Rightways

Wednesday, 8 August 2018

Here is how 1MDB money was used to buy Equanimity


~~https://clips.thestar.com.my/Interactive/EquanimityYacht/EquanimityYacht.mp4~~

KUALA LUMPUR: Super yacht Equanimity of fugitive financier Low Taek Jho (Jho Low) fame, was bought using four tranches of funds totalling US$262.4 million misappropriated from 1Malaysia Development Bhd (1MDB) between January and June 2014, according to lawyers representing the Malaysian government who “arrested” the billion-ringgit vessel in Port Klang yesterday.

In fact, US$140.6 million or just over half the yacht’s price tag was paid in early June 2014 using proceeds of a US$239.9 million Deutsche Bank bridging loan taken by 1MDB’s then 100%-owned unit 1MDB Energy Holdings Ltd (1MEHL) on May 26, 2014, according to information from Sitpah Selvaratnam, from the firm Tommy Thomas Advocates & Solicitors and lauded as one of Malaysia’s best maritime lawyers. [See Chart 4]

Two days after getting the loan, 1MEHL transferred most of the cash to Aabar BVI (British Virgin Islands), also known as the fake Aabar. The money then went through Affinity Equity and Alpha Synergy before reaching Jho Low, who on June 3, 2014 transferred US$140.6 million to WorldView for the fourth and final payment of the yacht. The earlier three tranches originating from 1MDB also went to WorldView.

“WorldView Ltd is a family trust of which only the Low family are beneficial owners of,” according to Low’s email in June 2015 to a lawyer at Hill Dickinson LLP and a senior BSI banker cited in the 251-page filing by the US Department of Justice (DoJ) in June 2017 to seize 1MDB assets, including the Equanimity.

The same filing said Jho Low and his parents Low Hock Peng (LHP) and Evelyn Goh Gaik Ewe on Sept 9, 2013 flew from Barcelona to Rotterdam — near where the Equanimity was being built — to view the shipyard and the yacht the following day.

The DoJ filing also said Jho Low laundered over US$200 million in misappropriated funds traceable to 1MDB’s 2013 bond sale into a US account belonging to US-based law firm DLA Piper.

The US$29.1 million second payment for Equanimity made on Feb 5 and 18 as well as April 2, 2014 was part of the US$56.5 million that went from DLA Piper’s account to LHP — who with Jho Low participated in the Condor joint venture (JV) through Strategic Resources (Global) Ltd (SRG) to acquire Houston-based Coastal Energy with International Petroleum Investment Co (Ipic) and Ipic’s Spanish unit Compañía Española de Petróleos SA.

The first and third tranches of payments for Equanimity made on Jan 7, 2014 and April 11, 2014 originated from US$2.72 billion bond proceeds raised in March 2013 by 1MDB Global Investment Ltd, which found their way to another Jho Low-linked offshore entity, Tanore Finance Corp.

The bond proceeds were intended for a JV with Ipic’s unit Aabar Investments PJS called Abu Dhabi Malaysia Investment Co. But instead of funding the Tun Razak Exchange development, the cash ended at Tanore instead. The money in the Tanore account was also used to buy artworks and the Park Lane hotel in New York, according to the DoJ filing.

When questioned by reporters yesterday, former prime minister Datuk Seri Najib Razak said he has never been on the Equanimity and has no knowledge that the yacht was bought using 1MDB money.

“Why we didn’t pursue [to get back the yacht] earlier [was] because we were interested in the full settlement with United Arab Emirates on Ipic … that is worth much more than this Equanimity. That is the biggest sum; we wanted [this] big settlement to be settled first, that’s why we didn’t pursue the yacht,” Najib said, adding that the Equanimity “is being used as a populist move”.

“I have no knowledge whatsoever as to the yacht and also the yacht itself is subject to litigation. It’s not a clear-cut matter,” Najib added.

Source: Cindy Yeap The Edge Financial Daily

Equanimity most expensive yacht to be auctioned

PETALING JAYA: Equanimity could smash the world record for the most expensive superyacht ever to be sold at auction in the event it goes under the hammer.

With the vessel now in Malaysian custody, all eyes are on the fate of the luxury yacht reportedly worth US$250mil (RM1bil).

