Challenges in South China Sea, sophisticated diplomacy needed

Illustration: Liu Rui/GT

Sophisticated diplomacy needed to tackle challenges in South China Sea

Philippine President Benigno Aquino III will seek the congressional approval of the proposed national budget for 2016 next week. In the budget proposal, the defense budget is $552 million, less than one 200th of China's military spending for 2015. The size of the Philippine defense budget may surprise many Chinese.

The defense spending of Vietnam is much higher than that of the Philippines. It reached $4 billion in 2014, but is still incomparable to China's. The GDP of Vietnam is less than $200 billion, much less than that of China's Guangxi Zhuang Autonomous Region which borders Vietnam. This will definitely constrain its overall scale of defense budget.

Though judging from the military spending of the Philippines and Vietnam, we can perhaps understand that the two countries won't pose a serious military threat to China in the South China Sea. But they are very likely to make a fuss and lean to external actors to intrude China's sovereignty and interests in the South China Sea.

The Philippines, facing a China with expanding maritime strength, feels anxious. But it is still greedy in its territorial claims. It holds a complex and sensitive mentality toward China.

Propaganda that China bullies small South China Sea claimants can spread easily, especially when Washington and Tokyo meddle backstage. China needs to do a lot of work to convince people of historical facts such as the origin of the nine-dashed line and that China holds sovereignty over the Nansha Islands. However, it is much easier to frame China as attempting to exert "hegemony" in the South China Sea.

China has to deal with the Philippines and Vietnam with enough patience and at the same time respond to distorted interpretations from the US and Japan about China's reef-building. The troubles are mostly caused by Manila and Hanoi, while strategic pressure mainly comes from the US.

The US and Japan have teamed up with the Philippines. China is not only facing several vessels and coast guard ships of the Philippines. Rather, China has been striving to figure out how to deal with the above issues and its own stakes in such a complicated scenario.

Obviously, China does not want to bear such reputations as "bullying small countries" or "seeking hegemony in the South China Sea." An impression of a peacefully rising China fits the country's global strategy. But if the Philippines and Vietnam, instigated by the US and Japan, cause a nuisance and step over China's red line, China will not remain restrained.

The Philippines and Vietnam are well aware of this. With China's increasing capabilities in the South China Sea, they will behave more cautiously.

The rivalry in the South China Sea is a highly technical diplomatic game and strategic contest. The public opinion should lend support, and Chinese decision-makers must be specialized diplomatic and strategic institutions. The Chinese public needs to know the real pattern of strength in the South China Sea and acknowledge that China has ample room to maneuver over the Philippines and Vietnam.

The strategy of the Philippines is to whine to the world about China's "bullying" so as to hinder China's global strategy. Hence it has formed an accord with Washington and Tokyo.

China has succeeded in its land reclamation projects on the Nansha Islands. This is an outcome of China's diplomatic specialization. It is reasonable and legitimate. The US and the Philippines can do nothing about it despite voicing objections.

The South China Sea should be an area where Chinese society can find confidence after experiencing long-time sufferings and setbacks. A big country not only owns its strength, but also has a broad mindset and wisdom to count its losses and gains.

Daniel Russel’s S.China Sea remarks absurd

US Assistant Secretary of State Daniel Russel Tuesday criticized China's policy on the South China Sea in Washington. These comments may sound reasonable to nonprofessionals but are not even worth refuting by legal experts.

Russel claimed that China misunderstood US neutrality and stressed that Washington only maintains neutrality with regard to the competing claims in the area. But when it comes to "adhering to international law," the US will not be neutral and will "come down forcefully." The US backs the Philippines' lawsuit to the international maritime tribunal and said the arbitration will be binding for both China and the Philippines.

It is necessary for the US to elaborate what article of international law that China's land reclamation activities in the Nansha Islands have violated and what forceful coercion China's engineering ships have done to neighboring countries.

By claiming both China and the Philippines need to accept the decision of the arbitral tribunal, Russel has deliberately misguided public opinion. Despite joining the UN Convention on the Law of the Sea, China submitted a declaration in 2006, stating that China does not accept any of the procedures provided for in Section 2 of Part XV of the Convention with respect to all the categories of disputes referred to in Article 298 of the Convention, which includes territorial disputes. Thirty-six countries, including South Korea, have made similar statements.

It's perfectly legal for China not to accept the arbitral tribunal's decision; in fact, forcing China to accept or abide by the arbitration result is illegal. Russel claimed the South China Sea issue has caused serious conflict between China and the US. But it needs to be pointed out that the conflict is at China's door, which is 12 time zones away from Washington. The conflict is actually imposed by Washington on us.

