STR/AFP/Getty Images EXECUTIVE INTELLIGENCE BRIEF

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1 STR/AFP/Getty Images A U G U S T EXECUTIVE INTELLIGENCE BRIEF

2 EXECUTIVE HIGHLIGHTS The August edition of the Executive Intelligence Brief presents the following in-depth, strategic analyses: CHINA MONTHLY REPORT As Chinese leaders work to manage spillover effects of the US North Korea standoff, they are also endeavoring to maintain economic stability ahead of the landmark Communist Party congress this fall. They remain determined to do so despite signs that rising financing costs and measures to rein in excessive credit will weigh on growth in the second half of the year. NORTH KOREA/INFLECTION POINT As Pyongyang and Washington engage in brinkmanship, there is a significant risk of miscalculation. China will remain ambivalent on North Korea as it regards a nuclear neighbor as a lesser evil than regime collapse. Kim Jong-un may never surrender his nation s nuclear arsenal but, in order to develop the economy, he could contemplate a freeze on weapons production. CHINA/COMMUNIST RULE A host of formidable challenges will test the authority of the Communist Party in coming years. Repressive measures designed to maintain the Party s grip on power are straining China s political system and society. However, if economic growth can prevent social discontent from boiling over, Communist Party rule may prove resilient. MEXICO/RISING VIOLENCE With murders at record levels, organized crime groups have spread across Mexico bringing heightened violence to the capital Mexico City and popular tourist resorts. US companies are mostly worried about government corruption, but violent crime is a significant threat to businesses as gangs fight for control of ports and steal oil from pipelines. AFRICA/TWO-SPEED GROWTH The region s overall economic growth has dropped to a level last seen 20-plus years ago. Nigeria and other commodity-dependent economies have suffered most, but several East and West African states have performed strongly as a two-speed continent emerges. A demographic dividend could become a burden if Africa fails to create 20 million jobs annually to accommodate its rapidly growing population.

3 AUGUST EDITION AUGUST 10, 2017 CHINA MONTHLY REPORT Eduardo Munoz Alvarez/AFP/Getty Images US and Chinese envoys hold a last-minute consultation before endorsing new UN sanctions against North Korea on August 5 executive intelligence brief

4 BEIJING CONTENDS WITH UNFOLDING NORTH KOREA CRISIS Chinese leaders are working to contain the spillover effects of an escalating confrontation between the United States and North Korea over Pyongyang s nuclear program and missile tests, while pushing for resumption of diplomatic activities that would safeguard China s strategic interests. The crisis is straining Beijing s already-fraught relationship with Pyongyang, which in May declared it was willing to forego a friendly relationship with its long-standing ally in order to continue with its nuclear weapons program. Notwithstanding Beijing s role as Pyongyang s principal economic benefactor, the foreign minister said on August 8 that China would enforce UN resolutions that are expected to slash North Korean export revenues by a third. President Xi Jinping is intent on forestalling any outbreak of hostilities while avoiding undermining the North Korean regime in the period leading up to a Communist Party congress this fall that will decide China s leadership for the next five years: While Beijing is doubtless worried about the repercussions of North Korean belligerence, its paramount concern is averting regime collapse in Pyongyang and subsequent chaos, which would likely involve destabilizing refugee flows and unaccountable nuclear materials. Of cardinal importance too for Beijing is to prevent the emergence of a reunified Korea that presumably would be aligned with the US. Simultaneously, Beijing is alarmed at the prospect of an escalating arms race and shift in the regional power balance to China s detriment. It has thus tried to persuade Seoul to abandon the US-installed THAAD missile defense system that it regards as a threat to China s national security because its advanced radar systems may undercut Chinese strategic capabilities. The current face-off puts Xi in the difficult position of balancing long-standing Chinese ties to North Korea with his hopes for steady relations with the United States. Beijing will focus for now on pushing for diplomatic progress to defuse the US North Korean confrontation. Official Chinese statements following the August 5 UN sanctions resolution urged resumption of the stalled six-party dialogue mechanism with North Korea, which includes South Korea, Japan, and Russia along with China and the US. Beijing also will press for US restraint toward North Korea in order to avert an unpredictable escalation with potentially grave consequences for the region. STRONGER GROWTH MASKS UNDERLYING PROBLEMS Beijing is determined to maintain economic stability ahead of the changeover in the country s top leadership this fall, notwithstanding signs that rising financing costs and measures to rein in excessive credit will weigh on growth during the second half of the year. For now, China s increasingly robust economic recovery is helped by improved developments in the external sector, while domestic inflationary pressures remain subdued: Exports rose 7.2% in July from year-earlier levels; while this was down from the 11.3% year-over-year increase in June, it marked the fifth consecutive month of growth fueled by sustained overseas demand. The trade surplus widened in July to $46.74 billion 54% of which was accounted for by China s bilateral surplus with the United States and net exports contributed more than half of aggregate economic growth of 6.9% in the first half. Imports in July expanded 11.0% year-over-year, slower than the 17.2% growth registered in June, but buoyed by an ongoing boom in construction activity in China. Growth in imports, however, is likely to slow in coming months as Beijing continues to clamp down on debt and speculative buying in the property market. Producer price inflation remained static in July for the third straight month at 5.5% year-over-year, while consumer prices rose 1.4% year-over-year in a continued deceleration from the 2.5% rate recorded in January. A slowdown in the property sector is the main downward risk for the economy in the second half, as recent regulatory tightening along with high lending rates are likely to weigh more heavily on growth. Beijing s efforts to move the economy away from a debt-fueled growth model and put it on a more sustainable growth path include raising short-term interest rates and cracking down on banks hidden loans and investments. Still, overall credit expansion continues to outpace aggregate economic growth. Moody s cited the erosion of China s financial strength due to the debt buildup when it recently downgraded the country s credit rating for the first time in nearly three decades. CENTRAL BANK STEMS CAPITAL OUTFLOWS Beijing has scored some success in its long-running campaign against capital flight, with recent figures indicating that curbs on foreign deals and support for the renminbi have stanched though not halted outflows. Data released on August 7 showed that capital flows turned positive for the first half of 2017 following two years of record outflows: 3

