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China-Central Asia’s growing cooperation irks US

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A milestone two-day summit is about to take place from tomorrow (18th and 19th) in the northwest Chinese city of Xian where leaders from five-Asian States will attend and they will be welcomed by the Chinese President Xi Jinping.

Beijing for the first time will host an in-person summit of central Asian leaders with core intention to cement ties in a region, where President Xi is expected to discuss deepening economic and security links with counterparts of the five-Asian countries.

The presidents of Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan will discuss ways and means to further strengthen ties among themselves and with China collectively. The core goal behind the summit is to build a strong foundation of cooperation and send a clear message of solidarity, peace and development to the world in such a tense situation.

The world is in dire of need of healing and solidarity. There is hardly any good news, rather the headlines are more on war, political crisis, economic hardship, racism, unhealthy competition, and so on… In such a tense situation, seeing at least leaders from Central Asians under one roof with the leader of China to work for peace and economic development is encouraging.

Diplomatic relations between China and five Central Asian countries goes back to 30 years ago, and since then they developed strategic partnership and tried to open new ways and paths to explore good neighborliness and engage in win-win situations.

The countries have gone through a batch of cooperation projects with China has been the main executor of them as Beijing is running big projects to create a good economic atmosphere for these five countries.

Achievements in exploring cultural communication, initiating people-to-people exchange programs with bigger development projects in oil and gas extrication plus transportation, trade, connectivity, investment and other projects made relations between China and these countries much different and unique. Meanwhile, it is not the way that all is good and there is no external threat to undermine their ties and great gap between them.

US unhappy with China-Central Asian countries growing relations

The Joe Biden administration has never wanted China and the Central Asian countries to come closer and engage in politics, economic, culture, educational and other mutual activities.

The US has recently tried to strengthen ties with Central-Asian states amid the Russian-Ukraine crisis and also to stop the rapid path of progress between China-Central Asian states. It is believed that the US is trying to gain influence in the region to secure its own interest in the region, especially after leaving Afghanistan in a hasty withdrawal process.

The US’s sudden interest in the region speaks loudly of US desperation to find a new alliance, but it seems difficult and the US is no more trust-worthy after looking at what it has done in regards to the situation in Syria, Iraq, and Afghanistan.

China-region ties won’t affect

The irresponsible withdrawal from Afghanistan after 20 years can serve as a concrete example of Central Asian states to avoid falling down to each empty promise of the US. In a clear attempt, earlier this year, US Secretary of State Antony Blinken visited Kazakhstan and Uzbekistan, where he signaled that his country is changing tack in the region.

Bringing the Russian-Ukraine war as an excuse, the US said that Washington is seeking to step up engagement with the region in order to help countries facing economic fallout as a result of the conflict.

The US is undermining the relation between China-Central Asian states, and thinks it can easily penetrate and spoil the process. The US must understand that relations between China and Central Asian states are based on win-win results and mutual trust and respect. No chance stands for the US to affect China’s ties with the region, especially in such a time when it has become clear that the US is only serving its own interests and really doesn’t care about others.

Mutual trust

China wants to promote a new alternative to the global order and the Central Asian region is the best option for that achievement. This year, Xi also visited for the first time Turkmenistan, Kazakhstan, Uzbekistan and Kyrgyzstan, where he said they were “neighbors” connected by common mountains and rivers.

Xi also paid a state visit to Tajikistan where the leaders reached an important consensus to further deepen bilateral ties. During his speech, Xi said that China highly values its friendship and cooperation with these countries and takes them as a foreign policy priority.

To show in reality the policy priority, President Xi’s active involvement and personal engagement to the summit has been delivering the commitment he has to strengthen ties with Central Asian states. The summit also indicates the successful diplomatic efforts and growing regional influence of China by establishing comprehensive strategic partnerships with all five Central Asian countries. The process also demonstrates high levels of trust and cooperation between them.

It is worth mentioning that the summit comes just days before the G7 Summit due to be held from Friday to Sunday in Hiroshima, Japan. Reportedly the G7 member states are expected to discuss issues related to economic security and how to counter China’s economic coercion and ending dependence on China in fields such as semiconductors and critical minerals.

China is unstoppable

China is following its vision of Belt and Road Initiative (BRI) where the Central Asian countries will be benefited the most. No power can stop China from pursuing BRI and the Central Asian states understand the economic and security benefits of the multi-billion dollar project.

