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Asean’s outlook optimistic thanks to ‘Asia dividend’

Mindy Tan
Published Tue, Oct 25, 2022 · 05:50 AM

EXISTING tensions between the US and China affords Asean an opportunity to become even more relevant as a manufacturing hub, even as the region leverages these twin engines of growth to ride out current headwinds.

“The US and China markets are the largest and second-largest economies. In aggregate, they control 40 per cent of the world’s gross domestic product (GDP),” said Frederick Chin, head of group wholesale banking and markets at UOB.

“I always say that three engines power the world – the US, China and Europe. Europe is going through a hard time ... but if at least one or two engines are alright, the world will continue to grow.”

He added: “I’m still optimistic and think this potential recession will be quite short because the whole system, globally, is not overly leveraged ... so people can come back to spend and companies can grow.”

Chin was speaking with The Business Times at the sidelines of the Gateway to Asean Conference on Oct 13.

The conference featured discussions on cross-border connectivity in the region and how companies need to adopt digitalisation and sustainable practices in their financial supply chain management. It was attended by more than 300 business executives from across the region.

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“The conference is about supply chains, but also about ESG (environmental, social and governance issues),” he said. “How can we transform the industry and ecosystem to make Asean even more relevant? We want to make sure ESG is factored in as people start building new capacity and seeking new opportunities.”

Building a manufacturing powerhouse

On the back of increasing labour costs, Covid-related supply chain disruptions and the Sino-US trade war, economies such as Vietnam, Indonesia and Thailand have already benefited from companies’ “China Plus One” diversification strategy.

It is not just about US-China tensions or Covid disruptions, which have led to the proliferation of the China Plus One strategy.

“Asean has a relative advantage in cost competitiveness vis-a-vis China or the US, so it’s a very attractive place to base production again,” said Chin.

Indeed, as China grows, the region also grows, said Charles Ormiston, founding partner of the Bain South-east Asia business, in a report produced by Bain & Company and Monk’s Hill Ventures’ Angsana Council on Oct 18.

While many economists have correctly focused on the pro-growth policies, stable macroeconomics and healthy demographics of South-east Asia, they have often missed this critical source of additional growth, he said.

Specifically, the region benefits from the rise of China in two distinct ways – what Ormiston referred to as the “China dividend”.

First, as China is the largest market for South-east Asian trade, and second, as China is an important source of foreign direct investment (FDI). Both non-Chinese and Chinese companies have been diversifying or shifting supply chains away from China due to Chinese wage cost escalation, the need for supply chain diversification, and concerns over Chinese business policies.

“However, it is better to think of South-east Asia as benefiting from an ‘Asia dividend’ as the world regionalises and North Asia expands its position as the largest investor and trading partner with South-east Asia,” he said.

The report posits that the South-east Asian economy will grow by 4-5 per cent annually over the next 10 years, with Vietnam leading the charge at a projected growth rate of 5-7 per cent.

“We remain optimistic about South-east Asia’s continued growth in the face of global instability and that it maintains the possibility of outgrowing other emerging regions in the world over the next decade,” said Ormiston.

Building on fundamentals

Already, China-Asean trade is valued at about US$650 billion and intra-Asean at US$650 billion, adding up to US$1.3 trillion. This is in addition to US$30 billion of projected FDI into Asean and another US$500 billion in trade for Asean with the US and Europe, noted Chin in his opening speech at the Gateway to Asean Conference.

Specific to China, UOB has identified eight sectors driving 70% of Greater China and Asean FDI and trade flows, including banks and non-bank financials; construction and infrastructure; and consumer goods. PHOTO: NYTIMES

Specific to China, UOB has identified eight sectors driving about 70 per cent of Greater China and Asean FDI and trade flows. These are: real estate and hospitality; technology; media and telecommunications; banks and non-bank financials; construction and infrastructure; consumer goods; healthcare; industrials; and oil, gas and chemicals.

“As China replaces the US as the economic engine of South-east Asia, new opportunities will arise,” he said.

“China has been on ‘slow mode’ for the last 18 months because of their zero-Covid policy, not because of a lack of policy tools to engineer growth. Despite pressure from the West and slower domestic growth, their growth numbers are still positive,” said Chin.

“I’m quite optimistic that they will slowly adjust and open up ... When they open, China will start having a bit of growth – maybe not 9-10 per cent, but even at 5 per cent growth, we’re talking US$600 billion in new growth,” he said.

“No single country has that kind of growth, and that’s why China is still a very important economic driver for Asean.”



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