Briefing MONTHLY #30 | August 2020
Peak China? | COVID in the Pacific | Vietnam family saga
Animation by Rocco Fazzari.
It says a lot about the state of bilateral relations with China that the interest group which once had the clearest focus on the value of the relationship – business – is now at the front line of uncertainty. The Business Council of Australia’s China Leadership Group has been replaced this month by a Global Engagement Committee. The new committee has a similar membership and still covers China. But it reflects the new priority business focus on diversifying supply chains.
At the same time, the Australia China Business Council is looking for a replacement chief executive at a critical time after the resignation of Helen Sawczak. And this comes as two prominent China business figures, the BCA engagement committee leader Warwick Smith and former Austrade China chief Michael Clifton have differed over whether there is a need for a shake-up in China-focused business groups. Last month Clifton wrote a report calling for an overhaul of several China-related institutions for the business backed policy institute China Matters, where he had been chief executive since February. But he has now also resigned.
See below: CHINA AND BUSINESS
As Australian farmers worry about who might be next in line in China’s tit-for-tat assault on farm exports after barley, beef and wine, inward foreign investors have more cause to look over their shoulders closer to home. Treasurer Josh Frydenberg’s rejection of China Mengniu Dairy’s $600 million purchase of the devalued Japanese-owned Lion Dairy and Drinks business has created an economic diplomacy irony. Australia needs to keep the recent rising investment from its close Asian ally Japan flowing, since Chinese investment has sharply slowed. But now one of the largest Japanese investors in Australia – Lion’s owner Kirin – has become the unwitting victim in Australia’s attempt to muscle up to China. Meanwhile, two recent reports on more post-COVID business engagement with Asia have suggested that connections with China cannot be replaced in practice by diversification to other countries.
These more immediate business dilemmas are going on against a much bigger picture debate about whether Australia is past the peak of its China relationship, half a century after diplomatic recognition. In ASIAN NATION below, we look at the two sides of this debate. Former Reserve Bank of Australia board member John Edwards argues that Australia cannot retreat from economic integration with East Asia which is built on other Asian countries’ integration with China as much as Australia’s own bilateral financial connections. “Thus far, the cleverness Australia increasingly needs is not evident in its handling of relations with China,” Edwards says in a Lowy Institute analysis.
But strategic analyst Ross Babbage argues that China’s slowing economy, rapidly ageing population and growing debt suggest that its rise as a global power may have already peaked. “Xi (Jinping) has warned his party colleagues of future ‘black swans’ – or complete surprises – and also of ‘grey rhinos’ – known adverse trends that eat away at national power. China looks increasingly vulnerable to both,” Babbage writes in a report this month for the US-based Centre for Strategic and Budgetary Assessments. He says Australia will have to update its strategic outlook much more regularly in a disrupted world.
China’s deputy ambassador Wang Xining made his own contribution to this bilateral relationship uncertainty at the National Press Club this week with a distinctively smooth performance by comparison with the recent so-called wolf warrior diplomacy of some of his peers. Whether this represented a potential rapprochement or a more veiled warning remains to be seen.
Two other recent reports have explained in detail why key economic links to China in agriculture and education have gone astray.
- University of Queensland economist Scott Waldron says the farm product export sanctions reflect internal economic forces in China as well as coercion towards Australia and will happen again, requiring both more careful risk assessment and diversification.
- University of Sydney academic Salvatore Barbones suggests many universities turned a virtuous cycle of rising Chinese student interest into a vicious cycle of overdependence when they restructured researcher recruitment to rise up the ranks of the Academic Ranking of World Universities Index, which Chinese families use to choose foreign universities.
SAYONARA ABE #2
Prime Minister Scott Morrison is targeting a personal meeting with his Japanese counterpart Shinzo Abe just as speculation is intensifying about whether Abe is about to leave office due to poor health, creating uncertainty over the country’s policies. Morrison reportedly wants to break out of his COVID travel bubble to meet Abe in Tokyo and reinforce the need for a more coherent US presence in the region after the US presidential election. The cancellation of the enlarged Group of Seven nations summit planned by US President Donald Trump prevented the two leaders from making this point in the US.
