Trade risks loom over Asean FDI in-flow, but the US and Japan likely to stay top investors for now: HSBC economists

The United States and Japan are still the main investors in top South-east Asian industries, while China is eyeing smaller markets and niche sectors, HSBC's Asean economics team has said.

Foreign direct investment (FDI) in-flows in the region are back to where they were before the Asian Financial Crisis of 1997, the HSBC economists wrote in an end-August report, and the trend could persist in the near to medium term.

But they still warned that risks may outweigh the benefits in the near term, given ongoing trade tensions globally, even though "it is also true that the region may benefit if companies decide to shift all factors of production to Asean to avoid China-specific tariffs".

The HSBC team noted that the FDI boom in Asean has not been felt equally, with Vietnam, Malaysia, and Singapore the key beneficiaries, with the Philippines and Indonesia lagging, while Thailand has faced net FDI out-flows for two years.

"We believe these are primarily due to structural issues, such constitutional restrictions to FDI in the Philippines and souring foreign investment sentiment in Indonesia, which their respective governments must address to take larger part in the broader region's FDI windfall," they wrote.

And, as for Thailand, factors such as political tension "have arguably led to higher volatility of inward FDI in recent years, and contributed to the delays of structural reforms and economic progress", said the analysts.

"Moreover, investors complained about poor availability and deteriorated quality of labour supply in Thailand, even as labour cost has risen to the highest in Asean except Singapore."

Meanwhile, the HSBC report said that Chinese FDI remains limited for the time being to niche sectors - that is, real estate, and mining and quarrying.

"This may not be the case in the not-too-distant future as Chinese companies continue to expand their presence overseas," they said, citing the regional headquarters that have been opened by Lenovo in Thailand and Huawei in Malaysia.

"But, while China has become a more prominent presence in trade, financing, and tourism terms, it will likely take more time and resources before it displaces the US and Japan as the dominant FDI force in the region," the HSBC economists predicted.