The latest diplomatic spat between the US and China erupted overnight, when China said on Tuesday it had “irrefutable” sovereignty over disputed islands in the South China Sea after White House spokesman Sean Spicer vowed to defend “international territories” in the strategic waterway. Spicer’s first official comments on Monday signaled a sharp departure from years of cautious U.S. handling of China’s assertive pursuit of territorial claims in Asia.
“The U.S. is going to make sure that we protect our interests there,” Spicer said when asked if Trump agreed with comments by his secretary of state nominee, Rex Tillerson. Two weeks ago, Tillerson said China should not be allowed access to islands it has built in the contested South China Sea.
“It’s a question of if those islands are in fact in international waters and not part of China proper, then yeah, we’re going to make sure that we defend international territories from being taken over by one country,” Spicer said.
This led to the now traditional escalating Chinese response, when, as cited by Reuters, the country’s Foreign Ministry spokeswoman Hua Chunying told a regular news briefing on Tuesday “the United States is not a party to the South China Sea dispute”.
Japan’s Land, Infrastructure, Transport and Tourism Minister Keiichi Ishii said on Tuesday the number of foreign visitors to Japan rose around 20% last year to 24.039 million, marking a record figure and a five-year growth streak. Visitors from Southeast Asia notably increased.
Ishii stressed the record number “is a result of measures such as relaxation of visa requirements and improvements of consumption tax exemptions” as Japan considers the tourism industry a pillar of its growth strategy.
Plenty of travelers last year came from China and South Korea, but growth was slow compared with 2015, when visitors skyrocketed 50% on a weak yen and loosened visa requirements. The yen’s temporary surge and earthquakes in Kumamoto Prefecture hampered growth in 2016, as did the Chinese economic slowdown.
Visitors, however, rose significantly from Southeast Asian countries such as Malaysia, Indonesia, the Philippines and Vietnam. Tourism campaigns in those countries helped attract more travelers, as did added airplane routes.
China’s Defence Ministry said on Saturday it had been in talks with the United States about returning an underwater drone taken by a Chinese naval vessel in the South China Sea, but the U.S. was not helping by “hyping up” the issue.
The drone was taken on Thursday, the first seizure of its kind in recent memory, about 50 nautical miles northwest of Subic Bay off the Philippines, just as the USNS Bowditch was about to retrieve the unmanned underwater vehicle (UUV), U.S. officials said.
The Defence Ministry said a Chinese naval vessel discovered a piece of “unidentified equipment” and checked it to prevent any navigational safety issues, before discovering it was a U.S. drone.
“China decided to return it to the U.S. side in an appropriate manner, and China and the U.S. have all along been in communication about it,” the ministry said on its website.
“During this process, the U.S. side’s unilateral and open hyping up is inappropriate, and is not beneficial to the smooth resolution of this issue. We express regret at this,” it added.
U.S. President-elect Donald Trump weighed in to the row on Saturday, tweeting: “China steals United States Navy research drone in international waters – rips it out of water and takes it to China in unprecedented act.”
Without directly saying whether the drone was operating in waters China considers its own, the ministry said U.S. ships and aircraft have for a long period been carrying out surveillance and surveys in “the presence” of Chinese waters.
“China is resolutely opposed to this, and demands the U.S. stops this kind of activity,” it said.
China will remain on alert for these sorts of activities and take necessary steps to deal with them, the ministry said without elaborating.
Earlier, the Global Times, published by the ruling Communist Party’s official People’s Daily, cited an unidentified Chinese source as saying they believed the issue would be resolved smoothly.
The United States says the drone was operating lawfully.
Barron’s Asia: When you look ahead to 2017, what keeps you awake at night?
Amando Tetangco: Short term, the Fed rate hikes — the timing and the magnitude. Of course, this would be related to the policies that the new U.S. administration will adopt. Medium-to-long term, the retreat from multi-lateralism. That is related to the performance of the global economy – the major and various economies, and emerging markets like China.
“Scary stuff” – that’s not the kind of utterance one would expect to hear from a central banker, but in this interview posted on Barron’s Asia with Amando Tetangco of the Philippines, “scary” is just how the central banker defines the increasingly chaotic global environment. Between Donald Trump’s shock election, Brexit, Italians showing their prime minister the door and fallout from quantitative-easing programs, 2016 has been an unusually unruly year. Will 2017 be a kinder, gentler one? Sadly no, says the governor of Bangko Sentral ng Pilipinas.