Meanwhile, China’s trade with these five countries increased to $70.2 billion in 2022, a great achievement that could be doubled once BRI further implemented. Moreover, as of the end of March, China’s direct investment stock in the five Central Asian countries stood at over $15 billion.

In a press conference, China’s Foreign Ministry spokesman Wang Wenbin had said that the summit, historically known as Chang’an, the starting point of the ancient Silk Road, will further build up the consensus between China and the Central Asian countries on high-quality development of the Belt and Road.

China invests in Afghanistan

Afghanistan is also one of the neighbors of China, and a great contributor to the Silk Road before war. Now when BRI is replacing the Silk Road, Afghanistan under the Taliban rule also showed interest to be part of the project. The Taliban has become a pioneer to promote the BRI and turn Afghanistan toward an economic country through active engagement in the project.

China has shown interest to invest in the gas and oil sectors in Afghanistan, and the spokesman for the Ministry of Mines and Petroleum,  Homyaoon Afghan, said that they have provided essential facilities for the investors.

While thanking Chinese investors, Afghan said that Afghanistan is rich in gas and oil and it will help bolster up the economy once the extraction process starts.

In January, Taliban also signed a contract with a Chinese company to extract oil from the Amu Darya basin, where Afghan Minister of Mines and Petroleum Shahabuddin Delawar, said the first three years will be exploratory and that in this period more than $540 million will be invested.

It is worth mentioning that the Ministry of Industry and Commerce had earlier reported that China had invested and signed contracts worth $2 billion in investment in Afghanistan since the takeover of Taliban in 2021.

ASIA

How will Trump’s potential tariffs affect Southeast Asia?

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Southeast Asia is worried about Donald Trump’s threat of universal tariffs and a new trade war with China. Five of the region’s six largest economies run a trade surplus with the United States.

But experts say the situation may not be so bad. The region, which tries to remain geopolitically neutral, saw an increase in gross trade with both China and the U.S. between 2017 and 2020 during Trump’s first presidency. Vietnam, Indonesia, Malaysia, and Thailand have benefited as companies from China, Japan, South Korea, Taiwan, and the U.S. have expanded their production bases in Southeast Asia to avoid U.S. tariffs.

Experts say exports and economic growth will take a hit in the short term, but the region could benefit from trade diversion and substitution.

What is Trump’s tariff threat?

The goal of Trump’s trade policy is to bring manufacturing jobs back to the U.S. and decouple supply chains from China. Trump and his advisers claim that China’s trade advantage is due to “currency manipulation, intellectual property theft and forced technology transfer”.

During his first term, Trump used executive powers to impose tariffs of up to 25% on $250bn of electronics, machinery and consumer goods imported from China. Beijing retaliated with similar measures on U.S. agricultural, automotive and technology exports.

Now Trump has proposed a 60 per cent tariff on all Chinese goods entering the U.S. and tariffs of up to 20 per cent on imports from everywhere else.

How bad could it be for Southeast Asia?

According to Oxford Economics, about 40 per cent of Cambodia’s exports go to the U.S., making it the largest exporter in Asean as a percentage of total exports, followed by Vietnam with 27.4 per cent and Thailand with 17 per cent. Thanavath Phonvichai, president of the University of the Thai Chamber of Commerce, said the Thai economy could take a 160.5 billion baht ($4.6 billion) hit if Trump fulfils his promises.

Vietnam has the world’s fourth-largest trade surplus with the United States. This imbalance has been growing rapidly as Chinese, Taiwanese and South Korean companies have used Vietnam to avoid Trump-era tariffs. Vietnam’s fortunes could change just as quickly, especially if the U.S. continues to classify Vietnam as a ‘non-market economy’, which requires higher tariffs.

Uncertainty over Trump’s tariffs could cause companies to pause or halt investment plans in Southeast Asia. U.S. companies accounted for about half of Singapore’s $9.5 billion in fixed-asset investment last year, according to the city-state’s Economic Development Board. In his congratulatory letter to Trump, Prime Minister Lawrence Wong was quick to remind him that the United States enjoys a “consistent trade surplus” with Singapore.

Any blow to the Chinese economy will have repercussions for Asean countries that depend on Chinese consumption, export demand and tourism. A reduced appetite for Chinese goods will also affect Southeast Asian suppliers of inputs to Chinese producers. Indonesia, Southeast Asia’s largest economy, will suffer the most because it exports 24.2 per cent of its goods to China, mainly commodities.