There are numerous claimants to the Nansha Islands. It's impossible for China to give up its sovereign claim; however, it didn't attempt to militarily expel Manila and Hanoi from the islands they illegally occupy. The Philippines deliberately stranded an old navy ship in China's Ren'ai Reef in 1999. It initially pledged to salvage the ship, but later on rascally reneged on this by reinforcing the ship. China has exercised restraint over the years. But Washington openly supports Manila's occupation of Ren'ai Reef. Where is the justice?

Chinese people never actually bank on Washington's neutrality, which doesn't exist at all. The US's South China Sea strategy serves its geopolitical purpose. Through lending support to Manila and Hanoi, it can realize its rebalance to the Asia-Pacific. South China Sea claimants have maintained the peace despite conflicts. The future situation will depend on how Sino-US competition develops, especially what intentions the US has in the South China Sea. As long as Washington doesn't want the tension to escalate, there will be hope for peace.

Swift’s South China Sea flight can only fool Manila

During his visit to the Philippines Saturday, Scott Swift, newly appointed US commander of the Pacific Fleet, joined a surveillance mission on board a P-8A Poseidon plane to observe the aircraft's full range of capabilities in the South China Sea. The US Navy released photos of Swift taking a bird's eye view of the South China Sea, but did not mention if the aircraft had flown over disputed areas.

The Philippine side soon welcomed Swift's move, believing it was a gesture from its US ally to aid its claims to the disputed territories with China.

Swift must have felt that he was the overlord of the South China Sea, as he merely flew over the area but the flight got various interpretations from the Philippine side and regional observers. Washington is an external player that can only exert limited influence to strike a balance over the South China Sea issue. That the US could extend its authority by "inspecting" the South China Sea would only be the illusion of a small number of Americans and Filipinos.

We have noticed that the US Navy has kept much lower key than two months ago when it released details that its reconnaissance plane had approached the Chinese islands under construction. It is estimated that the US will not behave inappropriately in the South China Sea before the meeting of the US and Chinese heads of states in September. But in the long run, its competition with China in the area is unavoidable.

China is accustomed to the frequent petty actions of the US in the South China Sea and is getting itself ready for the troubles stirred up by the US there. China is also improving its abilities in coping with the issue as well.

Most observers hold that while the US wants to strengthen the allies' trust, it does not have the excuse and determination to square off with China. Hence the contradictory and chaotic messages it conveys. Most importantly, Washington does not admit the facts. China has exercised much restraint in the South China Sea and its land reclamation does not violate international law, leaving others no excuse to prevent the move. But the US puts on a posture of involvement while it can unlikely take any substantial action, putting itself in an awkward position.

Manila is even worse. How can it be possible that the Philippines' disputes with China are resolved by the US? Does Manila think that China would acknowledge its unreasonable territorial claims after Swift's flight or if the US sends more navy ships? It would be overly simplistic if Manila thinks this way.

Recently a fictional post circulating on Chinese social media reflects the mentality of the Chinese public that China will not start up conflicts with the Philippines. But if Manila oversteps the red line for any reason, Beijing will strike back regardless of Washington's attitude.

It is understandable that the US hopes to maintain its clout in the area and the Philippines wants to counter China by roping in the US. But they need to mind the boundaries. The Philippines needs to be cautious in the area, as China has been.

Sources: Global Times

Penang property in steady demand, will the housing market facing a glut?

Investment-friendly: A file picture shows visitors at the recent Star Property Fair in Penang. Affin Hwang believes that property developers with land bank and established presence in Penang will benefit from rising property demand.

PETALING JAYA: An increasing population in Penang coupled withlong-term property demand will be supported by major projects driven by public-private partnerships (PPPs), according to Affin Hwang Capital Research.

Among the PPP projects, the largest being the RM27bil Penang Transport Master Plan (PTMP), could be awarded by September. Singapore’s Temasek Holdings also has a proposed joint venture with Penang Development Corp (PDC) to develop an RM11.3bil business process outsourcing centre and an international technology park.

The research house said in a report that its top stock picks for infrastructure and property exposure to Penang were Gamuda Bhd, IJM Corp Bhd, and Eastern & Oriental Bhd (E&O).

It said the Penang government had pushed for the economy to move up the value chain by encouraging knowledge-intensive and innovation-led manufacturing and services.

“Property development companies such as E&O, Eco World Development Group Bhd and Ewein Bhd are embarking on new large-scale mixed development projects in the state with total gross development value (GDV) of RM60bil,” it added.

E&O has the highest exposure to Penang with property development projects in the state comprising 77% of GDV totalling RM34bil. The multi-billion ringgit PTMP has seen keen interest, with six consortiums submitting bids to be the project delivery partner (PDP) while Affin Hwang Capital understands that discussions for the joint venture with PDC were in the final stages.

“The joint development agreement is expected to be inked in July or August. Work on the BPO Prime is expected to start in the first quarter of 2016.” The entry of Temasek would also attract more Singapore companies and other foreign investors to Penang.

