries, European nations such as the UK and France plan to open new embassies, increase staffing levels, and engage with leaders in the region. The UK plans to open new high commissions in Vanuatu, Tonga, and Samoa by the end of May 2019 and France is looking to meet and engage with Pacific leaders during the year.

Investment in Africa to limit China’s influence

As a strategy to curb China’s growing influence, the EU plans to deepen ties with Africa by boosting investment, creating jobs, and strengthening economic relations. The plan is to create 10 million jobs in Africa over the next five years. Europe is also aiming to establish free trade agreement between the two continents.

In recent times, China has been blamed of neo-colonial approach towards Africa, which is aimed at emptying the continent of its raw mineral in exchange for inexpensive loans, extensive but inferior infrastructure, among others. Europe aims to curb such influence by attempting to do business ethically. 

EOS Perspective

Unnerved by flurry of Chinese investments in the continent, the EU is looking to regain its control over matters. Europe has adopted a defensive approach against China’s initiatives, reflected through measures taken to protect critical sectors using investment screening system. The EU understands the downsides of enormous Chinese investments/loans, which may seem hugely enticing in the beginning, but could saddle vulnerable countries in debt they cannot repay – for example, a Chinese-built highway in Montenegro is likely to increase the country’s debt to about 80% of its GDP.

Currently, the key issue is the fact that Europe is standing divided on the right strategy to respond to bolder and ambitious China. While countries such as Germany, France, and UK have grown skeptical of China and are revolting against it, Italy, Hungary, Portugal, Greece, among others, are generally China-friendly. Europe has certainly become stern and tougher on China, but cannot pursue its interests without standing united.

The current situation does not demand Europe opposing China outright, but rather ensuring fair business conditions and equal market access through dialogue and cooperation with China.

Nonetheless, the EU has been quite slow to wake up to the various challenges that excessively ambitious China brings to the table. However, if Europe is able to become united now, there is still a chance to build a decent Sino-European partnership that serves interests of both parties.

by EOS Intelligence EOS Intelligence No Comments

China’s Investments in CEE: Sharing Benefits or Building Own Dominance?

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In 2012, China unveiled its plan to invest in Central and Eastern European Countries (CEECs) through transregional platform called the 16+1 Cooperation framework. Since the launch of this framework, China has been proposing various policies of mutual benefit, making efforts to become an important trade and economic partner of the CEECs.  While investments are welcome, several EU leaders and political experts in the region criticize such deals. They point at a threat of China’s growing dominance in the CEECs, as well as at China not keeping its promises made during the launch of this framework and negotiations of various deals.

China promises mutual benefits

The 2008 crisis brought worsened economic conditions to the CEECs, which have since been seeking capital to stimulate investment and facilitate higher economic growth, along with expanding exports beyond traditional European destinations.

Owing to China’s position as one of the largest economic power houses and due to the CEECs’ high trade deficit with China, the countries in this region showed interest in Chinese investments and opened their doors for potential avenues to increase trade with China. China too has looked for diversifying its export destinations and expanding its brands internationally, and CEECs could help it achieve just that. Chinese motivation to focus on CEECs has been fueled by two key factors: availability of skilled and cheaper workforce in CEECs (as compared to EU average) as well as China’s desire to gain stronger strategic influence in business and politics arena in the region as against the EU and Russia.

In this mutual interest, China and the 16 countries (Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Lithuania, Latvia, Macedonia, Montenegro, Poland, Romania, Serbia, Slovakia, and Slovenia) signed a framework named 16+1 Cooperation in Warsaw in 2012. At the outset, this framework aimed at deepening the multi-lateral economic ties, intensifying infrastructural and cultural cooperation, and capitalizing on the emerging business opportunities for both China and the CEECs.

The scope of cooperation was set to cover projects in CEECs’ infrastructure through investing in transportation systems by establishing new rail routes connecting the 16 countries with other parts of the world (Asia, Africa, and Middle East). China also intended to focus on capitalizing on green technologies, expanding export and import of goods, bringing new technologies for manufacturing sector, enhancing exchange programs for science, architecture, literature etc., and improving cross-cultural relations with the 16 countries.

Framework institutionalization raises a few eyebrows

In order to execute all the cooperation plans, the institutionalization of this framework in the CEECs became the first task to accomplish. It began with launch of Permanent Secretariat at the Chinese Foreign Ministry in China in 2012, followed by opening of Business Council in Poland (2014), Secretariat of Investment Promotion in Poland (2014), New Silk Road Institute in Czech Republic (2015), Center for Dialogue and Cooperation on Energy Projects in Romania (2016), Regional Center of the China National Tourism Administration in Hungary (2016), Coordination Mechanism on Forestry Cooperation in Slovenia (2016), Association for the Promotion of Agricultural Cooperation in Bulgaria (2017), China-CEE Institute in Hungary (2017), and few more.

Such institutionalization in the form of CEECs national coordinators, establishment of several secretariats, and a number of associations and industry organizations for individual states, became a crucial step towards enhanced political and economic relations of China and CEECs, and paved the way for further projects.

