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AMERICA PULLS BACK: China Moves to Fill Economic Void

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Since the aftermath of the global financial crisis, America’s overseas economic power has increasingly waned. Lower gross domestic product (GDP), expensive decade-plus wars, higher unfunded liabilities and anemic employment figures have negatively affected America’s economic reach. Larry Summers, who served two U.S. Presidents (Clinton and Obama), opined on the country stating that its “losing its role as the underwriter of the global financial system.” On the other hand, since inception, the United States continues to excel at becoming a destination for global capital thanks to relatively open markets, a sizeable middle class segment, private property rights, deep liquidity and an innovative populace.

In March, the U.K., a historical staunch U.S. ally, joined the Asian Infrastructure Investment Bank (AIIB), China’s counter to the U.S.-led World Bank.

Beijing is determined to augment its economic and political influence in global trade and finance, expanding into markets in Africa and Latin America, while deepening its financial firepower in Southeast Asia. A number of reluctant executives of these countries have inked deals with the Chinese (desperately needing the capital), usually exchanging money for natural resources. This is changing as securing natural resources is not a primary reason for China. Chinese developers are investing more capital into sub-Saharan Africa, creating urban developments such as Modderfontein New City project, a 1,600 hectare development in Johannesburg. China’s sovereign wealth fund, the China Investment Corporation (CIC), made a first major investment in South Africa when it bought a 25% stake into Shanduka Group – a major owner of McDonald’s franchises. The AIIB is headed by Jin Liqun, the man who was behind the CIC. Jin Liqun was the former vice president of the Asian Development Bank and China’s vice minister of finance.

Losing Face

In March, the U.K., a historical staunch U.S. ally, joined the Asian Infrastructure Investment Bank (AIIB), China’s counter to the U.S.-led World Bank. The U.K Treasury examined the structure and governance arrangements of the AIIB. An important note is that London is keen on becoming the largest offshore center for the renminbi. Other nations applying include the following countries: Saudi Arabia, France, Germany and Italy. South Korea and Australia also plan to join the AIIB, understanding that China’s influence is growing and U.S. influence is waning (at least economically speaking) in the region. In April, Israel announced its intentions to join the new bank. A lone key U.S. ally that has not committed to the AIIB is Japan. North Korea’s application to the AIIB was rejected.

Since 2010, the U.S. Senate refused to ratify governance reform at the World Bank, which would have bolstered the bank’s financial resources, but given expanded ownership weight to countries like China and Brazil versus proportionally shrinking European economies like France. The lack of reform at the World Bank and failure to boost commitments from its nation partners has solidified the case for alternative development banks. Not surprisingly, Brazil, Russia, India and China launched the BRICS Bank (now called New Development Bank) soon after. Furthermore, Asia’s massive infrastructure gap is too much for the World Bank to tackle alone. And by dissuading its natural allies to join the Chinese-backed institution, America cements greater isolation among major donor nations, endangering future investment access. The AIIB plans to invest US$ 100 billion in infrastructure projects across Asia.

Summers writes, “But I can think of no event since Bretton Woods comparable to the combination of China’s effort to establish a major new institution and the failure of the US to persuade dozens of its traditional allies, starting with Britain, to stay out of it.”

Obama Administration’s Concerns

Since Bretton Woods back in 1944, the World Bank has been the global institution funding projects and lending. The U.S. argues that the AIIB may allow for looser lending standards versus the World Bank’s decades-long push into financial transparency and incorporating environmental concerns when investing in projects. Last month, U.S. State Department spokeswoman Jen Psaki told reporters that it is the U.K.’s “sovereign decision” to apply to join the bank. America continues to supports its efforts in the Pacific through its Trans-Pacific Partnership strategy.

