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China’s power is rising in an unstable world

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The scourge of the coronavirus has exposed glaring weaknesses in capitalism and democracy all over the world.

With wages for some stagnating and a growing digital divide, divisions in societies, and the gap between the haves and have-nots, have never been starker.

While western countries flounder in the face of the pandemic and face challenges to their democracies, China has pulled ahead by containing the disease through technology and authoritarian rule.

It is not hard to imagine that in five years’ time China’s ambitions and technological progress, particularly in mitigating climate change, will determine the state of the world.

One way to foretell that future is, improbably, to take a look at the distribution of this year’s Beaujolais Nouveau. The sales of the red wine started around the world on November 19. In Japan, where the first arrival of the season is celebrated every year, the volume of imports has dropped to less than half their level 30 years ago, when Japanese consumption first took off in a bubble economy.

In years past, Japanese media outlets reported the arrival of aircraft loaded with Beaujolais Nouveau from France. But this year the “eco-Nouveau” wine was transported by train from France to Shanghai, a journey of some 10,000km, before being ferried to Japan by ship.

Carbon dioxide emissions by rail transport are one-twentieth of those by air, while the cost of rail is one-third that of air transport. The bottles featured a sticker proclaiming the wine’s environmentally friendly credentials.

This year’s first shipment of Beaujolais Nouveau arrives at Tokyo’s Haneda airport in October © Alamy

China isn’t just a stop in the wine’s supply chain. Its place in what was previously mostly a France-Japan business arrangement has grown massively. Despite the pandemic, Japan remains the biggest importer of Beaujolais Nouveau. But China is already the world’s third largest importer of wine overall.

On a bigger scale, the coronavirus crisis is forcing a review of societies and economies, a situation labelled the Great Reset by the World Economic Forum. When it comes to the environment, the acceleration of technological progress as businesses undergo digital transformation will also reduce emissions.

Excluding the US, Japan has lagged major developing countries in fulfilling the Paris climate pact. But Prime Minister Yoshihide Suga declared in October that Japan will be carbon-neutral by 2050. As Japan can no longer rely on nuclear power in the wake of the 2011 earthquake, innovation will be crucial to turning renewable energy into stable power sources to achieve the 2050 target.

Makers of automobiles, the biggest consumer durable of 20th century civilisation, also have no choice but to adapt. The transition from gasoline-fuelled vehicles to electric and hydrogen power, which will drastically reduce CO2 emissions, is fast approaching. Current market leaders will not necessarily be winners in the future.

Employment will also see rapid change. Carl Benedikt Frey of Oxford university once predicted that half of the world’s current jobs would disappear due to artificial intelligence.

In his recent book, The Technology Trap: Capital, Labor, and Power in the Age of Automation, he points out that innovation has two aspects — it either substitutes for labour or complements it, thus creating new jobs.

Lower-paid work has supplanted manufacturing jobs in many nations — Bloomberg
Lower-paid work has supplanted manufacturing jobs in many nations © Bloomberg

History bears this out. Spinning and weaving machinery in the early stage of the Industrial Revolution drew rural home manufacturing into urban factories, leading to the machine-smashing Luddite revolt.

On the other hand, the invention of the steam engine and the era of the Ford Model T brought mass production and mass employment, creating an affluent middle class typified by the Golden Fifties in the US.

A recent report by the Massachusetts Institute of Technology cites the importance of education and investment in human resources and warns that in the absence of a strategy, jobs will be lost and divisions in society will widen.

The World Ahead: an FT-Nikkei special report

FT and Nikkei journalists look ahead to the next five years after a five-year alliance marked by tumultuous events, from Brexit and the Trump presidency to the coronavirus pandemic. Other articles include:

  • FT and Nikkei sectoral experts forecast what work, finance, tech, retail and energy will look like in 2025

  • Martin Wolf, FT chief economics commentator, on the forces that will shape the next five years

  • A visual guide to the data shaping the 2020s and beyond

  • We asked for your predictions: a woman in the White House, yes, but no progress on climate change

It clearly explains why so many Americans support president Donald Trump. With the evaporation of manufacturing jobs in the rustbelt states, workers have been driven into low-paying jobs. At the other end of the spectrum, those who work for big tech companies — such as Google, Apple, Facebook, Amazon and Microsoft — are highly paid. This gap continues to widen.

