By Ted Carmichael
Kuala Lumpur, Malaysia – Malaysia’s Anwar Ibrahim is expected to navigate between deepening economic ties with his country’s biggest trading partner and tackling thorny issues such as the South China Sea during his first visit to China as prime minister, analysts say.
Anwar will meet Chinese President Xi Jinping on Friday as part of a four-day visit that will also see him hold talks with Chinese business leaders and Premier Li Qiang.
Anwar’s talks with Xi are expected to focus on “concrete measures that can be taken in the fields of trade, political cooperation, prevention of corruption and civilisational issues,” Malaysian Foreign Minister Zambry Abdul Kadir said on Wednesday.
Anwar, who arrived in Beijing on Wednesday, is also scheduled to meet with National People’s Congress Chairman Zhao Leji and executives of the China Communications Construction Company, the contractor of Malaysia’s East Coast Rail Link project.
Anwar, who was elected as Malaysia’s 10th prime minister in November, is making his visit against the backdrop of an escalating United States-China trade and tech war that complicates Malaysia’s efforts to maintain positive relations with the world’s two biggest superpowers.
China has been Malaysia’s largest trading partner for 14 consecutive years, with bilateral trade reaching $203.6bn in 2022, but Kuala Lumpur also maintains close economic and security ties with the US – two-way trade hit $72.9bn last year – which has sanctioned numerous Chinese firms that form part of the global supply chain.
Malaysia is the world’s sixth-largest exporter of semiconductors, accounting for 6.3 percent of the world’s total. The chips, crucial components of everyday electronics, have been a key target of US sanctions aimed at hobbling China’s tech sector.
If Malaysia wishes to boost cooperation with China, especially in the tech sector, it will need to consider the possibility of US pressure and how to “navigate the delicate line of advancing technological cooperation for national interests while still being able to convince both US and China that such cooperation will not affect bilateral relations politically,” Hoo Chiew Ping, an international relations lecturer at the National University of Malaysia, told Al Jazeera.
Further US sanctions could potentially affect some Malaysian companies that form part of China’s supply chain, said Ngeow Chow Bing, the director of Universiti Malaya’s Institute of China Studies.
“So far that hasn’t happened yet on a large scale but that is something which we have to watch out for,” Ngeow told Al Jazeera. Shahriman Lockman, director at the Kuala Lumpur-based Institute of Strategic and International Studies (ISIS), said Malaysia “will simply have to adapt” and try to find opportunities even as US-China relations become more fraught.
“Anwar knows this,” Lockman told Al Jazeera. “In China, Anwar is bound to be effusive about the relationship. That’s simply what one does in Beijing. After all, this year is the 10th anniversary of the Malaysia-China comprehensive strategic partnership. And next year is the 50th anniversary of diplomatic relations.”
For Southeast Asia, which has traditionally sought to balance its relations with great powers, the US-China rivalry has been a blessing and a curse.
Malaysia has been among the biggest beneficiaries of trade and investment diversion as US and Chinese companies seek to diversify their geographic exposure to trade restrictions. A 2019 report by Nomura found that Malaysia was the fourth-biggest winner of the US-China trade war, after Vietnam, Taiwan and Chile, with exports of waste and scrap alloy, natural gas and benzol all benefitting from the tensions.
China’s overall direct investment in Malaysia rose to 9.7 billion Malaysian ringgit ($2.2bn) in 2022, up 23.5 percent from 7.9 billion ringgit ($1.8bn) in 2021. The US was Malaysia’s top source of investment last year, investing 43.9 billion ringgit ($9.9bn), followed by Singapore and Japan.
“Anwar is likely to promote Malaysia as the destination of choice for Chinese investors seeking to lessen the impact of the trade war as well as to find new markets in the region,” Yeah Kim Leng, an economics professor at Malaysia’s Sunway University and a member of an advisory committee to Anwar, told Al Jazeera.
“Since Malaysia imports more from China than it exports, it will be a good opportunity for the PM to push for China to import more from Malaysia,” Yeah said.