AIIB Members and Applicants

AIIB Members Approval Date Notes
1 Bangladesh 10/24/2014 Regional
2 Brunei 10/24/2014 Regional
3 Cambodia 10/24/2014 Regional
4 China 10/24/2014 Founding Member
5 India 10/24/2014 Regional
6 Kazakhstan 10/24/2014 Regional
7 Kuwait 10/24/2014 Regional
8 Laos 10/24/2014 Regional
9 Malaysia 10/24/2014 Regional
10 Mongolia 10/24/2014 Regional
11 Myanmar 10/24/2014 Regional
12 Nepal 10/24/2014 Regional
13 Oman 10/24/2014 Regional
14 Pakistan 10/24/2014 Regional
15 Philippines 10/24/2014 Regional
16 Qatar 10/24/2014 Regional
17 Singapore 10/24/2014 Regional
18 Sri Lanka 10/24/2014 Regional
19 Thailand 10/24/2014 Regional
20 Uzbekistan 10/24/2014 Regional
21 Vietnam 10/24/2014 Regional
22 Indonesia 11/25/2014 Regional
23 Maldives 12/31/2014 Regional
24 New Zealand 1/5/2015 Non-Regional
25 Saudi Arabia 1/13/2015 Regional
26 Tajikistan 1/13/2015 Regional
27 Jordan 2/7/2015 Regional
28 Luxembourg 3/27/2015 Non-Regional
29 Switzerland 3/28/2015 Non-Regional
30 United Kingdom 3/28/2015 Non-Regional
31 Germany 4/1/2015 Non-Regional
32 France 4/2/2015 Non-Regional
33 Italy 4/2/2015 Non-Regional
34 United Arab Emirates 4/5/2015 Regional
  Applying for AIIB Membership Application Date  
35 Hong Kong 12/1/2014  
36 South Korea 3/26/2015  
37 Turkey 3/26/2015  
38 Austria 3/27/2015  
39 Spain 3/27/2015  
40 Brazil 3/28/2015  
41 Denmark 3/28/2015  
42 Georgia 3/28/2015  
43 Netherlands 3/28/2015  
44 Australia 3/29/2015  
45 Egypt 3/30/2015  
46 Finland 3/30/2015  
47 Russia 3/30/2015  
48 Azerbaijan 3/31/2015  
49 Hungary 3/31/2015  
50 Iceland 3/31/2015  
51 Israel 3/31/2015  
52 Kyrgyzstan 3/31/2015  
53 Norway 3/31/2015  
54 Poland 3/31/2015  
55 Portugal 3/31/2015  
56 Sweden 3/31/2015  
57 Chinese Taipei (Taiwan) 3/31/2015

Source: Park Alpha research, fully-compiled April 6, 2015
 

Michael Maduell

The views in this article are expressed by Michael Maduell.
Michael Maduell is President of the SWFI.
www.swfinstitute.org

Cassa Depositi e Prestiti Guides Companies to Find Opportunities in Naples Region

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The Cassa Depositi e Prestiti Group (CDP) and its investee companies, which include Fincantieri, Italgas, Snam, and Terna, have reached an agreement with the Municipality of Naples and the Authority of the Central Tyrrhenian Sea Port System. The entities will cooperate to provide for the development of Naples and its surrounding area. There will be a focus on helping the institutions and the community at large through financial support, real estate, and infrastructure investment, and support for local businesses. Signatories can help to provide technical expertise and planning, loans, and oversee public projects. Further, assistance and consulting will be provided, particularly as they relate to interventions and renegotiation of contract terms for the purposes of freeing up capital. Sustainable mobility will be a priority, with natural gas and biomethane forming the core fuels of the future. The group will be developing the ports, which will include the construction of emission-reducing structures.

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PIVOT: Federal Reserve Signals Zero Rate Hikes in 2019

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The Federal Reserve made a decision to hold interest rates steady and indicated that no more hikes will be coming for 2019. Federal Reserve Chairman Jay Powell addressed the media saying that the Chinese and European economies have slowed ‘substantially’. Despite low U.S. employment, Powell explained to the media that the U.S. has the lowest labor force participation rate among developed nations.

There were four interest rate hikes in 2018.

The Federal Reserve committee intends to conclude the reduction of its aggregate securities holdings in the System Open Market Account (SOMA) at the end of September 2019. Essentially, the Federal Reserve is ending quantitative tightening in September 2019. Furthermore, the committee intends to slow the reduction of its holdings of Treasury securities by reducing the cap on monthly redemptions from the current level of US$ 30 billion to US$ 15 billion beginning in May 2019.

In a March 20, 2019 statement called “Balance Sheet Normalization Principles and Plans”, a portion of it reads, “The Committee intends to continue to allow its holdings of agency debt and agency mortgage-backed securities (MBS) to decline, consistent with the aim of holding primarily Treasury securities in the longer run.

Beginning in October 2019, principal payments received from agency debt and agency MBS will be reinvested in Treasury securities subject to a maximum amount of $20 billion per month; any principal payments in excess of that maximum will continue to be reinvested in agency MBS.

Principal payments from agency debt and agency MBS below the $20 billion maximum will initially be invested in Treasury securities across a range of maturities to roughly match the maturity composition of Treasury securities outstanding; the Committee will revisit this reinvestment plan in connection with its deliberations regarding the longer-run composition of the SOMA portfolio.

It continues to be the Committee’s view that limited sales of agency MBS might be warranted in the longer run to reduce or eliminate residual holdings. The timing and pace of any sales would be communicated to the public well in advance.”

source: Federal Reserve website

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Tencent Contemplates A.S. Watson Investment

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Tencent Holdings Limited is contemplating a bid to acquire Temasek Holdings’s ownership stake in A.S. Watson, an Asian beauty and health retailer. Temasek Holdings has been trying to offload its 10% stake in A.S. Watson. The price tag could be around US$ 3 billion.

Alibaba Group Holding Limited has also expressed interest in the A.S. Watson investment.

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