Indian politics & policy updates
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India took a big step towards repairing its damaged image as an investment destination by moving to scrap a controversial retrospective tax that ensnared multinationals such as Cairn Energy and Vodafone.
Prime minister Narendra Modi’s government on Thursday introduced a bill in parliament to rescind a 2012 tax code provision that had allowed New Delhi to impose retrospective taxes on some foreign investments.
The controversial provision — pushed through parliament after New Delhi lost a $2.9bn tax battle with Vodafone in India’s Supreme Court in 2012 — had severely damaged the country’s reputation as an attractive place to do business.
“We think this is an important time for India to be welcoming of investment,” T.V. Somanathan, India’s finance secretary, told a local television channel after the bill was tabled. “We are very keen to basically get the economy on a faster growth path.”
The move comes as India’s economy is reeling from the impact of the Covid-19 pandemic, with GDP growth contracting 7.2 per cent last year. Even before the virus hit, the economy was in the doldrums, with GDP growth slowing for eight consecutive quarters.
New Delhi’s image has suffered in recent months from its high-profile international tax battle with Cairn Energy over the Scottish energy company’s 2006 corporate restructuring before it listed its Indian operations on the Bombay Stock Exchange.
In December, an international arbitration tribunal ordered New Delhi to pay Cairn $1.7bn as compensation for its’ seizure and sale of a 10 per cent stake in Cairn India against the disputed tax.
New Delhi refused to honour the award, and Cairn last month secured an order from a French court freezing Indian-government owned properties in Paris as a step towards collecting on its debt.
Cairn also filed a lawsuit in a US court seeking to seize aeroplanes of state-owned carrier, Air India, in lieu of payment, and said it had identified more than $70bn worth of other Indian government assets abroad that it could seize in lieu of payment.
Amending the Indian tax code — which will allow a tax refund to Cairn, though without interest — will allow New Delhi to say it has settled the dispute under Indian law, rather than appear to comply with an international arbitration ruling whose jurisdiction it has long contested.
“Those cases that predated the 2012 amendment are now going to be let off the hook, but we are doing this under Indian law,” Somanathan said.
“There is a principle at stake here — it’s being done through Indian statute. We continue to assert that we have the right to tax but we are choosing to do this. We are not accepting those arbitral awards. We have an objection to such disputes getting adjudicated outside India.”
Cairn said it had “noted” the proposed legislation and was “monitoring the situation.” Shares in Cairn soared as much as 47 per cent before easing slightly to close at 160p a share, up 27.4 per cent on the day.
Tax experts welcomed the move but questioned why the ruling Bharatiya Janata Party waited so long. The BJP had fiercely criticised the retrospective tax law when the previous Congress party government pushed it through in 2012, and had described it as ‘tax terrorism’.
“It should have been done a while ago, it’s absolutely the right decision and it sends the right signal to investors,” said Nigam Nuggehalli, registrar at the National Law School Bangalore.
“I’m sure that the immediate prod for them was the fact that they lost their arbitration cases against Vodafone and Cairn,” said Nuggehalli, “any more intransigence on this would really result in loss of face for [the government].”
Is China uninvestable? | Financial Times
Chinese business & finance updates
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Good morning. I have more to say about yesterday’s topics — capital flows and private equity — but I’m still doing some reporting. Meanwhile, back to the biggest business and finance story in the world: President Xi Jinping’s attempt to transform of China’s economy. Email me: email@example.com
Is China uninvestable?
If you have not been following the political and financial tremors that have been shaking China in recent months, I recommend the twin reads by my colleagues Tom Mitchell, James Kynge and Sun Yu, detailing how Xi is “reinserting the party into the private sector and into family lives in a way that has not been seen since Deng launched the ‘reform and opening’ era in 1978”.
Investors will have heard about government interventions in the technology, education, alcohol, video game, real estate and entertainment sectors, and will be wondering which industry is next on the hit list. To me, however, it is the tone set by the party and its allies that is most unsettling. A taste:
“A monumental change is taking place in China. The economic, financial, cultural and political spheres are undergoing a profound revolution,” Li Guangman, the pen name of a prominent leftist commentator, wrote in a commentary that captured the zeitgeist. “It marks a return [of power] from capitalist cliques to the people . . . It is a return to the revolutionary spirit, to heroism, to courage and righteousness.”
This commentary was amplified by state media. When governments start transmitting messages about “capitalist cliques”, surely it is time for foreign investors to pack their bags?
Some are. Here is a chart of global equity funds’ collective China exposure, based on a sample of funds with more than $1tn in assets, compiled by Copley Fund research:
The market capitalisation of China’s four biggest tech companies, formerly foreign investors’ darlings, have fallen by almost $1tn:
There is not a universal rush for the exits, however. Todd Sohn of Strategas Securities points out that the KraneShares CSI China Internet ETF received $1.5bn in inflows in August. While some of that may be down to demand for exchange traded fund shares for shorting, he says, most of the flow is likely to be from bargain hunters.
