Structural issues including education are holding Malaysia back

KUALA LUMPUR: Malaysia is facing several long-term structural issues in its economy that needs to quickly adjust in accordance with the new realities of the global economy.

This was the conclusion of a panel discussion by representatives of three leading rating agencies – Standard & Poor’s Ratings Services (S&P), Moody’s Investors Service and Fitch Ratings – during Malaysia’s Economic Update 2015 forum on “Outside-In Perspective: Economic Outlook for Malaysia” held here.

The agencies said that while the fundamentals of the country, including the financials, were good, the country needed to address several issues that would hold it back in the long-term.

S&P’s associate director of sovereign and international public finance ratings Phua Yee Farn said that one of the issues that needed to be quickly addressed was the state of education in the country.

“As discussed earlier (in the forum) by Minister in the Prime Minister’s Department Datuk Seri Abdul Wahid Omar on the education system here, this is something that is very fundamental to improving the level of output and productivity.

“The affirmative action policy has been around for decades and we think that it will continue to be in place here. However, this will continue to cause the brain drain to other countries. The brilliant ones are paid very well and are choosing to go somewhere else,” Phua said.

He, however, also acknowledged that the Government had made some efforts to try and reverse this situation, adding, however, that it would “not be easy”.

“The education system has to go through some structural reforms before we can see the next leap to a real high-income economy,” Phua said.

Meanwhile, Fitch Ratings’ managing director and global head of sovereign and supranational ratings James McCormack said that being stuck in the “middle-income trap” was something that should be of concern to Malaysia.

“While we are all preoccupied with China and the growth picture there now, the reality is that there is a transformation going on there now from an investment-led, export-oriented economy to a consumption-led, domestic-demand economy.

“Asia, in general, has leveraged off the previous export growth model tremendously. Even if the growth rate may be lower in China, but (structurally) it is a different kind of growth that will be taking place there,” McCormack said.

“It is not one where the rest of Asia can simply feed intermediate products into an export machine that will eventually end up in Europe and the United States. China is already supplying more of these inputs domestically so that trade is actually slowly disappearing,” he added.

He noted that the economies that were more geared to the new consumption model in China were the ones that would benefit from this new economic model there.

“This, however, seems to be more evident in north Asia such as in Taiwan, Japan and South Korea than it is in South-East Asia. These countries in north Asia are heavily invested in China and have companies that are directly selling to Chinese consumers. This is an economic model that is less prevalent in South-East Asia,” he said.

“This is why I worry about Malaysia and South-East Asia being caught in this middle-income trap because the higher value-added products are in north Asia, while the lower end lies in the lower-income countries.

“Because the income levels are moving up here in Malaysia and this is where you get competition from both the top and bottom. this is what the middle income trap is about – getting squeezed in the middle,” he pointed out.

McCormack’s views were also shared by Moody’s vice-president/senior analyst of sovereign risk group Christian de Guzman, who added that Malaysia needed to attract more high-value investments.

By DANIEL KHOO The Star/Asia News Network

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China-US new type of major power relations: positive narratives needed to help turn negative tide

Illustration: Liu Rui/GT

New type of great power relations

Xi Jinping's upcoming visit to the US comes amid the two sides' pledge to push for a "new type of great power relations." Though tensions come part and parcel of ties between great powers, China and the US have vowed to navigate those dangerous waters through dialogue.

http://t.cn/RyJMfbB

China-US are on way to a new type of major power relations



Recently, worries have been heard in the Western academia and strategic circles on China's development direction, foreign policy changes and thus the possible deterioration of China-US relations.

Two catchy phrases are mostly used to describe the current situation, the "Thucydides's Trap" and "tipping point."

The "Thucydides's Trap," which means a rising power generates fear in an established power that it ultimately leads to a war between the two, is not persuasive to describe the possible prospect of nowadays China-US relations. On the one hand, it neglects significant changes of the external environment. In addition, the theory hardly explains the peaceful transition of power in history.

On the other hand, the "Thucydides's Trap" puts too much blame on the threat of the rising country, missing the possibility that the established country could be more comfortable in launching a preemptive war.