Unable to send their goods to the U.S., Chinese exporters may turn to Southeast Asia, where governments have faced complaints from local producers hurt by dumping in metals, textiles, and consumer goods.

What is Southeast Asia’s advantage?

Southeast Asia’s current manufacturing boom started because of the trade war. Over time, analysts expect trade substitution and diversion to outweigh the hit to growth.

“We think a stronger crackdown on China could lead to more supply chain diversion as Chinese companies trade and invest more in Asia,” said Jayden Vantarakis, head of ASEAN research at Macquarie Capital.

“Electric vehicle factories, which some Southeast Asian governments are aggressively pursuing, could provide an economic buffer. Demand for EVs is also growing outside the U.S., so I think there could be a net benefit for Indonesia. Smaller countries that are trying to be carbon neutral, especially as petrol prices get more expensive, will try to take over the supply and buy more electric cars,” said Sumit Agarwal, a professor at the National University of Singapore’s School of Business.

Trump’s promised tariffs could embolden Asean governments to impose anti-dumping duties on Chinese goods, as Thailand did on rolled steel this year. Stricter U.S. rules of origin could also give governments an opportunity to ensure that more high-value parts are produced and assembled locally.

How will Southeast Asian currencies and markets be affected?

Trump’s tariffs could reduce pressure on Southeast Asian central banks to ease monetary policy further.

“Essentially, Trump’s victory is inflationary for the world because of his planned tariffs, so the global monetary normalization or easing cycle will probably not be as sharp as previously thought, including in the Philippines,” said Miguel Chanco, chief emerging Asia economist at UK-based Pantheon Macroeconomics.

Speaking to Nikkei Asia, Chanco said Southeast Asian currencies will not strengthen as much as previously expected, partly because markets are re-pricing the pace of easing by the U.S. Federal Reserve and thus the dollar will continue to strengthen.

Among Southeast Asia’s six major economies, the Thai baht and Malaysian ringgit have been the worst-performing currencies since Trump’s victory, losing 3.2 per cent and 2.9 per cent respectively against the U.S. dollar through Wednesday.

Thai brokerage InnovestX recommended stocks that would benefit from a strong dollar and weak baht. These include companies with significant export earnings, such as CP Foods and Delta Electronics, or tourism-related companies such as Airports of Thailand, property developers and hoteliers.

Governments are already taking steps to reduce their over-dependence on the U.S. or China by deepening ties with other countries and regions and emphasizing their neutrality.

Southeast Asian economies in particular are also expected to focus on building resilience by strengthening intra-ASEAN trade.

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Japan’s exports rise despite global risks, boosted by China

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Japan’s exports rose more than expected in October, driven by strong demand from China and other parts of Asia, despite growing uncertainties in global markets.

Exports increased by 3.1% year-on-year, led by significant growth in shipments of chip-making equipment, particularly to China, according to the Finance Ministry’s report on Wednesday. This marked a rebound following the first drop in 10 months in September. October’s figures exceeded economists’ forecasts of a 1% rise and were also bolstered by increased shipments of medical products to the United States.

Meanwhile, imports edged up by 0.4%, defying expectations of a 1.9% decline. As a result, the trade deficit widened to 461.2 billion yen ($2.98 billion), compared to 294.1 billion yen in the previous month.

This stronger-than-expected export performance has raised optimism about Japan’s economic recovery. Although the country’s gross domestic product (GDP) expanded for the second consecutive quarter through September, the pace of growth has been tempered by the drag from net exports.

“Today’s data raises hopes that external demand will revive in the October-December quarter,” said Hiroshi Miyazaki, Senior Research Fellow at the Itochu Research Institute. “The Chinese government’s stimulus measures have stabilized its economy and reversed the prior decline.”

Exports to China rose by 1.5% last month, rebounding from a 7.3% drop in September, with semiconductor manufacturing equipment exports surging by nearly a third. These gains align with signs that China’s stimulus policies are beginning to yield results, driving growth in certain sectors and boosting consumer spending.

Notably, Japanese exports grew despite the yen’s strengthening against the dollar, averaging 145.87 yen per dollar in October—2% stronger than the previous year, according to ministry data.

The export rebound occurs against a backdrop of heightened concerns about global trade policies. Business leaders are bracing for the potential return of Donald Trump to the White House, with fears that his proposed tariffs—60% on imports from China and 20% on other nations—could disrupt international commerce.

Some regions are already experiencing a slowdown. Shipments to the United States and Europe declined by 6.2% and 11.3%, respectively, in October.

