Financial Times Europe - 08.08.2019

4 ★ FINANCIAL TIMES Thursday8 August 2019

DELPHINE STRAUSS— LONDON

Beijing’s decision to let the renminbi fall below the symbolic level of seven to the dollar was a political choice — but it would not be in China’s economic inter- estto “weaponise” its currency, economists say.

Monday’s move to increase the renminbi’s trading band came as a retaliation against the latest US threat of fresh tariffs. And although China’s central bank took steps to stabilise the currency on Tuesday, investorsworry that the authorities could seek to put pressure on Washington by allowing a bigger devaluation. While political calculations might dic- tate that decision, concerns over the impact onChina’s economycould act as a restraint, according to economists. “I don’t see any upside for China,” said George Magnus, an associate at Oxford university’s China Centre. A depreciation would boost trade at the margin, he said, but stability in the

currency was far more important to Chi- nese policymakers, whose main concerns are to contain capital flight, avoid a domesticdebt crisisand pursue a rebalancing of the economy from exports to consumption. Using the exchange rate as a tool “is a double-edged sword, potentially hurting both the US and China”, said Alan Ruskin, a strategist at Deutsche Bank.

Has China been manipulating its currency? No. The renminbi lost about 10 per cent of its value against the dollar last year, as the first rounds of US tariffs took effect. But given thescale of the penaltiesthe US has imposed, a bigger adjustment could have been expected. The IMF said last month that the exchange rate was in line with economic fundamentals. Economists dismissed the idea that China had intervenedto drive the currency below its fair value, saying that if anything, Beijing had recently been

keeping the renminbi artificially high.

Would a much weaker renminbi boost the economy? It would help Chinese exporters com- pete overseas, and it might prop up growth to an extent. Bo Zhuang, at the consultancy TS Lombard, said a worsening economic outlook had made the Chinese leader- ship more open to a market-driven depreciation; and Jian Chang, an economist at Barclays, said policymakers might consider it as an alternative to cutting interest rates as a tool to stabilise growth. Mr Magnus said a much larger, sustained devaluation — in the order of a 20 per cent fall against the dollar since theonset of the trade war — would “bestow some competitive advantage”, although it could also spark tit-for-tat action in the region. But a weaker exchange rate does not make as much difference to trade pat- terns as it did in the past.

Global supply chains mean exporters’ gains are offset by the higher price they pay for imported components. The widespread use of the dollar in global trade invoicing may also limit the gains, at least initially. The IMF argued in its latest external sector report that when a country’s currency weakened, there would often be a rapid hit to imports, but only a tepid boost to exports at first — because other trading partners also saw their curren- cies fall against the dollar. “Exchange rate changes have muted effects on the trade balance in the short- term,” the IMF concluded. “Currency movements may not be passed through to final prices and may well be more than offset by higher tariffs... at least for exports to the United States,”said Stephanie Segal at the Center for Strategic and International Studies. Economists at Morgan Stanley said that if Chinese policymakers wanted to do more to support growth, the most

likely response would be a fiscal stimu- lus, focused on infrastructure projects.

What are the downsides for China? One risk of a renminbi devaluation is that it could trigger defaults on domestic dollar-denominated debt, especially in the property sector. Analysts at the consultancy Pantheon Macroeconomics noted that while these debts were not a high proportion of total Chinese debt, they were “non-negligible and will put the screws on developers”. However the government has already taken action to rein in excesses in the real estate sector, where bankruptcies have risen recently. A bigger concern is capital flight. When the renminbi last came under sustained pressure in 2016, net capital outflows over the year reached $725bn, and although China held foreign exchange reserves of more than $3tn, it depleted them at an alarming rate. “The danger now, for China, the United States and the rest of the world,

is that market forces overwhelm the official sector’s ability to respond,” Ms Segal said. However, Bo Zhuang argued, outflows would be more manageable now, because of China’s tighter capital controls, less “panicky” households and companies, and a lower level of specula- tive pressure from markets. The main problem is that a weaker renminbi would hurt Chinese consum- ers — who would pay higher prices for imported goods — more than it could help exporters. The UK’s experience since theEU ref- erendum in 2016 helps to illustrate this: the resulting fall in the pound drove up inflation, leading to a two-year squeeze on living standards, but made very little difference to the volume of exports. The recent thrust of Chinese policy had been to move away from export-led growth and orient the economy towards consumption, Mr Magnus noted, add- ing: “If you make imports more expen- sive, you’re frustrating that process.”

