TIME India

Why India’s Modi and Japan’s Abe Need Each Other — Badly

India's PM Modi shakes hands with Japan's PM Abe during a signing ceremony at the state guest house in Tokyo
India's Prime Minister Narendra Modi, left, shakes hands with Japan's Prime Minister Shinzo Abe during a signing ceremony in Tokyo on Sept. 1, 2014 Shizuo Kambayashi—Reuters

The two Asian leaders are looking to strengthen ties during their meetings in Japan to counter a rising China

Cuddly is not an adjective that comes to mind when describing the Prime Ministers of either Japan or India. Shinzo Abe, like most Japanese politicians, often appears overly formal, while Narendra Modi has a reputation for being demanding and stern. But apparently the two feel warm and fuzzy about each other. Abe made the unusual gesture of welcoming Modi on his five-day official visit to Japan with an uncharacteristic hug. After that, the duo chatted over an informal dinner and strolled through a temple in the historic cultural center of Kyoto.

The leaders of Asia’s two most prominent democracies have good reasons to cozy up. Greater cooperation between India and Japan could prove critical in helping Abe and Modi achieve their economic goals at home and their strategic aims in the region — which means countering an aggressive China. That’s why the two have gushed about the importance of the India-Japan relationship. Modi said in a statement that his visit would “write a new chapter” in relations, while Abe in a Monday press conference said that their bilateral ties have the “most potential in the world.”

They have a lot of catching up to do. For economies of such size — Japan and India are the second and third largest in Asia, respectively — their exchange is still relatively small. Trade between the two reached only $15.8 billion in 2013 — a mere quarter of India’s trade with China. Japanese direct investment into India totaled $21 billion between 2007 and 2013, making Japan an extremely important investor for the country. But recently, the inflows have tapered off amid India’s economic slowdown. Over the past three years, Japanese firms have invested more in Vietnam and Indonesia than India.

That may be about to change. The fact is that the economic interests of the two nations dovetail nicely. Modi is looking to restart India’s slumbering economic growth by upgrading its woeful infrastructure, strengthening its manufacturing base and constructing a network of new “smart” cities across the nation — all of which Japanese money, technology and investment can help make a reality. Abe on Monday pledged $33 billion of financing and investment for India from public and private sources over the next five years. “Japanese trade and investment ties with India are set to strengthen significantly over the next decade and beyond,” Rajiv Biswas, Asia-Pacific chief economist for consulting firm IHS, predicted in a recent report.

Meanwhile, Abe is trying to jump-start a Japanese economy that has been stalled for two decades, and badly needs new sources of exports and revenue for ailing Japan Inc. India, with its 1.2 billion increasingly wealthy consumers and bottomless investment opportunities, can provide just what Japan requires. That is especially the case due to Tokyo’s souring relations with that other Asian giant, China. As tensions have risen over disputed islands in the East China Sea, investment and trade between China and Japan has deteriorated.

China is pressing Tokyo and New Delhi closer together for other reasons as well. Abe is trying to forge ties with countries across the region to contain a rising and increasingly assertive China. Meanwhile, Modi, who has his own territorial disputes with Beijing on India’s borders in the far east and north, is aiming to enhance the country’s military capabilities. Much of a joint declaration signed by the Prime Ministers dealt with strategic cooperation. The two pledged to “upgrade and strengthen” their partnership in defense by regularizing joint maritime exercises and collaborating on military technology.

China wasn’t specifically mentioned in the declaration, but which country Abe and Modi have in mind is no secret. Modi, in fact, took a clear swipe at Beijing in a speech to businessmen on Monday. “Everywhere around us, we see an 18th century expansionist mind-set: encroaching on another country, intruding in others’ waters, invading other countries and capturing territory,” Modi said.

None of this has gone unnoticed in the Middle Kingdom. An editorial in the state-run Global Times written in response to Modi’s comments attempted to downplay the friendly Abe-Modi summit. “The increasing intimacy between Tokyo and New Delhi will bring at most psychological comfort to the two countries,” the newspaper contended. “If Japan attempts to form a united front centered on India, it will be a crazy fantasy generated by Tokyo’s anxiety of facing a rising Beijing.”

Whether closer India-Japan ties are a fantasy will become apparent quickly. China’s President Xi Jinping is due to visit Modi in India later in September. Let’s see if he gets a hug.

