FDI flows into Asean remain strong on rising costs in China


Foreign direct investment (FDI) flows into Asean as a preferred region will gather momentum as manufacturers look at relocating from China, according to Standard Chartered Bank plc (StanChart).

The latest global research special report by StanChart released yesterday that highlights China, Asean and the future, said rising costs in China would continue to benefit the Asean region as manufacturers look for alternative production sites.

”Rising wages remain a key challenge in China, according to our eighth annual survey of more than 200 manufacturers in the Pearl River Delta (PRD) region. Our respondents expect wages to rise by 7.2% on average in 2017,” it said.

The report noted high-end manufacturers were focusing on productivity gains through investment, while low-end manufacturers preferred to relocate operations to counter rising local wages.

The report said Malaysia was in good shape as it is among the top five countries in FDI flows into the Asean region.

The survey showed that Malaysia was among the top three favoured countries for the manufacturing sector, surpassed only by Indonesia and Vietnam.

“However, there is room for improvement when it comes to being the top choice among respondents for manufacturing outside of China,” it said.

“More respondents said they would prefer to relocate overseas versus moving inland, for the first time in our annual survey,” it said.

“The risk of the US’ trade protectionism, which would affect China substantially, has also encouraged companies to diversify production sources away from China,” said the report.

It said since North-East Asia was the region’s manufacturing powerhouse, the recent shift in manufacturing investment away from China had resulted in increased FDI flows from North-East Asia into Asean.

“Asean’s growing domestic market is another pull factor for FDI, this is in line with our positive long-term view on the region,” it said.

Based on the latest available data from United Nations Conference on Trade and Development, FDI flows into Asean remained strong at US$126 billion (RM541.8 billion) as of 2015, slightly above US$124 billion in 2014 and US$120 billion reached in 2013.

The survey also indicated that sustained FDI, favourable demographics, regional stability, government focus on growth policies and urbanisation were likely to boost the region’s purchasing power.

“In addition to the manufacturing sector, the financial sector in Asean is attracting FDI, likely as banks follow their clients such as manufacturers relocating into the region,” it said.

Among Asean’s many attractions are its ample and cost-efficient labour supply, improving infrastructure, multiple trade pacts, supportive investment policies, regional stability, increasing wealth and rapid economic growth.

“The US withdrawal from the Trans-Pacific Partnership (TPP) trade pact raised concerns about its effect on investment in Asean and Vietnam in particular, which would have been a key beneficiary,” said the report.

“But according to our PRD survey, the TPP was just one of many reasons cited for investing in Asean, and it was not the most important reason,” it added.

The latest data indicated that investment from North-East Asia accounted for 32% of total FDI into Asean, up from 23% in 2010.

Japan remained the largest investor in Asean, but South Korea, Taiwan and China were steadily increasing their shares. Vietnam in particular was attracting growing manufacturing FDI from Korea and Taiwan.

“We also expect increasing construction investment in Asean from China as China’s ‘One Belt, One Road’ infrastructure projects progress,” it said.

The Mekong region, specifically Vietnam and Cambodia and increasingly Myanmar, remained the preferred destination. This year, Cambodia took over the top spot from Vietnam, it added.

Based on the 2013-2015 aggregate data, the European Union remains Asean’s largest investor, accounting for 19% of its total FDI in the span of the two years.