“We believe Gamuda will likely be appointed the PDP for the project. Also, being one of the largest contractors in Penang, IJM Corp is expected to win a substantial portion of construction work for the PTMP,” it said.

“The Penang government also managed to convince Hewlett-Packard to choose Penang as the location to set up its new RM1bil manufacturing facility instead of Iskandar Malaysia.”

The plant would produce high-speed inkjet printer heads for the global market.

A ready pool of skilled workers out of a total workforce of 797,700, developed infrastructure, established information technology eco-system, and consistent and investment-friendly state government policies could be the reasons why Penang continue to be attractive compared with Iskandar Malaysia.

The island’s popularity with tourists, diverse culture, historical attractions, beautiful coasts and famous cuisine were added attractions.

“We believe property developers with land bank and established presence in Penang will benefit from rising property demand in the long run.

“Job creation from rising investments in industrial and service sectors should support population growth from organic expansion and inbound migration,” said Affin Hwang Capital Research.- The Star/Asian News Network

The housing market in Penang today

With an abundance of newly built high-rise condominiums, is Penang facing a property glut?

Malaysia’s population crossed the 30 million mark in February 2014. According to the Population and Housing Census 2010, about three in 10 people fall in the 20-40 years old age group – the one most likely to be firsttime home buyers. By 2020, that group is projected to grow to 11.3 million. In Penang, the current estimate for this age group is at 0.6 million, or 36% of the state population. The average property price in Penang currently stands at RM336,521. Even with the 50% stamp duty cut, middle-income earners with two dependents can only afford houses priced at RM300,000 and below [1], and looking at the current national average price for all types of properties, RM300,000 is well below the average (Figure 1).

Besides increasing prices, public concern is on whether or not the property market is overheated; many suspect that currently there is an oversupply of properties, especially in Penang. The current existing stock of residential properties can house more than six people per household (Table 1), and as smaller households are the global trend for developed and developing countries, statistics indicate that there is still a growing demand for housing.

Source: The Malaysian House Price Index Q1-Q2 2014, National Property Information Centre (NAPIC).

To meet market demands and expectations, a steady addition of incoming and planned supply to the existing property stock in Penang is still expected in the near future. Based on the population projection given by the Department of Statistics for Penang (1.75 million in year 2020), Malaysia Property Incorporated found that there is an oversupply of about 45,000 units this year and 22,000 units by 2020 [2], assuming that the average household size stays at 3.98 people and housing supply stops after 2015.

A growing demand for housing with a potential oversupply of properties sounds contradictory enough, begging the question: will the potential glut be for a certain type of residential property, and are the right kinds of properties being built in the right areas?

Whither the low-medium cost housing?

On Penang Island, the most densely populated district is in the north-east; the area encompassing George Town, Jelutong, Air Itam, Gelugor, Tanjung Tokong and Tanjung Bungah still remains one of the most sought-after places for property. Despite limited land spaces, incoming and planned unit supply to this district has seen no sign of abating.

However, in recent years, the south-west of the island, where the airport and the industrial area are located, has become the hottest investment spot for bigname developers. The highest growth of property supply on the island is expected to be in this area, with the likely addition of 17,518 incoming units (33.3%) and 17,058 planned units (32.4%).

Source: Property Market Report First Half 2014, NAPIC and own calculation.

On the mainland, the more populated central Seberang Perai (SP) is expected to see more new housing units in coming years, compared to north and south SP. The opening of the Second Penang Bridge and the announcement of a series of development projects in Batu Kawan, including IKEA and branch campuses of University of Hull and KDU University College, certainly give south SP a huge appeal for future housing development. So far, the housing demand there has not jumped markedly. However, as a prelude, following the announcement of the projects, land prices in south SP skyrocketed to between RM50 and RM60 per sqft, compared to previous prices of RM8 to RM9 per sqft [3].

Within the high-rise category, there is a trend of developers preferring to build higher value condominiums (Table 3). In coming years, especially on Penang Island, a higher proportion of new highrise units will come from condominiums. Although the construction of low cost flats is emphasised by both the federal government and the Penang state government, the supply of such units is slow and short in coming – at just half the number of the future supply for condominiums. The future supply of medium cost flats also cannot catch up with the supply rate and units of condominium, indicating that condominium sales seem more profitable for developers and that there may be an oversupply of higher value high-rise units in the near future.

Probably as the result of an influx of affluent local or foreign buyers, the supply for bungalows (detached) units has increased significantly. Service apartments have also become a new niche in the property market; the number of service apartment units is expected to double.

Source: Property Market Report First Half 2014, NAPIC and own calculation.

The island factor

Penang Island’s attractiveness as a place to invest or settle in can be seen from its property prices; one condominium unit on the island normally costs more than twice or thrice that on the mainland. The same goes for the price of landed properties (Table 3).