TIME europe

Europe’s Economic Woes Require a Japanese Solution

Rome As Italy Returns To Recession In Second-Quarter
A pedestrian carries a plastic shopping bag as she passes a closed-down temporary outlet store in Rome, Italy, on Tuesday, Aug. 12, 2014. Italy's economy shrank 0.2 percent in the second quarter after contracting 0.1 percent in the previous three months. Bloomberg—Bloomberg via Getty Images

The region’s economy is starting to resemble Japan’s, and that threatens to condemn Europe to its own lost decades

No policymaker, anywhere in the world, wants his or her national economy to be compared to Japan’s. That’s because the Japanese economy, though still the world’s third-largest, has become a sad case-study in the long-term damage that can be inflicted by a financial crisis. It’s more than two decades since Japan’s financial sector melted down in a gargantuan property and stock market crash, but the economy has never fully recovered. Growth remains sluggish, the corporate sector struggles to compete, and the welfare of the average Japanese household has stagnated.

The stark reality facing Europe right now is that its post-crisis economy is looking more and more like Japan’s. And if I was Mario Draghi, Angela Merkel or Francois Hollande, that would have me very, very nervous that Europe is facing a Japanese future — a painful, multi-decade decline.

The anemic growth figures in post-crisis Europe suggest that the region is in the middle of a long-term slump much like post-crisis Japan. Euro zone GDP has contracted in three of the five years from 2009 and 2013, and the International Monetary Fund is forecasting growth of about 1.5% a year through 2019. Compare that to Japan. Between 1992 and 2002, Japan’s GDP grew more than 2% only twice, and contracted in two years. What Europe has to avoid is what happened next in Japan: There, the “lost decade” of slow growth turned into “lost decades.” A self-reinforcing cycle of low growth and meager demand became entrenched, leaving Japan almost entirely dependent on exports — in other words, on external demand — for even its modest rates of expansion.

It is easy to see Europe falling into the same trap. Low growth gives European consumers little incentive to spend, banks to lend, or companies to invest at home. Europe, in fact, has it worse than Japan in certain respects. High unemployment, never much of an issue in Japan, could suppress the spending power of the European middle class for years to come. Europe also can’t afford to rely on fiscal spending to pump up growth, as Japan has done. Pressure from bond markets and the euro zone’s leaders have forced European governments to scale back fiscal spending even as growth has stumbled. It is hard to see where Europe’s growth will come from – except for increasing exports, which, in a still-wobbly global economy, is far from a sure thing.

This slow-growth trap is showing up in Europe today as low inflation – something else that has plagued Japan for years on end. Deflation in Japan acted as a further brake on growth by constraining both consumption and investment. Now there are widespread worries that the euro zone is heading in a similar pattern. Inflation in the euro zone sunk to a mere 0.4% in July, the lowest since the depths of the Great Recession in October 2009.

Sadly, Europe and Japan also have something else in common. Their leaders have been far too complacent in tackling these problems. What really killed Japan was a diehard resistance to implementing the reforms that might spur new sources of growth. The economy has remained too tied up in the red tape and protection that stifles innovation and entrepreneurship. And aside from a burst of liberalization under Prime Minister Junichiro Koizumi in the early 2000s, Japan’s policymakers and politicians generally avoided the politically sensitive reforms that might have fixed the economy.

Europe, arguably, has been only slightly more active. Though some individual governments have made honorable efforts – such as Spain’s with its labor-law liberalization – for the most part reform has come slowly (as in Italy), or has barely begun (France). Nor have European leaders continued to pursue the euro zone-wide integration, such as removing remaining barriers to a common market, that could also help spur growth.

What all this adds up to is simple: If Europe wants to avoid becoming Japan, Europe’s leaders will have to avoid the mistakes Japan has made over the past 20 years. That requires a dramatic shift in the current direction of European economy policy.

First of all, the European Central Bank (ECB) has to take a page out of the Bank of Japan’s (BOJ) recent playbook and become much more aggressive in combating deflation. We can debate whether the BOJ’s massive and unorthodox stimulus policies are good or bad, but what is beyond argument at this point is that ECB president Draghi is not taking the threat of deflation seriously enough. Inflation is nowhere near the ECB’s preferred 2% and Draghi has run monetary policy much too tight. He should consider bringing down interest rates further, if necessary employing the “quantitative easing” used by the U.S. Federal Reserve.