But in a curious twist, just as Morrison’s travel plans were being reported as a big initiative in the Australian media on August 19, the Japanese media was breathlessly reporting that Abe had made a surprise visit to hospital for a health check. He returned for another lengthy hospital visit later in the month. Ironically, Abe suddenly resigned as prime minister in 2007 due to ill health just days after meetings in Sydney to broaden the bilateral relationship with then Prime Minister John Howard.
Manoeuvring has reportedly begun over who will replace Abe, sparked by his apparently low-key approach to the persistent COVID outbreaks in Tokyo. Abe was expected to possibly stand down after a successful Tokyo Olympics. But now with the Olympics delayed, Abenomics tarnished by the sharp economic slump, and no apparent progress in his quest to amend the pacifist provisions in the Constitution, questions are being asked about what is left on his agenda. And some US-Japan analysts are suggesting Japan may be a less reliable security partner.
- In this opinion article from The Japan Times, long-time Tokyo-based economist Jesper Koll says Abe has set a high bar for his successors with how he has led the country.
- But in this piece from Toyo Keizai, Stanford University’s Daniel Sneider says US officials are watching Abe’s likely departure with concern.
IT'S MY PARTY...
Malaysia now has six Malay-based political parties fighting for a share of support from the country’s largest ethnic community in a remarkable dissolution of the once dominant role of the United Malays National Organisation (UMNO). Former long-serving Prime Minister Mahathir Mohamad, who is 95, underlined the fragmentation with his decision to make yet another bid to be prime minister in a new party jointly run with his son and former state chief minister Mukhriz Mahathir. The Homeland Warriors Party joins a crowded landscape of three Malay parties in the governing coalition: UMNO, the mostly Islamist Parti Islam SeMalaysia (PAS) and Bersatu. Mahathir helped establish Bersatu for his return to power in 2018 after defeating the long governing UMNO-led coalition which he had previously led for more than two decades as prime minister.
Meanwhile the now opposition Pakatan Harapan coalition Mahathir was part of in 2018 still contains a small moderate Islamic party Amanah and the more multi-racial Peoples Justice Party led by Anwar Ibrahim. Ethnic Malays constitute about 60 per cent of the country’s population, followed by Chinese, other indigenous groups and Indians. Mahathir has already won defections from Bersatu and Amanah, but this Malay festival of democracy seems set for a shakeout in any early election under the country’s first-past-the-post single member electoral system.
- Malaysian political analyst Wan Saifal Wan Jan argues that the reformist former Pakatan Harapan government failed because of Malay uncertainty about its leadership – even though Mahathir was the prime minister.
THE PACIFIC'S COVID DIVIDE
Australia is shifting towards more employment-intensive infrastructure projects in the South Pacific in a strategy change to adjust for the job losses caused by COVID-19. Department of Foreign Affair and Trade economist Jenny Gordon says the two-year-old Australia Infrastructure Financing Facility for the Pacific (AIFFP) is looking at projects such as road maintenance in a shift from planned focus on projects with long term economic impact. “That’s the way AIFFP is thinking of pivoting,” she told a Development Policy Center webinar on the impact of COVID in the Pacific.
New analysis by economists Stephen Howes and Sherman Surandiran has revealed a big division across the Pacific nations in how they are responding to the pandemic economic downturn, which could create some challenges for how Australia deploys its Partnerships for Recovery program. There are some interesting positive developments with some Pacific countries managing to assemble much larger health protection and economic stimulus spending than the global developing country average of 1.1 per cent of GDP. And the still limited data in the interim analysis shows that external remittance flows back to the region may not have fallen as much as expected, although there was some debate about this point at the webinar. As the chart shows countries with access to rainy day reserves like Timor Leste (oil sovereign wealth fund) and Vanuatu (citizenship sales) have managed quite substantial spending. But the region’s two largest and most populous economies, Papua New Guinea and Fiji, have struggled due to their respective revenue dependence on commodities and tourism.