On the other hand, however, it left room for criticism. Some organizations, such as Institute for Security and Development Policy, Sweden, pointed out that establishing these institutions in a scattered rather than centralized way will deeply affect proper coordination and flow of information about all projects and initiatives within the framework.

Other voices of criticism, mostly from EU diplomats, warned about the fact that these institutions will limit accessibility to the information for the public. These institutions tend to work in line with the Chinese culture which differs greatly from cultural norms in European (and thus CEECs) organizations. In CEECs’ political culture (prevalent to various degrees across the European region), institutions are expected to actively and symmetrically communicate information to the public, providing room for public criticism and ensuring transparent procedures.

However, in Chinese political culture, public consultation and individual opinion are not given such importance. This leaves many EU leaders to ponder whether China’s intentions are to actually enhance the Sino-CEECs relations or to grow its dominance over the CEECs and act as it pleases behind the veil of its own culture providing an excuse for limited transparency.

OBOR and 16+1 framework go hand in hand

One of China’s major initiatives (and perhaps the only one so far considered to bring real benefit for both sides) is the One Belt, One Road (OBOR) project, launched in 2013 (we wrote about it in our article OBOR – What’s in Store for Multinational Companies? in July 2017). Under this project, China is ambitiously investing in developing one road connectivity, and this plan includes connecting the 16 CEECs with Asia, Africa, and Middle East. According to National Development and Reform Commission of China, Chinese investment in OBOR is likely to reach anywhere between US$120 billion and US$130 billion and with the external investments, it is expected to be totaling to US$600-800 billion by 2022. The success of OBOR is likely to impact the economies of CEECs though increased trade not only with China but also with other countries in Asian Pacific region.

China’s Investment in CEE Sharing Benefits or Building Own Dominance

The Balkans remain important in China’s plans

As part of OBOR, China has increased investment in infrastructure development in CEECs countries, with the initial focus on a few Balkan projects, especially in Serbia, with which China have always had excellent bilateral relations. The country appears to be the central hub in the Balkans for OBOR, both at an infrastructural and political level.

China started with a couple of agreements for infrastructure development with Serbia. These included China’s first large infrastructure investment in the region – construction of “Mihajlo Pupin”, the second bridge over Danube River in Belgrade in 2014 by China Road and Bridge Corporation (CBRC). The bridge shortened the travel time between Zemun on the south bank and Borca on the north bank of the Danube River from more than an hour to just 10 minutes. It also considerably reduced traffic problem on the first bridge. The project was received well by Serbia and taken as a good sign of China’s efforts to strengthen relations between the two countries.

China and Serbia came together for three more deals under the 16+1 framework, leading to total Chinese investment of nearly US$1.06 billion. These included US$715 million for construction of Kostelac power generation unit and expansion of coal-fired plant complex started in 2013, another US$350 million for re-construction of 34.5 km long segment of Belgrade-Budapest railway line, started in 2014, and undisclosed-value project of construction of Surcin-Obrenovac segment on Serbia’s E763 highway developed by China Communication Construction Company (CCCC) in 2017. All the three projects are likely to be completed by 2020.

Another flagship project, which involved Serbia and Hungary, was the construction of China-Europe land-sea fast intermodal transport route that was initiated in 2014 and became operational in 2017. With these infrastructural developments, China showed it delivered on its promises, and took steps to facilitate an enhanced exchange of goods with the CEECs.

Asymmetrical distribution of opportunities also causes criticism

The fact that all these projects were developed predominantly by Chinese firms, has been a cause for concern for western European leaders who criticized Chinese companies for seizing all opportunities and profits. The critics point out that if China and CEECs are coming together for such projects, the local companies should be able to benefit and be given opportunity to contribute skillset and technologies to local infrastructure development.

On the other hand, according to numerous experts, several countries, including Serbia, lack the technical and financial capacity required for such projects. China’s perspective should also be considered here – as China is already investing in the CEECs in the development of infrastructure, it is only logical (and natural) that it would prefer to engage own firms in order to help their business and take back some revenue from the projects.

China strengthens its foothold through financing initiatives

Chinese investments in CEECs are not only limited to the infrastructure sector, but also include certain financing initiatives in the form of availability of loans and funds. During the launch of 16+1 Cooperation framework, China announced a special credit of US$10 billion to the 16 countries to be used as preferential loans for implementation of common projects. Apart from that, in 2013, China together with CEECs launched a Sino-CEE investment fund of US$435 million, which aims at contributing financially to the sustainable economic development of CEECs.

Further, various banks and financial institutions, such as Bank of China, China Development Bank, China Export-Import Bank, and Industrial and Commercial Bank, have opened their branches in the region. While the official reason for this was to provide financial support and availability of funds to the CEECs, a relevant reason was also for China to expand the reach of these financial institutions’ brands in the European market.

Chinese investments grow in size and breadth

It is clear that China’s interest in CEECs has been growing, as exhibited through the sectoral breadth of investment initiatives and the variety of investment modes. Chinese companies are also pursuing the path of acquisitions and joint ventures with CEECs-based companies, the key example of which was seen in 2016, when Polish waste management firm, NOVAGO, was acquired by China Everbright International (Hong Kong). The deal was signed up at a value of US$144.3 million and was one of the largest acquisitions by a Chinese firm in the environment sector in CEECs.