But Japan’s case also shows that monetary policy alone can’t raise growth. The BOJ is currently injecting a torrent of cash into the Japanese economy, but still the economic recovery is weak. Prime Minister Shinzo Abe finally seems to have digested that fact and in recent months has announced some measures aimed at overhauling the structure of the Japanese economy, by, for instance, loosening labor markets, slicing through excessive regulation, and encouraging more women to join the workforce. Abe’s efforts may prove too little, too late, but European leaders must still follow in his footsteps by taking on unions, opening protected sectors and dropping barriers to trade and investment in order to enhance competitiveness and create jobs.

If Europe fails to act, it is not hard to foresee the region slipping hopelessly into a Japan-like downward spiral. This would prove disastrous for Europe’s young people — already suffering from incomprehensible levels of youth unemployment — and it would deny the world economy yet another pillar of growth.

TIME Economy

A Global Financial Guru Who Predicted the Crisis of 2008 Says More Turmoil May Be Coming

Reserve Bank of India Governor Rajan Unveils Interest-Rate Decision And Images Of Market Reactions
Raghuram Rajan, governor of the Reserve Bank of India, speaks during a news conference at the central bank's headquarters in Mumbai on August 5, 2014 Bloomberg/Getty Images

Raghuram Rajan, the governor of India's central bank, fears supereasy money from the world’s central banks is inflating assets and encouraging bad investments

Back in 2005, Raghuram Rajan, then economic counselor at the International Monetary Fund, stood up in front of the annual meeting of prominent economists and bankers at Jackson Hole, Wyo., and gave a presentation that his listeners could never have expected. The U.S. investor community was reveling in the high growth and stable financial conditions then prevalent around the world, but Rajan had examined global financial markets and come to a very different opinion. He argued that increasingly complex markets, which spewed out complicated instruments like credit-default swaps and mortgage-backed securities in ever greater quantities, had made the global financial system a riskier place, not less so as many believed. Such comments were considered near blasphemy at the time, and Rajan’s audience didn’t take him very seriously.

Three years later in 2008, however, his views proved prophetic. Rajan had generally predicted the sources of the worst financial collapse since the Great Depression of the 1930s.

Today, Rajan, now governor of the Reserve Bank of India, the country’s central bank, is worried again. This time, he’s fretting about the impact of the superloose monetary policies pursued by the U.S. Federal Reserve and other central banks to combat the financial crisis and resulting recession. Long-term low interest rates and unorthodox programs to stimulate economies — like quantitative easing, or QE — could be laying the groundwork for more turmoil in financial markets, he argues.

“My sense is that monetary policy can only do so much and beyond a certain point if you try to use monetary policy it does more damage than good,” Rajan tells TIME in his Mumbai office. “A number of years over which we, as central bankers, have convinced markets that we continuously come to their rescue and that we will keep rates really low for long — that we do all kinds of ways of infusing liquidity into the markets — has created markets that tend to push asset prices probably significantly beyond fundamentals, in some cases, and make markets much more vulnerable to adverse news. My worry is that, with inflation not being strong, this can continue for some time until things are so stretched that any signs of inflation, and a rise in interest rates, could precipitate a fairly strong market reaction. Certainly that volatility hurts across the world.”

Rajan, 51, would not pinpoint specifically where the most dangerous spots in global finance may be, but he did say that he believed assets of all sorts have become inflated. “I don’t know what the right level of the market is,” he says. “But I do know that, when I look at my portfolio and try to figure out where to invest, I can’t think of what I think is fairly valued.”

On top of his worries about market volatility, Rajan is also concerned that supereasy money is causing the misallocation of capital in the global economy, with potentially huge consequences down the road. “My greater worry is that by altering the price of capital for a substantial period of time, are we also, in a sense, distorting investment decisions and the nature of the economy we will have,” Rajan says. “Have we artificially kept the real rate of interest somehow below what should be the appropriate natural rate of interest today and created bad investment that is not the most appropriate for the economy?”