The same MIT report attributes Japan’s long-term stagnation to the fact that it has clung to an employment and tax system intended for mass production in its high-growth period. Even now, 30 years later, the country has yet to fully climb aboard the digital train, although there are fewer concerns about employment compared to other major economies.

Against such an unstable global backdrop, China is growing as a superpower. Even after Democrat Joe Biden is sworn in as president in January, tensions between the US and China will continue as the two countries vie for global dominance. Donald Trump’s tenure as president has eroded American leadership of the free world. Whether it can regain lost ground under Biden remains to be seen.

The military balance between the US and China in the Taiwan Strait is also significantly different from the 1990s, when it was overwhelmingly favourable for the US.

As the US struggles to rebuild its reputation and heal its own divides after the chaotic and disruptive Trump presidency, Japan and Europe must step in to shore up the global order and free trade arrangements.

Japan is a central member of both the Trans-Pacific Partnership trade agreement, of which the US and China are not members, and the Regional Comprehensive Economic Partnership trade pact in East Asia, to which the US does not belong either. The fortress of free trade cannot be protected without the active involvement of Japan and Europe.

The writer is senior executive editor at Nikkei



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Emerging Markets

Central banks seek out riskier assets for reserves in yield drought

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Central bankers who manage foreign currency reserves have been turning to new — and riskier — investments to compensate for the global collapse in bond yields ushered in by the pandemic, according to a new survey.

The annual poll of 78 reserve managers with a combined $6.4tn of assets found that the reduction in yields has presented the greatest challenge to these investors over the past year. For many, it has driven a shift into new asset classes including corporate bonds, emerging market bonds and equities.

Reserve managers are typically among the world’s most risk-averse investors, but they enjoy huge clout thanks to the more than $12tn they manage, according to the most recent IMF figures. This cash, accumulated by central banks to keep their currencies steady or to protect them in times of crisis, is generally parked in safe assets such as short-term government debt.

However, the survey carried out by Central Banking Publications suggests the pressure of low returns is forcing some to take on greater risk to preserve their capital. Bond yields around the world plummeted to record lows last year as central banks slashed interest rates and launched huge debt-buying programmes to combat the fallout from the pandemic. Although yields have since rebounded, they remain very low by historical standards.

Just over half of respondents to the survey said they were considering investing in new asset classes, while 44 per cent said they might add new currencies to their holdings. According to the IMF, 59 per cent of the world’s $12.7tn of foreign exchange reserves is held in US dollars, with most of the rest in euros, yen or sterling.

The survey also found that 42 per cent were considering inflation-linked bonds and 23 per cent were looking at adding to their holdings of gold.

Another reserve manager from the Americas said they had increased holdings of Chinese bonds, inflation-linked bonds and gold, adding “we are always willing to look into opportunities to make our reserves more efficient in terms of risk/ return”.

Central banks, like many investors, have been struggling with falling bond yields for the past decade, resulting in a global “hunt for yield” that has buoyed riskier assets. Many of the safest bonds offer negative returns once inflation is taken into account, while in Japan and the eurozone negative nominal yields are also commonplace.

The survey highlights “the challenge of capital preservation faced by the large number of reserve managers who hold predominantly short duration portfolios in highly rated government securities”, said Bernard Altschuler, head of central bank coverage at HSBC.



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Israel conflict rattles rapprochement with Arab countries

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When the United Arab Emirates shocked the Arab world by normalising relations with Israel it said the move would help ease the protracted Arab-Israeli conflict. But nine months later, the wealthy Gulf state finds itself in a difficult position as its newest ally bombards the impoverished Palestinian territory of Gaza.

