BRICS and SCO: Seizing the Eruasian moment

While the West is distracted by the Gulf region and Ukraine, moves are afoot in parts of Asia and Europe to empower emerging regions in the future

IF there is still any doubt that Russia and China are cultivating their global presence together, events in recent days come as a timely antidote.

The five emerging BRICS economies of Brazil, Russia, India, China and South Africa, spanning nearly as many continents, had their seventh summit in Ufa, south-western Russia on Thursday.

Any lingering uncertainty over Moscow-Beijing relations would also have been dispelled by the fact that the BRICS summit was held back-to-back with the 15th Shanghai Cooperation Organisation (SCO) summit on Friday.

The SCO is an association of six countries – Kazakhstan, Kyrgyzstan, Tajikistan, Uzbekistan – and prime movers China and Russia, which also happen to be dominant. Its summit this time saw a growth in membership with the inclusion of India and Pakistan.

The BRICS countries have certain shared concerns and objectives, such as national development and international commerce that need not conform to the strictures of the Washington Consensus.

Strictures imposed by the Bretton Woods institutions, the World Bank and the International Monetary Fund (IMF), have bled already anaemic economies and destabilised countries in the developing world on the basis of ideological prescriptions.

At the same time, these Western-dominated financial institutions failed to give emerging economies, epitomised by China, their rightful voice according to their global economic importance. Thus a cash-rich China has had to evolve financial institutions of its own.

Such multilateral efforts are best done together with like-minded nations. So besides BRICS, SCO countries that span Eurasia – with a collective focus on Central Asia and now also South Asia – have come together to develop alternative funding agencies.

In addition to the Beijing Consensus of rapid growth that is politically conscious, defined and directed, there is now the “Shanghai Spirit” of mutual respect, trust, benefit and consultation with equality.

These values broadly mirror the Five Principles of Peaceful Coexistence adopted by China and India (Panchsheel Treaty) two generations ago.

But even as SCO membership sees steady growth, it is clear enough that its main drivers and those of BRICS are China and Russia. By dint of sheer size and capacity, particularly those of China, Beijing and Moscow have come to lead the rest.

The way Washington has managed to alienate China and Russia at the same time has helped develop their partnership. Following years of US criticism of both countries, the US navy chief lately branded Russia as the greatest threat while presidential hopeful Hillary Clinton accused China of hacking US sites.

Russia and China were thus prodded by the US to work more closely together. US foreign policy is often said to be defined by domestic interests, or perceived interests, and this is seldom more true than when a presidential election campaign approaches.

However, improving relations between China and Russia are not thanks solely to US posturing. Moscow and Beijing are not without common interests of their own.

On Thursday, Russian Foreign Minister Sergei Lavrov rallied member countries of both BRICS and the SCO to fight terrorism together. International terrorism today is a clear and present danger, a substantive threat and a common scourge requiring close cooperation particularly among neighbouring countries.

While BRICS’s terms of reference are more economic, the SCO’s are broader and more strategic. Within BRICS, member nations have formed a Business Council and formulated an Economic Partnership Strategy. Key sectors are manufacturing and infrastructure besides clean energy and agriculture.

But the star attraction at Ufa was the launch of the New Development Bank (NDB), also known as the BRICS bank, with an initial capital of US$100bil (RM378.2bil).

To be based in Shanghai with its first president in India’s K.V. Kamath, the NDB would be raising funds locally and internationally. It is set to issue its first loans next April. This is among four new financial institutions championed by China, the others being the Asian Infrastructure Investment Bank, the Silk Road Fund and the SCO’s Development Bank.

In the SCO context, member countries had made strides in the energy, telecommunications and transportation sectors. Now such gains needed to be affirmed while also developing opportunities in agriculture. Russia places a special priority on the Eurasian Economic Union (EAEU), which also covers Armenia, Belarus, Kazakhstan and Kyrgyzstan, with Russia dominant. China has prioritised its Silk Road Economic Belt initiatives linking Asia with Europe.

Working together, the EAEU and the Silk Road projects would be promoted jointly by the SCO. The proposed financial institutions, to which China would be contributing the most, would finance these and other related projects.

The fortunes of BRICS economies however have dipped in recent months. The Ufa summit did not deny the current challenges but chose to emphasise the positives.