Still, Rajan agrees with Federal Reserve chairwoman Janet Yellen in her policy of slowly withdrawing stimulus measures and reintroducing higher interest rates. “We’re in the hole we are in. To reverse it by changing abruptly would create substantial amounts of damage. So I’m with Fed officials in saying that as we get out of this, let’s get out of this in a predictable and careful way, rather than in one go,” Rajan says.

Rajan has had to confront fallout from Fed policy personally. When he took the helm at India’s central bank in 2013, India was suffering as one of the “fragile five” — the emerging markets deemed most vulnerable to the winding down of Fed stimulus. India’s currency, the rupee, tumbled in value as investors fled, fearful that the curtailing of dollars in the world economy would strain the country’s ability to finance its large current-account deficit. In a series of deft and quick steps, Rajan stabilized the currency and wooed back investors, earning him breathless praise in the Indian media. Newspapers dubbed him a rock-star banker and even compared him to James Bond.

Now India, he says, is “absolutely” out of the “fragile five” stage. With narrowing fiscal and current account deficits, falling inflation and rising currency reserves, India’s fundamentals, he argues, are much improved and the country is less vulnerable. However, he sees the turmoil India experienced as part of a larger problem: a lack of coordination between the Federal Reserve and other central banks around the world. The actions the Fed takes are based mainly on U.S. domestic economic factors, but because of the unique position of the U.S. in the world economy, those decisions ripple through dollar-dominated financial markets in ways the Fed leadership does not take into account.

The results, Rajan argues, can ultimately be detrimental to the world economy. He points to a rise in increase in reserves in India and other emerging markets – built up as a cushion against potential fallout from the Fed’s tapering of stimulus – as one of those negatives. By topping up reserves, these emerging markets are in effect decreasing their demand for goods from the U.S. and elsewhere, and that is in the end bad for global growth.

“The U.S. should recognize that the actions we have to take to protect ourselves long run come back to effect the U.S.,” he says. “Therefore there is room for greater dialogue on how these policies should be conducted, not just to be nice, but because in the medium run it is in [America’s] own self-interest. If you are not careful about the volatility you are creating, the others have to respond and everybody is worse off.”

Ironically, Rajan has faced some criticism at home for doing just the opposite of the Fed — keeping interest rates high. Unlike most of the world, where bankers worry about low inflation or even deflation, India has been an outpost where inflation has been running too high, and Rajan took steps to bring the rate down — with some success. Some critics, however, complained that Rajan’s high-rate policy was acting as a drag on growth, and there was much press speculation when newly elected Prime Minister Narendra Modi took office in May that Rajan would come under pressure to cut rates to aid the administration’s promise to get the Indian economy back on track.

Rajan, though, says the central bank and the Modi Administration “are completely on the same page” when it comes to fighting inflation. “I have said repeatedly that the way to sustainable growth is to bring down inflation to much more reasonable levels,” Rajan explains. “That message is something the government is completely on board with. Once we do bring it down then we will have the opportunity to cut interest rates.”

Rajan also seems to be on the same page as Modi on economic reform. He expressed confidence that the new government is taking the initial steps necessary to set the sluggish Indian economy on its way to recovery. Growth rates can be restored to 6% to 7%, from current levels under 5%, Rajan believes, by making the government more efficient in implementing policies — unlocking badly needed but stalled investments in the process.

“Those are the things that are really needed to get the economy back to reasonable growth,” Rajan says. “This government has set about the implementation in a steady way and I am hopeful that we will see the fruits of that in the months to come.” Maybe Rajan will prove prescient this time around too.

TIME indonesia

The Big Challenge for Indonesia’s New President: Proving Democracy Works

Indonesian presidential candidate Jokowi sits on a bench while waiting for the announcement of the results from the Elections Commission at Waduk Pluit in Jakarta
Indonesian presidential candidate Joko "Jokowi" Widodo, now president elect, sits on a bench while waiting for the announcement of election results by the Elections Commission at Waduk Pluit in Jakarta July 22, 2014. Beawiharta Beawiharta—Reuters

Joko Widodo’s election victory was a big win for Muslim-majority Indonesia, the world's third largest democracy and fourth most populous nation. Now the incoming President has to deliver much-needed reform

When Indonesia’s election commission announced late Tuesday that Jakarta Governor Joko Widodo had won July’s presidential election, the transition of the world’s fourth-most populous nation to democracy was finally made complete.