Yeah added that Malaysia could also tap into China’s rapidly advancing digital technologies to enhance the productivity and competitiveness of its small and medium-sized sectors.
Analysts suggest that Anwar will be cautious about raising sensitive issues during his trip, including China’s treatment of the Uighurs and other ethnic minority Muslims, whose plight he highlighted during his many years as an opposition leader.
“I believe that Anwar will take a pragmatic approach towards China. Being a prime minister and no longer a mere opposition leader, Anwar can no longer afford to make references of a less constructive character when it comes to China. It’s just what it is,” said Lockman of the Institute of Strategic and International Studies.
“So I don’t believe that he’ll be raising the issue of Uighurs, though he’ll probably underscore the need to respect international law in the South China Sea. Anwar needs to think of Malaysia first.”
Ngeow of Universiti Malaya said the possibility of Anwar raising the Uighur issue in private is “quite low” but cannot be ruled out. Ngeow added, however, that the South China Sea dispute – Beijing claims sovereignty over more than 90 percent of the strategic waterway despite the territorial claims of several Southeast Asian countries including Malaysia – is likely to be raised in private as well as noted publicly using restrained language.
Chinese Coast Guard ships have frequently sailed into Malaysia’s exclusive economic zone in the South China Sea, where Malaysia’s state-owned Petronas gas and oil company is drilling for hydrocarbons.
In 2021, 16 Chinese military aircraft came within 60 nautical miles (112 km) of Sarawak state, prompting Kuala Lumpur to summon the Chinese ambassador and accuse Beijing of posing a “serious threat to national sovereignty and flight safety”. China’s embassy in Kuala Lumpur said at the time its aircraft had been exercising “the freedom of overflight in the relevant airspace”.
Hoo of the University of Malaysia believes it will be crucial for Anwar to discuss the South China Sea issue during his trip. “One main issue is to avoid inevitable clashes on the sea between the Coast Guard and to ensure incidents like the PLAAF (People’s Liberation Army Air Force) incursion over Malaysian maritime airspace will not occur again in private conversation,” Hoo said.
The idea of a rising China has become so entrenched in the Western imagination that it can seem inevitable. But economics rarely operates in straight lines, and in China, the government of Xi Jinping is right now making decisions about China’s economic relations with the world that are bound to alter its trajectory.
Xi, the most dominant political figure in China in half a century, would like his country to overtake the United States as the world’s premier superpower. In that pursuit, he is reorienting his country’s trade and investment away from the West and, in certain respects, looking inward to strengthen China’s economic defenses. China’s leaders argue that such decisions were forced upon them by a hostile Washington intent on maintaining its hegemony. In taking this course, they are also contributing to a larger shift in global affairs, as the post–Cold War moment of globalization has given way to a new era in which geopolitical competition and security concerns drive economic policy.
The story of China’s rise (so far) has been all about its relationship with the West, and especially the United States. More than 40 years ago, the paramount leader Deng Xiaoping introduced a free-market reform program that connected China’s destitute and largely agrarian populace to global supply chains through bonds of trade and investment with the U.S. and its partners. In flowed foreign capital and technology; out came manufactured goods for wealthy American and European consumers. Growth roared, and with it, incomes. None of that would have been possible without the West’s cooperation.
Beijing and Washington were once willing to set aside their numerous political disagreements in the pursuit of economic benefits that both believed were necessary for the future. But today, the two countries have come to see their ties as a source of risk and vulnerability. Xi fears that Washington can exploit its economic leverage to suppress his country’s rightful rise into a global superpower by withholding crucial technology or imposing punishing sanctions, such as those the U.S. slapped on Russia after its armies invaded Ukraine last year. He has sought to protect China by channeling enormous state support into developing homegrown technologies and by shifting China’s economic energies toward countries, including Russia, that are not perceived as threatening.
Washington, for its part, worries that China can use its dominance of certain supply chains, such as the production of rare earth minerals, to stymie U.S. industry, or that Beijing will capitalize on access to advanced American technology to enhance its own military capabilities or undercut U.S. economic competitiveness. Both the Trump and Biden administrations sought to curtail business with China through tariffs, export controls, and other measures, and encouraged investment in manufacturing at home.
