South-east Asia could draw some investors away from China as virus lockdowns bite

MAJOR South-east Asian economies are set to pull more foreign direct investment (FDI) in the near term, as investors grow wary about China’s locked-down market.

Still, China’s status as the regional giant is likely to stay unchallenged, especially in the longer run.

“FDI flows into Asean have proven extraordinarily resilient over the last couple of years,” Frederic Neumann, co-head of global research for Asia at HSBC, told The Business Times.

“Asean has been a growing magnet for foreign investment flows already in the years prior to the pandemic, highlighting its strengthening competitiveness in many sectors vis-à-vis China.”

Earlier this month, consultancy Kearney’s Foreign Direct Investment Confidence Index identified the Asia-Pacific region as the 2nd-most attractive market for investors globally.

Survey respondents were asked to rank markets that are likely to attract the most investment over the next 3 years, and the share who indicated that they were more optimistic about the Asia-Pacific region than a year ago rose to 46 per cent, from 42 per cent previously.

Economies on the leaderboard included Japan in 4th place, up from 5th a year prior; China in 10th spot, up from 12th; and Singapore in 18th place, down from 16th.

“This was a particularly competitive year in our index. A striking 16 countries saw their weighted FDI scores increase compared with just 5 last year,” said Kearney Asia-Pacific head Arjun Sethi.

The poll was done in January, and does not take into account the full impact of virus outbreaks that are disrupting global supply chains in Chinese business hubs such as Shanghai and Shenzhen.

“The lockdowns and resultant dislocations may well create some short-term headwinds to FDI,” Sethi acknowledged.

Maybank Securities senior economist Chua Hak Bin observed that the level of FDI into China will see “near-term setbacks from (China’s) zero-Covid strategy and strict lockdowns”, as well as policy developments and trade tensions that could dissuade US and European multinationals from investing.

Lee Eng Keat, group FDI advisory executive director at UOB, added that the Covid-19 pandemic changed business priorities and put supply chain resilience top of mind.

“Some companies previously served South-east Asia from North Asia, but the pandemic has prompted them to explore establishing alternative distribution points,” he said.

“Both the pandemic and geopolitical tensions have also accelerated companies’ plans to strengthen manufacturing capacity in locations like Vietnam, Malaysia and Indonesia.”

The manufacturing sector is expected to be the main pillar for FDI inflows into Asean, with HSBC’s Neumann noting that “most South-east Asian economies have seen a pick-up in manufacturing investment as companies struggled to keep with surging global demand for goods during the pandemic”.

Indeed, Singapore’s Economic Development Board has set a medium- to long-term target of S$8 billion to S$10 billion in annual fixed asset investments (FAI), which Chua called conservative.

“There are heavy billion-dollar investments in the semiconductor industry, given the current shortage, and Singapore is a beneficiary of this,” he said, noting that the main risk to the official target may be a pullback in investments from European corporations, amid the ongoing war in Ukraine.

Chua added that Singapore and Malaysia will likely see more FDI in the electronics industry, while commodity giant Indonesia will see more FDI in the basic metal, chemical, food and transport sectors.

Yet watchers are also not writing China’s FDI prospects off.

Even with a looming economic slowdown on the cards, Sethi from Kearney cited China’s “robust” gross domestic product growth forecasts for the next 3 years, saying: “Persistent growth opportunities in China suggest the country will remain an attractive destination for FDI in the years ahead.”

Meanwhile, Singapore slipped 2 rungs on the latest index, which he noted could be attributed in part to the Republic’s 31.4 per cent year-on-year decline in FAI in 2021.

Other Asean countries are also seldom featured in the index. Thailand last made an appearance in 2017, in 19th place. In 2014, Malaysia was 15th and Indonesia, 25th.

Neumann added that supply chain diversification into Asean is not at the expense of FDI flows into China, as “there is a subtle change, with more and more foreign investment going into operations to serve the domestic market, rather than for export manufacturing”.

“In the coming years, China will thus likely remain a magnet for foreign investment, and may see even a pick-up in inflows once travel restrictions are eased,” he said.