Sixteen years ago, when autocrat Suharto fell from power amid street riots and a financial crisis, it seemed the sprawling archipelago nation could break apart as politics in Jakarta descended into chaos. However, the victory of Joko Widodo, affectionately called “Jokowi,” shows how mature and stable the country’s new democracy has become. Jokowi is the first leader in Indonesia who is not affiliated with the old ruling class, but a self-made man, who built a political career with his honesty, smart policies and good results.

Now he faces an entirely new challenge: Proving that new democracies in the emerging world can govern effectively. Indonesia has become a rising star in the global economy, propelled by its increasingly wealthy 250 million people and government policies that are friendlier to investment. However, Indonesia, like many other emerging economies, is slipping. The IMF expects Indonesia’s GDP to grow by 5.4% in 2014 — not bad, but the rate has been declining steadily from 2011, when it was 6.5%. The problem is the same that is dragging down developing nations everywhere, from India to Brazil: Politicians, mired in factional fighting and lacking the necessary will, have failed to implement the reforms critical to keep growth going.

Awaiting Jokowi is a long list of difficult reforms that economists believe are needed to restore Indonesia’s growth. Restrictive labor laws must be loosened up to attract more job-creating manufacturing and the nation’s inadequate infrastructure needs a serious upgrade. The education system could use one, too. Expensive fuel subsidies that are straining the budget have to be reduced. Jokowi will have to manage these changes in an unfavorable global financial environment. With the Federal Reserve moving to end its stimulus programs, the flow of dollars sloshing around the world will be curtailed, and Indonesia, with a large current-account deficit, might find financing itself more costly. The country’s currency and stock market were among the hardest hit when the Fed first announced it would “taper” its program in 2013.

The reforms waiting for Jokowi are almost identical to the ones the new Prime Minister of India, Narendra Modi, needs to implement. The similarities between the two don’t end there. Both were successful on a local scale but now have to implement policy on a more challenging national level. Both will have to navigate reforms through fractious democracies and sell hard change to protest-prone publics.

But Jokowi has it worse. While Modi’s Bharatiya Janata Party won a mandate in a landslide, Jokowi’s political party, the Partai Demokrasi Indonesia Perjuangan (which translates as Indonesian Democratic Party of Struggle), garnered only a minority in the nation’s parliament in April elections, which means he’ll have to govern in a potentially messy coalition. Jokowi’s own victory was more muted as well. He won 53% of the vote to best his chief rival, former general Prabowo Subianto, who may contest the results and drag out the election’s conclusion. “A narrow victory for Jokowi may not be sufficient to empower the newly elected president to carry out all the desired reforms,” worries Societe Generale economist Kunal Kumar Kundu.

There are also doubts about Jokowi himself. In comments on policy, he promised to raise Indonesia’s growth by tackling the nation’s toughest issues – from corruption to red tape – and make the country’s more open to investors. “We need to get our economy growing,” he recently said in one interview. “To do that, we must have more investment and also deliver in terms of infrastructure.” At the same time, Jokowi is new to national politics and policymaking and therefore unproven. “It is clearly too early to tell whether Jokowi will be the man to get Indonesia’s economy back on track,” says Gareth Leather, Asia economist at research firm Capital Economics. “There is no magic bullet to reviving growth.”

If Jokowi succeeds, however, he’ll offer yet another counterpoint to Asia’s other rising power, China. In Beijing, President Xi Jinping and his team seem to believe that tighter and tighter political control is necessary to guide the country forward. A Jokowi government could prove just the opposite – that open democracies can produce real reform and better lives for their citizens. The world will be watching.

TIME

The Factory in the China Food Scandal Is Foreign-Owned. That Could Have Made It a Target

A 24 hour McDonalds restaurant in a shopping mall. KFC,
A 24-hour McDonalds restaurant in a shopping mall. KFC, McDonalds, Pizza Hut and other Western brands are suffering food safety crises in the Chinese market. Zhang Peng—LightRocket via Getty Images

No company should be allowed to get away with unsafe products, but the harsh spotlight shone on multinational enterprises in China could be part of an effort to undermine them in favor of local businesses

Another day in China, another food scandal. This time the accused is a meat supplier to KFC and McDonald’s in China. An undercover investigation by a Chinese TV station, which aired on Sunday, claimed that a factory in Shanghai owned by Illinois-based OSI Group was shipping the fast-food giants expired meat. Later, coffee-shop chain Starbucks in China and McDonald’s outlets in Japan got dragged into the mess, as they, too, had meat from the suspect factory in their products.