While it is expected that such acquisitions can certainly bring benefits to the local entities involved in the deal (through capital and technology transfers, and easier access to the Chinese market), some concerns have been raised that an intensive Chinese-dominated M&A activity is not healthy for the local market dynamics.

The extent of these investments and acquisitions resulted in year-on-year increase in China’s outward foreign direct investment (OFDI) stock in the 16 countries. According to data from the Chinese Ministry of Commerce, the OFDI stock in 2010 in CEECs was estimated at US$0.85 billion and it reached US$1.97 billion in 2015, depicting an overall increase of around 130% in five-year period. Overall, Hungary was the leading recipient of FDI in CEE region with US$571.1 million, followed by Romania with US$364.8 million, and Poland with US$352.1 million in 2015.

The increased FDI in these countries is partially also a result of their interest in attracting Chinese investments even before the 16+1 cooperation framework came into picture. Poland, for example, being the largest economy amongst CEECs, started promoting itself with Chinese firms since the EXPO 2010 in Shanghai. For long, Hungary seems to have made a point to maintain good relations with China, even before other CEECs intensified multilateral relations with China. Hungarian government also made efforts to attract FDI, including from China, by proposing deals such as introduction of special incentives for foreign investors from outside EU or residence visa programs for bringing in a certain level of investment in Hungary.

Trade intensifies, though less than expected

Not only has there been growth in Chinese FDI since the yearly 2010s, but also the trade between China and the CEECs has grown progressively. According to Department of European Affairs at China’s Ministry of Commerce, trade between CEECs and China was estimated at US$43.9 billion in 2010 and grew to US$68.0 billion in 2017, showing a growth at a CAGR of 6.5% during 2010-2017.

While this might seem impressive, it must be noted that at the time of the launch of 16+1 cooperation framework, China promised to increase the trade value to US$100 billion by the end of 2015, which is far from the actual results even by the end of 2017. This again led to the criticism by the western European leaders over China’s ability (and willingness) to deliver on its promises, indicating lack of credibility in Chinese assurances.

On the other hand, the numbers do depict growth in trade between China and CEECs from 2010 to 2017 as compared to the previous years. According to Chinese Ministry of Commerce, China exports to CEECs were US$49.4 billion and imports from CEECs were US$18.5 billion in 2017, with an increase of 13.1% and 24%, respectively, from 2016. China’s exports to CEE concentrate on technology (with high-tech products from telecommunication, service sectors, and e-commerce sectors). CEECs supply agricultural products including fruit, wine, meat, and dairy products to meet the growing demand of the large population of China. Further interest in expanding imports of agricultural and dairy products by China can be expected, and an increased ease of exporting to China is likely to help CEECs to reduce their continued trade deficit in the coming years.

EOS Perspective

The rising investments of China in the CEECs have been under scrutiny since formalizing the 16+1 cooperation framework in 2012. Ever since the launch, China has been taking a range of initiatives that on the one hand worked towards development of the CEECs, but on the other hand gradually built its dominance in various markets and sectors in the region.

It is clear that such steps are taken by China in order to strengthen its political and economic foothold in the region. European leaders continue to remain skeptical over the intentions of China, which might also indicate the EU’s insecurity about China capturing strong hold over CEECs markets and building its dominance, which potentially might be able to overpower the EU’s influence in the region (especially in the Balkans out of which several countries are not EU members).

From the development point of view, initiatives such as OBOR, China-Europe sea-land express way, Belgrade and Budapest railway line, and even the mergers and acquisition deals, certainly bring advantages not only for China but for the CEECs as well, through much needed funding of infrastructure projects as well as through increased trade revenue.

Although it is of paramount importance for European watchdogs to keep an eye on the ongoing trade imbalance and growing Chinese ownership in CEE enterprises, it must be noted that acquisitions of CEECs-based firms by Chinese firms have largely affected the business in a positive way till now, thanks to influx of capital and the possibility to get the base to expand in Asian markets. Under this framework, despite its inherent issues and associated risks, steps taken by China for future development in the form of ongoing projects, especially in the infrastructure sector, have the potential to create more opportunities for the parties involved to strengthen cross-regional trade and hence create a (almost equal) win-win situation for both China and the CEECs.

by EOS Intelligence EOS Intelligence No Comments

China’s Investments in Africa Pave Way for Its Dominance

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Connecting nearly 70 countries through an extensive land network and sea routes across Asia, Europe, and Africa, the One Belt, One Road (OBOR) Initiative is the focal point of China’s foreign policy that is publicized as providing various economic developmental opportunities. Proposed by China’s President, Xi Jinping, in September 2013, the action plan and framework of the OBOR, also known as Belt and Road Initiative (BRI) was officially presented in March 2015. Since the unveiling, the initiative has gained huge momentum in certain parts of the world. Africa is one such region that has witnessed major infrastructural development across road and rail network, telecommunication, and energy sectors in the early stages of BRI.