Finance Minister Lim Guan Eng had said on Monday that his ministry wanted to get the best value from the Equanimity.

“Our aim is to draw back as much money as we can from the asset,” Lim had said, adding that the immediate plan was to ensure that all paperwork was in order and that all proper controls were imposed.

An online search of prices fetched so far by superyachts suggest that Equanimity could create a new record if the government decides to initiate an auction.

An article on the website of British publication Boat International listed the sale of the 72m Lürssen Apoise as the most expensive yacht ever auctioned.

At an auction in 2010, the yacht was sold for US$34.75mil (RM164mil), which is much lower than what Equanimity could be worth.

VesselsValue, a London-based online ship-valuation database firm, when contacted, said it valued Equanimity at US$175mil (RM712mil).

“Looking through our system, we also have the Apoise as the superyacht which has achieved the most at auction,” said VesselsValue associate director Claudia Norrgren.

The Apoise and Equanimity fall under the category of a superyacht or mega yacht, which refers to a commercially operated luxury yacht which is over 24m long.

Asked about the long term, Norrgren said superyachts don’t really go up in value.

“If it goes for auction it never realises its full potential as it is a distressed sale,” she said, adding that there have been times when a superyacht could go up in value from its ordered price.

“Pre-2018, people wanted a yacht immediately and there was a premium for very young superyachts, around one or two years old.

“Nowadays, it is a pretty stable market for second-hand superyachts, with changes in value set by market depreciation rather than being influenced by economic factors,” explained Norrgren.

The market for superyachts comprises the super-rich, also known as ultra-high net-worth individuals, said a luxury yacht broker.

The broker said it was in the best interest for the government to keep Equanimity in good condition in order to sell it easily.

The selling price of a used superyacht such as Equanimity, he said, would depend on a number of factors including how many people have been on the ship and used it daily.

The broker said offering Equanimity for charter service could diminish its value.

“The condition (of the yacht) will deteriorate. It will bring in charter income but the resale price of the yacht will be reduced,” added the broker.

Despite its eye-watering value, Equanimity is not the most expensive when it comes to superyachts.

In an online CNN article last month, which listed 10 of the most expensive superyachts, the top spot went to Serene, a 134m stunner that was reportedly bought by Saudi Crown Prince Mohammed Salman for US$550mil (RM2.24bil).

In 10th position is Octopus, a US$200mil (RM814mil) vessel commissioned by Microsoft co-founder Paul Allen.

Related post:

‘Equanimity’ billion dollar yacht is coming home

Yacht EQUANIMITY Equanimity arrives at Port Klang https://youtu.be/440utN2eMGw https://youtu.be/MZNlKocHgdM https://youtu.b...

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KUALA LUMPUR (Aug 8): Former prime minister Datuk Seri Najib Razak has arrived at the Kuala Lumpur Court Complex this morning to face new charges against him in relation to SRC International Sdn Bhd. He is scheduled to go to the Sessions Court today to ...

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1MDB claims ownership of super yacht Equanimity

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1MDB legal team to seek declaration of ownership of Equanimity

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Tuesday, 7 August 2018

‘Equanimity’ billion dollar yacht is coming home

Yacht EQUANIMITY

https://youtu.be/MZNlKocHgdM https://youtu.be/wE7IQhy1d4g

The Equanimity is expected to arrive at Port Klang soon after spending a day in Batam, Indonesia, yesterday.

Prime Minister Tun Dr Mahathir Mohamad thanked Indonesia for the good news, though he said if fugitive businessman Low Taek Jho could prove that he had purchased the billion-ringgit yacht with his own money, he could get it back.

“If they have proof that they purchased the yacht using their own money and not stolen money, they have the right to get the yacht back,” Dr Mahathir said in a video posted on Facebook.

He said the close relationship between both countries was the reason this problem could be solved.

“We believe the yacht belongs to Malaysia because it is believed to have been bought with Malaysian money stolen by certain parties.

“If there is anyone who claims the yacht is theirs, they can show proof that they own it. We want to know how they managed to amass such a huge amount of money that they were able to purchase such an expensive yacht,” he said.

He added that investigations by the US Department of Justice revealed that the yacht was purchased using funds stolen from 1Malaysia Development Bhd (1MDB).

A source said the vessel received port clearance from the Batam Marine Department at 2.30pm yesterday, indicating that its next port of call was Port Klang.

