Friday, 29 August 2014

ASEAN tigers reap FDI income as China teeters

Smart money is flowing into the Asia Pacific. Over the past 18 months, foreign direct investment (FDI) into the region proves it’s one of the best places on earth to see serious return on investment.

The problem, at least for China, is that the Asia Pacific is one of the best places on earth to invest. That’s not an accidental repeat. No longer is the region dominated by one or two major economies. Every nation competes for a limited amount of FDI, and that’s changing the calculus for China’s future plans.
The most recent FDI data from the World Bank, drawn from the recently compiled 2013 figures, shows the China heavyweight gathered an impressive 17.7% increase of FDI year on year. In total, China earned $US347 billion in FDI inflows in 2013. The story of a rising China is now very well known, but just as important for the region’s health – and crucial to understand the Asia Pacific’s long-term trajectory – is the quick rise of other ASEAN countries.

Malaysia too grew its FDI over the same time period by 19%. The Philippines joined the race for investment with their own 20.4% increase. Singapore, which accounts for much of ASEAN’s total FDI, increased its inflow by 4.2% and Vietnam saw a 6.3% increase.

Indonesia was one of the only major ASEAN economies to register a distinct backwards step in FDI over the period. The country – which has just tied up a controversial election – decreased its FDI by 3.6% last year.  The drop probably has more to do with Indonesia’s dilapidated and outdated infrastructure, and tendency for natural disasters such as flooding in major centres, than geography. President-elect Joko Widodo promises greater infrastructure investment, so Indonesia’s FDI may see a rise over the next few years.

As China shows signs of slower growth and lifts more of its citizens into the middle class, other Asian countries are tipped to catch the leaking FDI. In many ways, Chinese labour is becoming too expensive. Countries like Laos, Thailand, Vietnam and Indonesia are all expected to catch this investment, as wages are generally lower there.

In this light, Vietnam’s modest 6.3% FDI increase is therefore a little surprising considering its proximity to China. Some analysts expected Vietnam to register larger FDI, but the country hasn’t fully integrated into the regulatory environment or free trade benefits of ASEAN quite yet. These final movements should be completed by 2015 however, so Vietnam can expect a sharp jump in FDI next year.

In comparison to Singapore’s expected high FDI growth, Hong Kong appears to be stable but performed disappointingly lagging nearly two percentage points behind its main regional rival. Again, Hong Kong doesn’t have a free trade agreement with ASEAN which could explain its sliding performance. China does have a deal with the bloc, but the agreement doesn’t include Hong Kong.

Hong Kong has also experienced democratic trouble recently offering China perhaps less impetus to support any Hong Kong-ASEAN free trade deal (FTA). Whether China’s Central Government can bring the population of Hong Kong back under control will determine the likelihood of an imminent FTA.

In the meantime, Singapore will continue to soak up the foreign investment that Hong Kong misses. Until those crucial steps are taken in Beijing, Singapore will remain the business hub of choice for Asian investment.

As the data suggests, basing any Asian business is still more attractive from Singapore than from Hong Kong. The trends from the market seem to point to Hong Kong as little more than China-lite when it comes to organising business. While that’s not necessarily a bad thing, as Chinese wages increase the government will need to create ways to make their economy more attractive for FDI. In doing so, they could risk scuttling the “rebalancing” of their economy.

August’s data from China’s National Bureau shows the supply of credit to the Chinese economy expanded by only $53.14 billion in July (273.1 billion yuan). Compared to New Zealand’s figures, that seems high, but it’s actually the lowest it’s been in six years.

As pointed out last week, China is racing against time to evolve into an economy less reliant on the intimate bond between government-led credit expansion and housing and infrastructure construction. The World Bank data is another perspective on what’s happening in Asia. China still commands an impressive amount of foreign investment attention but the market is making noises about more attractive opportunities popping up elsewhere in the region.

Simply put, the confounding factor for China’s attempts to rebalance towards greater dependence on domestic consumption is the parallel growth of the rest of Asia. No longer is China the lone economy racing ahead as over the last decade. Vietnam is still 12 months away from emerging from its cocoon into a fully-fledged Asian tiger economy. Malaysia and the Philippines have each built a regulatory environment to harness more FDI in the future.

Indonesia and Thailand will repair and catch up too. Every example will compete directly with an economically preoccupied and tense China. There also are signs China is experiencing deeper structural and cyclical problems than it lets on, but the enormity of the economy keeps it afloat for now.

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