Nov 24, 2017
Pangoal Institution International Situation Monthly September 2017 (Vol. 7)
Pangoal Institution International Situation Monthly September 2017 (Vol. 7)
Pangoal Institution International Situation Monthly September 2017 (Vol. 7)

Pangoal Institution

International Situation Monthly

BRICS Plus Opens Up New Space

North Korea’s Sixth Nuclear Test

New US Policy to South Asia

Merkel of Germany Wins Fourth Term

China-Japan Relations Slowly Thawing

The Iraqi Kurdistan Independence Referendum

Fed Set to Shrink Assets

September 2017 (Vol. 7)

China-Japan Relations Slowly Thawing

It has been quite a whilesince China and Japan began their “neither good nor completely out of control”relations. On the surface there are historical issues, the Diaoyu Islandsdispute, and the East China Sea frictions. Yet the root cause for a difficultsubstantial improvement is a lack of strategic mutual trust between the two.

China’s rise has led tofundamental changes in the geopolitical landscape of East Asia. In terms of thebalance of power, China is now stronger than Japan, as was the case most of thetime in history. Since 2010 when China’s GDP exceeded Japan’s, it took theformer no more than a few years to go far beyond. Finding it hard to acceptthis historic shift, Japan refused to adapt to the regional order dominated byChina, and is determined to become strong again. Politically, it continuesgoing right; militarily, it seeks to enhance independent defense capabilitiesand strengthen alliance coordination with the US; diplomatically, it keepstrying to build a value community with India, the Association of SoutheastAsian Nations (ASEAN) and African countries so as to contend against the risinginfluence of China. The goal is to have a generally normal and partiallycompetitive relation with China while retaining multiple confrontations.

Economic and trade tiesand people-to-people and cultural link used to be the ballast and propeller oftheir bilateral relations. Yet recent years have seen their gradual deviationfrom political relations. Starting from 2012, China-Japan trade has beenconstantly decreasing. Although more and more Chinese citizens are visitingJapan, the fact that the two peoples have a poor mutual understanding has notchanged.

However, China-Japanrelation is a key bilateral relation in Asia. It directly shapes the landscapeof East Asia, and determines the odds of successful cooperation in the region.Asia cannot find peace unless China and Japan coexist on good terms.Eventually, the two countries should find a way to build a generallysatisfactory relation.

2017 marks the 45thyear since China and Japan normalized their diplomatic relation, and 2018 willbe the 40th anniversary of the China-Japan Treaty of Peace andFriendship. Both sides have shown willingness to improve their relationtill tolerable to both as well as other countries and regions following fourpolitical documents and four agreed principles. However it is highly doubtfulwhether they will be able to seize the opportunity and make substantialprogress.

On July 8th,2017, Chinese President Xi Jinping met with Japanese Prime Minister Shinzo Abeduring the G20 summit in Hamburg, Germany. Xi pointed out that both sidesshould have a stronger sense of responsibility and sense of calling, takehistory as a mirror and look into the future, and improve bilateral relationstowards the right direction despite interference.

On the night of September 28th, Abeattended the reception in celebration of the 68th anniversary ofChina’s foundation and the 45th anniversary of the normalization ofChina-Japan relations at the Chinese embassy in Tokyo, Japan. In his remarks,Abe said that stronger China-Japan cooperation is not only important to the twocountries, but indispensable to peace and prosperity of Asia and the world atlarge. Japan will make an effort to improve China-Japan relations for strategicmutual benefits.

The Iraqi Kurdistan Independence Referendum

On September 25th,Iraq's Kurdish Region held an independence referendum despite internationalobjections and the verdict rendered by Iraqi Supreme Court. Two days later, theReferendum Committee confirmed that more than 92% had voted in favor of theindependence of the region. The senior officials of Iraqi Kurdistan statedbefore and after the referendum that the vote did not mean independence wouldhappen instantly, and that the region would, based on the results, negotiate withBaghdad for one to two years.

The Iraqi centralgovernment came out strongly against the “unconstitutional” referendum, andrefused to negotiate with the Kurdish leadership over the vote. On September 25th,the Iraqi Council of Representatives decided to close all crossings into theKurdistan region, cutting the links between it and the rest of Iraq. Meanwhile,it also voted in favor of a recommendation to the Iraqi Ministry of ForeignAffairs to urge other countries which have consulates in the Kurdistan regionto close their offices.

Iraq’s neighbors, Turkeyand Iran, clearly expressed their opposition to the referendum and refused toacknowledge it. Iran has canceled commercial flights to Iraqi Kurdistan, andbanned the trade of crude oil products between Iranian companies and theregion. Turkey threatened to close its border with the Kurdistan and cut offthe pipeline that carries oil from the region to the outside world. Iraqi andTurkish armies even conducted joint exercises along their shared border withthe Kurdistan, aiming to put military pressure on the Kurdish independencemovement. Besides Iraq, Kurds are scattered in various countries, includingTurkey, Iran, and Syria. These countries are worried that the Iraqi Kurds’independence movement may trigger a chain reaction within their own borders andchallenge their territorial integrity.