Although numbering just five countries, the BRICS group had contributed half of the world’s economic growth over the past decade and produced 20% of total global output. No less than IMF findings show that until 2030 at least, BRICS growth would outperform developed and other emerging economies.

For Russia, the plans and initiatives have a more immediate tactical purpose – to alleviate economic pressures brought on by Western sanctions against its moves in Ukraine.

For China, the longer-term strategic purpose covers efforts to facilitate more trade, expedite internationalisation of the renminbi and generally build and solidify China’s global stature.

In investing massively in the new financial institutions however, Beijing will be competing against the IMF, the World Bank and the Asian Development Bank.

In doing so it will have to be more borrower-friendly, minus the strictures so synonymous with the Western-run rivals. The official word is that these new lending agencies are not going to challenge the Bretton Woods institutions, but the practical effect is nonetheless to offer borrowers more choice.

To substantiate the claim that the new institutions will neither rival nor replace the older ones, China is also calling for more open international accountability of the IMF and the World Bank. Somehow that may still not come as comforting news to Western power brokers.

But after all the platitudes and hurrah in Ufa, there are now the realities to contend with.

Strategic analysts prefer to gauge the viability of regional institutions based on the common interests shared among member states. In this respect, the future of BRICS may seem less promising than the SCO’s. Precisely because of the broad spread of the BRICS countries, there is little they have in common besides an affinity with alternative modes of development.

Their economic growth has been significant, but achieved independently of other BRICS nations and – except for China – with little support from (integration with) other countries in their respective regions.

The obvious question arises as to how sustainable can BRICS as an entity be. The fortunes of international associations depend on more than goodwill and bravado.

The SCO by comparison holds more prospects for success. By comprising a contiguous region that includes Eurasia and a substantial chunk of the Asian land mass, cross-border concerns are shared and can be attended to jointly.

Furthermore, practical projects like the Silk Road Economic Belt and the EAEU require constant attention, commitment and contributions from the 60 countries and regions that are involved.

This may mean more obligations to begin with, but consistent maintenance will ensure better management and success.

By Bunn Nagara Behind the headlines

> Bunn Nagara is a Senior Fellow at the Institute of Strategic and International Studies (ISIS) Malaysia.

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Chinese President Xi Jinping (C, front) poses for a group photo with the delegates attending

 Asian voice carries greater weight now

Big boost for Asia with the Asian Infrastructure Investment Bank (AIIB) launch, a positive step!

Financing required as Asia remains with looming infrastructure needs

Chinese President Xi Jinping's (C-R) meeting with the members of the Asian Infrastructure Investment Bank (AIIB) in the Great Hall of the People in Beijing, China 24 October 2014. 21 Asian countries are the founding members of the AIIB, an initiative by China. - EPA

THE launch of the US$50bil Asian Infrastructure Investment Bank (AIIB) is a positive step for the development of Asia where large areas remain with looming infrastructure needs.

There has been good work done by other international bodies, but due to the vast financing needs of the region, there is always place for another major bank to put in the good work.

The AIIB was launched in Beijing last Friday at a ceremony attended by Chinese finance minister Lou Jiwei and delegates from 21 countries including India, Thailand and Malaysia, said Reuters.

It aims to give project loans to developing nations with China set to be its largest shareholder with a stake of up to 50%.

In a speech to delegates after the inauguration, Chinese President Xi Jinping said the new bank would use the best practices of the World Bank and the Asian Development Bank, said Reuters.

The authorised capital of the bank would be US$100bil; the AIIB would be formally established by the end of 2015 with its headquarters in Beijing.

There was a huge demand for infrastructure investment in Asia; the Asian Development Bank (AIIB) put that at around US$8 trillion of investment during the current decade, said the Singapore Business Times (SBT) in a report earlier.

A principal motive in proposing the AIIB was to invest part of China’s US$4 trillion foreign reserves in higher-yielding assets than US Treasury bills, said SBT, also quoting diplomatic sources.

In addressing the potential rivalry between the AIIB and other international aid bodies, one has to look at the big picture in what will benefit Asia in the long run.

If carried out successfully, infrastructure development across Asia will help narrow the gap between the more and less developed areas.

China is already in partnership with India to develop infrastructure and industrial parks in India.