Africa is keen on receiving investment from China to boost its economic development. Owing to its location, the continent, as such, is placed perfectly on the sea route as part of China’s global plan. Although the continent lies on the Maritime Silk Road, the sea route that connects Indian Ocean to Suez Canal via Red Sea, only few African countries are of direct strategic importance to China along the OBOR route (including Egypt, Kenya, Tanzania, Ethiopia, and Djibouti). However, in its growth strategy, China is involved in several projects to increase its presence across other African nations as well.

Focus on strategic sectors

China is focusing intensely on infrastructure projects in the initial years of this initiative, as strengthening the railway and road network across the countries and developing sea ports is crucial for the success of the project. However, the expansion plans are not only limited to logistics. China is also investing heavily in other sectors, such as energy, mining, and telecommunications.

China’s Investments in Africa Pave Way for Its Dominance

Logistics and industrial zones

China is involved in a number of mega infrastructure projects in Africa. Railway projects rolled out by Chinese companies across Africa are amongst the ones (along with road network and sea ports projects) that have gained momentum in terms of execution and become operational ahead of scheduled time. The Mombasa-Nairobi Standard Gauge Railway (Madaraka Express) in Kenya at a cost of US$3.2 billion, built by China Road and Bridge Corporation (a Chinese state-owned construction and engineering company) and funded by China Exim Bank (90% funding by the bank and remaining 10% by Kenya government) connecting Mombasa to Nairobi, became operational in June 2017 (construction of the railway line began in January 2015) as against the timeline of four years. In due course, the line will link Tanzania, Uganda, Rwanda, Burundi, and South Sudan to Ethiopia’s Addis Ababa Light Rail Transit (AA-LRT) built by China Railway Group Limited, a Chinese construction company. Initiatives such as this, when married with port connectivity across sea-based countries, will not only improve trade amongst nations within the continent but will also boost Africa’s commerce market by opening new trade routes with other continents.

Some of the railway projects initiated by China were planned long before OBOR came to play, however, they could still form a crucial part of the initiative. For instance, the Tanzania-Zambia railway line built in 1970 with the technical and financial aid from China, is now being revived again with the help of Chinese companies Plans are underway to link it with other ports and build an industrial economic belt along the railway line to utilize the line more effectively. Chinese government has given Tanzania-Zambia Railway Authority (TAZARA) a US$22.4 million interest-free loan to not only improve the operations but also to extend the line to other countries that include Malawi, the Democratic Republic of Congo, Rwanda, and Burundi. This line is of strategic importance to China in terms of better connectivity, which could lead to improved trade partnerships in the future, as this is the only railway line in Africa that connects three economic blocs, namely East African Community, Common Market for Eastern and Southern Africa (COMESA), and Southern African Development Community (SADC).

China is effectively planning for future stability of its position in the continent, as evident from its plan to build Africa’s largest free trade zone in Djibouti, considered as China’s gateway to the continent.

China is effectively planning for future stability of its position in the continent, as evident from its 2016 announcement to build Africa’s largest free trade zone in Djibouti, considered as China’s gateway to the continent, spread over an area of 48 sq. km. The port will be built by Dalian Port Corporation Limited, Chinese largest port operator, and is expected to handle US$7 billion in trade within two years of becoming operational. About 15,000 direct and indirect jobs are expected to be created from the project. Strengthening Djibouti air transport sector is also of crucial importance to China and in light of this, two new airports – Hassan Gouled Aptidon International Airport and Ahmed Dini Ahmed International Airport – are also being set up to boost connectivity between the two countries. Funded by the China Civil Engineering Construction Corporation (CCECC), a Chinese construction engineering company, at a combined cost of US$599 million, this paves way for the country’s economic growth and development by making it a trade hub.

Telecommunications

China Communications Services Corporation Limited (also known as China Comservice), a subsidiary of China Telecommunications Corporation, is planning to revamp the original Africa Information Superhighway to Trans Africa Information Superhighway, an information and communication technology (ICT) project. The 20,000 km long optical cable is expected to pass through 48 African countries and involves an investment of US$10 billion. With growing internet penetration in many African countries (as per World Bank report, Kenya had an internet penetration rate of 45.6% in 2015 which was above the world’s average of 44%), the ICT project offers huge potential.

Mining and energy

China has already been heavily investing in energy, power, and mining sectors in Africa as part of its FDI policy, and now under the OBOR initiative the investments are expected to rise further. China General Nuclear Power Holding Corporation (CGNPC), a Chinese player that develops, constructs, and operates power plants, started mining uranium in the western-central part of Namibia in 2016. Known as the Husab Uranium Project or Husab Mine, it is amongst China’s largest projects in Africa, and has received investment worth US$2 billion, expected to produce 6.8 million kilograms of uranium oxide every year.

Although China has been investing in Africa for development of renewable energy projects, China’s focal point on the energy and power sector under OBOR initiative is still diluted. However, investments across this sector can be expected to happen in the near future owing to abundance of natural resources in the continent.

