THURSDAY, March 28, 2024
nationthailand

Southeast Asia set to benefit from China's economic rebalancing

Southeast Asia set to benefit from China's economic rebalancing

FOREIGN INVESTMENT pouring into China is going through a seismic shift from low-end manufacturing towards services. This is shaking up the global supply-chain status quo, and thrusting fast-growing but still relatively low-cost Southeast Asia into the spo

As China’s economy has developed and grown, wages and production costs have risen sharply. Manufacturing goods in China is no longer as cheap as it once was. Markets such as Vietnam and Cambodia are becoming appealing alternatives for foreign companies that are mulling investments in labour-intensive manufacturing projects.
The shift in flows of foreign direct investment (FDI) is actually good news for China. Attracting investment in value-added sectors such as services and high-tech manufacturing is preferable to flows into low-value manufacturing. It is in line with government efforts to maintain strong economic growth and draw greater attention from overseas investors.
Beijing recently launched the “Made in China 2025” initiative, which outlines a 10-year plan to move higher up the value-added chain.
The numbers already show the changes at work.
China attracted a total of US$85.34 billion in FDI in the first eight months of 2015, up 9.2 per cent year on year. In August alone, FDI jumped 22 per cent year on year, reaching $8.71 billion. From January to August, investment into the fast-growing services sector soared 20.1 per cent. The high-tech service sector saw an increase of 59.1 per cent to $5.51 billion.
This is an indication that Foreign investors are taking advantage of the broad rebalancing of the world’s second-largest economy.
Investors’ motivations have also changed. Only a few years ago, they saw China as a haven for low-cost manufacturing. Now, they are choosing to invest in China to access the country’s abundant and increasingly wealthy consumer base.
China’s new middle class has increased disposable income and a huge appetite for quality services – from healthcare and education, to tourism and financial services. This will continue to draw more and more foreign investment into China’s services sector in the coming years.
All of This has big implications for Southeast Asia. As China evolves, this region is set to benefit, by becoming an alternative destination of choice for companies as they seek bases for their labour-intensive manufacturing activities.
Southeast Asia’s biggest advantages are simple: Labour costs in much of the region are low; and it is within striking distance of China.
Manufacturers setting up operations in Southeast Asia get the best of both worlds: They can reduce production costs, while at the same time continuing to serve China’s well-established supply-chain infrastructure and its 1.4 billion consumers.
We have already seen a growing number of international companies diversifying their manufacturing chains. A classic pattern is this: Manufacture parts and components in cost-effective locations like Vietnam or Cambodia; conduct final assembly in China; and sell the end product either to China’s new consumers or to traditional markets in Europe and the United States.
In addition, Southeast Asia – which spans countries as diverse as Thailand, Laos and Indonesia – has its own promising growth dynamics, which will see it attract a growing slice of the global FDI pie in coming years.
As a whole, the region is expected to grow by 6.2 per cent in 2015 and reach a gross domestic product of US$3 trillion by 2024. By comparison, the US economy is forecast by the World Bank to expand by 2.7 per cent this year and the euro zone just 1.5 per cent.
The region has a growing capacity for handling sophisticated production of an expanding scale. But it currently accounts for almost 4 per cent of global manufacturing in value-added terms – leaving lots of room for growth.
Finally, much of Southeast Asia is about to undergo a burst of far-reaching economic integration.
At the end of this year the 10 members of the Association of Southeast Asian Nations will form the Asean Economic Community. This will allow the free flow of goods, services, investments and skilled labour, and the freer movement of capital across the entire region.
The synergies and economies of scale made possible by the AEC, and the region’s large and increasingly affluent consumer base, have the potential to turn Southeast Asia into a global economic powerhouse of well over 600 million people.
It seems likely that no single Southeast Asian country will be the solitary beneficiary of any large industrial relocation from China. Much will depend on the exact requirements of the production facilities being located in this region, as well as the perceived ease of doing business in any particular country.
Infrastructure capabilities also will be key to realising individual countries’ potential.
A lot is now happening on that front – and a major impetus will come from the “One Belt, One Road” initiative, under which Beijing plans to plough billions of dollars into infrastructure projects stretching from coastal China to Central Asia, the Middle East and on to Europe.
The goal is to oil the wheels of trade – and nearby Southeast Asia will be a major beneficiary.
Before too long, for example, rail networks and modern roads will link the southern Chinese province of Yunnan to the Indian Ocean via Thailand and Myanmar. This will significantly improve freight logistics and could create substantial opportunities for the development of major ports and free trade zones in Thailand and Myanmar, boosting their economic development.
China will remain an attractive place for foreign investors. The Chinese market is huge, and infrastructure construction and an improving business environment will provide big business opportunities for years to come.
But as China moves up the value chain, Southeast Asia can step in and leverage its low-cost advantages – much like China did 20-30 years ago. The result, overall, is likely to be mutually beneficial for both geographies.

Krisda Phatcharoen is head of commercial banking, HSBC Thailand.

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