Israeli war planes and artillery have been pounding Gaza while Hamas, the group that controls the territory, has fired rockets into Israel. On Sunday morning, death toll in Gaza stood at 181, including 83 women and children, local health officials said.

Ten people have died inside Israel, including two children, local medics have said.

While almost a third of Arab countries now have relations with Israel, this week’s bloodshed shows that diplomatic ties ushered in by last year’s so-called Abraham Accords have given them little leverage and done nothing to ease the root cause of the protracted crisis — the Jewish state’s conflict with the Palestinians.

“They [the UAE] are clearly in a very difficult position. On one hand, the UAE’s interests with Israel are long term and strategic, so ideally their relations should be resilient to shocks,” said Cinzia Bianco, a visiting fellow at the European Council on Foreign Relations. “At the same time, the UAE obviously claimed that the Abraham Accords would give them leverage to also support the Palestinians and rein in Israel’s aggressions against them.”

So far, Israel has rejected all international efforts pushing for a ceasefire. But Bianco said Abu Dhabi could still deploy diplomatic leverage to pressure the Jewish state to limit the scale of its retaliation. Such intervention, however, could jeopardise progress on joint projects of strategic value to the UAE, she added. 

Recent collaborations include plans for Emirati and Israeli defence manufacturers to develop a system to counter drones.

The normalisation of relations between Israel and the UAE under the Abraham Accords was quickly followed by similar moves from Bahrain, Sudan and Morocco, that marked a radical departure from the established Arab stance towards the Jewish state.

The Arab position before the accords was that they would recognise Israel only if there was a just settlement with the Palestinians that led to the creation of a viable Palestinian state. The transactional deals brokered by the Trump administration, which pursued an overtly pro-Israel stance, left the Palestinians feeling isolated and betrayed. Critics said Arab states had given up a bargaining tool and gained little in return, warning the moves would be exploited by more militant Palestinian factions.

Like other members of the Arab League, the UAE endorsed an appeal on Tuesday to the International Criminal Court to “investigate war crimes and crimes against humanity” committed by Israel against the Palestinians.

“The UAE stands with the rights of Palestinians, for the end of the Israeli occupation and with a two-state solution with an independent Palestinian state with East Jerusalem as its capital,” said Anwar Gargash, diplomatic adviser to the UAE president, this week. “This is a historic and principled position that does not budge.”

The UAE foreign ministry was last month quick to condemn Israeli plans to evict Palestinians from their homes on land claimed by Israeli settlers. And when clashes broke out between armed Israeli police and rock-throwing Palestinian youths, the UAE urged Israeli authorities to reduce tensions.

The UAE’s clear public stance has given cover for Emiratis and residents in the autocratic state to condemn Israeli actions and express support for the Palestinians, after any local anger at the earlier decision to normalise relations was suppressed at the time. Apart from a fringe of Emirati online activists who have sided with Israel, most social media reaction — even from some ministers — has been pro-Palestinian.

“Normalisation [of relations] is irreversible but it is very difficult to defend and even talk about in these circumstances,” said Abdulkhaleq Abdulla, a Dubai-based political science professor.

After the UAE signed its accord, there was speculation about whether Saudi Arabia, Israel’s main prize, would follow suit. Like Abu Dhabi, Riyadh has been covertly co-operating with Israel on intelligence and security matters as they share the goal of countering Iran.

But this week’s Israeli assault on Gaza makes that appear ever more remote. Saudi foreign minister Prince Faisal bin Farhan on Sunday said the kingdom “categorically rejects the Israeli violations against Palestinians”, while calling for an immediate ceasefire. 

In Morocco, which established relations with the Jewish state in October in return for US recognition of Moroccan sovereignty over the disputed territory of Western Sahara, the foreign ministry said it was watching events “with deep concern”.

In 2014, during the last major war between Israel and Hamas, thousands of protesters, including government ministers, took to the streets across Rabat, the capital. This time Moroccan police dispersed a small pro-Palestinian protest in the city this week. The newly formed Morocco-Israel Business Council was also reported to have postponed a virtual meeting aimed at encouraging Moroccan investment in Israel.

