A US-CHINA trade deal will not stop supply chains from reconfiguring towards Asean, as multinationals look to minimise risks from possible future trade tensions between the United States and China, a Maybank report has suggested.
"A larger proportion of MNCs will adopt a 'China + 1' strategy to hedge against the risks of escalating US-China trade tension and strategic mistrust," Maybank economists wrote in the bank's outlook report titled "Year Ahead 2020: Asean" on Friday.
This was signalled in a a survey by AmCham Shanghai, conducted in mid-2019 with 333 respondents, which showed that 26.5 per cent of respondents have redirected investments originally planned for China to other locations in the past year, with about half opting for South-east Asia.
In addition, Maybank economists believe more of the rising applications for foreign direct investment (FDI) in Asean in 2019 will translate into actual FDI next year, as multinational corporations pull the trigger and kick-start their plans to boost capital spending. Beneficiaries of the reconfiguring supply chain will be Vietnam, Malaysia, Thailand, and possibly, the Philippines.
There are however, several wild cards that could throw Asean off this trajectory.
One is if US President Donald Trump and the US begin targeting smaller countries, including Asean.
"US could charge some Asean countries for acting as a backdoor for China exports (Vietnam, Cambodia, Malaysia), currency manipulation (Vietnam, Malaysia, Singapore) and currency undervaluation (Thailand, Singapore)," the report wrote, noting that Vietnam came very close to being labelled a currency manipulator in the US Treasure report in May 2019.
Developing countries like Indonesia and the Philippines may see their trade preferences under the US' Generalised Scheme of Preferences programme removed, while smaller countries may be forced to take sides against China when it comes to Huawei or free trade agreements, Maybank said.
The second wild card is the return of inflation on the back of a tight US labour market, higher commodity prices and a stronger renminbi. "A trade and commodity price recovery, in the event of a trade deal, may reignite inflation risks in the latter part of 2020. This could increase pressure on US long term yields, prompt a shift in expectations towards a Fed rate hike and strengthen the US dollar," the report said, adding that this could pressure currencies in emerging markets.