Far East Opportunities & Risks - Part Two

Read part one here.

Japan

Recession and re-election

Last November came the shock news from Tokyo that the Japanese economy, the world’s third largest, had fallen into recession. This surprised experts who had mostly predicted modest growth in the economy. When he took office in 2012, Prime Minister Shinzo Abe promised to improve the slumping economy through massive public stimulus spending and reforms, a plan that became known as ‘Abernomics’. The shrinking economy follows the April 2014 rise in consumption tax from 5 to 8%, which apparently discouraged spending by consumers and businesses. This forced the Prime Minister to delay a second tax hike of 10% until April 2017. He called for a snap election in December 2014, the result of which returned him to power on a record low turnout of 53.3%. He has vowed to pursue his Abernomics plan. The LDP-led coalition could ease the Prime Minister’s path to re-election in a party leadership race in September of this year, and this might see him remain in power until 2018.

March 2015 marks the fourth anniversary of the triple disaster of the earthquake, tsunami and nuclear meltdown known as the Great Tohoku Earthquake, which caused unbelievable devastation. Planners in Japan are still facing practical problems and unprecedented challenges with over 62 municipalities affected in six different prefectures along hundreds of kilometres of coastline. We mentioned in our March 2013 issue that the post-earthquake era had created a resurgence in construction. The Japan Credit Rating Agency Ltd, in summarising the financial results of cement companies for the fiscal year to 31 March 2014, said domestic demand for cement had increased by 7% to 47.71 million t. While public sector demand increased by 8.6%, centring around demand for earthquake disaster reconstruction, disaster prevention and natural disaster reduction works, private sector demand increased by 5.4% as a result of a robust trend in housing investment and capital investment. The Japan Cement Association had forecast that domestic demand for FY14 would remain flat at 48 million t. The Agency predicts that despite uncertainty about the sustainability of economic recovery in and after FY15, the demand for earthquake disaster reconstruction and infrastructure development for the 2020 Olympics in Tokyo will expand.

South Korea

Success and progress

The value of South Korea’s construction industry increased at a compound annual growth rate of 2.4% during 2009 – 13. Growth was supported by private and public investments in infrastructure, industrial and commercial construction projects. Of particular importance is the country’s energy infrastructure construction, which is expected to be supported by the government’s plans to develop nuclear energy, increasing its usage to half of the total energy consumption by 2022. The country has plans to increase the use of nuclear energy from 29.2% of total energy consumption in 2012 to 43.4% by 2022 and 59.0% by 2030. To achieve this, 18 new nuclear power plants are proposed to be built by 2030, with an anticipated investment of US$32 – 40 billion.

An extraordinary example of South Korea’s technical prowess is being revealed through the construction of Songdo, known as ‘The World’s Smartest City’, or ‘The City of the Future’, along the River Incheon waterfront. It lies 65 km southwest of Seoul and is connected to Incheon International Airport by a 12.3 km reinforced concrete bridge. Built on 1500 acres of land reclaimed from a marshy stretch of tidal flats in the Yellow Sea, Songo International Business District claims to be the largest private real estate development in history. It is said that the reclaimed area required 500 million t of sand as infill. At a cost of US$40 billion the government is creating a sustainable city. After 11 years and a few economic downturns, some 60% of the planned infrastructure and buildings have been completed. The development will have 40% of its area reserved as green space, including a park of 100 acres, 26 km of cycle lanes and numerous charging stations for electric vehicles.

FTAs and FDIs

While the US-China declaration on new limits on carbon emissions was a top item on the agenda at November’s APEC Summit in Beijing, another important decision was reached by the Chinese and South Korean governments. They said they had effectively achieved a free trade agreement (FTA) that would remove or sharply reduce barriers of trade and investment between the two countries, ending negotiations that started in 2012. The agreement covers 17 areas including online commerce and government purchasing, but leaves barriers on rice and automobiles. When asked who stands to benefit the most economically, Gareth Leather, Asia Economist at Capital Economics, told Deutsche Welle: ‘It seems that South Korea would benefit most. China is South Korea’s biggest export market, with total exports worth over US$145 billion, accounting for 25% of its exports and around 11% GDP. The acceleration in export growth to China could deliver a large boost to South Korea’s economy. But China will also benefit. In the long run, the increase in trade between the two countries could create opportunities for greater specialisation.’

This is not good news for Taiwan as South Korea is its biggest competitor for the Chinese market, in which their exports share an overlap of some 70%. Once the pact between South Korea and China takes effect, Taiwanese exporters will lose their competitive edge as Korean exports enjoy substantial tariff advantages. The government is suggesting that about 30% of Taiwanese industrial products will be affected. The loss of market share in China could see Taiwan’s GDP drop by 0.5%.

In mid-2014 the Younhap news agency reported that for the first time in seven years South Korea’s investment in China outpaced that from Japan. Over the past two years, as tensions between China and Japan have risen, exports from Japan to China have been falling. Japanese FDI into China declined by almost 50% in the first half of last year compared with the same period in 2013. Chinese FDI into Japan in 2013 fell by 23.5%.

While Japan’s interests in China appear to be falling away, its cooperation with India is accelerating. In September 2014, the two countries announced a deepening of their strategic defence and economic cooperation and asked their officials to expedite inking of a pact for nuclear energy cooperation. Japan intends to invest US$35 billion in India over 5 years.

Rajiv Biswas, Asia-Pacific Chief Economist at IHS, speaking about the likely impact on the Chinese economy said: ‘The impact of Japanese firms diverting their new FDIs away from China will not have a significant impact on overall Chinese growth, since total Japanese investment flows are relatively small compared to the size of China’s GDP. However it will have implications for the ASEAN economies, with new FDIs flowing into countries such as Indonesia, Philippines, Vietnam and Myanmar, rather than into China’.

Is it a simple case of win some, lose some?

Written by Paul Maxwell-Cook. This is an abridged article from World Cement's February 2015 issue. Subscribers can read the full issue by signing in, and can also catch up on-the-go via our new app for Apple and Android. Non-subscribers can access a preview of the February 2015 issue here.

Read the article online at: https://www.worldcement.com/special-reports/05022015/far-east-opportunities-and-risks-part-two/