Spreading its infrastructure investments over the rest of Asia would be a natural step towards that development.

After warning on excessive speculation in currency and debt markets, the Reserve Bank of India (RBI) is looking at the low hedging levels by companies and the currency risks they face.

If indirect pressure on companies via their bankers failed, the RBI may consider forcing companies to submit detailed financial information through their lenders, said Reuters, quoting bankers who met with RBI officials earlier this month.

The RBI’s warnings signalled its concern that unhedged firms could be a vulnerable link should global markets buckle, said Reuters.

The central bank had worked hard to build up its defences after India last year weathered its worst rupee crisis in two decades, said Reuters.

Hedging, meanwhile, is expensive because India’s elevated interest rates mean forward premiums are high, said Reuters.

The RBI is keeping tabs on every aspect of companies’ exposure to currency risks.

After working hard to build up its defences on the rupee, the RBI would not want some other segment of the capital market to fail to keep pace.

The bosses at Royal Bank of Scotland (RBS), which is still under government ownership, were dealt an embarassing blow when their proposal to pay high bonuses was shot down.

The Treasury stopped RBS from paying some staff bonuses worth twice their salaries, said Reuters, quoting James Leigh-Pemberton, chairman of UK Financial Investments (UKFI) which controls the taxpayer-owned 79% of RBS.

UKFI had recommended that RBS be allowed to pay that level of bonus to retain staff and attract talent, said Reuters.

Retention of staff is a dicey issue when it involves banks that are still in the throes of reform.

It is a Catch 22 situation where these banks are still experiencing falling revenues and low share prices.

The situation will probably improve when these banks can reap the fruits of their revamp and get off the hook with government owning the stake.


By YAP LENG KUEN... PLAIN SPEAKING  The Star/Asia News Network
Columnist Yap Leng Kuen looks forward to a more balanced infrastructure development in Asia.

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Currency Wars: the Unloved Dollar Standard from Bretton Woods to the Rise of China

A yen for the unloved dollar standard

Tan Sri Andrew Sheng gives analyses the populist and expert views of how the yen measures against the “unloved US dollar standard”.

TRAVELLING around the South-East Asian region last week, the mood was all about currency fluctuation and impact on markets.

Things do look different when the Thai stock market daily turnover touches US$2bil and is higher than that of Singapore. But the headline that Thai growth slowed quarter-on-quarter but still grew 5.3% year-on-year gave rise to fears that export-driven economies in the region are beginning to slow.

The guru on the dollar relationship with the East Asian currencies has to be Stanford Professor Ronald I. McKinnon. McKinnon made his name with his first book, Money and Capital in Economic Development (1973), where he took forward the pioneering work of his Stanford colleague, Edward S. Shaw on the phenomenom of “financial repression” the use of negative real interest rates as a tax to finance development. His second book, The Order of Economic Liberalization: Financial Control in the Transition to a Market Economy (1993), was an influential textbook on how to get the sequencing of financial and trade reform right.

McKinnon's second area of expertise is the international currency order, explaining the macro-economics of the US dollar and its relationship with other currencies, particularly the yen and other East Asian currencies. The trouble was that his analysis did not “jive” with the populist policy view that “revaluing the other currency” would reduce the US trade deficit.

This began with the concern in the 1970s that the US-Japan trade imbalance was due to the cheap yen relative to the dollar. The Plaza Accord in 1985 was the political agreement to strengthen the yen and depreciate the dollar. From 1985 to 1990, the yen appreciated from 240 yen to 120 yen per dollar, followed by a huge bubble and two lost decades of growth.

In his important new book, McKinnon explains some uncomfortable truths with regard to what he called The Unloved Dollar Standard: From Bretton Woods to the Rise of China, Oxford University Press. The dollar standard is unloved because of what one US Treasury Secretary told his foreign critics of US exchange rate policy “our dollar, your problem”.

McKinnon argues that US monetary policy has been highly insular, despite globalisation making such insularity obsolete. He thinks that three macroeconomic fallacies were responsible the Phillips Curve Fallacy; the Efficient Market Fallacy and the Exchange Rate and Trade Balance Fallacy. In the 1960s, the US belief in the Phillips Curve that higher inflation generated lower unemployment resulted in the US pushing the Europeans and the Japanese to appreciate their currencies. When they refused, Nixon broke the link with gold in 1971.