"Tipping point" is another phrase that has caused a round of discussion about China-US relations in both countries. David Lampton, a senior China scholar, delivered a speech in May, worrying that China-US relations were approaching "a tipping point." After that, some US politicians and scholars followed the suit and expressed worries about bilateral relations. Even in China, people began to write articles, discussing how to avoid a hot war with the US.

Paying too much attention on the two phrases will exaggerate the competitive sides of the two countries and are not helpful for China-US relations. It will lead people to imagine more difficulties and feel frustrated about the relations.

We should adopt positive narrative about China-US relations and concentrate more on cooperation rather than competition.

It is a good chance for the two countries to strengthen the positive and grand narrative about bilateral relations during the upcoming state visit paid by Chinese President Xi Jinping to the US. A new type of major power relationship in general is a useful guideline and positive narrative for the future development of bilateral ties.

Meanwhile, the two countries should inject more concrete contents into the idea by narrowing divergences and expanding cooperation. China-US relations are the most important and complex bilateral relations in the world. It is impossible for the two countries to shun competition, but strengthening bilateral cooperation still forms the major part of the relations.

China and the US need each other. Although some US scholars and politicians argued that the US government should change its grand strategy toward China, namely balancing China's rise, the fact is that the US needs China's cooperation on a bunch of issues ranging from bilateral issues to global governance such as climate change.

Xi's visit will provide a great opportunity to facilitate cooperation between the two countries. The communication between the two leaders will first of all enhance the strategic mutual trust and ensure the relations on the right track. Numerous highlights might pop up during Xi's visit.

On cyber security, the two may reach some fundamental consensus like promising not to attack each other's key infrastructure, regulating their own actions and forming basic norms.

On economic cooperation, as the top two economies in the world, the countries should express their willingness to lead the global economic development.

On climate change, the countries may carry on the momentum and release another joint announcement to accumulate more dynamism for the upcoming Paris Climate Conference.

In addition, Xi might share his experience of China's development path to disperse US misunderstandings about China's domestic policies and interact with the US public, offering a solid foundation of the bilateral relations.

By Sun Chenghao Source:Global Times

The author is an assistant research fellow at the Institute of American Studies, China Institutes of Contemporary International Relations. opinion@globaltimes.com.cn

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China's Long March-6 new carrier rocket succeeds in carrying 20 satellites to space

A new model of China's carrier rocket Long March-6 carrying 20 micro-satellites blasts off from the launch pad at 7:01 a.m. from the Taiyuan Satellite Launch Center in north China's Shanxi Province, Sept. 20, 2015. The new carrier rocket will be mainly used for the launch of micro-satellites and the 20 micro-satellites will be used for space tests. (Xinhua/Yan Yan) 

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China successfully launched a new model of carrier rocket, Long March-6, at 7:01 a.m. Sunday from the Taiyuan Satellite Launch Center in north China's Shanxi Province.

The rocket carried 20 micro-satellites into the space for space tests.

The new rocket, fueled by liquid propellant made of liquid oxygen and kerosene, is China's first carrier rocket that uses fuel free of toxicity and pollution, said Gao Xinhui, an official at China Aerospace Science and Technology Corporation.

"Using such propellant can cut costs by a great margin," he said.

Zhang Weidong, designer-in-chief at the Shanghai Academy of Spaceflight Technology with the China Aerospace Science and Technology Corporation, said the new rocket also "reformed the way carrier rockets are tested and launched in China."

"Loading, testing and positioning were finished when the Long March-6 rocket was at a horizontal position, before it was lifted to an upright position for launching," he said.

"We believe it will greatly boost the competitiveness of Chinese carrier rockets in the international market. The new model will also significantly improve our abilitiy to access space," said Zhang.

The launch on Sunday has tested the feasibility and accuracy of the rocket's design as well as other new technologies. The new carrier rocket will be mainly used for the launch of micro-satellites.

The rocket is the 210th mission by the Long March rocket family. In 1970, a Long March-1 rocket sent China's first satellite, Dong Fang Hong 1, or "the East is Red", into Earth orbit. - Xinhua

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China launches new carrier rocket with 20 satellites

Asian finance uncertain future

While Asians think long term, their institutional framework remains short term.

