China’s Xi Expects Project to Spur ‘Golden Age’ of Globalization
China is continuing with its plans to create a modern-day version of the ancient Silk Road trade routes. The “vast multibillion-dollar building project would see over 60 countries linked by road, railway and sea,” according to a story in the online publication Dezeen.
Chinese president Xi Jinping earlier this month revealed his plans for the $1.4 trillion project, known as the Belt and Road initiative, which aims to develop trade links between China, Central Asia, Europe and Africa. The program was initially launched in 2013.
“Analysts suggest the project could shift the center of the global economy and challenge the U.S.-led world order,” CNN reported.
The venture is being described as “the world's biggest infrastructure project.” Plans are to construct a road and rail network that connects “the country to Europe through Central Asia and the Middle East, making up the ‘belt,’” Dezeen said. “China has already invested in multiple international infrastructure projects that will contribute to the Belt and Road scheme, which it originally outlined in 2013.”
Twenty-eight heads of state and government attended the unveiling forum. “The summit meeting (called a forum) has attracted the largest number of foreign dignitaries to Beijing since the Olympic Games in 2008,” The Economist reported.
While the endeavor is being promoted as a way to boost opportunities for non-Chinese countries, not everyone agrees. Few European leaders attended the forum. Also absent were dignitaries from India, which reportedly said the project would handicap countries with debt and environmental damage.
And officials in Sri Lanka and Myanmar are rejecting or seeking to renegotiate projects approved by authoritarian predecessors, The Economist said. Its commentary points to numerous issues with the plan, but “the suspicion that the project will fail could be misguided” because China has already invested so much into the plan and the country views it as the answer to its economic issues.
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World Trade Patterns Suggest Solid Growth
Chris Kuehl, Ph.D.
The growth of the U.S. economy has been solid, if not spectacular, thus far this year, and there has been much speculation as to why. Assertions have been made that it is all due to the enthusiasm over potential changes under the Trump administration, and others assert that consumer sentiment is driving it.
There is another motivator, however, and it has been somewhat overlooked. The global economy has been looking far healthier than it has in past years, and there has been a boost in global trade despite the fact that many countries have been pursuing policies that are protectionist and defensive. Given that the U.S. depends on exports for roughly 14% of its GDP (about the same level as Japan at 14.7%), the health of the global economy is important to the growth of the U.S.
Trade flows last year were as low as they had been since the start of the recession, but that pattern abruptly changed at the very end of the year. The last quarter of 2016 saw significant growth and that pattern has continued into 2017. The latest monthly gain was 1.5%, and the quarter has been up by 1.4% over what it was at the end of last year. The companies that handle the majority of global freight activity have also seen a significant increase in business, with air cargo up 11% and several of the ocean freight operations citing gains of between 8% and 17%. There has been talk of capacity shortage for the first time in several years and this will likely start to show up in higher freight prices at some point.
Theories abound as to why there has been a sudden boost in trade after the sluggish performance over the last decade. There has long been a connection between investment levels and trade and it has been noted that investment has been more active in the last few months. This is related to expectations to some degree. Those in the manufacturing sector assume that there will be more demand for their machines and output and they are doing their best to get ready for that expected surge of interest. The question is whether this enthusiasm will last if the expectations regarding tax reform, regulatory relief, infrastructure development and health care reform are not met or are deferred.
The most basic explanation is that there has been economic recovery in Europe and China. For the last decade, these countries and regions have been extremely stressed and their volumes of trade have fallen dramatically. The EU has been shaken hard by the collapse of the southern-tier states, the growth of populism in France, the Netherlands and elsewhere, and then by the Brexit decision in the U.K. These countries are heavily trade-dependent (Germany relies on trade for around 55% of its GDP annually) and when there are economic issues in one country it affects all the others. China has also been trying to get back in gear with some success. The export sector has grown as the U.S. economy has recovered, as there has been more demand for the consumer goods that China produces.
There remains concern about the protectionist tendencies that have manifested in the U.S. as well as parts of Europe and even Asia. The logic is always that when there are economic issues the best thing to do is to circle the wagons and fend off imports for the sake of domestic producers, but that logic is always flawed. Economic growth and expanded trade always win. It makes logical sense that an expanded market is more lucrative. The expansion of both growth and trade should give protectionists pause, but they rarely alter their opinions. For the U.S., the desire for expanded growth should reinforce support for more open trade, but there are still many proposals out there that call for trade restrictions, high tariffs and limits on foreign activity. This line of thinking is inconsistent with a desire for expanded growth.
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Eastern Europe’s Default Risk Worsens
Payment default risk in Eastern Europe is expected to worsen, according to an Atradius survey.
The Atradius Payment Practices Barometer survey for the region is based on feedback from more than 1,000 companies across the Czech Republic, Hungary, Poland, Slovakia and Turkey, which sell on credit terms to B2B customers domestically and abroad.