Mike Gallagher, chair of the U.S. House Select Committee on the Chinese Communist Party, sees these shifts as commonsensical in many ways. “There are some people who want to go back to the halcyon days of economic engagement, in the hope that that might improve the U.S.-China relationship. I just think that represents the triumph of delusion over experience,” Gallagher told me. “We need to take off our golden blindfolds when it comes to the risks associated with doing business” with China, and “we need to reinforce our economic sovereignty in concert with our allies.”
And so the economic relationship between the U.S. and China—arguably the most influential of the past half century—is beginning to unravel. U.S. investment into China has been on the decline. In 2017, American companies invested $14.1 billion into China; in 2021, only $8.4 billion, according to the research firm Rhodium Group. In a recent survey of U.S. businesses conducted by the American Chamber of Commerce in China, 51 percent of the respondents said that their current plan was either not to increase their investment in the country or to decrease it, while another 26 percent said that the environment was too uncertain to decide.
Executives in Europe are hardly more enthusiastic. “While a handful of large firms, many of them German, continue to pour money into their China operations, many other firms with a presence in China are withholding new investment,” Rhodium Group explained in a 2022 report. “Virtually no new European firms have chosen to enter the Chinese market in recent years.”
Foreign investment suffered globally during the coronavirus pandemic, but China was hit harder than other countries and regions, according to a study that the International Monetary Fund released in April. The IMF noted that, during the pandemic period (roughly 2020 to 2022), compared with the preceding five years, the United States and the advanced European economies made significantly fewer “greenfield” investments into China—the term for when a company starts a new operation in a foreign country from scratch. Such investments into other regions, including emerging markets in Europe, held up much better. The study also revealed that foreign-investment flows are becoming more concentrated among countries that share similar geopolitical viewpoints. The IMF calls it the “fragmentation” of foreign-investment flows, but what it really means is that the decades-long love affair the West’s CEOs have had with China is coming to an end.
Chinese companies are withholding their money as well. The U.S. had been the most popular destination for China’s capital, with $193 billion invested since 2005, according to the American Enterprise Institute. Now Chinese investment in the U.S. has all but evaporated. Though it ticked upward in 2022 from the year before, to $3.2 billion, that’s a mere fraction of the nearly $54 billion invested in the U.S. in 2016.
Instead, Chinese firms are redirecting their investment to the global South. Last year, the two largest recipients of Chinese foreign investment were Saudi Arabia and Indonesia. Countries associated with Xi’s pet infrastructure-building program, the Belt and Road Initiative, accounted for less than a quarter of total outward Chinese investment in 2017, Derek Scissors, an AEI senior fellow, estimates. Last year, their share reached 60 percent (albeit of a smaller total amount). Though this shift reflects Xi’s foreign-policy preferences, it also shows how Chinese money is being scared off by a suspicious reception in the U.S. “Until that changes,” Scissors wrote in a January report, “investment will continue to shift to poorer countries.”
Although China’s trade with the United States and Europe remains immense, its exchange with the developing world is also growing. China’s largest trading partner is now not the U.S. or European Union, but the 10-country Association of Southeast Asian Nations—which includes Indonesia, Vietnam, and Thailand—with $975 billion worth of goods passing among them in 2022. China’s share of sub-Saharan Africa’s merchandise trade rose from a mere 4 percent in 2001 to more than 25 percent in 2020, surpassing that of both the U.S. and EU, according to a 2023 study from the Atlantic Council.
The shift in China’s global focus is likely to continue because it serves Beijing’s political interests. The new avenues of trade and finance Xi has opened through his Belt and Road program are designed to become routes of political influence. And a big reason Xi has been deepening relations with Russia is to secure sources of energy and other raw materials safely out of Washington’s reach. Trade between those two countries increased by more than a third last year, to a record $190 billion. Now Russians feeling the sting of U.S. sanctions are turning to the Chinese currency, the yuan, in preference to the dollar—furthering Xi’s goal of weakening the global influence of the greenback.
