Briefing MONTHLY #31 | September 2020
Asian investment | Japan’s new PM | Jokowi unmasked
The number of Australian-owned businesses operating in Asia has grown very little since 2003 despite a series of trade deals and other government economic diplomacy initiatives to encourage integration with the region. The first detailed survey of outward foreign investment in 15 years by the Australian Bureau of Statistics (ABS) shows that the number of Australian-controlled subsidiaries in Asia (excluding Oceania) has only increased from 913 to 1,166 – but the proportion of the global total has remained static at about 22 per cent.
There were 5,176 Australian affiliate businesses operating around the world in 2018-19 owned by 275 parent companies compared with 4,012 in 2002-3, when this information was last collected. The data includes businesses which are at least 50 per cent Australian or Australian-based multinational-owned. The lack of change in Asian investment is consistent with the annual foreign investment data, but this special data series provides much more detailed information about where offshore investment is located and how it is performing. The offshore investors have $187 billion in equity investment in the Americas, $170 billion in Europe and only $78 billion in Asia (which in the 2019 data includes the Middle East).
The lack of growth also comes as the interim report from the Asia Taskforce convened by Asia Society Australia and the Business Council of Australia has argued that more on the ground investment will be necessary for Australian business to take advantage of continued high growth in the region. The new data underlines that investment on the ground appears to be crucial to exporting services to Asia and reveals that foreign-owned multinationals (MNCs) based in Australia play a key role in what the data defines as Australian investment.
And in a new insight into Asian business, the data suggests that these MNC affiliates are performing better than fully Australian-owned businesses. Investments in Asia produced a return on equity (ROE) of 6.7 per cent in 2019, which was mid-way between the ROE for investments in the Americas and Europe, suggesting that Asian investment is performing competitively. But Australian-based MNC investors in Asia produced a ROE of 16 per cent compared with five per cent for Australian-owned investments. The disparity is even greater in Southeast Asia where the MNC affiliates are returning 20 per cent compared with three per cent for the fully Australian controlled affiliates.
Source: ABS/Author calculations. These charts consolidate Asia and Oceania but exclude New Zealand compared with the original ABS data. A table with the original data including New Zealand has been included for reference in DATAWATCH below. Country numbers for India and South Korea were not published in 2003.
- For further insights into this data see the Lowy Institute’s The Interpreter here and Austrade economist Divya Skene here.
Illustration by Rocco Fazzari.
Is Japan’s new Prime Minister Yoshihide Suga the consummate machine man insider or a potential sneaky outsider? It is an important question as Prime Minister Scott Morrison reportedly considers a face-to-face meeting with Suga in November to reinforce Japan’s status as Australia’s closest regional security ally and revived importance as an economic partner as the China relationship wanes.
At face value Suga looks like a classic insider. He reputedly eats dinner twice a night to keep up with Liberal Democratic Party factions. So, it is no surprise the party leaders tweaked the leadership vote rules in his favour. And he says he has not stayed in his own home not far from Tokyo since he became a minister. These are questionable credentials for a man taking over a nation where improving the status of women in the workforce is actually a core economic challenge. But Suga’s rise to the leadership from a humble background on a strawberry farm means he stands out in a party riddled with political dynasties like the families behind outgoing prime minister Shinzo Abe. And Suga brings more of an interest in domestic economic matters to the job than Abe, despite his predecessor’s ownership of the eponymous Abenomics brand. While Abe has been praised for his economic reform strategy, he was regularly distracted by his greater passion for nationalist initiatives such as reforming the country’s pacifist Constitution.
Suga has made an interesting start by focussing on bureaucratic reforms and greater digitisation of the economy. His challenge will be to turn these types of issues into a personal reform flagship that will provide a more dynamic economic base to Japan’s higher profile regional diplomacy.
- This Nikkei Asian Review piece asks whether Yoshihide Suga is more like his early mentor and idiosyncratic former prime minister Junichiro Koizumi than Shinzo Abe.