The source said at least four Malaysian policemen would accompany the ship and its crew here.

The yacht arrived in Batam island yesterday morning. By 6pm, it had entered Malaysian waters.

It was supposed to head for the Batu Ampar port, but was diverted and anchored near the Pulau Nong lighthouse at the entrance to Tering Bay at around 9.30am yesterday.

The yacht had sailed from the Tanjung Benoa port in Bali last Thursday.

The Equanimity was seized in Bali in February at the request of US authorities as part of a multibillion-dollar corruption investigation launched by the Department of Justice over 1MDB.

However, a Jakarta court ruling in April declared that the yacht was wrongfully impounded and it was released to its owners after they obtained a court motion to declare that the seizure was illegal.

But the vessel was not allowed to leave the Tanjung Benoa port.

Last month, Indonesian police seized the yacht again following a formal request for legal assistance from the United States.

Reuters reported that the decision by the Indonesian government to hand over the yacht to Malaysia was reached following a personal request made by Dr Mahathir, who visited Indonesia in June.

Finance Minister Lim Guan Eng said his ministry intended to recover as much money as it could from the Equanimity.

Speaking to reporters at Parliament lobby yesterday, he said the immediate plan was for the Attorney General to ensure that all the paperwork was in order and proper controls were imposed.

“If possible, we need to make sure that there is a proper inventory of the assets inside, and we hope that the public can also view it.

“This may not be the entire ship, just a portion of it, because there are also a lot of valuable items inside and there must be some sort of control.

“At the end of the day, we want to get back as much money as we can from all these ill-gotten gains.

“These stolen assets should be sold at the highest price so the money can be returned to the people,” Lim said.

Asked if Malaysia would get to keep the yacht, Lim said he would leave it to Attorney General Tommy Thomas to explain, though he said the fact that the yacht was being sent here “speaks for itself”.

By Eddie Chua and Rashvinjeet S.Bedi The Star

Dr M’s ‘regime’ not interested in due process, Jho Low’s lawyers claim after yacht seized

The Malaysian government’s seizure of the yacht Equanimity is illegal and proof that Tun Dr Mahathir Mohamad’s administration has no interest in a fair and just process, tycoon Taek Jho Low’s lawyers said today.

The lawyers representing the fugitive businessman reiterated that the confiscation of the luxury vessel — which they said is owned by Equanimity (Cayman) Ltd — broke an Indonesian law and court decision, besides breaching recent United States court orders.

“The yacht’s owner, Equanimity Cayman Limited, had already filed a claim on this asset, which Mahathir ignores. Further proceedings have been issued today in response to this illegal act,” the tycoon’s lawyers said in a statement.

They accused Dr Mahathir of bringing the yacht illegally from Indonesia “into a rigged Malaysian system manipulated by a man who only cares about his absolute political rule”.

“Since his election, Mahathir has tried reinventing his public image following the appalling abuses of the rule of law he previously presided over, including the Anwar case and the 1988 judicial crisis.

“The reality is that he has simply continued on as he did during his previous regime and has shown that his only objectives are political: from freezing bank accounts of rival political parties, to public trial-by-media, where guilt is proclaimed before any evidence is presented,” the lawyers added.

Low’s lawyers have pointed out that the United States’ Department of Justice (DoJ) has argued that it must have possession of Equanimity to ensure that the asset retains its value pending a court hearing that can determine the final ownership and the rights of all parties involved.

Finance Minister Lim Guan Eng said today he will auction off Equanimity to recover as much money as possible from the luxury boat worth US$250 million (RM1.02 billion).

He said selling off the yacht belonging to the fugitive financier, who is allegedly a central figure in the 1Malaysia Development Berhad (1MDB) corruption scandal, would be the best option as the cost to maintain its docking would be high. - Malay mail

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Sunday, 5 August 2018

New Malaysia's civil servants must keep it civil of multi-racialism !

Brave new world: The civil service needs to get used to the New Malaysia approach while our ministers need to snap out of the Opposition mode and get down to work.