The Bank of Japan (BoJ) is closely monitoring these developments. BoJ Governor Kazuo Ueda noted on Monday that while the Federal Reserve’s prospects for a soft landing have improved, risks tied to the U.S. economy and their impact on global markets require careful consideration.

The most pressing concern for Japan’s trade outlook is the impact of potential U.S. tariffs. Historical data from the U.S.-China trade war (2018-2019) suggests that a 1% increase in export prices, including tariffs, led to a 0.35 percentage-point reduction in profit margins for Chinese exporters, according to research from Stanford University’s Centre for Chinese Economics and Institutions. A similar scenario could hurt Japanese firms’ profitability, counteracting gains from the yen’s depreciation.

“We are not yet at a stage where Trump’s tariff policy is clearly impacting export volumes or exporters’ behavior,” Miyazaki told The Japan Times. “However, there remains significant uncertainty, and we must continue to monitor the policy stance of the next Trump administration,” he added.

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IMF reviews Pakistan’s $7bn bailout

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An International Monetary Fund (IMF) team conducted an unscheduled visit to Pakistan last week to assess the country’s progress on the terms of its $7 billion bailout package. The surprise visit, coming less than two months after the loan’s approval, has raised questions about the future of the bailout program. IMF staff are expected to present their findings to the Washington-based executive board for review.

What prompted the IMF’s unexpected visit to Pakistan?

Several officials, speaking to Nikkei Asia on condition of anonymity, highlighted key factors prompting the visit. These included a $685 million shortfall in the government’s tax collection target for the first quarter of the current fiscal year and a $2.5 billion deficit in the external financing required under the bailout terms. Compounding these issues was the failed sale of Pakistan International Airlines (PIA), a key component of the IMF-recommended privatisation drive.

While routine IMF program review visits are standard, the timing of this visit—just seven weeks after board approval—has raised concerns. “This suggests significant difficulties in implementing the program,” said Naafey Sardar, an economics professor at St. Olaf College in the United States, speaking to Nikkei Asia.

Ikram ul Haq, a lawyer specializing in economic and tax policy, added, “The reality is that the government’s promises to the IMF have not been fulfilled.”

What were the key issues discussed?

The IMF raised the issue of the tax gap and urged action to ensure that Pakistan meets its annual tax collection target of $46 billion.

Islamabad was also asked to engage with Saudi Arabia and China, the largest investor, to bridge the external financing gap. Promised energy sector reforms and the repayment of billions of dollars of debt owed to mostly Chinese-backed power plants in Pakistan were also discussed.

Another issue was for the IMF to press provincial governments for more funds, such as the Benazir Income Support Programme, which provides a $2.1 billion annual cash transfer for poverty alleviation, currently paid for by the central government.

How does agricultural income tax fit into this picture?

As part of the loan agreement, Pakistan’s provinces missed an end-October deadline to harmonize their agricultural income tax laws with the federal income tax.

The IMF had previously said that Pakistan’s loan agreement would be in jeopardy if agricultural income remained largely untaxed. During the meetings, provincial government officials told the IMF that they would face significant difficulties in implementing a higher tax.

Economist Aqdas Afzal said such a move would face significant opposition from big landowners, who are disproportionately represented in the federal and provincial assemblies.

“Given the weak mandate of the current government, a higher agricultural income tax is unlikely as it could trigger major social and political unrest,” he added.

What assurances has the government given to the IMF?

Pakistan has assured the IMF that it will increase the provincial agricultural income tax rate by up to 45 percent. It has also pledged to meet annual tax collection targets and to continue reforms in the energy sector and state-owned enterprises.

“This is an ongoing dialogue process and there have been discussions [with the IMF] on energy and SOE reforms, the privatization agenda and public finance,” Pakistan’s Finance and Revenue Minister Muhammad Aurangzeb told local media.

Haq, a tax expert, said the government’s primary focus would be on meeting the six-month revenue collection target set by Pakistan’s Federal Board of Revenue, a government agency that regulates and collects taxes.

What are the challenges ahead for Pakistan’s loan agreement?

Meeting tough tax targets and implementing structural reforms are major hurdles for the government to overcome.

The IMF has previously cancelled other loan programmes when conditions were not met. Payments to Pakistan could be suspended or stopped altogether, which would be a serious blow to a country struggling with a sputtering economy.

The IMF is pressing for cuts in government spending.

“Structural reforms are being resisted by vested interests, making efforts to meet IMF conditions even more difficult,” Haq said.

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