NO WAY BACK NOW…
Australia’s economic integration with East Asia is likely to grow as a result of COVID-19, only intensifying the diplomatic balancing act over China, according to a new analysis of the pandemic’s cost. It says the existing integration with East Asia will support domestic economic recovery because the regional economies seem likely to recover faster than Europe or the US. This will increase the integration that has been happening for more than 30 years and this will result in more overall dependence on China. That is because, while there is a growing debate in Australia about diversifying from China, most of the diversification targets in other parts of Asia are also heavily integrated with China.
“Australia is meshed with China’s economy not only because China is the market for more than a third of Australian exports, but also because it is the major trading partner for Australia’s other markets in East Asia,” says former Reserve Bank of Australia board member John Edwards in the Lowy Institute report. “Australia cannot and will not decouple from China’s economy any more than Japan, Korea, Taiwan, or Southeast Asia can, wish to, or will… Australia’s stance towards the US-China competition must therefore be informed by a recognition that what injures China’s prosperity also injures Australia’s prosperity. Economic ‘decoupling’ of China from North America or Europe is not in Australia’s interests.”
The broader report argues that Australia is well placed to manage the rising government debt from COVID stimulus measures and that managing the China relationship will be more challenging than managing the COVID costs.
…BUT BIG DISRUPTIONS AHEAD
The Australian government will need to change its habit of reviewing the strategic outlook every five to eight years in foreign and defence white papers to deal with future changes in China, according to strategic analyst Ross Babbage. In a report co-written for the US-based Center for Strategic and Budgetary Assessments, he argues China’s slowing economy, massive national debt and rapidly ageing population mean its rise as a global power may have already peaked. “The Chinese Communist Party might muddle through, it might reform or it might fail. There is also a risk that the leadership might resort to international adventures to distract the public and bolster the regime’s security,” he says.
As a result, the Which Way The Dragon report argues: “The Western allies need a planning system that can accommodate marked changes in China’s trajectory. The need is for a mechanism that can detect and assess strategic changes in China promptly and link them directly to rapidly-paced Western countermeasures.”
The report is built around preparing for four alternative future for China by 2035: Xi Jinping’s dream, where the current regime continues; muddling through a series of set-backs into the late 2030s; the replacement of the current system with an assertive nationalist regime; and so-called Macro-Singapore where Xi responds to social, economic and political setbacks with far reaching reforms.
NEW PNG PARTNERSHIP
Australia has stepped up its bilateral relationship with Papua New Guinea in a new Comprehensive Strategic Economic Partnership (CSEP) just days after sending a medical team to the country to deal with its latest crisis – a COVID-19 outbreak. While the two events were largely coincidental, they underlined the expanding nature of the modern relationship ranging from traditional assistance to competition with China for influence.
In specific new moves, Australia has committed to building a solar power plant in the first major project to be funded from the $2 billion Australian Infrastructure Financing Facility for the Pacific, and will reportedly spend $45 million to expand technical and vocational training and increase defence cooperation funding.
Prime Ministers Scott Morrison and James Marape announced the CSEP after a virtual summit on August 5 declaring that the countries had a “special relationship underpinned by a shared history, geographic proximity, common strategic interests, deep community links, mutual respect, and cooperation across all spheres.”
When negotiations on the partnership were announced last year after a ministerial meeting there was a commitment to “comprehensive review” of the architecture for Australia’s sprawling almost $600 million spending on development assistance. But the new CSEP simply says the two countries will “continue refining” the way assistance works which appears to fall short of a serious review. And the ground has already been laid in the partnership agreement for even more architecture, with commitments to begin discussions on both formal security and trade treaties.
- This Lowy Institute interview with former high commissioners Charles Lepani and Ian Kemish, recorded before the CSEP was finalised, provides an insight into how the bilateral relationship might proceed under the new agreement.
See below: BOUGAINVILLE VOTES
DOUBLE DOWN ON VIETNAM
Australia is stepping up its plans to significantly increase economic engagement with Vietnam by seeking public submissions on the new economic strategy promised when Prime Minister Scott Morrison met his Vietnamese counterpart Nguyen Xuan Phuc in Hanoi last year. The two leaders agreed to a target of becoming top 10 trading partners and doubling two-way investment, and Morrison flagged the idea of pursuing a free trade agreement. So far work on the Enhanced Economic Engagement Strategy has focused on a comprehensive baseline analysis of the economic relationship including trade and investment opportunities and barriers, COVID-19 impact on each economy’s outlook and potential sectors for deeper engagement.