Looking at Chinese stock valuations, however, it is clear that we have not had a proper rout. Here are the forward price/earnings ratios of mainland Chinese stocks, Hong Kong shares and an index of US-listed Chinese groups, along with the 10-year average valuations of each (the dotted lines):
China stock valuations sit at their long-term averages, having only given up the premiums picked up in the past year and a half. Given the politics, is a foreign investor sticking their toe in this not particularly inexpensive water making a big mistake?
It would be useless for me to attempt to draw a gestalt image of Chinese political economy, and weigh the chances of various outcomes. I don’t know enough. But a clarifying question does occur to me: does the CCP care about what happens if foreign investors take flight? Do outcomes for foreign investors figure in the party’s political calculus? I put the question to three China experts.
George Magnus of Oxford University’s China Centre, who appears frequently in this space, thinks the answer is basically “no”:
“I don’t think the party does care that much if global investors are selling Chinese equities, especially if these are foreign listings. If a distrust of Chinese assets resulted in a fire sale of domestic equities and bonds in China and capital flight putting pressure on the reserves, then yes, I think they’d try to limit that damage.
“But you know what? The speed and scale of the initiatives that are being unrolled smacks of an ideological campaign to put backbone into citizens and the economy. It may not be a revolution as such, but there’s nothing random about it either. And because of that I suspect the leadership sees global investors as bits of capitalism that are of little relevance to them.
“ . . . I suspect real estate and healthcare are the next sectors in the regulatory crosshairs, maybe even finally, the introduction of a property or other tax on capital.
“Foreign investors need to factor in the risk they could get blamed for any market or economic volatility, and have restrictions imposed on access to dollars and more restrictions on outward capital movements. It’s that sort of climate.”
Another noted China watcher — who did not want to be named because they live in China and would prefer to continue doing so — noted that as long as the party aims to internationalise its currency, it has to consider the “prestige” brought by foreign investment in its capital markets. But the party has no economic need for foreign investment:
“When do you need capital inflows? When they bring you something like technology or management skill, or if you have huge investment needs and weak domestic savings . . . China doesn’t need capital, it has huge investment and a huge current account surplus, and stock and bond investments don’t bring technology or skills.”
The problem the party has to solve is almost the opposite: investment is so high that much of the capital is malinvested. As a result, debt is growing faster than gross domestic product. The irrelevance of foreign investors to China key problems doesn’t mean Chinese stocks might not go up, “but you have to get both the valuations and the politics right, and that’s just really hard”.
Jörg Wuttke, president of the EU Chamber of Commerce in China said:
“Does the party care [about foreign investors in capital markets]? Of course not. We should not forget, they are Communists, what matters to them is the party, what the party hates most is volatility [which they see in open stock markets].
The party is fully aware they are a huge domestic economy, they only rely on a few things from the world market . . . they feel less vulnerable and more at ease becoming a more insular country. They care more about foreign manufacturers, because they substitute domestic supply chains for foreign ones. But if someone doesn’t buy stocks and bonds, who cares? Institutional investors? Nice to have, if they don’t ask to look at the books.
China may not be uninvestable. But the stock market as a whole is still expensive, given that the party is cracking down on the symbols and sources of wealth and inequality, and has little incentive to consider the fate of foreign investors.
One good read
Regular readers will know I have a side interest in the ancient world, and have tolerated my occasional references to it. This past weekend I came across this short essay by Simone Weil, first published almost 80 years ago. It’s the best thing I’ve ever read about the Iliad.
EU calls for fines against Poland for ignoring court rulings
EU rule of law updates
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The European Commission has asked the European Court of Justice to fine Poland for ignoring court rulings over the country’s controversial judicial reform, in a significant escalation of a stand-off between Brussels and Warsaw over the supremacy of EU law over national rules.
The long-running confrontation over moves by Poland’s conservative nationalist ruling party to gain powers over its judiciary, including a disciplinary chamber with the power to punish judges, has deeply soured relations between Brussels and the EU’s fifth-largest member state. It has also hardened Eurosceptic voices in Warsaw.
Tensions were inflamed further last week when the EU’s economy commissioner said that the disbursement of tens of billions of euros in pandemic recovery funds requested by the country would be affected by Warsaw’s response to the commission’s insistence on the primacy of EU law.
The commission’s request to the ECJ on Tuesday stems from the country’s failure to comply with so-called interim measures imposed in July by Europe’s highest court over Warsaw’s controversial judicial disciplinary regime.
“The commission is asking the court to impose a daily penalty payment on Poland for as long as the measures imposed by the court’s order are not fully implemented,” it said in a statement, which did not specify the amounts involved.
The commission added that it would set in motion a separate process for Warsaw’s failure to comply with a second ECJ ruling that declared that Poland’s disciplinary regime was incompatible with EU law. Poland’s new regime, the court said, provided insufficient guarantees of judicial impartiality and independence, and did not protect judges from the influence of Polish politicians.
Brussels’ potential fine and legal proceedings come despite a pledge in August by Jaroslaw Kaczynski, head of the ruling Law and Justice party and Poland’s de facto leader, that the disciplinary system would be amended.