Wake Up Malaysian Civil Servants: Duty Beckons

by dinobeano

August 16, 2018 Wake Up Malaysian Civil Servants: Duty Beckons by Dr Amar-Singh HSS http://www.freemalaysiatoday.com These Civil Servants pledge to feather their own nest We need to get rid of the culture of censuring those in the civil service who speak up when they see wrong being done. I found the courage to write this […]

Keeping it civil: The civil service makes up the backbone of any nation, yet the concept of its implementation continues to elude some of the powers that be.

IT’S often said that ministers come and go, but civil servants stay forever. And the good old government machinery runs as before, a fact some of our new ministers will probably be clued into by now.

Ministers who have no experience at state government level may have pre-conceived notions of the privileges they enjoy, like unlimited authority and knowing what they decree would suffice to overrule the bureaucrats.

And that is the biggest mistake they could make as newcomers to Putrajaya, because nothing exemplifies shooting oneself in the foot more than putting down civil servants – they run the ministries, after all.

Making its rounds on the grapevine these days is how some ministers put down their secretaries-general at meetings, believing they know better, or quite possibly, that they can do a better job at improving the performance of their charges.

Some of our ministers were probably not born when British sitcom Yes, Minister (which later became Yes, Prime Minister) aired on BBC Two, and on RTM, from 1980 to 1984.

Set principally in the private office of a British Cabinet Minister in the fictional Department of Administrative Affairs in Whitehall, it follows the ministerial career of the Right Honourable Jim Hacker.

In it, he attempts, or rather, struggles to formulate and enact laws or effect departmental changes and meets with resistance from the civil service, in particularly his Permanent Secretary Sir Humphrey Appleby.

The obstructions (sabotages, some would say) were often carried out so deftly that the minister would often rarely know what hit him or possess a trail of evidence to prove insubordination.

In fact, the delays (such as total rejection of policy) were cited to impress upon the minster that the shenanigans were for the benefit of his political mileage.

But of course, the sitcom was totally fictional and in real life, not all civil servants could get away like that.

Respected banker and commentator Tan Sri Dr Munir Majid wrote that Prime Minister Tun Dr Mahathir Mohamad had put together a Cabinet with a mix of races and genders, and a range of ages, which is unprecedented in the political governance of our country. However, except for a handful of ministers, the Cabinet falls short on experience.

Dr Munir urged Pakatan ministers to get out of “Opposition mode” so they can function and deliver with all the advice and support available.

“They would need to get the government machinery – the civil service – to implement their decisions effectively.

“Here, there is another problem. The largely Malay civil service is not used to having political masters committed to a multi-racial Malaysia and a no-nonsense regime,” he wrote.

That simply means our ministers, who have been used to merely delivering fiery speeches, now need to roll up their sleeves and get down to work and show the fruits of their labour. They can only blame the ills and corruption of the previous government to an extent.

A few ministers, and even the Attorney-General Tommy Thomas, must now grapple with all the documents being in Bahasa Malaysia, unlike in the private sector where the medium of communication is English.

Their staff would most likely be entirely Malay, except for their aides, who are political appointees. Directives would be issued in an entirely different way, obviously reflected by the work culture and style of communication.

That is just how the civil service works, so, they simply need get used to it. Of course, stories of all this being a culture shock for some have surfaced recently.

Dr Munir reminded that “there is still some way to go to arrive at a New Malaysia in terms of multi-racialism. After two generations of ‘Malay First’ and subsequently ‘Malay and Muslim First’ political ethic, there is a mountain to climb to make it New Malaysia.”

The reality is that about 75% of the Malay electorate in GE14 voted for Umno or PAS, in comparison to 95% of the Chinese voters who voted for Pakatan Harapan (an increase from the 85% who supported the now-defunct Pakatan Rakyat coalition in 2013). About 70% - 75% of Indians voted for PH, the figures show.

It has been reported that only 25% - 30% of Malays voted for PH, according to figures from Merdeka Centre. Apparently, 35% - 40% of Malays voted for Barisan Nasional while 30% - 33% supported PAS.

The findings displayed that although a higher percentage of Malays voted for Pakatan Harapan in Johor and in west coast states such as Melaka and Negri Sembilan, the coalition’s overall Malay support was diminished by its weak performance in Kelantan and Terengganu.

It’s no secret that as the new government reaches its 100-day mark, some ministers are still struggling to assemble their offices.

It’s just as well that some have yet to meet the press or make statements, because they are still learning to juggle the workload as others continue their scramble to find the ideal personnel.