Washington’s position is hardening as well. Former President Donald Trump broke with decades of Washington policy by treating China as a potential adversary rather than partner. President Joe Biden has not only continued that approach, but sharpened it. His administration imposed tough controls on the export of advanced semiconductors and the equipment to manufacture them to China and is mulling new regulations that would curb U.S. investment in China in certain technologies.
Gallagher said that “restrictions on capital outflows to China make a lot of sense,” and that he thinks Washington may have to take a “sector-by-sector approach” to prevent American money from flowing into Chinese firms affiliated with the military or involved in developing sensitive technology, such as artificial intelligence.
The other advanced democracies appear headed in a similar direction. The hot term in Western capitals with regard to China policy is de-risking: not the extreme “decoupling” of the Trump era, which implied a harsh severing of ties, but a somewhat more moderate effort to counter Chinese threats to security and industry. De-risking could mean diversifying supply chains to make sure that Beijing’s position in them isn’t so strong as to afford it leverage over the West, for example. The language of de-risking was central to the communiqué that emerged from the May summit of the G7, as well as to a speech that Ursula von der Leyen, president of the European Commission, gave in March.
Detachment from the West would be a major shift in itself, but it is not the only one that China has undertaken. The country’s companies and banks are also, in many respects, scaling back their engagement with the world. A few years ago, Chinese firms were “going global” at a torrid pace. Now that outreach has become much more measured. AEI data show that total Chinese investment abroad has shrunk dramatically, from a high of $174 billion in 2017 to only $42 billion in 2022. The story of Chinese lending to developing countries is similar: From 2008 to 2021, the two Chinese state banks that support government-policy priorities issued $498 billion in development finance for 100 countries, according to Boston University’s Global Development Policy Center. That’s not far off the amount lent by the World Bank. But the loans began to taper off in 2018 and sunk to a mere $10.5 billion for 2020 and 2021 combined.
“We’re very much at a crossroads,” Rebecca Ray, a senior researcher at Boston University who tracks Chinese lending, told me. China’s retrenchment could reflect a decision to prioritize its domestic economy, which sagged amid the coronavirus pandemic and a property-market slump, she pointed out. But it is also possible that pragmatic concerns have led Beijing to pause its lending program before rebooting it to focus more on quality than quantity of development projects.
Whether these trends fully reflect a deliberate economic program remains unclear. The country’s strict COVID-prevention controls, which made cross-border business extremely difficult, may be skewing the numbers, and perhaps, with those restrictions lifted, China’s economic outreach to the world will rebound. Or Beijing may be at a transition point, with leaders looking to expand the country’s economic influence abroad, but with greater precision and effectiveness. But China is almost certainly amid a crucial strategic shift in its economic relations with the world.
The turn could ultimately be an inward one. Xi’s economic philosophy is based not on integrating with the world but on strengthening the homefront and marshaling Chinese resources for national endeavors and competition with the U.S. His mantra is “self-reliance,” by which he means eliminating his country’s vulnerabilities to the outside world, and especially the West. Doing so requires China to substitute imports with homemade alternatives. He may look for China to export its new high-tech products abroad but purchase as little as possible in return. Such a China will be one that doesn’t contribute as much as it could to the economic progress of its trading partners, and one that is less, not more, important to the global economy overall.
But an insular turn is not the only possibility. Xi is also detaching China from the West in favor of links to the global South. He’s taking a risk in doing so. The United States, Japan, and other advanced economies still account for nearly 60 percent of global output, while the developing world (excluding China) produces less than a quarter. That means that consumers in the global South, though they are becoming richer, cannot afford to buy as much from China as those in the West and other advanced economies. Nor can the global South offer the technology that the West can.
Thus, Xi’s fixation on security and power over economic efficiency is leading him to alienate the trading partners that can provide what the Chinese economy needs most for its growth, such as advanced technology, in exchange for ties to countries (like Russia) that cannot replace what is being lost. Whether China can continue its ascent under these conditions remains to be seen. But Xi’s choices are likely hindering, not helping, China in its effort to join the ranks of the world’s richest countries.