Barron’s Asia sat down with Tetangco in his Manila office to hear why “scary” days lie ahead.
Barron’s Asia: Many are so happy to see the back of 2016, a year of epochal political upheaval. It’s been a year when lots of financial relationships broke down, with messages from bond yields to stock prices to how oil prices affect markets going haywire. Is the worst over or are we in for rockier times in 2017?
Tetangco: I think it’s more of the latter. You mentioned politics. I think that’s a major consideration right now because it’s causing some uncertainty with this potential rise in populist policies – uncertainty because it is going to be difficult to frame economic policy when something isn’t clear. Among the important considerations in this regard would be Brexit. We don’t know yet how this is going to pan out.
U.S. President Barack Obama’s strategic “pivot” toward Asia, unveiled in 2012, attracted much international attention but did little to tame China’s muscular approach to territorial, maritime and trade disputes. Indeed, with the United States focused on the Islamic world, Obama’s much-touted Asian pivot seemed to lose its way somewhere in the arc between Iraq and Libya. Will President-elect Donald Trump’s approach to Asia be different?
In his first meeting with a foreign leader since his surprise Nov. 8 election triumph, Trump delivered a reassuring message to Japanese Prime Minister Shinzo Abe who, in turn, described him as a “trustworthy leader.” In a smart diplomatic move, Abe made a special stop in New York on Nov. 17, en route to the Asia-Pacific Economic Cooperation summit in Peru, to meet face-to-face with Trump, who shares his conservative, nationalistic outlook.
Today, Asia faces the specter of power disequilibrium. Concern that Trump could undo Obama’s pivot to Asia by exhibiting an isolationist streak ignores the fact that the pivot has remained more rhetorical than real. Even as Obama prepares to leave office, the pivot — rebranded as “rebalancing” — has not acquired any concrete strategic content.
If anything, the coining of a catchy term, “pivot,” has helped obscure the key challenge confronting the U.S.: To remain the principal security anchor in Asia in the face of a relentless push by a revisionist China to expand its frontiers and sphere of influence.
Trump indeed could face an early test of will from a China determined to pursue its “salami slicing” approach to gaining regional dominance. In contrast to Russia’s preference for full-fledged invasion, China has perfected the art of creeping, covert warfare through which it seeks to take one “slice” of territory at a time, by force.
With Obama having increasingly ceded ground to China in Asia during his tenure, Beijing feels emboldened, as evident in its incremental expansionism in the South China Sea and its dual Silk Road projects under the “One Belt, One Road” initiative. The Maritime Silk Road is just a new name for Beijing’s “string of pearls” strategy, aimed at increasing its influence in the Indian Ocean. Meanwhile, without incurring any international costs, China aggressively continues to push its borders far out into international waters in a way that no other power has done.
Indeed, boosting naval prowess and projecting power far from its shores are at the center of China’s ambition to fashion a strongly Sino-centric Asia. Boasting one of the world’s fastest-growing undersea fleets, China announced earlier in November that its first aircraft carrier, the Liaoning, is ready for combat. Such revanchist moves will inevitably test the new U.S. administration’s limits.
Global nickel prices spiked on Tuesday after the Philippines, the world’s top supplier of nickel ore, announced that 20 more metals mines were at risk of being shut down for violating environmental regulations.
The 20 mines, which include the Philippine unit of Australian miner OceanaGold, were ordered to explain why their operations should not be suspended. Environment and Natural Resources Undersecretary Leo Jasareno on Tuesday said most violations were related to siltation, soil erosion, dust emissions and lack of relevant permits.
Jasareno said only 11 of 41 metal mines passed the review, which was conducted from July to August. The government earlier suspended operations at 10 mines for violating environmental regulations.
Suspended mines and those that have been recommended for suspension accounted for 55% of the value of nickel production last year, he said. UBS said shutting three-fourths of Philippine metal mines will cut about 11% of the global nickel ore supply.
The IEA forecast that the surplus in global oil markets will last for longer than previously thought.
Philippine President Duterte called for US troops to leave the southern island of Mindanao.
Relations between Poland and the EU are deteriorating.
Former head of Brazil’s lower house Eduardo Cunha was expelled and banned from public office for eight years.
Brazil’s central bank cut the amount of daily reverse swap contracts sold to 5,000.