The job has been so overwhelming that they have been unable to meet their key officers to solidify plans and directions.

With no appointments in sight, some staff are wondering if they are being snubbed, or simply that the ministers are too busy with other engagements. It doesn’t help that they don’t even reply messages.

But the civil service needs to accept that this is New Malaysia. There is no turning back. The culture of openness, accountability, engagement and success must take centre stage, with any form of prejudice left by the wayside.

The strategy of using race and religion to stir emotions seems hollow now.

Millions of ringgit were stolen from the people by those in power, and as the facts have revealed, they weren’t Chinese, Indians or Christians, contrary to what these politicians still want the Malays to believe.

And certainly, the civil servants who sniffed out the moral decay under their very noses knew exactly what was happening.

Clean, trustworthy and competent ministers, and a loyal, non-corrupt and efficient civil service will make Malaysia great.

After all, as the saying goes, it doesn’t matter what colour the cat is, as long it catches the mice.

In this context, what’s important is surely them being good Malaysians.

Wong Chun Wai

Wong Chun Wai began his career as a journalist in Penang, and has served The Star for over 27 years in various capacities and roles. He is now the group's managing director/chief executive officer and formerly the group chief editor.

On The Beat made its debut on Feb 23 1997 and Chun Wai has penned the column weekly without a break, except for the occasional press holiday when the paper was not published. In May 2011, a compilation of selected articles of On The Beat was published as a book and launched in conjunction with his 50th birthday. Chun Wai also comments on current issues in The Star

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Saturday, 4 August 2018

Coming recession in 2020? Possibly earlier

Negative rates: Pedestrians walking past the Bank of Japan (BoJ) headquarters in Tokyo. BoJ’s goal remains at keeping real interest rates as negative as possible, as long as the economy performs. — Bloomberg

IT’S mid-term review time as the US yield curve begins to flatten.

This curve tracks the relationship between interest rates of US government debt obligations. Normally the yield curve is rising, with long-term bonds having yields higher than short-term obligations.

But occasionally the curve inverts, with long bonds yielding less than short Treasury bills – a historical predictor of future recessions and bear markets in stocks. Recently, the curve has become noticeably flatter, with short rates rising and longer yields remaining stagnant. This has led many analysts to think that the yield curve will soon invert.

But that does not mean a recession is imminent. Just returned from an extended visit back to Harvard. Touched base with my mentors and professors at both extremes of the economic spectrum. They are all split on what this flattening really means. In the event it does invert (the gap today being below 0.3%), recession has almost always (over the past 50 years) followed within a year or so. But few see a recession soon on the horizon.

The first half has come and gone. The ongoing transition to more normal conditions continue in the context of a robust US economy; continued progress in the orderly normalisation of US monetary policy; and re-awakened sensitivities to geopolitical and protectionist risks.

There will be higher interest rates, some inflation concerns and trade tariffs coming-on in the context of markets more readily accepting two to three more rate hikes by the Fed in 2018. The prospect of a global trade war makes everyone very cautious.

Once we start down the road of tariff increases and threats of more to come, the dangers of retaliatory miscalculations are real and very scary. Still even an inverted yield curve should not be on top of our worry list under today’s accommodative monetary conditions.

Synchronised pick-up

The world economy benefitted from four drivers of higher growth: the healing process in Europe, re-bound from slowdowns in Brazil, India and Russia; soft landing in China; and pro-growth measures in US.

To persist, Europe needs to do much more. Also, there is hope that recent tariff tensions would eventually lead to fairer and still-free trade which recognises the inter-dependent nature of global supply chains, and show greater willingness to protect intellectual property rights, modernize trade arrangements and reduce non-tariff barriers. Yes, more rate hikes from the Fed are still on the cards. But the same by the European Central Bank (ECB) and Bank of Japan (BOJ) demand trickier manoeuvring.

This is an area that warrants close monitoring since volatility will likely persist. At least for now, fears of Japan-like deflation in US and Europe are effectively gone. But OECD is worried global growth is not yet self-sustaining. It’s strength in 2018 is largely due to monetary and fiscal policy support – and lacking in rising productivity gains and sweeping structural reforms. In Europe, the “clock is ticking”; without reforms, more populist uprisings will appear as the upswing ages and then fades. US inflation is not only returning to the Fed’s 2% target, but also likely to exceed it. In Europe, consumer prices were last still lower than a year ago – below the ECB’s target of just below 2%. Fear of the spectre of deflation has led BOJ to remain cautious about tapering its monetary easing program. Will just have to wait and see.