INTERNATIONAL

HANNAH MURPHY— LAS VEGAS MADHUMITA MURGIA— LONDON

A newly identified team of Chinese hackers is carrying out political espionage for Beijing while simultaneously attacking businesses for personal financial gain, research has found, in an example of how the lines are blurring between state-sponsored and commercial cyber criminals. Advanced Persistent Threat 41 (APT41), the hybrid group identified yesterday by US cyber security group FireEye, is described as a “creative and

well-resourced” outfit that has been operating since 2012, moving into state- backed espionage operations against the healthcare and high-tech sectors and political dissidents in 2014. “This is remarkable because explicit, financially motivated targeting is unu- sual among Chinese state-sponsored threat groups, and evidence suggests these two motivations were balanced concurrently from 2014 onward,” a FireEye reportsaid. “[This] may indicate the group enjoys protections that enable it to conduct its own for-profit activities, or authorities are willing to overlook them.” The group’s activities, which have taken place in 14 countries including the US, UK, Singapore, Japan and France, were aimed at industries “aligned with

China’s five-year economic develop- ment plans”, FireEye said. For instance, the hackers repeatedly targeted global telecoms companiesfor call record information, as well as tech groups developing machine learning, autonomous vehicles, medical imaging, semiconductors, processors and enter- prise cloud computing software. In the healthcare sector the hackers allegedly stoleintellectual property from medical device and pharmaceuti-

cal companies, including clinical trial data, and detailed business information ahead of mergers and acquisitions transactions. China and the US agreed to stop commercial espionage in 2015 and FireEye said it had not seenintellectual property theft by the group since then. FireEye said APT41 had also “gath- ered intelligence on pro-democracy dissidents in Hong Kong” in 2016 and 2017. According to Fred Plan, a senior threat intelligence analyst at FireEye, the timing suggested the group had been tasked with gathering intelligence on the pro-democracy Umbrella Move- ment candidates who at the time were running for election in Hong Kong. In 2017, shortly after an APT41 hack, the group of pro-democracy activists

was banned for five years from holding public office in Hong Kong, in effect putting an end to their political careers. APT41’s cyber crime career started in the video games industry. “Learning to access video game pro- duction environments enabled APT to develop the tactics, techniques and procedures that were later leveraged against software companies to inject malicious code into software updates,” the report said. The revelations shed light on little- known Chinese cyber operations and come amid escalating trade tension between Washington and Beijing and rising suspicion among lawmakers and US intelligence that Chinese companies, such as technology groupHuawei, present a risk to US national security.

Security research

Beijing hackers work for profit, finds report

Lines blurred between

state-sponsored and commercial cyber crime

‘[This] may indicate the

group enjoys protections that enable it to conduct

its own for-profit activities’

Currency devaluation

Weaponising renminbi will do little to boost China, warn economists

ANDRES SCHIPANI— BELEM

Brazil’s lower house of the National Congress passed a much-vaunted pension reformyesterday in what is seen as a big step towards shoring up government finances and restoring growth in Latin America’s largest economy.

The reform, various forms of which have been in thepipeline for 20 years, is closer thaneverto being approved, passing its second and final vote in the usually fractious lower house by 370 votes to 124, comfortably above the threshold of the 308 votes it needed. Analysts saw the two rounds of votes as the most critical in the congressional approval process for the reform. The base text of the bill willundergo a review in the lower house, then a senatorial commission, and two votes before full sessions of the Senate for final approval. Senior lawmakershavesaid they expect final approval of the legislation next month, but analysts said it could stretch into October. By raising the retirement age of many Brazilians and reining in pensions payment obliga- tions, the legislation seeks to tackle the

state’s precarious fiscal position with savings of about $230bn over the next decade. Rodrigo Maia,Speaker of the lower house, who has been critical in building supportfor the bill, has said that with- out the reformpension spending would balloon to 17 per cent of gross domestic product in the next40 years, leading to a “social collapse”. Members of the new rightwing administration of President Jair Bolsonaro have championed thereform, mainly Paulo Guedes, finance minister, and Rogério Marinho, social security secretary. “Victory for Brazil,” tweeted Onyx Lorenzoni, Mr Bolsonaro’s cabinet chief after thevoting session in Congress. Thepension reform proposal was ini- tiated underMichel Temer, Mr Bol- sonaro’s predecessor, but stalled after the former president was implicated in graft claims. Since Mr Bolsonaro’s election last year, however, most lawmakers have come round to the idea of reining in Brazil’s vast system ofsocial welfare payments,which has undermined the state’s ability to invest and led to ever higher taxes. International businesses say they areholding off investingin Brazil until the reform passes, describing it as a lit- mus test of whether Mr Guedes and his team will be able to pass a broader economic agenda, including deregulation, anoverhaul of theunwieldy tax system, and privatisations. Many hope the passage of the bill will restore confidence in the Brazilian economy, which is facing the prospect of a technical recession in the second quarter after suffering afirst-quarter con- traction. Economist Marcos Lisboa, president of Insper business school, has warned that, although critical, the pension reform alone would not “mean the economy will start growing automatically”.