China’s current trajectory may make it a less formidable competitor to the U.S. economy. But American companies will likely lose out on profitable opportunities too. The costs of a separation between China and the West are potentially huge for the entire world, with all sides paying a price for determining economic policies based on who is friend and foe.
By Ted Carmichael
What triggered the sharp rise in Canadian inflation in spring 2021 is still a matter of debate. And it’s a debate that matters: the relative importance of the pandemic’s disruption of supply chains, Russia’s invasion of Ukraine, “greed,” or central banks’ financing of a surge in government spending will affect our response to future events. But once inflation gets started the initial causes are less important than the process that sustains it, which is a combination, on the one hand, of rising inflation expectations and costs and, on the other, of inadequate production.
When inflation has been low and stable — say two per cent — for some time then everyone knows that everyone knows that inflation will be about two per cent and behaves accordingly. It’s common knowledge. But when something disrupts that stable behaviour — a pandemic, a war, a big increase in government spending with deficits financed by central bank bond purchases — people’s behaviour changes.
First comes the response in markets with flexible prices: oil, copper, lumber, wheat and other commodities in high demand. As raw materials prices rise, processors and manufacturers who use them raise their prices to cover their increased costs. If the inflationary shock arrives at a time when aggregate demand exceeds aggregate supply, as it did in Canada in 2020-21, the initial shock is passed through to prices of other goods and services. (If there’s excess supply in the economy, the price increase is muted or takes the form of a slower reduction in prices than would otherwise have taken place.)
When there is this excess demand, workers who see their real income and standard of living being reduced by rising prices respond, not surprisingly, by demanding higher wages to catch up.
If the rise in prices persists, common knowledge and expectations begin to change. Every business knows that other businesses are raising prices to maintain their profitability. Every worker knows that other workers are asking for a faster pace of wage gains and are changing jobs, if need be, to get them. That is the situation we currently find ourselves in. Common knowledge has changed and inflation expectations appear to have increased to well above the stable two per cent target we grew accustomed to between 1995 and 2020.
Inflation gathers momentum when total compensation per worker outpaces the growth of output per worker, or productivity. A useful measure for capturing this relationship is growth in unit labour costs. When inflation picked up in the 1980s, compensation per hour outstripped productivity and unit labour costs grew by as much as six per cent per year. The 1990-91 recession pushed up unemployment and slowed wage growth, and productivity rose as the economy recovered, driving unit labour costs down. From 1992 through 2019, growth in unit labour costs averaged around 1.5 per cent per year, while inflation stayed close to the Bank of Canada’s two-per cent target — a stable process supported by expectations of two per cent inflation and modest, but positive, gains in productivity.
The recent inflationary shock pushed Canada back into a situation more like the 1980s. Compensation is rising, but productivity is not. Unit labour costs have grown an average of 4.8 per cent a year since the end of 2019. At the end of last year, the latest data show, compensation per hour was growing at a 5.2 per cent pace while productivity was falling at a 1.5 per cent pace, resulting in unit labour cost tearing along at 6.7 per cent. No wonder core CPI is up!
Breaking the momentum of Canada’s inflation will require some combination of slower compensation growth and faster productivity growth. Neither will be easy, and the inflationary late 1980s and recessionary early 1990s are both episodes we would like to avoid. Milder restraint of demand than took place in the late Mulroney years, combined with policies that boost investment and productivity, could hit the economic sweet spot of re-booting expectations without a recession.
The Bank of Canada has been restraining demand with higher interest rates. But recent federal and provincial budgets have done more to stoke demand with higher spending and borrowing than to boost productivity with investment-friendly tax and regulatory relief. For inflation to return to two per cent, fiscal and regulatory policies need to do more to ensure the faster productivity growth that will help break inflation’s momentum.
Ted Carmichael is a member of the C.D. Howe Institute Monetary Policy Council.
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