Spotlight on... Asia
Overcapacity and implications for infrastructure investment in Pakistan
Slowing Chinese GDP growth, as low as 3% by some estimates, and the changing structure of the economy, is putting pressure on China’s infrastructure companies. China is now in a state of industrial overcapacity. That is a major concern for the government as it “could lead to a wave of bad loans and firm closures”, according to the New Straits Times. Another major political concern is unemployment. Many analysts consider that Chinese infrastructure investment abroad is aimed at providing relief for this overcapacity, and is for this reason finding political support. The support is represented by the One Belt, One Road (OBOR) initiative, the Asian Infrastructure Investment Bank (AIIB), as well as a number of other projects across Asia.
Investors should look for infrastructure-related opportunities particularly in Pakistan, where USD 46 billion worth of projects are planned. For example, OBOR will finance “a USD 2 billion joint venture for the development of the Thar Block II coal mine and the construction of two associated 330-megawatt power stations in Sindh”, as reported by legalbusinessonline.com. Pinsent Masons and Linklaters will be advising the parties involved in the deal. However, investors interested in participating in OBOR deals in Pakistan should be aware of the persistent security risks in the country and especially the tribal parts of West Pakistan, but should be mildly optimistic given the credible support of the Chinese government.
Sources
http://www.forbes.com/sites/jnylander/2015/09/23/swedens-top-economist-puts-chinas-gdp-growth-at-3-others-are-less-optimistic/#65f54fef2243
http://www.legalbusinessonline.com/deals/pinsent-masons-linklaters-act-2-bln-power-project-under-obor-programme/71732
13th Five Year Plan: a commitment to green technology?
The National People’s Congress (NPC) and the Chinese People’s Political Consultative Conference (CPPCC) are holding their annual meetings in early March in Beijing. This year is special, however, as the two meetings will give shape to the upcoming 13th Five Year Plan (FYP). Though the Plan has not been finalised yet, one of the main targets is clear: green development. Growing environmental concern puts the spotlight on creating and mainstreaming innovative green technologies.
This is a very positive development for those interested in entering the Chinese green technology market. The political support for a change in the energy mix has been strong and reaching the highest levels of government: both President Xi Jinping and Premier Li Keqiang have called for diversifying China’s energy sources. The Chinese Energy Development Strategy Action Plan “specifies targets for reducing coal’s share in primary energy consumption to 62%, and for increasing nonfossil energy’s share to 15% by 2020 and to 20% by 2030”, according to U.S. Energy Information Administration. Investors should watch the NPC and CPPCC meetings for clear evidence and specific details of the 13th FYP’s support for green technologies. In future articles, PRIS Spotlight will bring you more specific information on the opportunities associated with 13thFYP and clean energy in China.
Sources
http://www.eia.gov/todayinenergy/detail.cfm?id=22972
http://english.gov.cn/policies/latest_releases/2015/05/19/content_281475110703534.htm
http://www.theclimategroup.org/what-we-do/news-and-blogs/cleantech-innovation-set-to-take-off-under-chinas-new-five-year-plan-changhua-wu/
http://uk.reuters.com/article/china-energy-idUKL4N0OU2ZB20140613
China’s pharmaceutical market: too good to be true
China’s population is ageing. The population of over-65s will reach 9.7% in 2016, from 8.4% in 2011, according to Deloitte. Given their weaker health, the elderly will require increasing amounts of medication, including prescription and over-the-counter drugs. Moreover, spending on healthcare has been rising steadily, with the year-on-year increase in 2014 reaching 14.91%. Chinese consumers in general also trust Western brands more than Chinese ones in medicine. Overall, this seems like a very interesting opportunity for foreign investors interested in entering China’s pharmaceutical market.
However, political support for Traditional Chinese Medicine (TCM) is on the rise. Amidst waning economic growth, Premier Li Keqiang has voiced his support for boosting TCM. Supporting the local medical industry at the expense of foreign companies should boost the Chinese economy. A high-ranking representative of China’s State Administration of Traditional Chinese Medicine has announced a two-phase plan to do so, which includes an increase of TCM hospital capacity and an addition of more TCM products to the national essential drug list. Moreover, a consolidation of the TCM market can be expected, as the government has voiced support for a greater number of mergers and acquisitions. Thus, TCM firms will prove to be tough competition for foreign entrants into the Chinese healthcare marketin the upcoming years.
Sources
http://www.ecns.cn/voices/2016/03-02/201120.shtml
http://english.cri.cn/12394/2016/02/20/3441s917412.htm
http://www.chinadaily.com.cn/bizchina/2016-02/29/content_23686332.htm
http://news.yahoo.com/china-consolidate-drug-market-promote-traditional-medicines-030541700–business.html
https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Life-Sciences-Health-Care/gx-lshc-2015-life-sciences-report-china.pdf
http://www2.deloitte.com/content/dam/Deloitte/ch/Documents/life-sciences-health-care/ch_Studie_Pharmaceutical_China_05052014.pdf
EU-Japan Free Trade Agreement at standstill
The prospect of trading with Japan remains attractive despite its low economic growth. With a population of 126 million, and GDP per capita of USD 36,000, Japan is the EU’s second-biggest trade partner in Asia. Trade is dominated by capital goods and automotives. There are opportunities for expanding trade in many other industries, including fashion and high-tech. But bilateral trade remains hampered by tariffs in numerous sectors, including agriculture, textiles, and importantly the automotive industry.
Recent news on reducing trade barriers is not encouraging. The talks on the EU-Japan Free Trade Agreement (FTA) are moving slowly. There seems to be a lack of political will to go forward with the deal. Japan objects in particular the provisions that concern strategic industries, such as foodstuffs and automotives. The Japanese also seem to be putting more energy into the Trans-Pacific Partnership that was signed early last month. The EU has retaliated by announcing that the annual summit may be downgraded to informal talks this year. Investors interested in Japan should keep an eye on the developments around the EU-Japan FTA.
Sources
http://www.japantimes.co.jp/news/2016/03/05/business/eu-may-downgrade-summit-with-japan-as-trade-talks-stall/#.Vt3QOfnJxsd
https://www.euractiv.com/section/trade-society/opinion/eu-japan-fta-why-negotiations-are-far-from-over/
https://www.euractiv.com/section/global-europe/opinion/stitching-up-the-eu-japan-trade-deal/
http://ec.europa.eu/trade/policy/countries-and-regions/countries/japan/?message=ok
About Jaroslav Ton
I am a second-year BSc Economic History student at the LSE. In my studies, I have focused on historical developments in East Asian economies. Given the importance of China in the world, I have paid special attention to Chinese language and culture. I have also had the opportunity to see the current state of China first hand when I spend two months at Fudan University in Shanghai in the summer of 2015. Fascinated by China and the East Asia region as a whole, I decided to write regular political risk and investment articles for PRIS.