Although this tendency is likely to persist for some time, the number of residential property transactions slowed down on the island for the first three quarters of last year whereas property sales in SP were generally unaffected (Table 4). Due to market-cooling measures – i.e. the introduction of more stringent real property gains tax (RPGT) and maximum loan-to-value ratio for individual and non-individual borrowers – laid by the federal government and Bank Negara to curb property speculating, the upward price index trend for both landed properties and high-rise units slowed down significantly for the first half of 2014. Given that the number of sales was also at a lower level in the third quarter compared to the previous year, property prices on the island for the latter half of 2014 were probably stagnant.

Source: Residential Property Stock Table Q2 2014, NAPIC.

With the implementation of the goods and services tax (GST) on April 1, firsttime home buyers may rush to make property purchases in the first quarter of 2015 to avoid paying the incremental cost. Although residential properties fall under the “Exempt Rated” basket of goods, property prices look set to increase due to the inflation cost of construction materials. According to a market survey, developers are facing ever higher compliance costs. Therefore, it is unlikely that house prices will drop this year when higher inflation is expected. Meanwhile, the “Youth Housing Scheme” announced in Budget 2015 may encourage young families from lower and middle income groups to make their first home purchase. Under the scheme, those who qualify and are selected will be given RM200 monthly financial assistance by the federal government to pay the loan instalments, 50% stamp duty exemption on loan and transfer agreements as well as 100% loan financing.

Source: Residential Property Stock Table Q2 2014, NAPIC.

Old is gold

Interest from investors in George Town’s pre-war heritage properties has never been greater since the city was inscribed as a Unesco World Heritage Site in 2008. Under the draft of the George Town Special Area Plan, there is a total of 4,665 buildings located within the core (50.2%) and buffer (49.8%) zones. Given the immense potential for capital appreciation or gain from investments, these heritage properties are in red-hot demand. With the booming tourism in George Town, many investors have transformed old, neglected heritage shop houses into boutique hotels or commercial premises.

Before the repeal of the Rent Control Act in 1999, there were very few transactions and the price index did not move much for properties situated within the conservation zones. Since then, the compound annual growth rate for such properties from 1999 to 2013 was at 12.7% [4]. For the first half of last year, the average price for pre-war properties in George Town registered a new highest record at RM1,300 per sqft.

Source: Henry Butcher Malaysia (Penang) and NAPIC.

Similarly, the number of pre-war property transactions also soared especially after 2008 (Figure 2). However, despite the new highest record of average transaction price, there were fewer property transactions last year; the Penang Real Estate Market Research Report on pre-war properties published by Henry Butcher Malaysia (Penang) [5] suggests that the prewar heritage property market has more buyers than it has sellers due to a limited supply of good listings. Because of this, the pre-war property market price could be very much distorted. For example, in March 2012, a 2,000sqft shop house along Lebuh Pantai (considered a prime heritage area) was sold at RM4mil (or RM2,000 per sqft) [6] – an isolated case but way above the average market price nonetheless.

Since the number of pre-war heritage buildings in the historic George Town is fixed and more than a thousand of such properties were transacted since 2008, the proportion of “sellable” properties in the market will shrink by year while market demand for such properties remains high. Hence, it is reasonably expected to see even steeper transaction prices and fewer transacted pre-war property units in years to come.

 By Lim Chee Han
Lim Chee Han received his PhD in Infection Biology from Hannover Medical School, Germany. He is a senior analyst in the economics section of Penang Institute.

Illegal estate agents on the rise

The Board of Valuers, Appraisers and Estate Agents Malaysia (BOVAEA) is concerned that the number of cases involving illegal real estate brokers will increase if the problem is not addressed soon.

To curb the problem, the board will be working with the relevant government agencies in order to trace and bring these criminals to justice.

In a statement, BOVAEA revealed around 50,000 illegal real estate brokers are duping innocent Malaysians into parting with their hard earned money.

To earn quick cash, these unscrupulous characters impersonate developers’ representatives, property investors, unregistered salespersons, community leaders, foreigners and even housewives.

Last week, a certified negotiator discovered his photograph was printed on name cards under different companies which were being distributed to unsuspecting shop lot owners, who were duped into paying the necessary sales and rental deposits.

“We are afraid the number of cases will increase with desperate property owners trying to cope with the slowdown in the property market,” said BOVAEA Estate Agency Practice Committee (EAPC) chairman Eric Lim Chin Heng.

Lim said they were shocked at property owners’ apathy on determining the authenticity of the people representing them. BOVAEA underscored that estate agency practice is regulated by law.

“Anyone who is not a registered estate agent or is not a certified real estate negotiator is breaking the law. More importantly anyone using the services of anyone who claim to be agents without the authority to practice is not protected by law,” he explained.

To avoid being at the losing end, Lim urges potential property sellers and buyers to check the tags instead of relying on the name cards alone.