Public sentiment in the Arab world remained strongly pro-Palestinian, said HA Hellyer, senior associate fellow at the Carnegie Endowment for International Peace. “The absence of protests isn’t an absence of the desire to protest but an absence of permission to protest.”

Restrictions on freedom of speech across the region made it harder to gauge the extent of public anger, Hellyer said, but social media and the extensive coverage on mainstream television showed the “Palestinian question” was still close to Arabs’ hearts.

“Almost half of the messages I received on Thursday for the religious festival marking the end of Ramadan, show pictures of the Dome of the Rock in Jerusalem,” he added.



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Chilean voters prepare to elect country’s constitutional legislators

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Chile will this weekend vote in the legislators who will draw up its new constitution, with the country’s centre-right government facing a battle to maintain its grip on power ahead of a presidential election in November.

Gubernatorial, mayoral and municipal polls that were postponed because of the pandemic will also take place on Saturday and Sunday, alongside the election to populate the constitutional assembly.

Chile has not been spared the coronavirus second wave that has hit Latin America despite it having the highest vaccination rates in the region. Confirmed infections reached their highest ever level last month, although numbers have since declined.

“Chile is doing several historic and unprecedented things at the same time . . . in the middle of the economic and health crisis brought on by Covid-19,” said Robert Funk, a political scientist.

The most important vote will select members of the constituent assembly charged with rewriting the constitution drawn up during the 1973-90 dictatorship of General Augusto Pinochet — which most Chileans regard as illegitimate.

Nearly four-fifths of voters opted in favour of reforming the constitution in a referendum in November.

“These elections will probably define Chile’s institutional course over the coming decades,” said Gloria de la Fuente of Chile’s transparency council. “The vote will have a profound effect on Chile’s political system and civil society . . . electing the authorities to bring the country’s agenda forward.”

Yet turnover is predicted to be lower than the referendum. Some 58 per cent of Chileans who took part in a recent Ipsos poll said they were less likely to vote due to the pandemic, while less than half knew they would be voting for four different positions.

Chile has in recent decades become one of Latin America’s wealthiest nations, even if the deep inequality that sparked widespread social unrest in 2019 is far from resolved.

The low approval ratings for President Sebastián Piñera since those demonstrations have been exacerbated by defeats for his government in Congress, notably over pensions reform.

While the leftwing coalition that dominated Chile for most of the past 30 years has disintegrated since Piñera returned to power in 2018, his unpopularity could allow the left and centre-left to secure the two-thirds majority in the constituent assembly required to pass each article of the new document.

“If the right gets more than 30 per cent [in the assembly], it will be a tremendous victory,” said Lucia Dammert, a sociologist at the University of Santiago.

Despite the relative success of its vaccine rollout, Chile has been hard hit by the coronavirus crisis. Last summer’s peak of a weekly average of 352 daily cases per million was surpassed last month, reaching 383. Cases have since fallen back to about 280 cases per million.

However, Piñera’s government has been able to offer more generous Covid-related subsidies than most other countries in the region.

A feature of this weekend’s polls has been the emergence of independent candidates, Dammert said. Yet although the traditional parties had been badly wounded by the political turmoil, it would be “an uphill battle” for the independents to gain recognition, she said.

There are also wild cards such as Pablo Maltes — husband of Pamela Jiles, a populist presidential hopeful — who is running for governor of the metropolitan region of the capital Santiago.

“If Maltes wins, then there’s definitely something going on with Jiles,” said Funk, as it would suggest she was a strong contender for the presidency.

Jiles, who has championed measures to withdraw funds from Chile’s vaunted private pension system, is one of a number of presidential hopefuls, with no single candidate on the right or left enjoying a clear lead.

Electoral reform under the previous leftwing government of Michelle Bachelet that increased proportional representation means Chileans will for the first time also elect regional governors in a country where power has traditionally resided firmly in Santiago. The elections will also renew nearly a third of local authorities.



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