See below: WHAT WE’RE READING
DEALS AND DOLLARS
BUSINESS AND CHINA
The Business Council of Australia has shifted its international focus to broader global supply challenges from China security issues in an apparent acknowledgement of the push to diversify Australia’s trade and investment links. The peak business group’s new Global Engagement Committee will replace the old China Leadership Group which was established a year ago mainly to help build better high-level communications between business and security agencies over China related issues. The new committee will still be led by banker Warwick Smith, who has played leadership roles in several China-focussed business and government institutions, including as the Asia Society Australia previous chairman. Smith has told members that as Australia emerges from the pandemic, the BCA needs a globally focussed platform to deal with the more uncertain international economic environment for business. But he has said China will continue to be a priority of the new committee, given its importance to business and Australian prosperity.
The BCA shift comes after Smith publicly opposed a much bigger shakeup of the country’s China-focused business institutions proposed by former Austrade China head and then China Matters chief executive Michael Clifton.
In a China Matters brief published at the end of July, Clifton called for institutional changes to give business a stronger voice in Canberra and to re-engage with counterparts in China. This included a new China business lobby of 4 to 6 people, coordinated by the head of the BCA’s now supplanted China Leadership Group and the Australia China Business Council (ACBC) national president. And he said the BCA and the ACBC should work with Chinese counterparts to revitalise the Australia-China CEO Roundtable. He also urged the creation of a China Advisory Council to the federal government in addition to the relatively newly established National Foundation for Australia-China Relations.
“Increasing the influence of Australian business in Canberra and Beijing will require the engagement of more senior business leaders who have progressed beyond a strictly buyer/seller relationship with business partners in the PRC. Too few Australians have succeeded in using formal business partnerships as a platform for developing the genuine personal relationships that could be called upon in times of crisis,” Clifton wrote.
However, Smith says in response that there has been good progress in improving mutual understanding about China between business leaders and key security agencies in Australia over the past year under the existing framework. He told a Bank of America private function at the end of July that relations with China had never been worse but that business was closely engaged with security agencies on issues like cyber security and China had been made aware of this.
Australian businesses are being urged to pay closer attention to the growing digital and ecommerce opportunities in Southeast Asia as the region’s economy re-emerges from the pandemic. This was a key theme of a webinar organised by ambassadors from the Association of Southeast Asian Nations to Australia on August 18 to look at how Australia can support the recovery and what new trends are emerging.
The event, attended by some senior business figures and policymakers, was held under Chatham House rules. It revealed some significant differences of opinion about how much supply chains will change as a result of the pandemic which seems likely to create some uncertainty for business. “A lesson has been learned about how companies operating just in time is no longer sufficient,” one participant said. But another said: “We can’t make masks in Australia as cheap as in ASEAN. To put up barriers would be a big disappointment.”
Concerns were also raised about the outlook for the Regional Comprehensive Economic Partnership trade deal due to growing geopolitical tension, if it is not signed later this year as Australia is pushing for. While Indonesia, in particular, has some highly capitalised digital start-ups, one regional business representative said many ordinary businesses in the region were well behind the curve on digitalisation and the pandemic had forced them to catch up. He argued that this provide opportunities for specialist Australian service providers in areas such as Big Data, blockchain and ecommerce training to move into the region.
- See below: DIGITAL SINGAPORE
SKILLS LAG ASIAN EXPANSION
A new report on Australian business engagement with the region has found that while activity is up led by exports, the Asian literacy of top business leaders has not improved in the past three years.
The Winning in Asia report says foreign revenue of the top 200 Australian companies grew 26 per cent in the past five years while domestic revenue was flat. But this was mostly led by average 8.5 per cent a year export growth mainly to Asia and mainly by mining companies. As a result, the report finds that medium sized top 200 companies (capitalised at $3-5 billion) on average produced 82 per cent more shareholder returns than more domestically focussed companies.