- And in this article long-time Australian resident in Japan Melanie Brock says the country needs clear targets to increase the workforce participation of women.
PRECARIOUS AND BROAD-BASED
Source: ADB Outlook September Update
It is a roll call of the survivors: Bangladesh (5.2 per cent), Bhutan (2.4 per cent), Nepal (2.3 per cent), Tuvulu (2 per cent), China (1.8 per cent), Vietnam (1.8 per cent), Myanmar (1.8 per cent), Brunei (1.4 per cent), Taiwan (0.8 per cent) and Kiribati (0.6 per cent). Only ten out of 38 countries across East and South Asia and the Pacific will grow this year as the region goes into recession for the first time in 60 years with an average contraction of 0.7 per cent.
And it says a lot about the survivors that the Asian Development Bank (ADB) September outlook dolefully reports that it was only exports of petrochemical (Brunei), food (Myanmar) and work from home electronics (Vietnam) that kept those countries off the casualty list. The ADB has now downgraded its first post COVID-19 growth outlook for the region in April by 2.9 percentage points to get to the current overall negative forecast.
The ADB describes the downturn as broad-based and says the 6.8 per cent forecast recovery next year is still precarious. One of the strong points in the outlook is that developing Asia’s trade fell less than elsewhere in the world because demand for health-care supplies and work-from-home electronics supported exports. Developing Asia (which excludes Japan) has now spent US$3.6 trillion or 15 per cent of GDP on pandemic support and stimulus payments which is about half the GDP share of rich countries.
Looking past the pandemic, the ADB has warned that while the pandemic is likely to speed up the digitisation of education and finance in Asia, this runs the risk of intensifying inequality because 46 per cent of the population – or two billion people – remain offline. And in contrast to the debate in Australia about some possible de-urbanisation due to the pandemic, the ADB says COVID-19 has just intensified the challenges for Asia where the urban poor have suffered the most. “The risk of exposure to COVID-19 is greatest for those living in high-density environments such as informal settlements and slums, which house three of every 10 urban residents in developing Asia,” it says. “The primary challenge in the near term is to maintain and improve urban infrastructure and services and to ensure equitable access.”
ANWAR ACT #?
It is a bit hard to count how many times over the past three decades Anwar Ibrahim has seemed on the cusp of becoming Malaysia’s prime minister – almost certainly more times than anybody else. However, this time is the most confusing of all.
It says a lot about the country’s ability to get by amid a remarkable fragmentation of the once dominant United Malays National Organisation (UMNO), that King Abdullah has been able to spend a week in health care while Malay politicians argue about who has the numbers to be prime minister. But it is not without potential costs with another economic stimulus package to offset the impact of COVID-19 just rolled out and Malaysia due to host the Asia Pacific Economic Cooperation (APEC) group summit in November.
Anwar has reportedly drawn support remarkably from the UMNO faction associated with former Prime Minister Najib Razak to claim he has more parliamentary support than incumbent Prime Minister Muhyiddin Yassin. But Anwar’s Pakatan Harapan coalition won office in 2018 by beating his long-time rival Najib, who went on to be convicted of corruption.
The parliament does not sit until November. But the king is due to meet Anwar this week with three options: accept he has a majority, declare that Muhyiddin still commands a majority, or accept a request for an early election from Muhyiddin.
- This Nikkei Asian Review article argues that Malaysia needs to move on from its old warring leaders.
It has been a big month for debating the future of Australia’s relations with China at the nation’s thinktanks:
At China Matters, Dirk van der Kley argues that Chinese influence peddling in Australia has failed to make much impact on elite opinion or government policy but it has silenced some members of the local Chinese community. Referring to the Chinese Communist Party’s United Front Work Department (UFWD), he argues: “This lack of policy influence is partly due to a backlash against the PRC’s assertive behaviour and partly due to the exposure of United Front work by Australia’s security services and civil society … Current scrutiny of politicians’ links with Beijing is already sufficient and there is little need to make a policy change.” But he says more attention needs to be paid to intimidation of members of the local Chinese community and their reluctance to report this to local authorities. So, in the latest China Matters Explores he calls for a Foreign Interference Commissioner in the Australian Human Rights Commission and an encrypted portal for victims to report foreign interference.
