China’s moves in the South Pacific

This is an audio transcript of the FT News Briefing podcast episode: China’s moves in the South Pacific

Marc Filippino
Good morning from the Financial Times. Today is Wednesday, April 27th, and this is your FT News Briefing.

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The Nasdaq Composite fell to its lowest level in more than a year. A new study shows the impact that Brexit’s had on small businesses — it’s not good. Plus, we’ll find out about Chinese companies that are trying to lease property on South Pacific islands. I’m Marc Filippino, and here’s the news you need to start your day.

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The Nasdaq lost 4 per cent of its value yesterday. Part of that was Tesla shares. They dove 12 per cent a day after its CEO, Elon Musk, struck a deal to buy the social media site Twitter. But investors are also nervous about inflation and rising interest rates and their impact on tech earnings. Turns out they were right to be concerned. After the close of trading, Google’s parent company, Alphabet, announced first-quarter earnings that just missed Wall Street expectations. But shares still dropped more than 6 per cent after the bell. Microsoft beat expectations and announced strong growth in its cloud business, but its shares still fell in after-hours trading.

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One of the biggest questions surrounding Brexit was, “What impact would it have on trade between the UK and the European Union?” Now we have a bit of a sense. There’s been a big study from the London School of Economics. It analysed trade patterns for 1200 individual product lines. The FT’s public policy editor, Peter Foster, has this key finding.

Peter Foster
Most of the modelling suggests that UK exports to the EU are significantly down from where they would have been, maybe 15 per cent down from where they would have been. But within that figure, that headline figure, what this research from the London School of Economics shows is that smaller companies have been disproportionately hit by Brexit. So bigger companies have found ways to deal with the bureaucracy but smaller companies, which is reflected in the number of buyer-seller relationships between the UK and the EU, have really suffered, those fallen by about a third within the first quarter of the EU-UK trade deal coming into force in January 2021. And that’s because smaller companies have found it much, much harder to deal with all the red tape thrown up by the UK’s exit from the EU single market.

Marc Filippino
So Peter, did these findings line up with what you hear from small business owners? You know, what have they told you?

Peter Foster
Frequently, I talked to businesses that are facing that situation. There might be one business that sells second-hand books of rare and vintage books. Another business sells honey from Staffordshire just became impossible to economically move his product into the European Union because it was a one-man band.

Marc Filippino
OK, so what does this hit to small businesses mean more broadly?

Peter Foster
Well, really simply smaller businesses become bigger businesses. And so, you know, what this does is point to the fact that the stock, as it were, of embryonic smaller UK businesses who are learning to trade internationally, learning to trade with Europe, is being crimped and curtailed by Brexit, and the risk is that has longer-term impacts down the line. We’ve also seen, even though the headline numbers are the same, if you look at the data from the Office of Budget Responsibility, the UK is underperforming against other G7 major economies by a factor of about 15 per cent. The OBR reckons that UK exports over the medium term will fall by 15% from where they otherwise would have been as a result of Brexit.

Marc Filippino
Peter Foster is the FT’s public policy editor. Thanks, Peter.

Peter Foster
My pleasure.

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Marc Filippino
China is expanding its influence in the South Pacific. Last week, Beijing signed a security pact with the Solomon Islands. But in the years leading up to this, Chinese companies were trying to wrangle property deals in the region. The FT’s Kathrin Hille joins me now to talk more about this. Hey, Kathrin.

Kathrin Hille
Hi.

Marc Filippino
So I wanna ask about one of the companies you investigated. It’s called China Sam Enterprises. What was it trying to do?

Kathrin Hille
Well, in 2019, just a few months after Solomon Islands switched their diplomatic recognition from Taiwan to China, China Sam Enterprise Group comes out of nowhere and proposes a 75-year lease on Tulagi, which is a small island in the Solomon Islands. And at the time they said they wanted to set up an economic zone and there was talk of oil refineries. But for this you have to know that there is no oil in Solomon Islands. So they signed a contract with the provincial premier at the time. But when it became public, this contract was annulled by order of the attorney-general, who found it in violation of several laws. A year later, the company tried again to acquire a long lease on another plot of land in another province for the People’s Liberation Army to build military installations and other infrastructure. Fast forward to spring this year, now we all of a sudden have the Chinese government signing a bilateral security agreement with the Solomon Islands government, and under that deal it would be possible for China to send armed forces to the Solomon Islands.

Marc Filippino
Why are those Solomon Islands so strategic?

Kathrin Hille
The key thing about Solomon Islands and any of these Pacific Island nations really is they control vast areas of ocean. And for China, it is particularly important to be able to move around in the Pacific and especially in the South Pacific, because that would bring them closer militarily to some of the places where the US, which is still the dominant military power in the Pacific, has some of its military installations. So for the People’s Liberation Army to be able to keep tabs on the US military and also to project power and be a serious competitor militarily, they need to get close. And that can only be done with naval assets, with ships and for ships to move around and operate for extended periods of time so far from home, they would need a foothold.

Marc Filippino
So is there a link between these Chinese companies trying to lease land in the region and China just signing a security pact with the Solomon Islands?

Kathrin Hille
We don’t know. I mean, you judge, yourself. It does appear very, very odd that this obscure Chinese company that also happens to have links to the security forces makes two attempts to secure territory. And then little more than a year later, the government comes out and signs such a deal. Now, we do have to say that this security agreement that the Chinese government has signed with Solomon Islands is being explained now by both sides as something that is not for the purpose of setting up a Chinese naval base in the Solomon Islands.

Marc Filippino
And just out of curiosity, what are the people that live in the Solomon Islands say? Or other South Pacific nations? What do they say about China’s influence?

Kathrin Hille
Well, the political landscape in the Solomon Islands is deeply split. There are a lot of opposition politicians who are fiercely against this security agreement with China. But if there is one thing everyone agrees upon, it is that the outside world needs to take a real interest in the Solomon Islands and not just look at the country through a geopolitical lens all the time. Many of these countries have very unique problems. Almost all of them are really, really threatened by climate change. So if water levels rise just a bit, they just disappear or part of their territory disappears. But from the perspective of outside countries or actors in the region, those countries have tended to focus on geopolitics and hard security and have, from the perspective of the Pacific Island nations, not done enough to fight climate change and to think about solving these problems.

Marc Filippino
Kathrin Hille is the FT’s China correspondent.

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You can read more on all of these stories that FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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