CHINA’S reopening is the biggest economic event of the year and will have profound implications for South-east Asia and the world.
In 2022, South-east Asia was powered by robust consumption, investment spending and exports. This resilience will continue.
However, some of these tailwinds will start to fade with slowing global growth in 2023.
The good news about slowing growth is that inflation should peak and tight monetary policy will similarly ease in the region.
The peaking of rates as well as the weakening of the US dollar will offer some reprieve for South-east Asian economies.
This year, with China’s reopening taking place much faster than anticipated, South-east Asia will get a big boost from it.
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Asean Business
Business insights centering on South-east Asia's fast-growing economies.
South-east Asia has undergone a healthy reset over the past decade with deleveraging and continuing infrastructure investment.
An eclectic mix of old and new economy, South-east Asia is well positioned to capture China’s reopening with its growing digital economy, alongside a revival of traditional industries such as commodities, tourism and manufacturing.
China’s economic recovery in the first quarter might be bumpy, but growth will reaccelerate for the rest of the year.
In 2023 and beyond, South-east Asia will benefit from China’s reopening on three dimensions: tourism, trade, and investments.
Revenge travel on a new level
Imagine three years of pent-up demand and savings being unleashed by mainland Chinese travellers.
Pre-pandemic, there were 150 million Chinese outbound tourists. If each of the 150 million Chinese tourists were to spend US$2,000, the size of Chinese tourist spending would amount to US$300 billion each year.
China’s reopening will bring revenge travel to a whole new level. And Thailand, Singapore, Indonesia and Vietnam are key beneficiaries of the return of Chinese tourists.
Many will use Singapore as a stopover to visit key destinations such as Bangkok, Bali and Ho Chi Minh City.
In anticipation of a surge in Chinese tourists, the Tourism Authority of Thailand (TAT) has revised its forecast for foreign arrivals to 25 million in 2023, from 18-20 million previously.
Thailand is one of the few economies in the world to likely experience a growth spurt this year.
We expect Thailand to see a growth acceleration of 3.8 per cent in 2023, compared to 3.2 per cent in 2022.
South-east Asia’s labour market recovery will be significantly boosted by the return of China’s outbound tourism, especially for tourism-related sectors such as food and beverage, entertainment, and hospitality.
The reopening of China will also see the return of business travel. Singapore, in particular, will benefit from business conferences, events and exhibitions.
We also expect well-heeled Chinese individuals and families to turn to Singapore – a global financial centre and wealth hub – for their long-term wealth planning and transition needs.
Trade reinvigorated
South-east Asia is China’s largest trade partner, so the recovery of Chinese demand will boost the region’s exports.
China’s reopening will lead to higher consumption and result in it being more plugged into the global economy.
As Chinese consumers dine out more, there will be an increase in demand for agricultural and industrial commodities that South-east Asian countries produce.
Specifically, China will require more agricultural commodities from Thailand, the Philippines and Vietnam.
Indonesia is another economy to watch this year as China’s reopening will raise demand for its commodities such as coal and nickel.
In addition, Indonesia is experiencing its own industrial renaissance. With an abundance of nickel and with an upgrading of its manufacturing capabilities, Indonesia can become a key producer of electric vehicle (EV) batteries.
Investments turbo-charged
The implementation of the Regional Comprehensive Economic Partnerships (RCEP) – the world’s largest free trade agreement – will further integrate trade and accelerate investments between China and South-east Asia.
This is especially important as global companies look for new locations to diversify supply chains.
China’s investments into the manufacturing sector of South-east Asia is going to continue.
Furthermore, there will be an acceleration of Chinese investments into Indonesia and Thailand to bolster the region’s EV supply chain.
Indonesia is the key beneficiary as the country has the world’s largest nickel deposits, which is critical in EV battery manufacturing. The country accounts for a quarter of global production.
South-east Asia as a region has complementary strengths: Indonesia with its natural resources; Singapore as a key financial centre; Malaysia for its prowess in electronics manufacturing; and Thailand’s strong automotive sector.
Through the RCEP, South-east Asia has the potential to become a leading manufacturing hub of the future – one that is built on smart manufacturing, sustainability and automation.
Investment strategy
The South-east Asian stock markets recorded one of the strongest earnings growth in 2022, outperforming its global and regional peers. This trend is likely to sustain in 2023.
Within the South-east Asia equity markets, we are overweight Indonesia and Thailand as they witness strong earnings momentum.
Taking a step back, South-east Asian markets are not as volatile as most investors expect.
Over the past decade, the volatility of South-east Asian markets is comparable to many developed markets. This is despite the fact that South-east Asia is still in a high-growth stage of economic development.
From a market performance perspective, South-east Asia was a laggard to Asia over the past decade. But we are on the cusp of witnessing a reversal.
The reopening of China will reinvigorate growth for South-east Asia and should be on the radar of investors.
The writer is chief investment officer for South-east Asia at HSBC Global Private Banking & Wealth.
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