The report sent the U.S. companies into full crisis management. Yum! Brands, which operates KFC, garners more than 40% of its total operating profit from China, while McDonald’s considers the country one of its most important growth markets, so neither can afford tainting their brands with tainted food. KFC and McDonald’s issued apologies to their customers, while suspending shipments from the Shanghai factory. Starbucks said it removed all products with meat from the supplier from its stores. OSI, meanwhile, is undertaking an investigation into the practices at the factory. On Wednesday, Chinese police detained five people in connection with the scandal.

The allegations, if proved true, reveal just how rotten China’s food supply really is. If such shenanigans are taking place at OSI, a supplier with a long history and good reputation, one can only shudder to imagine what’s happening elsewhere in the industry. Yet that raises another question almost as uncomfortable. In a country where companies routinely flout the law and officials — by the government’s own admission — are grossly corrupt, we’re forced to ask why some corporations and people find themselves in Chinese newspaper headlines or investigated by regulators, and not others. In other words, why was OSI the target of a time-consuming TV exposé and not another company?

TIME attempted repeatedly to pose that question to Dragon TV, which aired the investigation, but did not receive a return phone call. The focus on a foreign-owned factory, however, is part of a trend. Foreign companies do seem to figure prominently in state-media critiques and government investigations. The revelations about KFC and McDonald’s are just the latest in a series of attacks on popular foreign brands and established foreign companies in the country.

Since June, Chinese state media have claimed U.S. technology companies such as Microsoft and Yahoo can be used by Washington to spy on China. Earlier this month, Chinese state TV claimed that the Apple iPhone was a threat to national security. Alleged bribery by drugmaker GSK in China has been paraded in national headlines for months. American restaurant brands have been targeted before. Last year, Chinese media accused Starbucks of overcharging Chinese customers, while in 2012, state TV conducted another undercover investigation into McDonald’s, which it claimed exposed unsavory practices at a Beijing outlet.

Obviously, if foreign companies are engaged in illegal or improper practices in China, they must be held accountable. Yet the spotlight shone on the activities of foreign firms is so bright that it can be seen as part of another, more disturbing trend: an effort by the government to undermine foreign brands and business in China.

We can speculate why that might be happening. The government could be trying to reel in a few “big fish” to try to scare smaller fry into better behavior. Officials might be attempting to win points with the public by appearing to address issues of great public concern like food safety without roiling any Chinese interests. And in the process, the Chinese government might believe it can aid Chinese companies in their competition with foreign firms by undercutting the reputation of international brands. The latest exposé on KFC and McDonald’s could have serious repercussions for the American fast-food chains. In 2012, KFC’s business in China suffered badly when news broke that some of its chicken suppliers were pumping excessive antibiotics into their birds.

The Chinese government has a long history of attempting to tilt the local playing field in favor of its own firms. Foreign carmakers, though very successful in China, are still forced to manufacture in the country only through joint ventures with Chinese firms — a restriction most other emerging economies don’t impose. Reports from chambers of commerce accuse Chinese bureaucrats of routinely hampering the expansion of foreign business by taking a “go-slow” approach when issuing mandatory permits and licenses. There is a feeling among foreign businessmen in China that the government regularly discriminates against them. The latest survey conducted by the European Union Chamber of Commerce in China revealed that 55% of the respondents believed that they are treated unfavorably compared with Chinese companies.

The process of opening the China market wider to foreign business has also stalled. More than half of the respondents in the E.U. survey said there had been no opening of the market in their industries over the past one or two years, while 9% believed that the market had become more closed. Such restricted access and other regulatory hurdles cost European companies nearly $29 billion in lost business in 2013, according to the survey. Generally, foreign businessmen feel that China has become a more hostile environment. A similar survey by the American Chamber of Commerce in China found that 41% of its respondents felt less welcome in the country than they had been before.