In the Greenspan era (1987-2008), there was a strong belief in Efficient Markets, which encouraged global foreign exchange liberalisation, despite high volatility. But the most enduring fallacy is the belief that the exchange rate's role is to correct trade imbalance, hence the Japan bashing in the 1980s and the China bashing in the 21st century in order to push for their exchange rates to appreciate in order to reduce the US trade deficit.

McKinnon considers the third fallacy as the most pernicious conceptual barrier to a more internationalist and stable US monetary policy. Chapter 7, which is written by his student Helen Qiao, gives a robust argument why the third fallacy is wrong. She argues that while a depreciation of an insular economy with no net foreign liability may result in improved trade balance, it is not clear whether the depreciation of the dollar with a large net global liability is to the benefit of the United States.

In the case of Japan, a rising yen since the 1970s did not “cure” the Japanese trade surplus with the US. Between 2005 to 2007, when the yuan appreciated, the Sino-US trade surplus doubled. Qiao worries that China could follow Japan's steps into deflation and even a zero-interest rate liquidity trap if the yuan continues to appreciate.

The central thesis of this book is that the US should recognise that the dollar standard is actually a global standard, with many privileges and responsibilities. Depreciating the dollar is not to the US advantage, because it would only lead to future inflation. Instead, the US should concentrate on improving its competitiveness and manufacturing prowess. This requires having positive real interest rates.

The logic of the McKinnon thesis is irrefutable, although his American colleagues may find the conclusions somewhat unpalatable. The logic is that whoever maintains the dominant currency standard must maintain strong self-discipline, because the benchmark standard cannot be on shifting sands. If the dollar is weak because the US economy is weak, then all other currencies will be volatile, because they float around an unsteady standard.

For small open economies that maintain large trade with the US, having dollar pegs require them to keep their economies flexible and they must maintain fiscal and monetary discipline. This is the experience of the Hong Kong dollar peg.

Flexible exchange rates have not resulted in countries adjusting their overall competitiveness. What happened instead is that flexible exchange rates often allow governments to run “soft budget constraints” and try to depreciate their way out of the lack of competitiveness.

It is the refusal to make structural reforms that cause overall competitiveness to decline and these economies then go into a vicious circle of over-reliance on the exchange rate to keep the economy afloat. This is not sustainable, since if everyone tries to devalue their way out of trouble, rather than making structural adjustments, then the world will enter into a collective deflation.

The solution to this requires the US and China to work cooperatively at the monetary and exchange rate levels. This makes a lot of sense, which is why perhaps presidents Barack Obama and Xi Jinping are meeting soon to achieve rapport.

Anyone who wants to understand currency wars must read this book. It is an honest and frank appraisal of how we need common sense to get out of the current fragile state of global currency arrangements.

THINK ASIAN By TAN SRI ANDREW SHENG
■ Tan Sri Andrew Sheng is president of the Fung Global Institute.

The Philippines recklessness killing Chinese Taiwan fishermen

The killing of 65-year old Taiwanese fisherman Hung Shih-cheng is not the first incident involving Philippine Coast Guard shooting at Taiwanese fishermen. In 2006, another fishing boat was attacked, which led to the death of 67-year-old captain Chen An-lao. 




The Philippines initially denied the shooting, then admitted its coast guard did fire at the fishing boat. Recently, it agreed to make an apology.

Abigail Valte, spokeswoman for the presidential office of the Philippines declared that "The Taiwanese fishing boat attempted to ram our coast guard ship. It was without a doubt a provocative action."

Armand Balilo, Philippine coast guard spokesman detailed the story on the same day. According to the Manila Times, Balilo emphasized the incident happened in Philippine waters. He said the coast guard quickly left the area after they saw a third vessel, "a big white ship," besides the two Taiwan fishing boats they tried to approach, and felt threatened.

The actions of the Philippine coast guard narrated by both spokespersons could be interpreted from two perspectives.

For one thing, although the Philippines claimed the incident took place in Philippine waters, the Philippines doesn't have competent jurisdiction over the region, otherwise, the coast guard would not have been allowed to beat a hasty retreat.

It also shows that the Philippine authorities are very supportive of stirring disputes in disputed regions.