EOS Perspective

China’s OBOR initiative seems to be successfully transitioning from a theoretical plan to reality, at least within African continent. It provides developing countries across Africa what they need the most – infrastructure (roads, railways, sea ports, airports, power plants, refineries) along with supporting various other sectors such as information technology, telecom, and financial services. Apart from streamlining infrastructural development in Africa, African countries can also benefit in terms of better trade within the continent as China plans to build high speed rails, ports, and roads across the continent as indicated in the memorandum of understanding (MoU) with the African Union (AU), signed in 2015. Though this means some good news in terms of job creation, infrastructural development, and overall growth, African nations need to strategically think and analyze how they can emerge truly stronger in the run for economic development, without the threat of being increasingly dominated by the Chinese influence.

Projects undertaken as part of OBOR are of great size and offer growth opportunities, but also involve large amount of investment, long periods of construction, and associated operational risks – we wrote about it in our article OBOR – What’s in Store for Multinational Companies? in July 2017. African domestic stakeholders should wisely chalk out their approach tactics and secure participation in implementation plans when partnering with Chinese companies, in order to favor their own economic and sustainable development as well as share in benefits. Governments and local leaders of each African country will have to play an active and important role in negotiating and finalizing business terms with Chinese companies, if they want these partnerships to benefit their country and local population in the long run.

African stakeholders should secure participation when partnering with Chinese companies, in order to favor their own economic and sustainable development as well as share in benefits.

While it cannot be denied that African countries are surely bound to benefit from the OBOR initiative, it is the Chinese companies leading these projects that will reap the largest benefits as well as China that will intensify and strengthen its economic hold in the region. Starting off with successful road and railway projects in Africa, Chinese companies are going to focus on sectors such as manufacturing and real estate in the coming years. Presence of natural resources in the continent is also likely to attract Chinese players in the mining sector. And with so much investment already happening in the initial phase of OBOR, Chinese players are planning for the long haul by developing large industrial zones to avoid issues related with labor costs and tariffs.

This sudden inclination of China towards developing and helping African nations seems overwhelming. It draws attention to the fact that China may try to overpower and dominate the economic and geo-political scenario across Africa in disguise of offering the countries development opportunities. With easy loans, with no stringent clauses related to intellectual property, legal matters, and human rights policies, all of which are conditions far more attractive than those that would be offered by China’s Western counterparts, China makes sure to have an upper hand in all the projects that are undertaken as part of the OBOR initiative.

With loans from Chinese banks and projects led by Chinese companies, there is no doubt that the Chinese influence in the continent is already on the rise. While the immediate effect of growing Chinese dominance in Africa will first be realized in the countries that fall directly on the OBOR sea route (or are easily connected to these sea routes via road and rail), other regions, that are currently not on the OBOR map, are highly likely to also witness the rising control of Chinese companies in less than a decade.

It is also being speculated that if Chinese investment continues to grow at this speed, it can be expected that in relatively near future many sectors will be dominated by Chinese companies, leaving no room for African players to grow. This could lead to exploitation of African players by the Chinese side, local governments finding themselves under huge debt with Chinese banks hampering plans for domestic development, and leaving local people to deal with meaner jobs as all the high paid jobs would be retained with the Chinese – these are just a few of possible immediate repercussions, but the list might not end here.

If Chinese investment continues to grow at this speed, it can be expected that in relatively near future many sectors will be dominated by Chinese companies.

A drive such as OBOR definitely seems to greatly contribute to putting the African economy on a growth path by pouring the much needed billions of dollars to link China’s trade route to African countries through a strategized set-up of railways, roads, sea ports, and airports thus opening doors for investment in other sectors as well. In the short term, it is clear that African countries have more to gain than to lose when receiving huge investments from China as this drives the continent towards economic prosperity. But China’s intentions behind investing in developing African economies, under the disguise of OBOR initiative, might be more than meets the eye. In the long run, Africa’s economic scene may be China-dominated, not only reshaping the continents’ infrastructural and business scenario, but also initiating a new phase of globalization and development, which most of the African nations have been void off for a long time.

Amid these discussions of the extent to which African nations will let China take control in the name of growth, one thing is clear that China is a strong ally for African nations and the association can only be expected to strengthen under OBOR. Both China and Africa stand to gain from this association – China to notch up a step to reach its goal for global expansion by leaving an imprint on the continent that will be clearly visible for decades to come, and Africa, with regular investment from China, to work on the development and economic upliftment of the continent.

by EOS Intelligence EOS Intelligence No Comments

Commentary: Truck Drivers’ Strike amid Brazil’s Recovery from Recession

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In May 2018, Brazil witnessed a nationwide strike conducted by 200,000 truck drivers, which managed to paralyze the entire country for over 10 days and caused major issues such as shortage of food, death of poultry, and unavailability of public transport, among others.

In 2017, Brazil’s Oil and Gas Company, Petrobras, tied its fuel prices to float with international prices. This was following years of being exposed to high prices paid by Petrobras for refined fuel in international markets and the company’s inability to pass on these higher costs onto the customers domestically, due to existing price controls. The decision to float the domestic prices was further sealed by Petrobras’ attempt to seek recovery of profits after the company’s share prices fall due to a corruption scandal.

