China's Belt and Road Initiative (BRI) is not just about infrastructure, with the country's investment in South-east Asia having surged in a broad range of sectors since the BRI's launch in 2013, as explored in the DBS Group Research report Understanding China: BRI in Southeast Asia – Beyond infrastructure. ASEAN BUSINESS brings you the main points.
China's FDI flows into Asean's manufacturing sector rose from US$1.2bn in 2013 to US$3.5bn in 2016, translating into an compound annual growth rate (CAGR) of 43.9 per cent. Chinese textile firms such as Texhong and Youngor have moved production facilities to Vietnam, while more Chinese automobile makers are building plants or acquiring stakes in the region.
This investment is only expected to grow, given an ageing labour force and higher wage costs in China; threats from United States tariffs against China-manufactured goods; and improved infrastructure due to the BRI. Improved power supply and transport networks, for instance, will reduce production and logistics costs and encourage Chinese firms (as well as other foreign players) to build facilities in the region.
China's services FDI in Asean has also grown strongly, at a 20.1 per cent CAGR from 2013 to 2016, most notably in leasing and commercial services, wholesale and retail trade, real estate and financial services. Chinese financial institutions have opened more branches or undertaken merger and acquisition activities in the region, while tech firms have invested in ICT services.
Here, too, investment is expected to increase. As Chinese manufacturers expand their operations in Asean, the demand for financing and other business services will rise accordingly. With more Chinese expatriates being localised in the region, there will also be a corresponding need for Chinese-style retail, food and beverage, real estate, transport, mobile payment and e-commerce services.
The BRI infrastructure projects themselves will also create a value chain for services: not only project financing, but also engineering consultancy, engineering insurance, infrastructure management, legal, advisory and various other types of professional services.
China's total FDI flows to Asean cooled in 2016, partly due to the Chinese government's crackdown on capital outflows and stricter scrutiny of overseas investment. Nonetheless, medium- to long-term growth prospects remain strong.
The DBS report estimates that if the post-BRI trend is sustained, China's FDI in ASEAN will rise to US$52 billion in 2030, five times that of 2016's US$10.3 billion figure. In a more conservative scenario, using the longer-term trend in the past ten years, the estimated 2030 figure is US$30 billion instead, still three times that of 2016. The relatively mature Asean economies like Singapore, Malaysia and Thailand are most likely to attract Chinese investors in the coming years.
Investment and trade flows
Despite stronger investment ties, China-Asean trade growth has weakened in recent years. Total bilateral trade grew an average 4.2 per cent per annum from 2014 to 2017, a huge slowdown from the 20.7 per cent rate in the prior four years. However, as the BRI progresses and cyclical factors improve, trade growth is expected to recover.
The DBS report argues that creating positive linkages with local business ecosystems is key to the BRI's success. This includes hiring local workers, sourcing raw materials from local suppliers, and transferring technologies to local firms.
As the report concludes: "Should the positive linkages with the local ecosystems become more visible, Chinese capital would be welcomed more by the recipient countries. The overall BRI concept would be increasingly seen as a regional cooperative initiative that benefits multiple parties, rather than a Chinese strategy that serves China’s own interest. This could mean intrinsic and mutual incentives for China and other participating countries to push forward BRI, and the establishment of a virtuous cycle of rising investment and rising economic growth/incomes in the longer term."