At the Australian Strategic Policy Institute, Fergus Hanson, Emilia Currey and Tracy Beattie find that Australia has been subject to more cases of intimidating diplomatic actions from China than any other country with 17 such actions in the past decade. Canada (10) and the US (nine) followed. They say this sort of action is increasing against foreign governments and companies but isn’t well understood. And countries and companies have struggled to develop an effective toolkit to push back against and resist it. “China is the largest trading partner for nearly two-thirds of the world’s countries, and its global economic importance gives it significant leverage. The impacts of coercive diplomacy are exacerbated by the growing dependency of foreign governments and companies on the Chinese market. The economic, business and security risks of that dependency are likely to increase if the CCP can continue to successfully use this form of coercion,” they say in The Chinese Communist Party’s coercive diplomacy.
At the Australia-China Relations Institute, James Laurenceson, Thomas Pantle and Michael Zhou warn that Chinese economic pressure on Australia could be much worse that we have seen so far. They look at six incidents over the past three years where the situation has been clouded by China denying it was engaged in economic coercion while others have advanced various alternative reason for Chinese actions which restrict Australian trade. And they point out that this has happened in a broader context of rising Australian trade with China and rising use of economic coercive measures by the US government. They say China has been restrained by several factors including the lost access to resources, concern about sparking a broader backlash against it in Australia, damage to its global image and signs that Australia is diversifying its trade. “Going beyond PRC government rhetoric and Australian media headlines to analyse existing data are fundamental to developing a best-practice understanding of potential PRC economic coercion today,” they say in PRC Economic Coercion: the Recent Australian Experience.
At the US Studies Centre, Fiona Cunningham says the federal government should be doing more in its diplomacy to reduce the risk of nuclear conflict between China and the US and be working to prevent a China-US military clash turning into a nuclear war. “The increasing prominence of nuclear weapons in US-China competition raises the question of whether the US-Australia alliance is equipped to deal with the attendant nuclear hazards,” she writes in Managing US-China Nuclear Risks. She argues there is a small risk of deliberate nuclear use and a larger risk of inadvertent nuclear use in a future US-China conflict, both of which could increase if the possibility of conflict grows or if Washington or Beijing pursue more ambitious nuclear strategies. While the US and China are not in a nuclear arms race, US efforts to maintain its current superiority over China’s nuclear forces, or to deter North Korea or Russia, could prompt further growth in China’s arsenal.
HEADWINDS ON THE FARM
At the Perth USAsia Centre Jeffrey Wilson and Gemma King say that Australian agriculture is facing unprecedented headwinds from the simultaneous downturn in political relations with China just as it also makes farm import concessions to the US. They say agriculture is bearing the brunt of the downturn in the bilateral relationship because Chinese restraints on education and tourism have proven largely symbolic given the pandemic restrictions on international travel. “There is now a pressing imperative for the Australian farm sector to diversify its trade relationships. While China has been a reliable growth market for the last decade, political risks mean this pattern is unlikely to continue in the future,” they say in Political risks for the Australia-China agriculture trade. However diversification will be a complex and long-term endeavour for the agribusiness with many high quality food products requiring established relationships with foreign partners rather than commoditised sales. However, they say Australia is fortunate to have emerging markets in India, Indonesia and Vietnam.