The commission is under increasing pressure from parliamentarians to make clear that the bloc will not tolerate a move by Poland to contest the primacy of EU law. Brussels officials view it as an existential threat to the very legal order that underpins the EU project.
That stance, however, has prompted scathing Polish criticism of the EU among some ruling party politicians. They equate it to financial blackmail, raising the question of whether the country would be better off without EU financing.
Poland in May requested €23.9bn in grants under the EU’s landmark recovery funds programme, along with €12.1bn in loans, but the package has yet to be approved. Paolo Gentiloni, the EU’s economy commissioner, said last week that the legal fight between Brussels and Warsaw had “possible consequences” for the Polish recovery and resilience plan.
Konrad Szymanski, Poland’s minister for EU affairs, suggested on Monday that the stand-off was harming the EU’s standing in Poland.
“In terms of the political costs of this — due to the disturbances that we are observing — their scale is unclear today, but there are some: there is certainly a political cost for the EU in Poland,” he told local television.
“Poland is owed money from the European Union budget and the Reconstruction Fund. Not because of this or that attitude of whichever political capitals or EU institutions. But as a result of international agreements, from the law,” he added.
Germany protests to Russia over wave of cyber attacks
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Germany has accused Russia of launching a spate of cyber attacks on politicians amid suspicions that Moscow is interfering in this month’s election to decide who succeeds Angela Merkel as chancellor.
Germany’s foreign ministry said it held Russia responsible for illegally targeting a number of national and regional politicians with “phishing” emails to gain access to personal details.
These “unacceptable actions” posed a “risk to Germany’s security and its democratic decision-making processes, and [placed] a heavy burden on the bilateral relationship” with Russia, said Andrea Sasse, a spokeswoman for the German foreign ministry.
State secretary Miguel Berger had passed Germany’s protest directly to Russian deputy foreign minister Vladimir Titov at a meeting of the two countries’ security policy working group last week, Sasse said.
The warning comes ahead of what appears to be the most open election in recent German history, with polls pointing to an inconclusive outcome that could usher in months of uncertainty in Europe’s most powerful country. It will bring the curtain down on Merkel’s 16-year reign as chancellor.
Some polls point to a victory for the left-of-centre Social Democrats and their candidate for chancellor, finance minister Olaf Scholz. An INSA poll published on Monday put the SPD on 26 per cent, the CDU/CSU on 20.5 per cent, the opposition Greens on 15.5 per cent and the pro-business Free Democrats on 12.5 per cent.
It is unclear which party Moscow would like to see win the election. Both Scholz and Armin Laschet, the CDU/CSU’s candidate for chancellor, have struck emollient tones on Russia.
However, Annalena Baerbock, candidate for the Greens, is highly critical of the Kremlin and opposes Nord Stream 2, the pipeline across the Baltic Sea that brings Russian gas directly to Europe, bypassing Ukraine. Critics say it will increase Europe’s dependence on Russian energy exports.
Concern has been growing in Berlin that Russia could attempt a reprise of its interference in the US election in 2016. Thomas Haldenwang, head of Germany’s domestic intelligence agency the BfV, said in July that foreign intelligence agencies considered the Bundestag election a “significant target” and were exploring ways to affect the outcome.
Germany has long accused Moscow of seeking to access the digital networks of its political institutions. Merkel said last year there was “hard evidence” that Russian forces were behind a huge hack of the Bundestag in 2015 that also targeted her own emails.
The two countries also clashed over the killing of an exiled Chechen rebel leader in a Berlin park in 2019, which Germany said was carried out on the orders of the Kremlin.
Sasse said that in recent months, hackers had been using “phishing” emails to try to access the personal login details of MPs in the Bundestag and in Germany’s 16 regional parliaments.
“These attacks could serve as preparations for influence operations, for example disinformation campaigns linked to the Bundestag elections,” she said.
The Kremlin and Russia’s foreign ministry did not immediately respond to a request for comment.
Sasse said the “Ghostwriter” cyber group, which for years had combined “traditional cyber attacks with disinformation and influence operations”, appeared to be behind the attacks.
She said Berlin had “reliable information” that its activities “can be attributed to a cyber actor of the Russian state, and in particular Russian military intelligence, the GRU”.
Haldenwang said in July that the attempted hacks could be a prelude to “hack and leak operations” on social media in which personal information acquired by hackers was “published in a selective and misleading way and also falsified with manipulated information in order to discredit individuals or parties”.
In 2018, US authorities charged 12 Russian intelligence officers with hacking Hillary Clinton’s campaign and the Democratic National Committee during the 2016 presidential election which was won by Donald Trump. They said the Russians stole and leaked emails as part of a Russian government effort to interfere with the election.
Meanwhile, US intelligence concluded in March this year that Russia’s president Vladimir Putin authorised “influence operations” aimed at supporting Trump’s re-election attempt in 2020.
Germany’s federal court last year issued an arrest warrant for Dmitry Badin, a Russian man who allegedly works as a hacker for Russian military intelligence and who is believed to have been behind the 2015 attack on the Bundestag.
Additional reporting by Max Seddon in Moscow
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