However, this is occurring when a separate analysis found that only seven per cent of the board members and senior executives of these companies would qualify as Asia-capable, according to criteria developed by Asialink Business. The average Asia-capability score of directors and senior executives was 13.8 per cent and 13.5 per cent respectively. These measures change little from a similar analysis in 2017. The analysis found most of these senior business leaders had worked for companies which exported goods or services internationally. As a result, it concludes: “This suggests that while most business leaders possess the general skills to work across borders, few have the specific Asia skills necessary to fully capitalise on opportunities in Asia.”
The study, sponsored by Asialink, Commonwealth Bank, Australian Institute of Company Directors, and Chartered Accountants, says there is no one-size-fits-all model for Asian expansion. But it sets out examples that are succeeding, especially private companies, and argues that there are big opportunities in the consumer and discretionary sectors where Australian businesses have typically been underweight in international expansion even though they have Asia-capable senior leaders.
The Winning in Asia report follows the A Second Chance interim report, published by the Asia Society Australia/Business Council of Australia Asia Taskforce, which has recommended more cooperation by Australian government agencies and businesses abroad and better coordination at home, as well as better use of diaspora and returning expatriate business talent.
UPGRADE FOR SINGAPORE POWER
The federal government has given “major project status” to the $22 billion plan to export power from a giant solar farm to Southeast Asia via an undersea cable. Energy Minister Angus Taylor said the decision recognised the “strategic significance” of the project which would inject billions into the economy and create thousands of jobs. The Australia-ASEAN Power Link, backed by Sun Cable, plans to connect the world's largest solar farm and battery system in the Northern Territory to Singapore and Indonesia via a 3,700 km undersea cable.
AMATIL X BETS ON INDONESIA
Coca-Cola Amatil's $10 million venture capital arm has made its second investment in Indonesia with a strategic stake in a start-up which helps small restaurants digitise their businesses. Amatil X joined a $US5 million ($7 million) series A capital raising by the three-year-old Wahyoo following an investment in an Indonesian freight logistics marketplace Kargo Technologies earlier in the year. Amatil X head Alix Rimington said her team was working with Wahyoo to better understand the warung makan restaurants, which accounted for a big slice of the Indonesian food and beverage market and which was an important sector for the broader Australian company. “We are already working with Wahyoo to supply our beverages to warungs across Jakarta,” she said.
Australia and Singapore have finally signed a Digital Economy Agreement to take the existing bilateral trade agreement to the cutting edge of ecommerce. Trade Minister Simon Birmingham, who signed the agreement with Singapore’s Minister for Trade and Industry Chan Chun Sing in a virtual signing ceremony, said: “These are some of the most ambitious digital trade rules Australia has ever negotiated, and this agreement will serve as a benchmark for other digital trade rule negotiations within our region.”
The agreement follows an earlier agreement this year between Singapore and Chile, but the two countries see it as a potential model for further expansion in Asia. Mr Chan said: “As COVID-19 forces businesses to consider innovative ways to reach customers and adapt to a new way of doing business, agreements like the SADEA will allow our companies to take advantage of opportunities in the digital economy and tap on new technologies to create new digital products and services.”
LYNAS FUNDS FOR MALAYSIA
Rare earths miner Lynas Corp is raising $425 million in new capital, partly to fund its expanded Malaysian business after blaming a shutdown in Malaysia for a loss in the last financial year. The company lost $19.39 million – down from an $83 million profit last year – after being hit by COVID-19, weak commodity prices, and soft demand in the automotive industry. It was forced to shut its Malaysia plant for six weeks due to that country’s pandemic controls. The disposal of low-level radioactive waste in Malaysia has been a controversial issue, prompting protests over health concerns. But in its profit announcement the company said the renewal of its Malaysian licence for three years had been a highlight of the year and work towards its new disposal site was well under way.
“We should avoid any reflex towards a negative globalism that coercively seeks to impose a mandate from an often ill-defined borderless global community. And worse still, an unaccountable internationalist bureaucracy.”