Latin America

Brazil pension

reform wins

go-ahead from

lower house

of Congress

SONG JUNG-A AND EDWARD WHITE SEOUL KANA INAGAKI— TOKYO Son Yong-jin was not thinking about the consequences when he raised a steel pipe above his head and smashed iton to the roof of his most prized possession: a silver Toyota Lexus worth $45,000. Even now, theSouth Korean, who as a result ofdestroying his car has to ride the bus to work while braving the fury of his incensed spouse, said he had “no regrets” about the act, part of a growing Korean boycott of Japanese goods. “I was too ashamed to drive a Japan- ese car after what Japan did to our country,” said Mr Son, 47, who runs a small shop in Incheon, near Seoul. The patriotic sacrifice of his vehicle — images of whichwent virallast month — captured anger over Tokyo’s colonial era rule of Korea that is escalating into a trade war between theneighbours. Tokyo and Seoul are perennially at loggerheads over historical and territo- rial disputes, butthe latest flare-up, which stems from a South Korean court ruling last year that allowed individuals to make compensation claims for wartime servitude against Japanese companies, is among the most severe in years. Japanese premier Shinzo Abe’s government believes the issue was resolved through a 1965 treaty, and $500m paid to South Korea in aid and loans at the time, and has called for arbitration, in line with the terms of the pact. The administration of Moon Jae-in, the South Korean president, however, has resisted such calls and has refused to overrule the courts, leading Japan to declare a breakdown in trust and im- pose a series of export controls on products critical to South Korea’s technology groups, a move that is hurting the South Korean economy and threatening to upset global supply chains. Despite Tokyo’s insistence that the export controls are not related to the dispute, South Korea regards them as retaliation. This has raised fears among someexperts that Mr Abe has adopted a similar stance to US president Donald Trump,who has been criticised for usingpunitive trade measures against Chinafor political reasons. Pascal Lamy, former director-general of the WTO, said he was “very worried”

Japan was using trade to address an essentially “political problem” of colonial reparation. “What is now happening between Jap- an and Korea, it is like a cancer metasta- sising of Trump’s weaponisation of trade,” Mr Lamy said. “People don’t even pretend it is about something else [and] use trade for a totally political reason.” In South Korea, a campaign to boycott Japan-made goods and services has snowballed since July, when Tokyo imposed restrictions on shipments of three chemicals essential for making memory chips and display panels, which are among South Korea’s top exports. Tens of thousands of retailers have stopped selling Japanese beer and ciga- rettesin recent weeks, while petrol sta- tions and garages are refusing to fill up or service Japanese cars. Sales of Japa- nese vehicles have fallen. Korean air- lines are reducing flights between the two countries and some politicians are calling for an outright travel ban. In the most extreme protests, two men in their70s, separately attempted

self-immolation outside the Japanese embassy in Seoul. Both later died. “I am so angry because Abe does not show any remorse about the past,” said Yang Geum-duk, 91, who was forced to make aircraft parts at a Mitsubishi fac- tory in Nagoya when she was 12. “I haven’t heard a word of apology for my suffering for the past 70 years, let alone compensation.” The public backlash is expected to only intensify after Tokyo on Friday removed South Korea from a “white list” of trusted trade partners, a move that risks further slowing supplies of equipment, components and materials critical to manufacturing groups such as Samsung, SK and LG, which underpin the South Korean economy. The unravelling ofdiplomaticties between Japan and South Korea, two cornerstone US allies in Asia, has also worried Washington, coming against an upturn in missile tests by North Korea and moves by China and Russia to expand military activities in the region. “China and Russia can see there is a gap between Korea and Japan, and that

is something they can exploit against American interests,” said Go Myong- hyun, a research fellow at the Asan Institute for Policy Studies in Seoul. Despite these worries and concerns within Japan’s business community, analysts said Mr Abe was unlikely to alter hisstance against Seoul, with polls in Japan showingsupport for the export controls as high as 71 per cent.Mr Moon also might be tempted to take a harder lineahead of a legislative election next year. Seoul, to try to reduce itsreliance on Japan for electronics components, has already announced plans to invest $6.5bn to shore up itstech industry. Officials areeyeing whether to scrap a military intelligence sharing pact, in a potential blow to the security alliance amongthe US allies. And South Korean tech companiesaretesting potential substitutes for the Japanese products, including from China. “This is not good for both sides. They will all suffer if the trade spat drags on,” said Eom Chi-sung, a director at the Federation of Korean Industries.

Asia.Trade conflict

South Korea public backlash unravels Japan ties

Relations sour between US

allies as dispute over wartime

forced labour reignites

Street fury: South Koreans denounce Tokyo’s trade restrictions on their country outside the Japanese embassy in Seoul on Saturday Ahn Young-joon/AP

‘People don’t even

pretend it is about

something else [and]

use trade for a totally

political

reason’

Members of the rightwing

administration of President Jair Bolsonaro

have championedreform

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Financial Times Europe - 08.08.2019

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