IMF warns that the world’s US$164 trillion debt pile (at 225% of GDP) is bigger than at the height of the financial crisis a decade ago. One-half was accounted for by US, Japan and China. What’s needed is for US fiscal policy to be recalibrated to bring down the government debt to GDP ratio (80%) and for China to deleverage its US$ 2.6 trillion private debt. There is no sign either is being done which runs the risk of triggering yet another financial crisis.

Growth will falter

Growth in US can slow considerably when the boosts from last year’s tax-cuts in US fades in 2019 and 2020. IMF now warns that US will grow at about one-half the 3% annual pace forecast by the White House over the next 5 years, reflecting the effects of growing massive fiscal deficit and continuing trade imbalance. For US, sluggish productivity remains a key determinant. In 2Q18, GDP picked-up to rise 4.1% (2.2% in 1Q18) the fastest pace in nearly four years, reflecting broad-based momentum.

But worker productivity advanced 1.3% from a year earlier, consistent with the sluggish 1.2% average annual rate in 2007-2017, well below the better than 2% annual average since WWII. Spending by consumers, businesses and government as well as surging exports all appeared solid in 2Q18. The expansion enters its 10th year this month, building on what is already the second longest expansion on record. Faster growth which has helped to drive the unemployment rate to its lowest level in 18 years, fueled quick corporate profit growth.

Median estimates place GDP growth at 2.8% in 2018, 2.4% in 2019 and 1.8% over the long run. But everyone has growth slowing next year because of falling business and consumer sentiment, reflecting trade disputes with China and many US allies, and uncertainty whether rising business investment is sustainable.

The big concern is the economy overheating – already, it is bumping up against capacity constraints as labour markets tighten. Still, the consensus is that the next downturn will not arrive until 2020. Most economists expect 3% inflation over the next year. What worries me most is the deteriorating global political and strategic environment.

Not so much the economic outlook directly. The world is changing too much, too fast.

So much so, the geopolitical situation is getting worse – open warfare between Israel and Iran, the disgraceful state of Palestine, and uncertainties surrounding Donald Trump and Vladimir Putin, and lack of leadership in Europe. Trade barriers are causing much anxiety. It is as though what’s put in place since WWII isn’t worth a damn anymore.

Europe and Japan

Latest indications from the Brookings-FT Index for Global Economic Recovery (Tiger) show global growth has peaked and momentum has started to fade. Indeed, financial markets are already reflecting mounting vulnerabilities. With weak economic data in 1H’18, Europe and Japan have since cooled. In late 2017, eurozone was still growing at 3.5%: Germany at 4%, France 3%, Italy 2% and Spain 3.5%. But activity slackened to only 1.2% in early April; even Germany recorded a sharp dip – down to only 1%, reflecting waning monetary easing effects and supply-side constraints. The outlook is for a strong above trend upswing for the rest of the year. OECD now expects GDP growth in 2018 to be 2.2% (2.6% in 2017) and in 2019, 2.1%.

For eurozone, the window for reforms is closing – ranging from the implementation of dual currencies for its members to putting European Parliament in charge of economic policy, including the euro-budget. Japanese GDP shrank 0.1% in 1Q18 despite a rise in capital investment. Household spending unexpectedly fell. Still, recovery is expected to be driven by a weak yen brought about by monetary stimulus (BoJ has been buying assets at US$740 billion a year to drive down long-term interest rates). But underlying inflation is stuck at 0.5%. BoJ’s goal remains at keeping real interest rates (after inflation) as negative as possible, as long as the economy performs. OECD forecasts growth in Japan to be 1.2% in 2018 (1.7% in 2017); the same in 2019.

China and BRICS

Many emerging markets (EMs) are still enjoying momentum from 2017, but there is growing concern about rising debt and vulnerabilities to capital flight as interest rates in US rise. For those recently emerged from recession, viz. Russia, Brazil and South Africa, their urge to return to strong levels of activity remains sluggish.