The Philippine government argued that the boat was attacked in waters where claims of rights of two sides overlap. In a region with controversial rights issues, each could come up with reasonable queries for the other.

The rights of Taipei and Manila in the disputed regions are undifferentiated. In past years Taiwan authorities didn't take enough action over the Philippines seizing and even killing Taiwanese fishermen, but that doesn't mean the Philippines can violate the international laws.

According to the United Nations Convention on the Law of the Sea (UNCLOS), coastal countries have the right of hot pursuit in their territorial waters. It grants coastal states the right to pursue and arrest ships escaping to international waters.

According to the Article 111 of the UNCLOS, "the hot pursuit of a foreign ship may be undertaken when the competent authorities of the coastal state have good reason to believe that the ship has violated the laws and regulations of that state. Such pursuit must be commenced when the foreign ship or one of its boats is within the internal waters, the archipelagic waters, the territorial sea or the contiguous zone of the pursuing state, and may only be continued outside the territorial sea or the contiguous zone if the pursuit has not been interrupted."

As a nod to the territorial principle, "the right of hot pursuit ceases as soon as the ship pursued enters the territorial sea of its own state or of a third state."

Hot pursuit is the most powerful right that international law grants to coastal countries over illegal operations of foreign ships in their waters.

However, the recent incident took place at 20 degrees north latitude and 123 degrees east longitude. It's not in the territorial waters of the Philippines, but in the overlapping region of exclusive economic zones.

The Philippines are not qualified to exert the right of hot pursuit in the region.

Even it could, the hot pursuit right is not applied to attacks by heavy weapons like the machine gun used in the latest case.

When international laws and principles that we think can protect us are violated yet again, we need to calm down and think carefully about how to deal with the other side.

By Ju Hailong
The author is a senior research fellow of the Institute of Southeast Asian Studies at Jinan University based in Guangzhou. opinion@globaltimes.com.cn

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President Xi: Russia ties ensure peace; foreign debut illuminates China's 'world dream'

Chinese President Xi Jinping and his wife Peng Liyuan arrive in Moscow



Freshly elected President Xi Jinping chose the Russian capital as the first foreign city he will visit as China's head of state, as Moscow and Beijing move toward a full-fledged partnership for the next decade.

On the global arena, both Russia and China have a similar approach, and Jinping's visit has been interpreted as a sign that the new Chinese administration is keen to re-inforce ties with Russia.

In the past, the two countries had a difficult and politically ambiguous relationship and were once Cold War rivals but their international interests are becoming more aligned.

The two countries have often jointly used their veto powers at the United Nationa Security Council, most recently with issues related to the Middle East, where they have blocked Western-backed measures regarding the Syrian conflict.

China and Russia also share a sizeable border and have tried to bolster their regional clout as a counterweight to a United States that is 'pivoting' towards Asia.

And as well as being permanent members of the Security Council, the two countries have worked shoulder-to-shoulder on the Shanghai Cooperation Organization and the so-called G20.

President Xi Jinping will also be talking trade on his visit in Moscow. The two countries have burgeoning business interests.

Bilateral trade has more than doubled in the last five years and reached $83bn in 2012 but the volume of trade is still low compared to their other trade partners. It is five times smaller than Russia's trade with the European Union, and also far smaller than China's trade with the United States; but the trade in energy is seen as a growth market for the two countries.

Russia is of course the world's largest energy producer and China the biggest consumer. The two countries are in discussion about a gas pipeline that could eventually deliver 38bn cubic metres of Russian gas a year to China

So, how significant is this visit? Will it shape a new relationship between Moscow and Beijing?

To discuss this Inside Story, with presenter Hazem Sika, is joined by guests: Victor Gao, the director of China National Association of International Studies, who was also a former China policy advisor; Dimitry Babich, a political analyst at Russia Profile magazine; and Roderic Wye, a China analyst at Chatham House and senior fellow with the China Policy Institute at Nottingham University.

"Obviously there is a lot of substance [in the meeting] about the energy relationship, there are big issues to talk about on the international stage - not least, North Korea and the problems there - but also it is an important symbol to show for both Russia and China that they have independent foreign policies ... and that they are not beholden to the United States in any particular way."