5 According to figures on China s balance of payments, a surplus of $16 billion was recorded over the first six months of the year, exclusive of central bank intervention, following a $417 billion deficit in Foreign-exchange reserves increased on a valuationadjusted basis in the second quarter for the first time since early Reserves at the end of July were up $80 billion from a fiveyear low in January. The turnaround underscores the central bank s ability and apparent intention to keep the currency stable for now, reducing market traders expectations of resumed renminbi depreciation. Since the beginning of the year, the renminbi has strengthened 4% against the US dollar, reversing its record 6.5% decline in The trend is driven by an improved outlook for the Chinese economy following the most severe downturn in a quarter century, but it also reflects efforts by the central bank to squeeze currency-market speculators betting against the renminbi. Nonetheless, investor sentiment regarding China appears to be bearish for the medium term. Various measures of shortterm money movements show that so-called hot money continues to flow out of China, albeit at a slower pace than heretofore, suggesting that investors continue to look for ways to circumvent Chinese capital controls. A recent study by the US Federal Reserve concluded that much of China s deficit from trade in services actually represents disguised capital flight. Beijing in recent months has moved aggressively to curtail outbound mergers and acquisitions (M&A) activity that more than doubled in 2016 over year-earlier levels. Regulators reportedly are concerned that money for some overseas acquisitions is being raised through potentially risky channels such as high-interest shadow financing activity. LOOKING AHEAD Sino-US trade tensions ramping up. Beijing is bracing for resumed friction with Washington over trade policy. The time frame for a 100-day action plan on trade, agreed by the two countries leaders in April, expired with only limited concrete results and little evidence of narrowing the $347 billion bilateral trade imbalance. US business and industry observers noted that notwithstanding modestly improved access to Chinese markets in finance and agriculture in line with agreements under the action plan persistent obstacles remain, especially those involving China s agricultural subsidies, steel overcapacity, government data-sharing requirements, and inadequate intellectual property protection. Beijing probably anticipates that a US investigation into China s intellectual property policies is about to be launched. However, Chinese concerns are heightened by reports that Washington may also be considering recourse to a long-dormant but particularly blunt trade remedy, under Section 301 of the Trade Act of 1974, to retaliate against Beijing s policies. New tightening of financial controls. Chinese regulators are preparing new mechanisms to contain financial risks in the runup to this fall s leadership transition, reflecting President Xi s recent assertions that financial security is an important component of national security. A cabinet-level committee is being established with broad authority to coordinate financial regulations and to strengthen the central bank s role in preventing systemic risk. The changes were announced at a July meeting of the National Financial Work Conference, which is held every five years and is usually presided over by the premier. On this occasion, however, the session was convened by Xi himself, signaling the president s determination to put his personal stamp on stricter economic and financial policies. executive intelligence brief

Every month, Starr Companies produces the Executive Intelligence Brief, as well as periodic Special Bulletins, for the exclusive benefit of our readers who need to understand the ever-changing risks

6 Every month, Starr Companies produces the Executive Intelligence Brief, as well as periodic Special Bulletins, for the exclusive benefit of our readers who need to understand the ever-changing risks and opportunities in managing their global businesses. Starr offers a wide range of insurance products including coverages for such risks as political risk, energy, cyber, construction, marine, aviation, and more to help mitigate potential problems and to allow you to manage your businesses and investments more securely. Starr also offers an Intelligence Consulting Service that can provide you with customized, top-to-bottom SWOT analyses of developments in specific countries and internationally, an understanding of which is crucial for effective decision making and risk mitigation. See what the leading insurance industry experts at Starr can do for you. To learn more about how we can support your needs, please visit our website or contact Gerald J. Komisar, Vice President, Starr Holdings, Inc. Starr Companies Global Risk Intelligence 399 Park Avenue New York, NY Gerald J. Komisar Vice President jerry.komisar@starrcompanies.com Office: Mobile: David J. Lay Senior Director david.lay@starrcompanies.com Office: Mobile: This Executive Intelligence Brief has been written and approved by Starr Insurance Holdings, Inc., and the content is intended for informational purposes only. Neither Starr nor its subsidiaries, representatives or employees provide tax, legal or financial planning advice. You should consult your tax, legal and/or financial advisers regarding your or your company s own situation.

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The trade conflict between the U.S. and China has evolved beyond the narrow issue of the trade deficit.

KEY INSIGHTS February 14, 2019 By: Desmond Dahlberg and Elizabeth Rust Key Insights The trade conflict between the U.S. and China has evolved beyond the narrow issue of the trade deficit. The U.S. wants