Global factory: A cargo ship waits to be loaded with shipping containers at a port in Qingdao, Shandong province. China’s emergence consolidated Asia’s key role as the global factory, supplying the rest of the world with all manner of consumer goods. – Reuters

ANYONE who thinks he can predict the future of Asian finance has to know first how the Asian real economy will be doing. Projections of the future, based on past data, are notoriously inaccurate. But there are general scenarios that we can paint about the mega trends in the global economy that will certainly shape what will happen to Asia.

Roughly every five years, the US National Intelligence Council (www.dni.gov/NIC_2030_project.html) has been publishing scenarios about the future, the latest being for 2030. There are no straight line projections into the future, but rather factors that we do have some knowledge about that will impact on future outcomes.

The key trends are well known, such as demographics, urbanisation, technology and social media, globalisation, climate change and growing risks through social conflict, including terrorism, civil disruption and regional wars. The main trend that makes life much more complicated is the fact that we have moved from a uni-polar world where the US dominant position has weakened relative to the other major players.

Not only are there new powers emerging, such as the BRICS countries, but also non-state players like Isis that can fight across borders without a national identity. This makes coordinated and consistent action much more difficult to manage, which is why there is little agreement at the level of the United Nations, International Monetary Fund and other multilateral institutions.

The McKinsey Global Institute has tried to help corporate captains and policy-makers frame the uncertain future for the period 2015-2025 into basically four possible outcomes. The best scenario is a globally coordinated and distributed growth underpinned by broadening productivity increases.<

Next are pockets of global growth with imbalances. Scenario three is low but stable global growth, with lots of muddling through. And the worst is continuing rolling regional crises with volatile and weak growth all round.

Stimulus packages

Most of what is likely to happen would depend on what is happening near term to stimulus packages like quantitative easing (QE) and the outlook for energy prices. Over the long term, the aging of advanced economies, rapid urbanisation (or labour migration) and technology and global connectivity will shape the final outcome.

The near-term outlook is much bleaker in the post-crisis adjustment period. Having shot the world full of steroids in terms of QE, the world’s central banks are moving in divergent paths. The Fed wants to withdraw, while the European Central Bank and Japan are still bent on using very loose monetary policy. But post-crisis, advanced country growth are roughly 2% below potential, and their demand for Asian imports are likely to remain weak.

Which is why Asian finance would depend on what happens in the next decade to the Asian global supply chain. Historians remember that the Japanese led the post-war revival of the Asian economies by being the first to supply the demand for consumer goods by the West.

After growth in Japan peaked in the 1980s, Japan invested heavily in the rest of East Asia to exploit cheap labour and increase its productive capacity. China’s emergence consolidated Asia’s key role as the global factory, supplying the rest of the world with all manner of consumer goods.

The success of the Asian global supply chain meant that Asia ran a current account surplus with the rest of the world, but mostly with the US. With rising incomes and savings, Asia became a net lender to the world, further stimulating global growth as domestic investments, an emerging middle class and demand took most of Asia to middle-income levels.

But such excessive savings were never properly intermediated within Asia. Instead, the excess savings were parked in New York and London, returning to Asia in the form of foreign direct or portfolio investments. Fundamentally, Asia did not upgrade its bank-dominated system of using short-term deposits to fund long-term investments.

Despite aging population, the level of long-term pension and insurance funds and therefore the institutionalisation of long-term savings remained small compared with the banking system.<

Low rate policies

Much of this has to do with a penchant for low interest rate policies, beginning with the Japanese attempts to reflate its economy with ultra-loose monetary policy. Excessively low interest rates meant that investments may not go to the best use of funds, while speculation in asset bubbles became more profitable than upgrading total factor productivity.

China’s stock market gyrations this year symbolise the contradictions within Asia’s financial system. On the one hand, the stock market should be the source of long-term equity much needed for giving the whole economy an equity cushion against overleveraged fragilities.

On the other, the stock market became a casino for retail punters with margin funding.

Which is why the Fed’s decision on raising interest rates has so much impact on the future of Asian finance, because New York and London remain an important intermediary for Asian excess savings.

Capital outflows back to New York and London occur precisely because as Asian excess savings unwind, interest rates will adjust upwards and Asian asset bubbles will accordingly also unwind.

