Magic Island Maker

China has launched a new dredging ship capable of creating islands, such as those Beijing has already built in the disputed South China Sea. The ‘Tian Kun Hao’ has been dubbed the ‘magic island maker’ by Chinese state media. According to the designers, it is the largest dredger in Asia and can dig 6,000 cubic metres an hour, the equivalent of three standard swimming pools from 35 metres below the surface of the sea.

China’s Belt and Road initiative is seeking to revive Silk Road trade routes, linking China with Africa and Europe. This includes developing a number of ports in the Indian Ocean and the Middle East and the ‘Tian Kun Hao’ could be used in deep water port construction.

However, China has been accused of creating artificial islands in the South China Sea to bolster its claim over the contested waters. China is believed to have so far created seven fortified islands, some of which now apparently house airfields, missile bases and radar systems. Additionally, state media has recently reported China has also opened a modern cinema theatre on Yongxing Island.

Will the ‘Tian Kun Hao’ be deployed to build further islands from dredged sand, mud and coral?

China, Vietnam, the Philippines, Malaysia, Brunei and Taiwan are all in dispute over the Spratly islands. The US Navy has traditionally asserted freedom of navigation which means it sails past or flies near the disputed islands, a strategy which has angered China. The news on the ‘Tian Kun Hao’ emerged during President Trump’s Asian visit last week. The timing could be a coincidence but is another reminder of the considerable tension that activity in the South China Sea can generate.

What have we been watching?

Previously, it was politicians making headlines and last week it was tax avoiders. The Paradise Papers leak has disclosed the offshore financial affairs of numerous celebrities and high net-worth individuals and even the Queen’s private estate was revealed to have invested £10m in offshore funds. Meanwhile, it was ‘night of the long knives’ in Saudi Arabia with at least 11 princes and dozens of senior officials and prominent business men arrested by the country’s new anti-corruption commission. They include, one of the world’s richest men, billionaire tycoon Prince Alwaleed bin Talal, a major investor in many western companies including Twitter and Citi-group.

Besides the oil price moving higher on developments in Saudi Arabia, investors continued to monitor progress on crucial US tax reforms where there are a lot of doubts about the timetable. This is not surprising given President Trump has so far failed to deliver, particularly as last week marked the first anniversary of his election victory.

The UK is facing its most challenging issue for decades in Brexit, yet the Conservative cabinet seems in complete disarray as ministers have flouted PM Theresa May’s authority, freelanced on policy and engaged in bitter feuds. Theresa May has forced Priti Patel to resign as international development secretary over undisclosed meetings with Israeli politicians. She is replaced by Penny Mordaunt, a former junior work and pensions minister who campaigned for a Leave vote in last year’s EU referendum.

Nearly two-thirds of businesses based in the EU expect to move part of their supply chain as a result of Brexit according to a survey by the Chartered Institute of Procurement & Supply. The survey also found that 40% of British businesses with EU suppliers are looking at domestic alternatives. Meanwhile, Ireland has called for a transition period of up to five years after the UK leaves the EU in March 2019, in a sign of Dublin’s mounting concern that it will suffer collateral damage from Brexit. The EU is giving the UK two weeks to see how much it is prepared to pay in the Brexit divorce settlement, warning otherwise it will struggle to prepare this year for a transition deal. Media reports suggest Theresa May is ready to ‘considerably increase’ the UK’s €20bn divorce bill offer to the EU after signs that the Euro-sceptics in her party will tolerate paying more money to break the deadlock in negotiations.

In the UK, car sales fell in October for the seventh month in a row. Falling confidence amongst consumers and businesses were blamed along with a collapse in demand for diesel vehicles. The British Retail Consortium said that sales of non-food items grew by just 0.1% in the three months ended October as consumers appeared to favour outdoor experiences and excursions during half-term, over visits to the shops. Rising petrol prices are not going to do British retailers any favours. The Royal Institution of Chartered Surveyors (Rics) reported house prices are now falling in four areas of the country, London, the South East, east Anglia and north-east England but that across the country as a whole, prices are flat. The combination of the increased cost of moving, a lack of fresh stock coming to the market, uncertainty over the political climate and now an interest rate hike appears to be taking its toll on housing activity. While the consumer is under pressure, UK industrial output, including manufacturing which accounts for about 14% of the economy continues to benefit from improving global economic growth and weak Sterling. UK industrial output increased by 0.7% in September, well ahead of forecasts.

In Europe, economic growth expectations for 2017 have been raised from 1.7% to 2.2%. Despite uncertainty about Brexit, low inflation and slow wage growth the eurozone is projected to grow by 2.1% in 2018 and 1.9% in 2019.

In the USA, Senate Republicans are having to grapple with a politically fraught menu of choices as they attempt to squeeze President Trump’s tax overhaul into a framework that could sharply curtail their ability to run up budget deficits. In the initial ten -year period following implementation of the tax bill, Republicans have restricted themselves to adding no more than $1.5trillion of debt with their tax proposals. If forced to water down a proposed excise tax on multinational companies, the package could breach the deficit ceiling.

In Japan, President Trump, on an official visit told a gathering of business leaders that Japan has an unfair advantage on trade and that he intends to fix the imbalance by making it easier to do business with the USA. This highlights the Trump administration’s concerns over the size of the US trade deficit with Japan, which is second only in size to their deficit with China.

President Trump struck a warmer tone with China’s leader Xi Jinping in marked contrast to his previous criticism. On China’s trade surplus, he surprised many when he said he ‘did not blame China for taking advantage’. However, he urged China to ‘work very hard’ to persuade North Korea to give up its nuclear weapon programme.

Brent oil moved above $64, its highest level in two years on fears that the Saudi Arabian crackdown on corruption will sow political uncertainty. Meanwhile, tensions remain heightened in the Middle East as Saudi Arabia has accused Iran of an act of ‘direct military aggression’ by supplying missiles to rebels in Yemen who recently fired a ballistic missile towards King Khaled International Airport, near Riyadh. OPEC raised its longer term global oil demand forecast from 95.4m barrels a day to 102.3m by 2022. It expects the growth in China, India and other emerging economies to offset the shift within developed economies to electric vehicles and from the adoption of more energy efficient policies.

Finally, some offshore tax havens may not have a leg to stand on, but if challenged, the Isle of Man can argue that it has three!

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