In the EM equity space as measured by MSCI, Thailand (+2.2%), Qatar (flat), and Indonesia (-0.1%) have outperformed this week, while Colombia (-4.0%), Brazil (-3.4%), and Taiwan (-3.0%) have underperformed. To put this in better context, MSCI EM fell -2.7% this week while MSCI DM fell -0.9%.
In the EM local currency bond space, South Africa (10-year yield -6 bp), Czech Republic (+1 bp), and China (+1 bp) have outperformed this week, while Hong Kong (10-year yield +20 bp), the Philippines (+18 bp), and Russia (+16 bp) have underperformed. To put this in better context, the 10-year UST yield rose 1 bp this week to 1.69%.
In the EM FX space, ZAR (+0.8% vs. USD), PLN (+0.7% vs. EUR), and CNH (+0.6% vs. USD) have outperformed this week, while MXN (-3.7% vs. USD), KRW (-2.1% vs. USD), and MYR (-1.4% vs. USD) have underperformed.
Perhaps it is not a coincidence that on the 15h anniversary of Sept11, China’s navy announced earlier that China and Russia will hold eight days of naval drills in the South China Sea off southern China’s Guangdong province starting from Monday. The exercises, previewed here at the end of July, come at a time of heightened tension in the contested waters after an arbitration court in The Hague ruled in July that China did not have historic rights to the South China Sea and criticized its environmental destruction there. As reported previously, China vehemently rejected the ruling and refused to participate in the case, and has been aggressively pushing an axis that involves Russia to counteract that regional tension which has seen the US spearhead the anti-China quasi alliance.
The “Joint Sea-2016” exercise will feature surface ships, submarines, fixed-wing aircraft, ship-borne helicopters and marines, the Chinese navy said in a statement on Sunday on its official microblog. The two countries will carry out defense, rescue and anti-submarine operations, as well as “island seizing” and other activities, it added.
Among the numerous exercises, which are meant to send a loud message to the US, Japan, Philippines and other “interested” parties who dispute China’s territorial claims on the artificial islands and reefs in the South China Sea, marines will participate in live-fire drills, island defense and landing operations in what will be the largest operation ever taken together by the two countries’ navies, the statement said.
China announced that it had called the “routine” naval exercise in July, saying “the drills were aimed at strengthening cooperation and not aimed at any other country.” One can almost sense the smile on its face as it wrote this.
As a reminder, China and Russia are veto-wielding members of the U.N. Security Council, and have held similar views on many major issues such as the crisis in Syria, often putting them at odds with the United States and Western Europe. Last year, they held joint military drills in the Sea of Japan and the Mediterranean.
Southeast Asian leaders failed to take a firm stance against China on territorial rows in the South China Sea, as divided opinions kept them from presenting a united front at their gathering here in the Laotian capital Wednesday.
Without singling out China, a statement issued after the Association of Southeast Asian Nations summit said leaders “remain seriously concerned over recent and ongoing developments” in the South China Sea. It noted “concerns expressed by some leaders on the land reclamations and escalation of activities in the area.” The joint communique, released as a chairman’s statement, reiterated that all parties should abide by the United Nations Convention on the Law of the Sea.
Meanwhile, the statement welcomed agreements with Beijing on measures aimed at easing tensions. These include the establishment of a diplomatic hotline for maritime emergencies, as well as the application of the Code for Unplanned Encounters at Sea in the South China Sea.
No mention was made of a July ruling by a U.N.-backed arbitration tribunal denying Chinese claims in the South China Sea, following the pattern set at the ASEAN foreign ministers meeting convened after the decision. This illustrates why the chairman’s statement came out so quickly, when wrangling among ASEAN members often delays statements for days.
It is a tough time to be pursuing economic integration. For the Association of Southeast Asian Nations, accelerating efforts to create a single market can feel like going against the grain, now that the U.K. has opted to leave the European Union and both U.S. presidential candidates are opposing the Trans-Pacific Partnership.
Yet, Christine Lagarde, the managing director of the International Monetary Fund, insists the world needs more trade and joint infrastructure to overcome the inequality that plagues it.
“The world needs more growth,” Lagarde said on Wednesday at the ASEAN Business and Investment Summit (ABIS) 2016 in Vientiane. She noted that 2016 will be yet another disappointing year for the global economy, with growth coming in lower than the pre-financial crisis average of 3.7%.
“Growth,” Lagarde said, “has been too low for too long,” bringing benefits to “too few people.” Trade, she stressed, is a vital part of the solution — not the culprit behind the world’s problems. “Trade is the critical engine of growth.”