The floating price mechanism brought an increase in domestic fuel prices, which greatly affected truck drivers whose earnings were gradually slashed, in a scenario where the Real, Brazil’s official currency, weakened by 17% against the US dollar between May 2017 and May 2018. As a result, truck drivers decided to take their demands for a fuel price control policy to the streets, paralyzing many activities and sectors of the Brazilian economy, and exposing some of Brazil’s main weaknesses.

Brazil greatly depends on the truck industry for distribution

The strike caused substantial fuel shortage as oil trucks were not delivering petrol to gas stations, which affected delivery of other goods across the country. Subsequently, disruption in the distribution of food and other products translated into a visible shortage of items on supermarket shelves and a general hysteria that made people over-purchase what was left. The strike also exposed Brazil’s over-dependency on road distribution system for various sectors to operate (instead of using a balanced mix that would include other means of transport, e.g. cargo trains). Most importantly, the strike, in which truck drivers blocked main road arteries within the country’s 19 states, caused great losses, including (but not limited to) US$826.8 million worth of poultry during those 10 days.

After several attempts by the Brazilian government to reach an agreement with truck drivers, both parties settled to pause the strike – initially for 15 days although now for unlimited time, despite truck drivers’ reservations about the government eventually meeting their demands. The potential of the strike being resumed is still looming on the horizon of the Brazilian economy. The persistence of this conflict and the threat of a longer strike could lead to longer interruption of businesses and industrial activities, which is detrimental for a country that is recovering from one of its deepest recessions of 2015-2016.

Consumers’ purchasing power and confidence may decline

Consumers’ purchasing power is expected to slightly decline due to price increase after the temporary food shortage. According to the price index released by the FIPE (Economic Research Institute Foundation) during the strike, general food prices rose by 1.82%, resulting in a 0.62% increase above what was expected when compared to the same period of 2017. Price of half-finished goods (e.g. poultry) rose by 8.43%, while dairy products prices increased by around 5.85%. In some cases, such as with potatoes, the price increase was of 50.3%. Further, a spread hysteria among consumers led to over-purchasing of products, even at a higher value, meaning Brazilians’ disposable income was reduced for the month of May.

Inflation in May reached an unexpected 3.22%, an atypical increment for a month with usually low inflation rate. In a country overcoming a two-year deep economic recession, uncertainty about food availability and low disposable income have affected consumers’ confidence, which has fallen 4 percentage points in June, potentially translating into reduction of expenditures and hindering Brazil’s economic growth.

Investors’ trust may also fall

The 2015-2016 recession weakened local demand, however, Brazil managed to register a trade surplus and a low account deficit due to positive exports volumes and foreign direct investments (FDI) entering the country. Since the government and the truck drivers are still in talks to reach an agreement, the threat of another strike of similar nature is real. Experts agree that investors may become wary and cease to invest further, if political unrest and economic instability were to continue in the country. As a result, Brazil may not be capable of improving, or even maintaining, its low deficit in the account balance. In 2017, investments reached US$70.3 billion and, before the strike happened, experts believed FDI would register US$80 billion in 2018.

Brazilian president, Michel Temer, offered Petrobras US$274 million as compensation for losses it would incur by cutting oil prices. Though this may offer a 60-day solution to the worried truck drivers, it is only a short-term compensation which Brazil does not plan on extending forever.

EOS Perspective

It should come as no surprise that the strike was conducted only a few months away from Brazil’s presidential elections. Analysts believe it to be a strategy to weaken the image of president Temer, and shed some positive light on the Worker’s Party, of which Lula Ignacio Da Silva, former Brazilian president, is a current member. Despite Lula’s conviction in January 2018 for corruption, its party requested Brazil’s Supreme Court to grant a “suspensive effect” to the conviction, which would eventually allow him to run in the next presidential elections.

Regardless of who will be elected president, the strike has certainly stirred the economic and political scene, and has uncovered several of Brazil’s vulnerabilities.

by EOS Intelligence EOS Intelligence No Comments

Infographic: China Going Cashless – What Does It Mean for Consumers, Trade, and Economy?

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China is heading fast towards a cashless society. The immense adoption and use of smartphone apps that provide mobile-payment services for buying goods and services have transformed how payments are made, eliminating the need to carry cash and reducing the dependence on credit and debit cards, which are already close to scarce in China. Easy access to smartphones and lack of alternative non-cash payment options, low penetration of credit cards and tedious debit card payment process that includes authentication via messages and codes, have led to the growth of online payments in the country.

This cashless payment revolution is expected to continue and grow, thus impacting the way businesses function, consumers shop, and China’s economy rolls.

by EOS Intelligence EOS Intelligence No Comments

Brazil – Long Road Ahead

Sentiments regarding economic recovery in Brazil rose high when Index of Economic Activity of the Central Bank (IBC-Br) recorded growth in January and February this year, only to be dampened by the March data, which showed 0.44% decline in the index. Hope of economic revival was hinged on good show by service sector, coupled with anticipation of improvement in agriculture and industrial sectors in the first quarter of 2017.