“There is a Quick Response (QR) code on each tag so customers can scan the code with their smartphones to find out the background of the agent, the firm they represent, their REN No and their identity.”

Under the Valuers, Appraisers and Estate Agents Act, those caught abetting an illegal agent can also be fined RM300,000 or face three years imprisonment or both, said Lim.

Farah Wahida, Editor of PropertyGuru, wrote this story. To contact her about this or other stories email farahwahida@propertyguru.com.my

Harness STEM for engineering

DATUK IR. LIM CHOW HOCK President The Institution of Engineers, Malaysia

AS Malaysia gears up to developed nation status by 2020, there is still much to do to get there.

One of the most direct ways to arrive at the vision is to ensure a sufficient and growing number of engineers.

Increase in the number of engineering students is paramount to meet the nation’s need for engineers who would implement and maintain the many economic development projects.

During his visit to the International Bureau of Education (IBE) in Geneva in April, Deputy Prime Minister Tan Sri Muhyiddin Yassin spoke of the need for Malaysia to harness skills and knowledge in Science, Technology, Engineering and Mathematics (STEM).

Muhyiddin also pointed out that the countries which started on the same level as Malaysia had moved much further ahead, crediting it to their wisdom in making full use of STEM to boost their country’s fortunes.

As such, he emphasised the need for human capital development in STEM, which he considers vital in the national transformation process.

To achieve this, a strategy comprising a series of actionable plans must be able to support the production rates needed for generating skilled STEM human capital at two levels, namely secondary schools and tertiary institutions, to reach the target of 500,000 STEM graduates by 2020, according to Muhyiddin.

Although the solution is apparent, its execution remains challenging.

One of the factors hindering this step to greater national development is getting students to love science, or science classes. Science and mathematics as school subjects must be made interesting, easy to understand, as well as more hands-on and exploratory. This is in line with the Government’s aim for 60% science and technology-based education by 2020.

For the engineering profession, interest in science, technology, engineering and mathematics in school will result in more qualified students who are eligible to pursue engineering courses in universities.

Through the increase in engineering students, the nation’s need for engineers would be met. This would translate into greater implementation and maintenance of the country’s economic development projects.

The Institution of Engineers Malaysia (IEM) lauds the Government’s effort to promote interest among students to study science in schools.

Without the large number of science students, there will surely be a corresponding limitation in the ability of universities to produce the number of engineers needed.

As a national association with the nation’s interests at heart, IEM has been actively involved in conducting school career awareness talks, arranging competitions and exhibiting interesting projects on engineering to school children to promote interest in engineering. IEM has also set up IEM Student to encourage students to choose sections in various universities in Malaysia.

Engineering students are also encouraged to join IEM as Student Members which will enable them to access IEM resources and activities such as talks and networking. IEM is one of the supporting members (together with AAET, MiGHT, Utar and NSC) for the Kuala Lumpur Engineering Science Fair, an annual programme to promote interest in STEM among primary and secondary school pupils.

We believe that career prospects will be a major factor in the students’ decision in their studies and career options.

Prospects for engineers include top level positions, attractive remuneration as well as status recognition, which will be a great motivation for students to take up STEM Education and thus pursue a career in engineering.

Students must be made aware that job prospects for engineering graduates remain bright as Government allocation for infrastructure development has supported the demand for engineers.

National development towards an industrial nation has also spurred the demand for engineers.

Students, and parents too, must realise that a career in engineering is not only limited to the five traditional branches of engineering, namely Civil, Mechanical, Electrical, Electronic and Chemical Engineering. Through the years, engineering has expanded into many new disciplines such as Aeronautical Engineering, Environmental Engineering, Maritime Engineering, Mining Engineering, Oil and Gas Engineering, among many others, which would be exciting career options for students.

The Government being the largest employer should provide equal opportunity and create a structured pathway for all science-based professionals, in particular engineers, to take up high positions in the civil service.

Recognition of the contribution of engineering success and seeing it as a pathway to top positions in the civil service will be a great motivator for students to pursue STEM education in Malaysia.


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The great technology transformation

AFTER a week in the Silicon Valley, California last month, I came to the conclusion that I am a dinosaur. The speed of change from technology has been so fast and so profound that we are lost in transition, translation and transformation.

The digital revolution is already upon us, but the baby boomer generation, to which I belong, is having difficulty understanding this because we still upload (read) on paper, whereas the millenials (those born between 1980 and 2000) upload information mostly on mobile phones, video and communicate through social media.

Demographics say a lot. At the turn of the 21st century, the baby boomers (born 1946-1964) were half the work force, but today in the United States, millenials and Gen X (born 1965-1979) are roughly one-third each. The baby boomers may own most of the retirement funds and wealth, but the new wealth is being created rapidly by the younger generations.