TIME FOR A RESET
At the University of Sydney, James Curran argues that Australia’s recovery from the COVID-19 pandemic will require a reset of the China relationship but this might now have to wait for leadership change in Australia and China. He says: “That China has changed under Xi does not render the clear-eyed practicality of the Hawke and Howard governments irrelevant. True, new approaches need to be found, new tactics adopted, new strategies devised. But that task is infinitely more crucial to this country’s future than the force-fed diet of fear and phobia that disfigures national life, exacerbates tensions and risks far graver strategic and economic crises.”
ASEAN AID PIVOT
Australia has committed another $60 million in initiatives to support Southeast Asia under its COVID-19 focussed Partnerships for Recovery program. These measures announced by Foreign Minister Marise Payne at the Association of Southeast Asian Nations (ASEAN) follows commitments of more than $20 million earlier in the year. The measures include a new partnership to help the Mekong sub-region detect COVID-19 in wastewater using Australian technology, research to support recovery plans for women, and a contribution to ASEAN’s response fun to purchase medical supplies. And a successor to Australia’s flagship economic cooperation program with ASEAN will support recovery through cooperation in connectivity, digital transformation, responding to the fourth industrial revolution, and private sector development.
DEALS AND DOLLARS
CALLING HONG KONG
A new business advisory group has been formed to recommend tax and regulatory reforms to help Australia capitalise on the decline of Hong Kong and to compete as a regional financial and technology centre. t will be headed by former Macquarie Group Asian investment banking chief Andrew Low who says Australia has a better chance to compete in this area than in the past due to China’s crackdown in Hong Kong and changed work practices due to COVID-19. “Hong Kong will continue to be a large financial centre, but it is increasingly going to become a China-centric one with more domestic Chinese businesses based in Hong Kong,” he said in an interview in The Australian Financial Review.
CHINESE INVESTMENT FALL
The Australian National University’s Chinese investment database is the latest pointer to a sharp downturn in the broader commercial relationship between the two countries. It reports that investment fell 47 per cent to $2.5 billion in 2019, compared with a peak of $15.8 billion in 2016. Perhaps more significantly the fall in capital outflow to Australia was much greater than the 9.8 per cent decline in global Chinese investment in 2019. According to the ANU data Chinese investment to Australia almost halved across all sectors, with major falls in mining, real estate and commercial property, manufacturing and a collapse of investment in agriculture. There were some modest gains in construction, education and finance.
Papua New Guinea and Indonesia have figured prominently in global tour by mining entrepreneur Andrew Forrest looking for diversification opportunities in the post-COVID world. Forrest has now visited those two countries as well as Afghanistan, Ethiopia and the Democratic Republic of Congo for a new venture Forrest Future Industries from a base in Croatia to stay out of Australia’s quarantine rules. In PNG he reportedly looked at opportunities in Bougainville where the mothballed Panguna gold and copper mine could fit with his ambitions to invest in battery metals. In Indonesia he signed an agreement aimed at assessing the viability of using Indonesia’s hydropower and geothermal resources.
The head of the Chinese company which owns the Swisse vitamins group, Laetitia Garnier, expects daigou traders will remain quiet for the next few months. Swisse reported a 36 per cent fall in sales revenue to $127 million in Australia/New Zealand in the six months to June. Garnier, chief executive of Health & Happiness, said the Australian market had been a challenging one. “We’ll continue to see pressure from our daigou business in ANZ region throughout (the second half). This is obviously going to last for a while as Australian borders are not reopening. And again, we will refocus our efforts in the ANZ region on the domestic market to make sure we capture growth there with the local consumers,” she told an earnings call.
LATITUDE EYES CHINA
Latitude Financial chief executive Ahmed Fahour says his business is looking at expanding into China and other Asian countries, as it looks to boost its growth by targeting the region's fast-growing and online-savvy middle class. He said the company was exploring bringing its regulated instalment loan products into China by working with an unidentified partner. “We’re focused on this interest-free instalment space, and we've identified a couple of geographic expansion opportunities, and we’ve nominated a couple of internal executives who have built this kind of platform in Asia,” Mr Fahour said in an interview with The Sydney Morning Herald. “We’re at this moment actively exploring with a Chinese partner a specific and large opportunity in China. We're pretty well advanced in building that technology capability," he said of the approach from a partner with extensive access to China's market.