In order to maintain thegains from the Iraq War and facilitate the country’s post-war reconstruction,the US and EU also opposed the independence of the Kurdistan region and agreedto keep Iraq united.

The rise of the Kurdish independence movement is asequel of the geopolitical cracks in the Middle East caused by the US militaryoperations against Iraq. It seems unlikely that a large-scale military conflictmay occur in the Kurdistan region in the short run, and prospects of theKurdish independence are slim and severely blocked. Nevertheless, theinstability may grow in the Middle East, and a new hot spot will emerge fromthe existing ones.

Fed Set to Shrink Assets

Early in the morning ofSeptember 21st, the Federal Reserve (Fed) announced that it willstart shrinking the balance sheet from October 13th in the face of adebt-ridden country and the threat of hyperinflation.

Prior to the 2008financial crisis, the Fed had $900bn on its balance sheet. After the crisis,the size grew to $4.52tn thanks to three rounds of quantitative easing (QE),five times of the previous level. Since the fourth quarter of 2014, the Fed hasbeen maintaining its balance sheet at $4.5tn, 24.2% of GDP, the highest sincethe data began after WWII. This is abnormal. It is the result of thepost-crisis unconventional monetary policy. Therefore, the Fed started tonormalize its monetary policy in 2015.

The normalization ofinterest rate policy has already begun. Particularly, multiple interest ratehikes starting from end-2016 have helped avoid an economic bubble. But theanti-inflation marginal income has decreased and marginal cost has been rising.Under current circumstances, the Fed finds it impossible to keep on turning upthe interest rate without shrinking assets. The normalization of assetportfolio will start as expected. The whole process will take five years, inwhich the balance-sheet liability will be reduced to 40% of the current level,yielding the similar result from three interest rate hikes as a whole. Also,the Fed expects one interest rate up in 2017, three in 2018, two in 2019, andone in 2020. The longer it takes, the more evident the combined effect incurbing a bubble and adding quality assets from asset shrinking and interestrate hike.

Since 1920, the US has undergone six balance-sheetshrinks. The longest was from 1957 to 1965. And the seventh will soon begin. Itwill help maintain a steady economic growth. Yet in the medium and long term,the move coincides with Trump’s imminent bold tax-reduction policy as well asother major economies’ asset shrinking process which has already begun. It willfurther sap liquidity from the global market. China is still in the process ofreducing overcapacity, de-stocking and de-leveraging. Its economy has not yetbounced back from the bottom. So China needs to keep a close look on thepossible impacts of the Fed’s monetary tightening on new market economies, andtry to pinpoint new growth drivers.

International Events in September 2017

On September 1st,Kenya’s Supreme Court annulled the re-election of the sitting President UhuruKenyatta in the August presidential election, demanding revoting.

On September 3rd,North Korea conducted its sixth nuclear test.

From September 3rdto 5th, the ninth BRICS Summit was held in Xiamen, China.

On September 11th,the United Nations Security Council unanimously adopted Resolution 2375 (2017)to impose new sanctions on North Korea.

On September 17th,the US Secretary of State Rex Tillerson confirmed that it is believed that theUS diplomats in Cuba were hit by sonic attacks causing hearing loss and othersymptoms, and that the US is considering closing its embassy in Havana.

On September 18th,Chinese President Xi Jinping spoke with the US President Donald Trump over thephone.

On September 19th,the US President Donald Trump addressed the General Debate of the 72nd RegularSession of the UN General Assembly (UNGA 72).

On September 21st, Trumpannounced that the US would pile on additional unilateral sanctions againstNorth Korea, and signed an executive order to expand the authority of theTreasury Department to impose sanctions on individuals and entities doingbusiness with North Korea and any financial institutions that facilitate suchtransactions.

On September 24th,the German Chancellor Angela Merkel won another term in office in the federalelection.

Trump signed a new travelban, slapping restrictions on citizens from Chad, Iran, Libya, North Korea,Syria, Yemen, and Somalia as well as a few government officials fromVenezuela.

On September 25th,the Kurdistan region held a referendum on secession from Iraq, in which theturnout was 72.16%. Initial results have shown that most Iraqi Kurds supportindependence. President Recep Tayyip Erdogan of Turkey said that the“separatist” referendum was unacceptable and economic, trade and securitycounter-measures would be taken. The US and other Western countries alsoexpressed their opposition to the referendum.

Japanese Prime MinisterShinzo Abe announced that he would dissolve the lower house of the parliamentthe moment it convenes for a scheduled session on September 28th,paving the way for a snap election: the official campaigning is set to start onOctober 10th, and the election will be held on October 22nd.

On September 27th,Thailand's supreme court sentenced former prime minister Yingluck Shinawatra,who has fled abroad, in absentia to five years in jail for criminal negligencein a rice subsidy program.

On September 28th,the first round of China-US Social and Cultural Dialogue (SCD) was held inWashington, DC, US.

On September 30th,the US Secretary of State Rex Tillerson visited China.

The White House announced that the US President DonaldTrump and First Lady Melania Trump will travel to Japan, South Korea, China,Vietnam, and the Philippines from November 3rd to 14th.

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