A simple set of statistics says it all. The Forbes top five US companies by revenue are Walmart, Exxon, Chevron, Berkshire Hathaway and Apple. Walmart employs over 2.1 million people, with revenue just under US$485bil, but profits of US$16bil with market capitalisation of US$265bil. Apple, with only 80,000 employees, had double Walmart profits of US$39bil and a market capitalisation of US$725bil, larger than Walmart and Exxon put together. Twitter, with only 3,638 employees or less than 0.2% of Walmart workforce, is valued at 9.2% of Walmart. Facebook, with only 9,200 employees but 1.44 billion users, is valued at 86% of Walmart.

In fact, if it wasn’t for the fact that Silicon Valley is booming in terms of wealth creation, California would be suffering from the economic effects of the worst drought in years. But at US$2.3 trillion, California is growing at 2.8% per annum, faster than US real gross domestic product growth of 2.2% in 2014. The Western Pacific states of Oregon and Washington are growing faster at 3.6% and 3% respectively, thanks to growing trade and services from the boom in technology.

Two things that stand out in the Digital Disruption – speed and scale. The speed and scale of the digital transformation is so fast and so wide and deep that we are all having problems valuing what it means – which is why we have a tech bubble in the making.

It is quite normal for us to accept that the Silicon Valley is the world leader in digital change, but what was eye-opening as I dug into the data is that the next waves are already happening in China and India. This has mind-boggling implications on a geo-political basis, especially for smaller economies, such as Malaysia, Hong Kong or Thailand.

What struck me from delving into the pattern of growth in the Internet Revolution is the speed and scale of change in China and India. Who would have expected even five years ago that four out of the top 15 global public Internet companies, ranked by market capitalisation would be Chinese (Alibaba, Tencent, Baidu and JD.com) with a combined value of US$542bil or 22.4% of the total market valuation of US$2.4 trillion of these 15 companies as of May, 2105.

Scale and speed

The reason for this valuation is scale and speed of the Chinese transformation, already overtaking the world leader, the United States. The rate of Internet penetration is over 80% for the United States, only 40+% in China and 20+% in India. But China already has more Internet users (618 million), double the US population and its growth in smartphones is double (21%) that of the United States (9%).

Although incomes in China and India are far lower than the United States, Chinese and Indian millenials (for that matter, millenials in all emerging markets) are beginning to spend more time on their smartphones than the advanced countries.

There are two implications from this broad trend, which the Chinese Internet platforms like Alibaba and Tencent are beginning to exploit.

The first is the ease and convenience of buying, selling and paying using the smartphone – an all service tool. Partly because of regulation, the US leaders such as eBay, Amazon and Facebook are still in their core areas of strength, but Alibaba and WeChat (part of Tencent) have developed eco-systems that are simultaneously social networks, chatrooms, trading and investing platforms combined.

When I lost my Blackberry, MacBook and camera recently in Latin America, I was staggered that using WeChat on iPhone, I could go on video and instant chat with friends across half the world for free. My only constraint was the battery on my iPhone and that I had not set up to get funds transfer in case of need.

The second implication is that traditional service providers are way behind in this technology. My credit card companies are still on outdated phone-banking, which meant that in order to report lost cards, I was frantically trying to Press one, Press two and Press self-destruct! These companies are at least two generations behind in customer service technology.

Internet Revolution

My conclusion from this survey of the Internet Revolution is that the disruption from technology on conventional businesses is yet incomplete. In the 1990s, the Internet changed the music, photography, book sales and video rental business. Today, we book airline and hotel travel on the web.

But with the arrival of the iPad and iPhone, healthcare, finance, investing, education and social communications are being combined into one gadget (the mobile phone) to do what we have to.

This disruption is happening very fast in China and India, because these late-comers have no pre-conceived legacy ideas on what cannot be done with technology.

If China is currently going through its tech bubble, watch out for the next tech bubble in India.

Those who think only in terms of risks think that bubbles are to be feared. I have come to realise that the animal spirits in us change the game through excesses. But those who learn from their mistakes will create the new.

Silicon Valley is not a place but a mindset – nothing ventured, nothing gained. That mindset is truly the New Digital Transformation.

Watch this space in Asia.

Andrew Sheng comments on global trends from an Asian angle

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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An eyesore: Mitigation works being carried out to restore the cleared slopes of Bukit Relau.

Council slow to act on Botak Hill

GEORGE TOWN: The Penang Island City Council has come under fire for taking such a long time to tackle the illegal hill clearing at Bukit Relau.

Bayan Baru PKR MP Sim Tze Tzin (pcs left) said it should not have taken so long to carry out mitigation work at the 22.89ha site which became known as Botak Hill after it was cleared.

“When the issue broke out in 2013, I called a senior council officer who told me that it would be settled within six months.

“But after two years, the problem is still not settled.

