This week around Asia

China shuffle, from Russia with love

This is a weekly blog by Associate Editor Ravi Velloor offering his take on events around Asia and those that affect the region. It is exclusive to The Straits Times digital edition.

The China Shuffle

Across Asia, as nations brace for the Donald Trump chips to fall, there is much flux in diplomatic ties. Old friendships are being re-evaluated while old adversaries and rivals are making nice. 

In Asia, the most important of those ties is doubtless the bilateral relationship between China and Japan, the biggest economies of the region and dominant powers. A recent three-day trip to Tokyo by Chinese State Councillor Yang Jiechi, and the high-level meetings he secured, underscores how things could be poised to rapidly change in north-east Asia.

Mr Yang is not quite as popular as his predecessor, Mr Dai Bingguo, who was genuinely liked around the region. Still, that did not prevent him from getting to see Prime Minister Shinzo Abe, Cabinet Secretary Yoshihide Suga, and a meeting of extreme symbolism with former premier Yasuo Fukuda (grandson of Premier Takeo Fukuda who, four decades ago, propounded the Fukuda Doctrine that has been the bedrock that helped open ties with China and been the template for Japan’s approach to Asia). 

Mr Yang’s arrival in Tokyo followed the visit by Mr Toshihiro Nikai, a top official of Japan’s ruling Liberal Democratic Party (LDP), to China for the recently concluded Belt and Road Forum (BRF). A summit between President Xi Jinping and Mr Abe on the sidelines of the G-20 summit in Germany now looks a near certainty.

What’s driving this? 

On the surface, it looks as though Japan is being emollient towards China. According to this line of thought, Mr Abe, shocked at US President Donald Trump’s decision to abandon Trans-Pacific Partnership (TPP) despite his personal entreaties, and wary that Mr Trump may stitch up a deal with Beijing that could leave him in the lurch, is hedging his bets by softening things with China.

 

The reality may be somewhat different. Mr Abe is not on a bad wicket. His economy is performing well enough - by Japanese standards, at least - and his security policies are moving to his satisfaction. What is more, it looks like the United States may in due course install a Terminal High Altitude Air Defence (Thaad) missile system on Japanese soil as well, in addition to the one it has installed in South Korea, to much controversy.

From Tokyo’s point of view, China is the needy one in the relationship at this point of time.


China's State Councillor Yang Jiechi (left) meets Japan's Prime Minister Shinzo Abe at Mr Abe's official residence in Tokyo,  on May 31, 2017. PHOTO: REUTERS

How so? 

First, Japan’s assessment is that China suspects its relationship with Mr Trump is poised to go down the chute when the American leader recognises that Beijing cannot, or will not, deliver on North Korea. At that point of Trump fury, it will be useful to have Japan, America’s top ally, to help calm things in East Asia. 

There is a second reason, perhaps: the Chinese economy may be in worse trouble than most people realise, especially as the debt overhang worsens. Should the dire forecasts come true - the recent sovereign downgrade by Moody’s was a warning bell - Beijing will have its hands full tackling that emergency and would like to keep things calm externally. A Japan-China entente thus works in everyone’s interest.

India: Central bank’s Tweedledum and Tweedledee

When the Narendra Modi government ejected central bank governor Raghuram Rajan last September by declining him a tenure extension, few were in doubt as to the reasons why the globally known Dr Rajan, a former International Monetary Fund (IMF) Chief Economist, had to go: his unwillingness to trim interest rates to play to the ruling party’s nationalist gallery and aspirations for muscular growth. 

It was reckoned that his deputy and successor, Mr Urjit Patel, would be more amenable to the government’s thinking and that a monetary policy committee installed six months ago would override the personal predilections of the governor. 

It hasn’t turned out so.

 

This week, the Reserve Bank of India (RBI), the central bank, stayed put on the key repo rate, angering government economists who had wanted lower rates to spur growth. While it is acknowledged that there was dissent within the committee, as one man it declined to meet with the finance ministry before its decision to hold rates, despite slashed inflation predictions on the back of a stronger rupee and weak price for oil, the principal import.

The Modi government, and people close to it, are livid. As they see it, Mr Rajan’s central bank consistently overestimated inflation expectations with the result that even as the key inflation index kept falling, interest rates either rose or held steady, which was as good as hardening rates. Because a poor country like India could hardly be expected to have excessive demand, this effectively resulted in killing supply, goes the argument. 

Now, Mr Patel, educated at the London School of Economics, Oxford and Yale University, seems no different. However, for better or worse, the Modi government is stuck with him for the rest of its term since RBI governors have three-year, renewable stints.

That said, there is little doubt that the Indian economy is in nowhere as good a health as the Modi government would like the world to think. Data released on May 31 showed gross fixed capital formation to have declined steeply in the year past, all the way to 25.5 per cent. While a lot of it owes to legacy issues from the Manmohan Singh government, some economists think the massive fiscal tightening the Modi government undertook early in its tenure, against the backdrop of poor monsoon rains that are important for the farm economy, contributed to the weakness.

Mr Modi’s best hope for the world-beating growth India claims is a good monsoon this year, which will raise agriculture productivity, farm incomes and feed back as consumer demand. Fortunately for Mr Modi, India is on track for a good rainy season.

Shangri-La Dialogue: From Russia, With Love

Last weekend, at the closing plenary of the annual Shangri-La Dialogue in Singapore, a person who caught much attention was Russian Deputy Defence Minister Lieutenant-General Alexander Fomin, particularly when he spoke of his country’s opposition to the Thaad missile system the US has installed in South Korea, and his government’s appreciation for Mr Xi's China.

Like China, Moscow is deeply concerned about the advanced missile defence system upsetting the strategic balance in the region.

 

“It is not only a ballistic missile defence system – it has real function,” said Lt-Gen Fomin, glowering at the audience. “That is why it is alarming. And it is a direct threat to Russia. We are convinced that it will increase the tensions of the region. That is our principal position.”

The Russian and Chinese delegations held their own meeting on the sidelines of the security conference, reflecting their swiftly building strategic relationship. But it was Lt-Gen Fomin’s response to a question on Chinese behaviour in the South China Sea that left the most impression on attending delegates.

Saying Russia’s position was arrived at after careful consideration of the circumstances,  Lt-Gen Fomin then praised China.
“China is a good country if you don’t know,” he said. “A big country and a peace-loving country.” 

He also went on to ask which nation was responsible for regime changes as with the ouster and killing of Muammar Gaddafi in Libya and Saddam Hussein in Iraq, developments, he suggested, had upset traditional orders and led to the current instability.

Few in the audience seemed to be in a mind to contradict him.

Until next week then.