Prime Minister Scott Morrison, 4 October 2019
“Australia’s interests are not served by stepping away and leaving others to shape global order for us. Isolationism would also cut us off from the world on which we are so dependent for our own security and prosperity in the world's most dynamic region.”
Foreign Minister Marise Payne, 16 June 2020
“I know the WTO and its processes can seem arcane, but having an effective rule book is the cornerstone of a functional, rules-based system. It couldn’t be more essential for a country like Australia.”
Trade Minister Simon Birmingham, 17 June 2020
“They recognised that global solidarity, cooperation and effective multilateralism, including through the G20, the East Asia Summit, APEC, the United Nations, the World Health Organization, the OECD and international financial institutions were required more than ever.”
Statement by Prime Ministers Scott Morrison and Shinzo Abe, 9 July 2020
“When global institutions and their bureaucracies become unaccountable, when they become vulnerable to manipulation or coercion, when they lose the confidence of their membership, they fail in their task to help the sovereign nations that establish them… a year ago, I described that trend as negative globalism. And my view hasn’t changed.”
Prime Minister Scott Morrison, 5 August 2020
WHAT WE'RE READING
The Mountains Sing by Nguyen Phan Que Mai (Oneworld Publications)
This is a sweeping story of a family split, and at least partly reunited, amid Vietnam’s century of torment emerging from French colonialism to become the fiercely independent nation that it is known as today. While the external history of colonialism (briefly Japanese, as well as French) and the war with the US (plus Australia) is well known, this novel provides a compelling insight into how these big events played out inside the private lives of the country (or countries, as they were). And it doesn’t hold back in dealing with the more sensitive history of how the internal tensions between the pro- and anti-communist forces tested the very ability of families to survive in a culture where kinship is so important.
In some ways it reminds of Pachinko, which covered the same period of tumultuous modern Asian history in a family across Korea and Japan. But while Pachinko is grittily worldly, Que Mai brings a poetic lyrical quality to her story – which is not surprising because she is a poet and this is her debut novel. While she splits her time between Indonesia and Vietnam now, she spent five years studying in Melbourne.
It is a novel, so it makes no historical claim as to how many families experienced this sort of wrenching turmoil. Although the author notes it was inspired by the experiences of her family and many others. At times the narrative has a slightly naïve tone due to the way it is built on a grandmother explaining the family history to her grand-daughter, who in turn is learning the country’s real history from a very independent-minded survivor. “Grandma once told me that the challenges faced by the Vietnamese people throughout history are as tall as the tallest mountain. I have stood far enough away to see the mountaintop, yet close enough to witness how Grandma became the tallest mountain herself: always there, always strong, always protecting us,” Que Mai writes as the more familiar modern country emerges towards the end of the book.
The story slowly and tantalisingly incorporates Vietnamese customs and language as it draws the reader into the Tran family’s psychic history and away from the bigger background history. As Vietnam becomes more important to Australia’s strategic and economic future in Asia, it is hard to think of a gentler, more engaging way to understand its 20th century evolution.
ON THE HORIZON
Voting in Bougainville’s election ends next Monday, paving the way for serious negotiations to start with Papua New Guinea on independence for the already autonomous province. The new president and 39 members of the House of Representatives who are elected will assume the responsibility for negotiating some form of independence from PNG in line with the overwhelming support for independence in the referendum last year.
Some questions will immediately emerge over the future role in the negotiations of incumbent president John Momis, who cannot stand again, and the losing candidates from the 25 people running for his job. But there are other issues on the election agenda, including economic development, law and order, government services, and the future of resource developments.
Australia faces the delicate task of facilitating the sentiment from the referendum for a potentially fragile new nation without being embroiled by any anti-independence sentiment in PNG. The new Comprehensive Strategic and Economic Partnership agreement with PNG underlines the sensitivity by simply noting: “We acknowledge the Bougainville Peace Agreement is a national priority of the Government of Papua New Guinea. We commit to continue supporting the post-referendum process through the ongoing collaboration of Papua New Guinea and Autonomous Bougainville Government.”
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