Fluctuations in IBC-Br, which is considered as a preview of Brazil’s GDP performance, indicate the fragile condition of the country’s economy, shaken by two back-to-back recessionary years. Downturn of 2015 and 2016 was uncommon in the country’s recent economic history, which had not seen the GDP declining for two straight quarters on more than four occasions since 1996. Brazil was among the few countries that were able to withstand the global financial turmoil of 2008-2009.

Reasons behind the deterioration of the Brazilian economy seem to be clear. Reliance on commodity exports for growth and high consumer debt were among the key factors that burst Brazil’s economic bubble. Unless these issues are addressed, Brazil’s long-term economic recovery will remain doubtful. Hence, it is imperative to look where the country stands with respect to each of the factors that contributed so considerably to the deterioration over the past two years.

EOS Perspective

In near term, commodities are likely to retain high share in Brazil’s external trade, as increasing the export share of finished or semi-finished goods would require significant efforts that Brazil currently is unlikely to be capable of making. Commodity prices are expected to remain volatile in near term, with soybean, sugar, and wheat likely to continue registering decline in prices (as witnessed year on year, April 2016 – April 2017). Therefore, unless the domestic demand picks up, commodity export is unlikely to assist significantly in boosting the Brazilian economy in the near future.

Keeping interest rates low is one of the ways to boost spending, and the country’s falling inflation, which in April 2017 plummeted to 4.08% (below the market forecast of 4.1%), has enabled the central bank to slash interest rates from 12.25% to 11.25%. This is expected to reduce the cost of credit for households, thereby boosting spending (amid fears of debt burden ballooning up again).

Brazil needs to create more assets to increase productivity and to create more income sources. Capital formation (a measure of investment) as a share of GDP was at about 15.5% in 2016 (fourth quarter) as compared with the high of 23% in 2013 (first quarter). The country needs to invest more, and one way to unlock funds for this would be through reforming the pension scheme (bill related to pension reforms was passed in lower house of Congress in May 2017 amid protests), which is the primary reason behind Brazil’s fiscal deficit. Brazil currently spends more than 10% of its GDP on pensions. Reforms seek to fix minimum retirement age at 65 for men and 62 for women. At present, many Brazilians qualify to retire in early to mid-fifties, and this not only impacts the productivity but also puts pressure on the government coffers.

There is a general consensus that Brazil will come out of recession in 2017, registering a modest sub-1% growth. However, to sustain this recovery, it will require a political will, fiscal discipline, and a vision for long-term growth.

by EOS Intelligence EOS Intelligence No Comments

GST Likely to Become India’s Biggest Tax Reform

Business Acronym GST as Goods and Services Tax

After 16 years from the conception of the idea, in August 2016, the Indian parliament finally passed the much awaited Constitution Amendment Bill for the introduction of Goods and Services Tax (GST) which is set to replace almost all indirect taxes in the country by April 2017, effectively simplifying India’s tax system. GST, a value added tax, is a single tax levied on the supply of goods and services from the manufacturers to the end consumers. As per this new tax regulation, the dealer of the product will be liable to pay tax only on the value added by him in the supply chain, thereby offsetting tax credits paid on inputs. Thus, the consumer will bear only the GST charged by the last party in the supply chain.

Under the previous tax regime, the state and the central governments levied different charges such as income tax, sales tax, excise duty, central tax, and security transaction tax separately. The GST is set to replace this procedure of implementing multiple indirect taxes with a single comprehensive tax regime under the GST umbrella. The new regime will have a dual structure with the central government and the state government having administrative powers to charge GST across the supply chain. It will include three kinds of taxes: the central GST, the state GST, and an integrated GST to handle inter-sate transaction.

This new tax reform is said to have far reaching impact on the Indian economy. It aims to eliminate the shortcomings of the current way of applying taxes across the supply chain involving numerous multi-layered policies and to remove the ‘cascading effect’ of multiple taxes on goods and services. The old regime of imposing separate taxes on goods and services and dividing transaction values for taxation purpose led to administrative complications and high compliance costs. The new system of uniform and integrated tax rates is likely to facilitate ease of doing business in the country, while the removal of inter-state taxes is likely to reduce time and logistics cost of the movement of goods. In addition, the integration of taxes and removal of Central Sales Tax (CST) is expected to lead to a decline in prices of domestic goods and services. Lower transaction costs combined with the removal of CST are likely to facilitate a rise in the competitiveness of the country’s goods and services in the international market and boost exports.

A robust IT infrastructure will be the backbone of the GST system, initiating ease of tax administration for the government and transparent and easy conduct of tax services, such as payments and registrations, for the citizens. Only a comprehensive IT infrastructure is likely to enable smooth transfer of tax credit across the supply chain, keeping a check on leakage. The new system is also expected to lead to a decline in the cost of tax collection, thereby generating high tax revenues for the government.

The GST system is also believed to be of significant importance to the consumers. Multiple indirect taxes levied by the central and state governments led to incomplete input tax credit availability which had to be adjusted against tax payable leading to the inclusion of various hidden taxes in the cost of goods and services. The GST system will levy a single tax from the manufacturer to the consumer, providing transparency and clarity of taxes paid. Further, efficient business conduct and reduction of leakages will lower the tax burden on the goods.