BUBS CHINA FACTORY
Bubs Australia chief executive Kristy Carr says the infant formula company's investment in a new China factory to produce a product using goat milk powder from Australia will help shield it from the growing bilateral diplomatic tensions. “Everyone sees the opportunity in China, but there’s a new level of risk there in terms of the geopolitical landscape, and I think this strategy has really mitigated some of that risk,” Ms Carr said in an interview with Nine newspapers. The investment will be funded by a $38.3 million equity raising and will give the company a 25 to 35 per cent stake in the factory with a Chinese partner. The company delivered a 24 per cent increase in revenue to $55 million in the last financial year, but fell short of recording a full year profit.
NEW CHINESE ENTREPRENEURS
A new generation of Chinese entrepreneurs are making their presence felt in Australia just as the relationship with Australia’s biggest trading partner has taken a downturn that threatens the future of some economic contact. The findings from a survey by KPMG and the University of Sydney Business School is the first of its kind in Australia and offers some lessons for the integration of other migrant entrepreneurs. It says: “Our research uncovered new business models and other innovative approaches that these Chinese Australian migrants brought to our business communities. These entrepreneurs, who grew up in China and experienced Australian tertiary education, have an understanding of the norms of doing business in both countries and can offer a bridge between the two cultures and markets.”
Asia’s diverging COVID recovery path
Sources: Oxford Economics/Haver Analytics/CEIC/WDI/Blavatnik School of Government/Other national sources
In this Oxford Economics scorecard of recovery measures from the pandemic, a higher score indicates less vulnerable, less stringent measures, better containment, more effective policy support and stronger recovery prospects.
The new ABS survey of Australian investment in Asia in detail
Source: ABS/Author calculations. This table contains the original data for the charts used earlier. But it also includes New Zealand for comparison. Other includes Asian and Oceania locations. Country numbers for India and South Korea were not published in 2003.
“The World Health Organization has a vital role, ensuring that if and when there is a vaccine, people around the world can get access it. Australia supports the WHO’s efforts to develop a global framework so that vaccines and therapeutics are allocated fairly. In facing a global health threat, we have all been reminded about the importance of multilateral cooperation. And I acknowledge the efforts of the WHO in containing the spread of the virus, including in the Indo‑Pacific region. I’m pleased that the WHO has established an independent panel to evaluate the global response.”
“The UN is fulfilling its high purpose, the purpose that 75 years ago brought the world together in a united hope, and in goodwill … But with more voices and challenges comes complexity, negotiation, processes, bureaucracy that would test any organisation. At 75, we know that the UN, like the humanity it serves, the nations that form it, are not perfect. So, against this backdrop, we should think about what the next 75 years look like for the UN, its structures, its functions and for multilateralism more generally. We want these multilateral institutions to continue to deliver for us and all nations. So, we’re committed to ensuring they are fit for purpose, that they’re effective, that they’re open and transparent and, most importantly, that they are accountable to the sovereign states that form them.”
Prime Minister Scott Morrison speaking to the United Nations General Assembly September 26, 2020
WHAT WE'RE READING
Man of Contradictions by Ben Bland (Penguin Specials/Lowy Institute)
Indonesia is now one of the first overseas stops for new Australian prime ministers in a welcome recognition of where Australia’s real interests are and where its influence may well be deployed. But this brings with it a tendency for exaggerated claims to instant personal relationships and overstatements about Indonesia’s role in democracy, moderate Islam, economic reform and the list goes on.