“This is not rocket science. What is so difficult?” he told a press conference yesterday in Sungai Dua near here.

Sim said someone should be held responsible for the delay and urged the state to find the culprit.

“The person has to be punished as this has to do with accountability.

“If you cannot do the job, then resign to let other people do it,” he said.

Sim was commenting on the latest news report which stated that the mitigation work being carried out by General Accomplishment Sdn Bhd was scheduled to be completed by October. - The Star 15/7/15

Botak Hill to be patched up soon

GEORGE TOWN: Mitigation works on Bukit Relau, infamously known as Botak Hill after a section of its top slope was cleared in 2013, is scheduled to be completed by October.

The Penang Island City Council (MBPP) said the mitigation works started in April and was expected to be completed in six months.

The council said it had endorsed the Erosion and Sedimentation Control Plan (ESCP) and slope strengthening design to mitigate landslips and pollution caused by mud flow based on the proposal by the geotechnical consultant appointed by General Accomplish-ment Sdn Bhd which owns the cleared site.

MBPP said the mitigation plan was vetted by the state’s Hillside Geotechnical Advisory Panel chairman Dr Gue See Sew.

General Accomplishment was fined RM30,000 by a Sessions Court here in July 2013 after a represen-tative pleaded guilty on behalf of the company to clearing the 22.89ha site between April 24 and May 8 the same year without obtaining written approval from then Penang Municipal Council (MPPP).

The offence under Section 70 A of the Street, Drainage and Buildings Act 1974 carries a maximum five-year imprisonment or maximum RM50,000 fine, or both.

MBPP said in a statement yesterday that the mitigation measures include the building of a few catchment and sedimentation ponds along the access route to the site, cutting the slope to reduce its steepness and covering the exposed slope with vegetation.

The council said the works also involved the building of cascading drains along the access route to dissipate the energy of surface runoff and mitigate soil erosion.

Several residents living nearby had earlier this month raised their concern after seeing earthworks being done at the site.

MBPP said the land cutting was done to allow access for heavy vehicles and to carry out rock blasting.

It said huge boulders needed to be removed to ensure a safe route and for the mitigation works to proceed, adding that the rock blasting was approved by the Minerals and Geoscience Depart-ment and police.

MBPP said it would continue to monitor the works to ensure that it was carried out in accordance with the approved mitigation plan.

It said grass had been planted on the access route to prevent erosion and that more plants could now be seen on the cleared slope. The Star 14/7/15

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1MDB probe gains momentum, a sensitive time for PM and Umno

PETALING JAYA: The probe into claims that funds were channelled into the personal accounts of Prime Minister Datuk Seri Najib Tun Razak heated up when the task force investigating the matter froze six bank accounts and said it was looking into 17 others.

The Wall Street Journal (WSJ) meanwhile revealed documents that it claimed were the basis of its controversial story.

The freeze on the six accounts was issued on Monday, according to a statement issued jointly by Attorney-General Tan Sri Abdul Gani Patail, Bank Negara Malaysia governor Tan Sri Zeti Akhtar Aziz, Inspector-General of Police Tan Sri Khalid Abu Bakar and Malaysian Anti-Corruption Commission chief commissioner Tan Sri Abu Kassim Mohamed.

“Several documents over the issue of non-compliance with Bank Negara’s rules and procedures have also been seized,” it read.

“As the investigations are still under way, we appeal to all parties to give their fullest cooperation to complete the probe.”

It is learnt that the 17 accounts belonged to various companies and individuals.

While neither the banks involved nor the holders of the accounts were named, several portals claimed they had received confirmation that three of the accounts belonged to Najib.

Hours after the statement was released, WSJ uploaded nine documents on its claim that US$700mil (RM2.6bil) were channelled into three personal accounts of Najib.

The nine documents comprised three flow charts, three remittance forms, two credit transfer notices and a letter of authorisation by Nik Faisal Ariff Kamil, the former chief investment officer of 1Malaysia Development Bhd (1MDB).

However, Najib’s name appeared only in the flow charts. It was not in any of the banking documents in which the last few digits of the account numbers were blanked out.

A banker said it was normal that entire bank account numbers were not made public for fear that the accounts could be hacked.

“What is important is the codes in the documents are correct,” said the banker.

The charts detail funds flowing from SRC International Sdn Bhd, a company that used to be under 1MDB but was subsequently taken over by the Finance Ministry in 2012, into personal accounts supposedly belonging to Najib.

According to the charts, the funds flowed into AmPrivate Banking in AmBank Islamic and the beneficiary, it claimed, was Najib.

Based on one chart, the funds flowed out of SRC International’s account in AmBank Islamic into Gandingan Mentari Sdn Bhd, also in Ambank Islamic.

Subsequently, the money was transferred to Ihsan Perdana Sdn Bhd, whose account is in Affin Bank. From there, the funds were moved to AmPrivate Banking in AmBank Islamic.