It finds that 86% of the survey respondents in the region have experienced late payment of domestic B2B invoices over the past year. For 58% of respondents, late payment was attributable to customers’ liquidity issues compared with 52% in Western Europe. In Hungary, 78% of respondents experienced late payment due to their customer’s liquidity issues.
Across the countries surveyed, 45% of the average total value of domestic B2B invoices remained unpaid after the due date, up from the 42% average for Western Europe. On average, 10% of domestic B2B invoices became delinquent (unpaid 90+ days after the due date) and 1% written off as uncollectable.
In Turkey, the average percentages for overdue and delinquent debts were higher at 61% and 20%, respectively, with 2% uncollectable. This is also reflected in the country’s DSO figure, which averaged 73 days, notably higher than the 61 days average DSO for Eastern Europe as a whole.
Sharing the view of their peers in Western Europe, more Eastern European respondents expect an overall deterioration in the payment behavior of their B2B customers over the coming 12 months. In particular, more respondents (26%) anticipate deterioration rather than improvement (16%), with 58% not expecting any change at all.
To protect their B2B receivables portfolio from the risk of payment default, 53% of the respondents in Eastern Europe (60% in Western Europe) intend to continue using their current mix of credit management tools this year, even in the face of Brexit, more protectionist measures from the U.S. and a slowdown in China on the horizon.
The growth outlook in some regions and countries across the world appears to be brighter than before, but risk is still a significant factor. Political uncertainty in the eurozone is weighing on the region’s medium-term growth outlook.
In Eastern Europe, the structural weaknesses and negative impact of sanctions on productivity and investment continues to weigh on growth in Russia. The close trade ties among world regions means that a deteriorating business and economic climate in one or more markets could have negative impacts in other markets also, with potentially negative consequences for the global insolvency environment. Against this backdrop, a strong focus on the management of trade credit risk is essential to maintaining the financial viability of a business.
Iran re-elects Rouhani, but trade hurdles will remain. When Iranians re-elected Hassan Rouhani for president on May 19, the news was well-received among foreign companies looking to tap into the huge post-sanctions economy. But experts say the election of a moderate president will unlikely be a quick solution to the many hurdles of doing business in Iran. (Global Trade Review)
Israel announces measures to help Palestinian economy prior to Trump visit. Israel passed a series of measures aimed at bolstering the Palestinian economy as a confidence-building gesture before U.S. President Donald J. Trump arrived last week to elaborate on his plans for addressing the Middle East conflict. (Business Mirror)
NAFTA 2.0 and the Art of the Deal: Stay or Go? During the2016campaign, Donald Trump repeatedly and harshly criticized the 23-year old North American Free Trade Agreement (NAFTA). Last month, the Washington Post reported that President Trump was set to announce withdrawal from the agreement. Members of Congress, his own cabinet officers, and leaders from agriculture and business urged him not to do so. Ultimately, the President decided to renegotiate, not terminate, NAFTA. But is renegotiating NAFTA a good idea? (Global Trade Magazine)
TPP: With one down, can 11 stand? Move over a TPP of 12 nations (TPP12) and make way for TPP11, the lower number reflecting the withdrawal of the U.S. from the agreement. When President Trump withdrew the U.S. from the TPP in January, the prevailing view was that this was the death knell for the trade grouping. Yet on the sidelines of an APEC meeting on May 21, the remaining eleven nations breathed life into the TPP. (The Interpreter)
Brazil’s Car Wash Scandal Reveals a Country Soaked in Corruption. Amid even the worst federal scandals, Watergate included, the United States has never been nationally profiled as crooked. Brazil feels that way right now, largely the result of a bribery scandal of Amazonian proportions known in Portuguese as Lava Jato, or Operation Car Wash, believed to be the largest corruption case in modern history. (Bloomberg)
Is Thailand’s economy undergoing ‘juntification’? Since seizing power from the elected civilian government, Thailand’s junta has become increasingly authoritarian. But attempting to ‘juntify’ the economy is proving difficult for a variety of reasons, and is distracting them from capitalizing on other economic opportunities. (Global Risk Insights)
China and the U.S. vie for friendship with the Philippines, while Duterte hedges. The rapprochement between China and the Philippines has ostensibly avoided the prospect of a confrontation in the South China Sea. On the sidelines of a two-day summit about China’s global development project, held in Beijing on May 14-15, the Philippine ambassador announced plans for talks with China over its territorial claims in the sea. (EconoTimes)
China’s reforms not enough to arrest mounting debt: Moody’s. China’s structural reforms will slow the pace of its debt build-up but will not be enough to arrest it, and another credit rating cut for the country is possible down the road unless it gets its ballooning credit in check, officials at Moody’s said. Moody’s downgraded China’s sovereign ratings by one notch to A1, saying it expects the financial strength of the world’s second-largest economy to erode in coming years as growth slows and debt continues to mount. (HSN)
Week in Review Editorial Team:
Diana Mota, Associate Editor and David Anderson, Member Relations