Ben Bland’s new book provides a timely insight into the superficiality of these regular comments through the lens of how a furniture manufacturer became the first person from outside the country’s elite ranks to be elected president. While a disturbing number of Australians refuse to accept Indonesia as a democracy after almost twenty years of elections, President Joko Widodo has arguably cut through in the minds of many more Australians than his predecessors. Former Prime Minister Malcolm Turnbull’s “ties-off” tour of a market with Jokowi (as he is colloquially known) is a good example of this. But the great value of Bland’s book is the way he colourfully and insightfully explains Jokowi’s chameleon political character in both an Indonesian cultural perspective and as an example of a successful leader from a developing Asian country. He starts out explaining how he was told on arrival in Indonesia as a reporter that the president should be understood as a “bundle of contradictions.” Fortunately, he is less of a contradiction after this first biography in English but not easier to predict or categorise. “Indonesians and outsiders would come to see Jokowi as many different things: an economic liberal, a political reformer, a defender of pluralism and, eventually, a neo-authoritarian. But Jokowi has approached politics from a more straightforward perspective, that of the furniture maker,” Bland writes.
Now after five years of dismaying early liberal supporters, outmanoeuvring elites and swinging in various directions, there is a problem. Bland writes: “Jokowi’s simplistic approach to the economy seems to have exhausted itself … Instead of clarifying his positions over time, Jokowi has tended to lurch from problem to problem, becoming ever more subsumed by the defining contradictions of modern Indonesian history. The parallels with Soeharto’s rule, and Indonesia’s longer struggle between democracy and authoritarianism, are hard to ignore.” The narrative underlines how foreign observers should understand Jokowi as a canny politician with a populist touch cutting through traditional elites, but also allying with them. And that this is quite normal for a country such as Indonesia as it tries to navigate the modern world from a complex old culture. So, visiting neighbours should beware: “In foreign policy, as in other areas, Jokowi and Indonesia appear to be stumbling from one dilemma to the next. It does not amount to a grand strategy. But that is the leader and the nation we see before us.”
ON THE HORIZON
EXPANDING THE INDO-PACIFIC
While tensions between China and the US dominate most discussions about regional architecture these days, below the surface momentum continues toward the possible emergence of two new nations at the bottom of that architecture. On October 4, New Caledonians will vote for the second time on independence from France in a series of three possible referendums agreed to in the 1998 Noumea Accord. Meanwhile in Papua New Guinea’s already autonomous region of Bougainville a new president has just been elected with the principal responsibility of negotiating some form of independence.
Anti-independence bystanders watch a 'yes' vote rally in Noumea. Credit: Thierry Peron/Les Nouvelles Calédoniennes
New Caledonia: In November 2018, 57 per cent of New Caledonian voters decided to remain part of the French Republic, but the strength of the minority independence vote surprised the pro-French political establishment setting the scene for a drawn out series of referendums. The indigenous Kanak people appear to overwhelmingly support independence adding another difficult political element to the process. France has been increasing its presence in the Pacific in partnership with Australia but would suffer a loss of credibility if it can not retain control of one of its three populated territories in the region.
Ishmael Toroama (left) during the election campaign. Credit: Joseph Nobetau
Bougainville: A former rebel army leader Ishmael Toroama has been elected the new president of Bougainville as part of the general election for a new Parliament. He has said he wants to achieve independence from PNG within five years following a referendum late last year in which 98 per cent of voters supported independence. But the referendum was officially non-binding so Toroama now has to negotiate a timeframe, process and governance structure to be approved by the PNG Parliament. Australia has pledged to work with both sides but faces the prospect of a stalemate or the emergence of fragile new nation.
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Briefing MONTHLY is a public update with news and original analysis on Asia and Australia-Asia relations. As Australia debates its future in Asia, and the Australian media footprint in Asia continues to shrink, it is an opportune time to offer Australians at the forefront of Australia’s engagement with Asia a professionally edited, succinct and authoritative curation of the most relevant content on Asia and Australia-Asia relations. Focused on business, geopolitics, education and culture, Briefing MONTHLY is distinctly Australian and internationalist, highlighting trends, deals, visits, stories and events in our region that matter.
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