There were three accounts under AmPrivate Banking in AmBank Islamic supposedly belonging to Najib. The last few digits of the accounts were blanked out.

The Prime Minister’s name was not to be found in any remittance transfer forms from Affin Bank to AmBank Islamic.

The total amount transferred from Affin Bank to AmBank Islamic was RM42mil and the transactions were done in three tranches.

There were two transactions on Dec 26, 2014 and one on Feb 9, 2015. The reasons for the transfer of funds by Ihsan Perdana to the AmPrivate Banking account were stated as CSR programmes.

Najib’s name is also not visible in the two credit transfer notices from Wells Fargo Bank in the United States to the AmPrivate Banking account under AmBank Islamic.

But a banker said it was normal for the beneficiary’s name to be left out of remittance forms or credit transfer notices.
“The identity of the beneficiary does not need to appear if it is a familiar name. The banks only need the necessary codes and account numbers,” said the banker.

The funds from Well Fargo amounted to US$681mil and were transferred in two tranches, on March 21 and March 25, 2013, according to the documents.

The transaction order came from Tanore Finance Corp in British Virgin Island.

The funds were transferred to AmPrivate Banking account in AmBank Islamic under the Swift Output Code of Single Customer Credit Transfer.

“A Single Customer Credit Transfer means the account is held by an individual,” said the banker. - The Star

Sensitive time for PM and Umno

DATUK Seri Najib Tun Razak has been out and about every day since the start of the fasting month.

He has been seen at a number of Ramadan bazaars, he has been the VIP guest at various buka puasa functions and he has joined the congregation for evening prayers after the breaking of fast.

The fasting month is a test for all Muslims and even more so for the Prime Minister given the issues surrounding him.

The 1MDB issue has snowballed into a political monster for his administration and he is fighting what could be the biggest battle of his political career.

Allegations in The Wall Street Journal (WSJ) that billions of ringgit went into what is believed to be his personal bank account are still reverberating among the financial and political circles.

Najib has responded to the report, calling it wild allegations and insisting that he has never taken funds for personal gain. It was not quite the explanation or answer that people were expecting and it has raised more questions than provided answers.

But many in Umno are prepared to give him the benefit of the doubt even though they are unsure what to make of it.

Najib has a lot of support in his party and up until the recent allegations, he was said to have won over some 75% of the 191 Umno division heads.

They want to rally around him but they need clear answers in order to defend him.

Najib has made it very clear that he intends to sue WSJ and his lawyers are preparing a case to be filed soon against Dow Jones, the publisher of WSJ, in the United States. That is the way to go to clear his name.

The pressure mounted yesterday when four of the country’s top regulators and law enforcers issued a joint statement, saying that the special task force probing 1MDB had frozen six bank accounts related to the case.

The affected bank accounts were not identified but the signatories comprised the Attorney-General, Bank Negara Governor, Inspector-General of Police and the MACC chief.

It was unprecedented and it was a sign that the investigations had become more serious and complicated. The snowball has grown bigger.

Najib’s deputy Tan Sri Muhyiddin Yassin has added to the pressure. He had asked the authorities to look into the WSJ allegations and Umno vice-president Datuk Seri Shafie Apdal has joined in.

Their move confirms the political divide in the party that the Umno crowd has been talking about.

Umno politicians also noticed that Tun Dr Mahathir Mohamad has been rather restrained after months of relentless attacks and it could mean two things.

One, he feels that he has achieved his desired objective – he has got Najib up against the wall.

Two, Dr Mahathir might have realised that in his determination to remove the head of the house, the entire house may come down too.

His campaign against Pak Lah contributed to the 2008 political tsunami and his attacks against Najib has damaged Umno even more.

A group of Umno supreme council members met Najib at his official residence on Sunday night. It was very hush-hush and none of those who attended picked up or returned the calls of reporters, let alone spoke about what transpired.

The speculation is that the meeting was probably not about declaring support for the boss, otherwise they would not be so secretive.

The group was there to seek answers about what Najib plans to do and where he intends to go from here.

This is a very sensitive time for Umno and especially for Muhyiddin. He played a leading role in Tun Abdullah Ahmad Badawi’s exit and he is again in the spotlight.

It is doubly sensitive for Muhyiddin this time around because he is an interested party.

Muhyiddin is being extra cautious because he understands the powers of incumbency and is aware of what the Prime Minister could do to those who are not with him.

Moreover, Najib’s tentacles in the party go back a long way and whoever wants to take him on has to consider the repercussions from his hardcore supporters.

By Joceline  Tan Analysis The Star

Related stories:

Go out and explain 1MDB issue, Umno leaders told
Umno lawyers preparing lawsuit against WSJ
Call to probe how WSJ obtained private banking documents
Opposition Members of Parliament call for snap polls


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