Such an attitude by China’s government runs counter to the oft-repeated pledges by the most senior Chinese officials that they remain committed to their long-standing policy of opening up to the world. But it is also representative of a more assertive Chinese attitude toward the West in many aspects. Beijing is standing up for what it sees as its rights in various territorial disputes with its neighbors, as it tries to re-establish its traditional political and military dominance in East Asia. After decades of reliance on foreign investment to drive growth and introduce technology, China, now the world’s second largest economy, wants to rely more on its own companies and innovation.

That’s only natural. But at the same time, China, as a developing nation still in need of jobs and technology, can’t afford to chase off foreign investment, either. The fact is that China is becoming a less desirable place to invest, for reasons ranging from the slowing economy to rising costs to ambiguous government regulation. Only one-fifth of the companies queried in the E.U. Chamber survey said China was their top investment destination in 2013, down from one-third just two years ago. Meanwhile, the percentage of respondents who said they intend to expand their current operations in China, dropped sharply to 57% from 86% just last year. Beijing may see benefits in targeting foreign firms, but it should also be aware of the costs.

— With reporting by Chengcheng Jiang / Beijing

TIME Aviation

Malaysia, the World’s Unluckiest Airline, Will Now Struggle to Survive

Malaysia’s national carrier was already in a weak financial position. Now its future is highly uncertain

Only four months after Malaysia Airlines Flight 370 vanished somewhere in the Indian Ocean with 239 passengers on board, Flight 17 was shot down over Ukraine, causing the loss of another 298 souls — an unprecedented blow to a major international airline. Even a robust operator would have trouble overcoming twin disasters like that. But the fact is that Malaysia’s flag carrier is in no financial shape to absorb these catastrophes. In fact, analysts wonder if it will ever be able to recover.

“The outlook is very dire,” says Mohshin Aziz, an aviation analyst at Kuala Lumpur–based Maybank. The airline, he fears, “won’t be able to survive beyond the year in its current form.”

The next months could prove humbling for an airline that had grand ambitions. The Malaysian government had high hopes that its national carrier would compete with the region’s best, and invested much money and emotion into building it. But Malaysia Airlines got badly squeezed in the fiercely contested Asian airline industry. Its cost base is too high to compete with lean and mean budget carrier AirAsia, also based in Kuala Lumpur. At the same time, it lacks the prestigious brand image to raise its ticket prices and take on East Asia’s more premier airlines, such as Singapore Airlines and Hong Kong’s Cathay Pacific. As a result, the company has been bleeding for years. The airline’s Kuala Lumpur–listed parent, Malaysian Airline System, has racked up losses of more than $1.4 billion since 2011. Management has tried cutting costs and improving service to turn around the airline’s fortunes, but such efforts were making only minimal progress.

Now whatever hope remained may get dashed by the two crushing tragedies. Analysts are concerned that the fallout will scare passengers away from flying on the airline, or force management to discount tickets to convince them to book — reducing revenue either way. That could push the airline’s fragile finances to the breaking point, causing “the ticking time bomb to explode,” says Daniel Tsang, founder of consultancy Aspire Aviation in Hong Kong. That reality will likely force Malaysia Airlines to take more drastic measures to stay afloat. Even before the latest crash over Ukraine, CEO Ahmad Jauhari Yahya told shareholders in June that the MH370 incident “sadly now added an entirely unexpected dimension, damaging our brand and our business reputation, and accelerating the urgency for radical change.”

There are options, but all are equally unsavory. Mohshin believes that Malaysia Airlines will have to greatly shrink its business, perhaps eradicating most of the international routes it flies, to focus on the more profitable parts of the operations. “It will never get back to the large size it was before,” he says. “The sooner they accept that fact, the better off they will be.” Tsang says that bankruptcy proceeding would be a “pretty good option” for Malaysia Airlines. That process would make it easier to strip out more of the legacy costs and make the airline more competitive.

What happens next ultimately depends on the Malaysian government. A state-controlled investment fund owns a majority of the shares in the carrier’s parent company, and that makes the future of Malaysia Airlines a political issue. The airline’s powerful union has been able to fight off previous efforts at radically overhauling the carrier and analysts say that rescuing Malaysia Airlines this time will require a high degree of political commitment. Still, if Malaysia Airlines manages to streamline its operations, it may live to fly another day.

“The restructuring will be painful for a lot of people,” Tsang says. “But a phoenix can rise from ashes.”

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