China and India have fewer concerns for their immediate outlook. Still, they need to reform their economies to help raise living standards to catch up. The main challenges will be to execute particular reforms – not just to the financial system but also to SOEs and local governments, including getting rid of corruption.

China’s GDP rose 6.7% in 2Q’18, the slowest pace since 2016. Retail sales held up rather well as did exports. Still, measures to curb rampant borrowing are biting – investments in infrastructure and manufacturing by SOEs and local governments have since slackened. These efforts, in the midst of headwinds from abroad (especially protectionist tariffs), have led to downgrades in growth for the rest of the year. IMF now forecasts GDP growth in China to average 6.5% in 2018 (6.8% in 2017) and about the same in 2019.

Recent depreciation of China’s currency, the yuan, exposes crucial vulnerabilities within the world’s second-largest economy as it faces escalating trade tensions with the US. The currency posted its biggest ever monthly fall against US$ in June (3.4%) and has since lost more ground. This slide marks a departure for the currency often regarded as an anchor of stability for Asia and other EMs.

As Beijing assesses the options, it finds itself between a rock and a hard place because (i) People’s Bank of China (PBoC) intervention means selling its US dollar stash of reserves – which stood at US$3.11 trillion in June; (ii) it could instead raise domestic interest rates, thereby making the currency more attractive which might help to shore up the yuan. But it also risks weakening an already slowing Chinese economy just as the trans-Pacific trade war starts to bite; and (iii) it could impose stricter controls on China’s capital account which will likely spook overseas funds that have rushed into China’s domestic bond and equity markets this year at an unprecedented rate.

However, to internationalise the yuan, China has to keep fund flows relatively unencumbered. The PBoC has sensibly pledged to keep the RMB “generally stable.” In July, China implemented a mix of tax cuts and greater infrastructure spending citing growing uncertainties, as it ramps up efforts to stimulate demand to counteract a weakening economy.

As for India, I wrote extensively on what’s happening there (my July 2018 column: “India: Chugging Along but Needs More Firepower” refers).

What then are we to do

As I see it, China and China-India centred Asia is now the heart of the world economy. Their steady growth has been a source of stability in an otherwise unsteady world.

Of late, developments in China received more scrutiny than usual because of the context: Chinese stock market has since fallen into bear territory, and a growing trade dispute with the world’s largest economy, US. Despite China’s astonishingly sustained expansion, the economy is widely considered vulnerable because growth in output has been underwritten by an even faster increase in debt.

The nation’s gross debt – both public and private – is now estimated at over 250% of GDP. The worry is not just the volume of debt but its quality. China’s domestic policies encourage high savings.

Those savings, held in banks, have been funneled to companies, especially SOEs. The credit quality of the loans is hard to assess but is likely to be uneven. China has since begun to slowly tighten the credit taps, with even tighter rules on shadow banking and more scrutiny for both local government financing and public-private investment projects.

At the same time, a sharp increase in the number of defaults by corporate issuers has revived anxieties about Chinese debt. In my view, it is the tighter credit conditions and defaults, rather than worries about a trade war, that best explain the recent 22% decline in the Shanghai Composite index from its January highs.

Tightening credit policy is also a compelling explanation for the weak macro-economics. Credit growth fell, and growth in fixed investment followed. This appears to be having some effect on consumer sentiment as well.

No doubt, Trump’s tariffs on US$50bil of Chinese imports (and threatens US$200bil more) will have a direct (but unlikely to be catastrophic) impact on growth. But China is now an investment-led rather than an export-led economy.

Still, it is the knock-on effects that are most feared. If the escalation of hostilities leads to a reduction in foreign direct investment in China, the long-term impact could be significant. True, China may be facing a delicate moment economically.

But given China’s deepening role in the world economy, any pain that the US manages to inflict on it would be quickly shared with the US and the broader world – at a moment when Europe’s economy is slowing, and many EMs looking unstable.

On the whole, China’s economy will remain strong and resilient. Whatever happens, I think this won’t change the Chinese situation much.

By Lin See-yan - what are we to do?

Former banker Tan Sri Lin See-Yan is the author of The Global Economy in Turbulent Times (Wiley, 2015) and Turbulence in Trying Times (Pearson, 2017). Feedback is most welcome.

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