Investment drive deepens economic ties between China and Asean

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While global attention has been fixed on the geostrategic discord between China and its neighbors in Southeast Asia, their economies have been discovering new harmonies.
Where manufacturers in China and the 10 members of Asean were once competitors, today their output is increasingly complementary, especially in more specialised manufacturing industries.

Trade in services is expanding rapidly and investment flows are turning from a trickle to a flood.

Trade flows between China and Asean are driven as much by the evolution of regional production networks and trade integration initiatives as by rising regional domestic demand.

China-Asean trade is dominated by goods for production rather than consumption – 66 per cent of Asean imports from China and 58 per cent of China’s imports from Asean are intermediate goods.

Almost all shipments to China from Laos, Brunei, Myanmar and Indonesia are primary commodities. Asean markets are inundated with Chinese manufactured goods, but Asean is not just a passive recipient of Chinese goods.

Two-way trade between China and Asean rose 5.4 per cent year on year to US$261.3 billion (Bt8.525 trillion) in July. It’s on track to achieve the joint target of $500 billion next year. We believe that intra-Asian trade as a whole will be worth $10.8 trillion by 2020.

The most significant driver of regional change is the rise in production costs in China. The country is moving up the value chain, increasing its share of medium-to-high-technology exports, particularly mechanical and electronics products.

China is undergoing a transformation to a consumption-driven economy powered by its own internal growth, a trend that will accelerate as Chinese middle-class consumers rise from 250 million today to 600 million by 2020.

Some Asean countries have become ideal locations for Chinese and international companies looking for additional manufacturing capacity to service China’s burgeoning market.

Asean will have a new division of labour and will be production-centred on China. More Chinese and international companies are now manufacturing their parts and components in cost-effective locations across Asean countries such as Vietnam and Cambodia, conducting final assembly in China and are either selling to China’s new consuming class or exporting to the traditional markets in Europe and the United States.

We expect manufacturing across Asean will continue to evolve over the next decade as consumption rises, improvements are made to the infrastructure and investment environments, free-trade agreements come into effect and investment into and between bloc members deepens.

Some of the biggest challenges are the wealth, cultural and political disparities among Asean members. Last year, annual gross domestic product per capita in Asean ranged from $55,182 in Singapore to $869 in Myanmar.

China’s direct investment in Asean accounts for only 7 per cent of its total foreign direct investment, but the share is growing. Past investment emphasis had been on natural resources in countries like Laos, Myanmar and Cambodia, but this is starting to change. From January to July, China’s investment in Asean rose 9.1 per cent to $2.89 billion year on year, and Chinese capital is now flowing into infrastructure, real estate and agricultural processing.

Beijing is focusing on increasing direct investment and building infrastructure in the region, especially roads and high-speed railways. The country is spending $7 billion to build a railroad starting in Yunnan’s capital Kunming and running through Laos, Vietnam, Cambodia, Myanmar, Thailand and Malaysia before terminating in Singapore.

Chinese investors accounted for 30 per cent of investment transactions above $10 million into Asean commercial real estate last year. Some large Chinese retail developers are expecting to invest in rapidly urbanising markets like Vietnam and Thailand.

China is aiming to increase its investment in the region fivefold to $150 billion by 2020. However, the country needs to compete not only with Japan – which is continuing to invest heavily in manufacturing, agriculture, clean energy, healthcare and infrastructure throughout the region – but also with cross-border investments from within the region.

We believe China will play a greater role as an exporter of capital to Asean because of its high level of savings, saturation of domestic industries, rising costs of production and domestic deregulation of investment. The creation of theAsean Economic Community next year will have an additional positive impact on this investment.

With the uncertain direction of the US dollar, and the euro being weighed down by continuing debt concerns, Aseanbusiness and banking communities have been increasingly using the yuan as an alternative trade and investment currency.

The flow of yuan into Asean countries typically goes through Singapore. Yuan deposits there grew from 195 billion at the end of last year to 220 billion in the first quarter of this year.

Yuan loans in Singapore, mainly for trade, grew by almost 25 per cent to reach over 300 billion. Singapore accounted for about 60 per cent of yuan trade finance outside mainland China and Hong Kong, based on Swift data.

Asean economies will lead the global pack in adopting the yuan as an international currency, expanding from trade settlement to infrastructure financing and broader investment opportunities as the region’s dependence on – and loyalty to – the US dollar declines.

But for the currency to become a truly international reserve currency, China would need to open its capital account and achieve full convertibility.

China and Asean are only starting to strengthen their trade and investment relationship. The road may be occasionally rocky, given the ongoing political and territorial disputes, but rising prosperity and economic links – and especially an increasingly integrated investment landscape – point to a shared and prosperous future.

Asean is a political and economic organisation formed in 1967 by Indonesia, Malaysia, the Philippines, Singapore and Thailand. It now also includes Brunei, Cambodia, Laos, Myanmar and Vietnam.

Noel Quinn is head of Asia-Pacific commercial banking at HSBC.

Source : The Nation | October 7, 2014
Thomas D’Innocenzi
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About thomasdinnocenzi

Thomas D'Innocenzi is a highly accomplished, results-focused senior international executive with extensive experience in global sourcing and market development worldwide to meet evolving business needs. Tom has proven ability in implementing and managing profitable global sourcing operations worldwide. Extensive experience in international market development operations to accommodate rapid growth. Skilled in building top-performing teams, benchmarking performance, and restricting organizations to improve efficiency, productivity, and profitability. Experienced transition leader and change agent. As principal of Nova Advisors, LLC I’ve assembled an exemplary team that brings with them the knowledge and experience gained from starting up a Global Sourcing program with multiple Fortune 500 companies as well as the largest supplier network throughout the Asia-Pacific region. We have experience and expertise in more than a thousand medical and pharmaceutical products in manufacturing and sourcing at the best value. The right product, the right price point and the right branding fueled these successes that resulted in double-digit growth for top line sales and bottom line net margins for our customers. What sets us apart: • Our reach includes a large network of suppliers & manufacturers spanning 13 countries in Asia-Pacific region • We understand the manufacturing process and the business of the supplier and the buyer • Our company culture is based on quality assurance and our process is based on local quality control Our commitment is to be your partner offering the best products and services at the lowest cost. Contact me to discuss how we can make the global marketplace work for you. thomas@novaadvisors.com In addition, I am open to discussing opportunities in global sourcing, international marketing & sales, logistics and medical/pharma in Thailand, Vietnam, Malaysia, Philippines & Japan. Aside from my work I enjoy piano, astronomy, physics, and assisting my daughters with their studies. SPECIALTIES: Global Sourcing, Supply Chain Management, Business Development, Marketing, Logistics, Global Networking, Market Development, Healthcare Solutions, Pharmaceuticals, Medical Devices, Technology, Asia, Southeast Asia, US and Canada
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