'China + 1' hedge will keep Asean in spotlight

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Mr Nanji expects the acceleration in investments to be supported by both companies already invested and those new to the region.
JANUARY 02, 2020 - 5:50 AM

Singapore

ASEAN is likely to see an acceleration in supply chain shifts in the coming year, as companies start pumping in more investment into the region.

This comes as the region has benefited from the flow of goods and services into the region as a result of trade diversion.

Munir Nanji, head of global subsidiaries group Asia Pacific Banking at Citi, said the acceleration in investments will be supported by both companies already invested and those new to the region.

Mr Nanji said: "Companies that already are in Asia have probably maxed out their capacity on their current facilities . . . so they'll put in new capex (capital expenditure). If you're new to Asia, you'll be looking at where to put that capex - and there, Asean fits in very well.

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"The conversations I've been involved in are on the new capex front . . . This is where the growth is coming from; it's coming (to) Asean so you've got to be here. If you're sitting in countries where growth is not happening . . . you'll want to capture that pie (in Asean) and (that's why) you should see an acceleration of this investment."

Already, more supply-chain shifts to Asean are being announced. According to Citi economists Kit Wei Zheng and Ang Kai Wei, these are increasingly led by capacity additions rather than the use of existing capacity. In a report issued last October, the economists noted that there were 24 announcements of supply chain shifts in Q2 this year, based on their sample of 109 companies' first-time supply chain adjustment announcements. This figure grew to 29 in Q3. They tracked an average of 18 each quarter from Q3 2018 till Q1 2019, and just two in Q2 2018.

The economists noted that "for now, continued acceleration of US imports from Asean-6 suggests that capacity constraints are not binding yet on the aggregate".

However, they said, pockets of capacity constraints could be emerging in specific sectors.

Companies with factories in the region have been putting their excess capacity to work, pointed out Citi's Mr Nanji. "But what's happened after that is that you start investing more money . . . It's this wave that's coming. There's more capital expenditure coming in. If you look at the FDI numbers into Asean last year, the biggest increase is happening here."

Indeed, South-east Asia bucked the global trend of falling foreign direct investments (FDI). According to data from the United Nations Conference on Trade and Development's (UNCTAD) World Investment Report 2019, Asia remained the world's largest FDI recipient, absorbing 39 per cent of global inflows in 2018, up from 33 per cent in 2017. South-east Asia specifically received a record level of investment, up 3 per cent to US$149 billion.

This is against a backdrop of sliding global FDI flows. 2018 saw the third consecutive year's fall in FDI, falling by 13 per cent to US$1.3 trillion.

James Zhan, director of UNCTAD's division on investment and enterprise, said the prospects for FDI flows into Asia in 2019 are "moderately optimistic", thanks to a favourable economic outlook and ongoing efforts to improve the investment climate in several major economies.

Looking into 2020, Maybank Kim Eng senior economist Chua Hak Bin noted that rising FDI applications in Asean in 2019 will begin translating into actual FDI, as multi-national corporations (MNCs) pull the trigger on capex as a larger proportion of MNCs adopt a "China + 1" strategy to hedge against the risks of future US-China trade friction and strategic mistrust.

In a report sent in late November, Dr Chua said that a US-China partial trade deal will not halt the supply chain from shifting and reconfiguring towards Asean. Beneficiaries of the reconfiguration of the supply chain will be Vietnam, Malaysia, Thailand, and possibly, the Philippines. Indonesia is failing to gain from the shift.

According to Citi's Mr Nanji, the the next big trend to look out for is the growth of Asian companies within the region.

"The Western companies are much larger because they've been here longer. But the Asian companies are growing much faster. If you project further, probably five years from now, the Asian companies will be much larger than Western companies."

The bank is already positioning itself to capture this growth. "Over the last 18 months, we've put more resources and focusing on Asia-to-Asia. It's growing the fastest. I think western clients are doing well, they have access to Asia, but in some ways, they've been here for awhile so the growth is probably (in) single digits.

"The Asian companies that are growing, they have new products, are closer, they're very hungry for business and they're doing quite well."

Citi said that it has seen strong client growth in intra-Asia trade corridors, and this has supported the bank's performance in the first half of the year in the region.

Specifically, the biggest growth is seen along the South Korea to Asean and China to Asean corridors.

According to its data from September 2019, the South Korea to Asean corridor has seen 36 per cent year-on-year growth increase. This has been driven largely by Vietnam, as it us one of the key countries for manufacturing due to to tax incentives, affordable and young labour.

The China to Asean corridor has meanwhile seen a 23 per cent year-on-year jump in growth.

"Fintech is a rapidly growing sector, and we are the main cash bank for many of our digital clients. Our wide network is another advantage as clients just need to engage one bank to control all their overseas subs accounts; we provide them with holistic solutions," said Citi.

Since 2017, the bank has opened additional Asia desks. To date, they have over 20 Asia desks in operation - including 11 China desks and Japan desks in Thailand, Singapore, Vietnam, India and two in China.

Logistics startup Ninja Van is also benefiting from flows in the e-commerce space.

"Trade war or not, China sellers are increasingly interested in selling into South-east Asia, notably the large countries such as Indonesia and the Philippines. We see a maturing of the cross-border e-commerce flow where overseas sellers are getting more interested in fulfilling locally rather than at origin. This shows their confidence in investing in inventory at destination and offering shorter lead times," said Pang Sing Yang, vice-president of cross border, at Ninja Van

He added that while intra-SEA business-to-consumer flows currently make up a small base, it is "rapidly" becoming a significant portion of their business.

"It is not any surprise that a significant proportion of these originate from Malaysia, where overseas sellers like to locate their regional hub due to favourable regulations and decent airfreight connectivity through Malaysia's carriers and proximity to Singapore's Changi Airport."

Ninja Van started curating first-to-last mile logistics solutions for corporate businesses in 2019. It has since launched its operations in Malaysia, with plans to establish its business-to-business, or B2B, units in all six countries where it currently has a presence.

One of the reasons people remain so positive on growth prospects for the region lies in its commitment to trade integration said Eduardo Pedrosa, secretary-general for the Pacific Economic Cooperation Council (PECC), one of three official observers of the Asia-Pacific Economic Cooperation (APEC).

According to PECC's Annual State of the Region report for 2019/2020, the mood across the Asia-Pacific has soured since this time last year with expectations for global growth turning distinctly negative. A whopping 67.9 per cent of respondents to the annual survey of the Asia-Pacific global community said they expect weaker or much weaker growth for the global economy next year.

They cited the top five risks as increased protectionism and trade wars, a slowdown in world trade growth, a slowdown in the Chinese and US economy respectively, and a lack of political leadership.

In terms of expectations for selected economies and regions, South-east Asia led the pack in terms of positive sentiments, with 42.2 per cent expecting growth to be stronger, followed by India (31.6 per cent).

"If you think about the bigger narrative, people are really quite deeply worried about this sort of protectionist trend that that we've been seeing . . . On the other hand, in South-east Asia, the trade integration story is continuing. We have the Asean Economic Community, we also have the Regional Comprehensive Economic Partnership (RCEP) negotiations which all but concluded with the Bangkok summit . . . (and) several Asean economies of course are also involved with the CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership) as well."

RCEP is a proposed free trade agreement involving Asean and five of its major trading partners: Australia, China, Japan, New Zealand and South Korea. China, Japan and South Korea have also stated that they will actively push for the signing of the RCEP agreement in 2020, ahead of the eighth China-Japan-South Korea leader's meeting which was held in Chengdu, Sichuan province in December.