Source:Al Jazeera - Roderic Wye, China analyst at Chatham House

 Xi's foreign debut illuminates China's "world dream"
 
On Friday, Chinese President Xi Jinping embarked on his first overseas trip since taking office last week, and experts here believe the trip will clarify Xi's recent references to China's "world dream."

Shi Yinhong, a professor of international relations at Renmin University of China, said, "The trip will reveal some important features of Xi's concept of world order."

"From the destinations of Xi's first foreign trip, we can tell that China is committed to promoting democratization in international relations as well as a more just and reasonable international order and system," he said.

In a joint interview on Tuesday with reporters from BRICS countries (Brazil, Russia, India, China and South Africa), Xi said China hopes that countries and cultures around the world will carry out exchanges on equal footing, learn from each other and achieve common progress.

He also voiced his hope that all countries will make joint efforts to build a harmonious world featuring enduring peace and common prosperity.

"This is Xi's version of China's 'world dream,'" Shi said.

"It is in line with the common aspirations of people from different countries and closely related to the 'Chinese dream' put forward by Xi," he said.

Pursuing the "Chinese dream" of the great rejuvenation of the Chinese nation is conducive to realizing the "world dream," and if the "world dream" comes true, it could offer a sound external environment for the country to achieve the "Chinese dream," Shi said.

NEW TYPE OF INTER-POWER TIES

Based on Xi's first foreign trip and his interactions with other foreign leaders in the past week, analysts believe China is committed to developing a new type of "inter-power relations" in an all-around and open way, with hopes of breaking the zero-sum theory by promoting win-win cooperation.

Unlike past inter-power ties that have mainly targeted certain world powers, China now advocates a new type of cooperative relationship among all major powers, including leading powers among developing countries, said Ruan Zongze, deputy head of the China Institute of International Studies.

"We should adopt a new and open attitude toward all powers," he said, adding that the word "new" here means regarding the development and growth of other countries as an opportunity for one's own country.
"Only by doing this can state-to-state relations develop in a sound and sustainable way," he said.

In the joint interview Tuesday, Xi said his visit to Russia shows the "high level and special nature" of the comprehensive strategic cooperative partnership between the two countries.

Ruan said China's relations with Russia, the first leg of Xi's trip, have already reached a stage featuring a "high level of mutual trust," with both countries seeing each other's development as an opportunity.

"The zero-sum mentality, namely believing one party's success means the other's failure, has been one of the major factors hampering mutual trust and creating conflicts between major powers," he said.

Ruan pointed out that although Sino-Russian relations have seen marked progress in the past decade, this does not mean there are no problems in the bilateral relations.

"Both sides, however, agree not to let these differences restrain the development of bilateral relations," Ruan said.

MAIDEN TRIP NOT TARGETING A THIRD PARTY

Analysts here also point out that Xi's maiden overseas voyage as China's head of state is not of an exclusive nature and does not target a third party.

Zhang Yuanyuan, former Chinese ambassador to Belgium, said China's foreign policy is inclusive.

During his nine-day tour, Xi is scheduled to pay state visits to Russia, Tanzania, South Africa and the Republic of Congo. He is also expected to attend the fifth leaders' summit of BRICS countries in Durban, South Africa.

Zhang said the visits involve multiple factors, including a world power and a neighboring country, developing countries and multilateral cooperation, all of which have been among China's foreign policy priorities.

During the week since Xi was elected president, other Chinese leaders have received important guests and maintained contact with leaders from other countries.

In a phone conversation on March 14, Xi and U.S. President Barack Obama both promised to make efforts to achieve the goal of building a new type of inter-power relationship.

While meeting with U.S. Treasury Secretary Jacob Lew here on March 19, Xi urged the two nations to objectively view each other's development stages, respect each other's interests for further development and regard the other party's opportunities and challenges as its own.

Zhang pointed out that building a new type of inter-power relationship and exploring ways for the two major powers to get along with each other could straighten out Sino-U.S. relations and break the historical curse in which "conflicts between major powers are inevitable."

Meanwhile, Ruan Zongze dismissed concerns about Xi's itinerary, saying such concerns are "totally unnecessary."

"The reason for China to pursue the building of a new type of inter-power relationship is that it will not embark on the path of alliance," he said.

"The age of old-school alliances or jointly targeting a third party has long passed," Ruan said.- Xinhua