The irony of Asian growth is that while Asians think long term, their institutional framework remains distinctly short term. Asian pension and insurance funds remain too small and lack the firepower and innovative imagination to be the market stabilisers that are needed for the long haul.

The Japanese pension system is the classic example of Asian institutional weakness. By putting the bulk of its savings in domestic government bonds, the system is trapped in terms of returns, since the large Japanese fiscal deficit and debt overhang (roughly twice GDP) can only be sustained by low interest rates. We then have the world’s largest net saver becoming the largest borrower, owing everything to oneself

Can the right hand of an aging person rescue its left hand? Over any demographic cycle, it is the young that will support the old, so one must invest in the young for the future to be bright.

The future of Asian finance is less a technical issue and more a mindset problem. Unless Asian policymakers start thinking more about long-term funding for its young (in thinking as well as action), it will continue to be subject to the whims of monetary policy decision in Washington DC.

Andrew Sheng writes on global issues from an Asian perspective.

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US key interest rate unchanged as global economy worries

U.S. Federal Reserve Chair Janet Yellen attends a press conference in Washington D.C., the United States, Sept. 17, 2015. The Federal Re...

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US key interest rate unchanged as global economy worries

U.S. Federal Reserve Chair Janet Yellen attends a press conference in Washington D.C., the United States, Sept. 17, 2015. The Federal Reserve announced on Thursday that the federal funds rate will stay unchanged considering the weak global economy and low inflation. (Xinhua/Yin Bogu)

WASHINGTON, Sept. 17 (Xinhua) -- The U.S. Federal Reserve on Thursday kept its benchmark interest rate unchanged, saying the rising uncertainty abroad and low inflation were the key reasons behind the decision.

After concluding a two-day monetary policy meeting, the Fed said in a statement that the economic activity is expanding at moderate rate with labor market approaching maximum employment but inflation staying muted.

However, in light of the heightened uncertainties abroad and a slightly softer expected path for inflation, the Fed judged it appropriate to wait for more evidence, including some further improvement in the labor market to bolster its confidence that inflation will rise to 2 percent in the medium term, Fed chairwoman Janet Yellen said at the press conference on Thursday.

In regard to foreign developments, the central bank is paying more attention to the developments in China and emerging economies, according to Yellen.

China's economy is growing at a slower pace as it rebalances its economy, which has no surprise, said Yellen, but adding that developments in financial markets in August, in part, reflected concerns that there was down-side risk to Chinese economic performance.

In addition, the substantial downward pressures on oil prices and commodity markets have significant negative impact on resources-exporting emerging markets and advanced economies. Important emerging markets have seen significant outflows of capital, pressures on their exchange rates and concerns about their future performance.

Besides the rising uncertainty in emerging markets, the low inflation is one of the reasons holding the Fed back in raising interest rates.

The core personal consumption expenditure (PCE) price index, an inflation gauge preferred by the Fed, only went up 1.2 percent year on year in July, far below the central bank's 2 percent. The index has been below the Fed's target for over three years.

The recent drop in oil prices and the further appreciation of U.S. dollar have put some downward pressure in the near-term on inflation, which means that it will take a bit more time for these transitory effects to fully dissipate, said Yellen.

According to the Fed officials economic projections released on Thursday, they expected the core PCE price index won't meet the Fed's target until 2018, while the unemployment rate will drop to 4.8 percent, below 4.9 percent, the level the Fed considered as full employment.

Yellen said that as the labor market heals, there will be further upward pressure on inflation. But She said the process is slow and is characterized by lags, and that is why it takes a few years as the inflation to get back to 2 percent, while the unemployment rate falls and even overshoots its longer-run normal level.

The Fed still leaves door open to a rate hike sometime this year. Most Fed officials still expect a first rate increase this year, Yellen said, noting that 13 out of the 17 Federal Reserve Board members and Federal Reserve Bank presidents are looking for a move in 2015.

The Federal Open Market Committee, the monetary policy decision body, will hold two policy meetings this year, in October and December. According to Yellen, every meeting has possibility for a rate increase.

Yellen reiterated that market should pay less attention to the timing of the first interest rate increase and more attention to the expected path of rates.

"The stance of monetary policy will likely remain highly accommodative for quite some time after the initial increase in the federal funds rate," said Yellen.

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