While the GST promises to streamline the indirect tax regime with a single tax, it has to overcome various challenges to be successful. Since the country is adopting a dual structure with the central and state governments, the main issue would be the coordination between different states. The central and state governments will be required to come to an agreement regarding the GST rates, administration efficiency, and the implementation of the GST, which might prove to be a cumbersome procedure. Further, IT infrastructure, which is said to be the foundation of the GST regime, will be a critical factor affecting the success of the new system. A strong technology support connecting all state governments, banks, industry, and other stakeholders on a real-time basis will be required for the efficient conduct of business. In addition, since the working of the GST tax regime is different from the indirect tax system, proper training will be required for the tax administrative staff at central and state levels regarding legislation and procedures within the GST. Another factor the government will need to consider is to adjust the new tax in a way that the tax revenue remains at least same without any revenue loss. For this purpose, a Revenue Neutral Rate (RNR) will need to be calculated and critically evaluated, as such a rate is likely to have a great impact on the Indian economy.

GST is a much awaited revolutionary tax reform in the Indian economy. If implemented properly, it is believed to add 2% to 2.5% to the nation’s GDP in the long run. It promises ease of doing business, economic growth, and higher tax revenue. Even with the diverse challenges the new tax regime is likely to be faced with, the GST has the potential to be a game changer for the Indian economy in the near future and is said to pave the way to a ‘one nation, one tax’ system.

by EOS Intelligence EOS Intelligence No Comments

The West vs. Russia: Will Russia Really Survive The Impact Of Sanctions?

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Russia trampled international laws with annexation of Crimea (previously part of Ukraine) to its territory and is reeling under wrath of sanctions imposed by the EU, the USA, Australia, Canada, Norway, and Switzerland, among others. Over a period of time, the sanctions have expanded to inflict economic damage to Russia by targeting its financial, energy, and military sectors. Even though the ball has always been in Russia’s court, the country has only deepened the damage by retaliating with food embargos and standing adamant on its decision to hold on to Crimea against Ukraine’s sovereignty.

The sanctions are intended to limit trading relationships with Russia, which in turn have adversely affected both the EU and the USA. The economic impact is more intensive on the EU member countries and Russia, as they were engaged in high volume and value trading relationship.

Understanding the Sanctions Imposed on Russia

Russia’s economy is suffering under the contracting GDP, growing inflation, capital flight, as well as Ruble depreciation. Economic turbulence has been further intensified with plunge in global oil prices — as Russia’s is one of the world’s largest oil producers, with oil and gas exports accounting for 70% of its export income.

How Are Sanctions Savaging The Russian Economy

The sanctions also had a crumbling effect on the Western companies operating in Russia. Several luxury and consumer goods companies had previously flocked into Moscow to capture the growing middle class market, however, Russia lost its attractiveness and image to being a ‘malignant country’ post Crimea annexation. After the sanctions were imposed, several consumer goods companies shut down their operations — Zara, a Spanish fashion brand, closed flagship store in Moscow in 2014. Wendy’s (an American international fast food restaurant chain), Esprit (China-based clothing brand), and River Island (British fashion shop) are also planning to end their operations in Russia. Consumer spending and retail sales reflect the economic sanctions with retail sales falling 7.7% y-o-y in February 2015.

Western Companies Hit Worst By Russian Crisis

In August 2014, Russia devised a strategy to retaliate against Western countries by banning agricultural import of certain products from the USA, the EU, Canada, Australia, and Norway. Presently, the Russian government is encouraging domestic production to reduce reliance on imports. However, it will take at least five years, if not more, before import substitution starts yielding real impact on domestic food availability and the Russian economy.

Food Embargo Imposed by Russia and Its Impact


EOS Perspective

There is no doubt that sanctions along with falling oil prices have damaged Russian economy. Decline in oil prices strained the availability of domestic liquidity, which could normally be compensated with foreign debt market borrowings. However, borrowing has been prohibited by the ban on Western debt and credit, which intensified the situation and put crushing pressure on the Russian economy.

It is expected that the sanctions are not going to be lifted any time soon, which is projected to bring absence of foreign loans, which in turn is likely to be paired by significantly reduced of foreign investment. This could be a major challenge for Russia, as the FDI tends to be one of the key sources of capital and technologies in emerging nations. With this isolation, Russia might not be able to keep the necessary pace of growth due to lack of capital and limited trading relationships.

Under the pressure of sanctions, Russia can be expected to undergo a transformation to rebalance its economy — with Western companies exiting Russia, their place could be taken by Asian counterparts or domestic companies. For instance, in October 2014, Russia signed 40 agreements with China spanning energy, financial, and technology sectors. Further, Chinese banks agreed to offer credit lines valued at US$ 4.5 billion to Russian banks and companies. These recent agreements clearly show that Russia has been seeking to deepen its strategic ties with Middle Kingdom, intending to improve trade between the two countries to double it to US$ 200 billion by 2016 end.

Sanctions are likely to continue to deeply impact Russia’s key choices in its internal policies as well as the international arena, with expected focus to increase domestic production and choosing Asian allies over Western partners to establish trading relationships.

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