Ma Tieying / August 20, 2018
We examine the dimensions beyond infrastructure of the Belt and Road Initiative (BRI).
Key summary points
China’s FDI in Southeast Asia has surged in a broad range of sectors since the BRI was launched
Manufacturing investment is expected to continue rising, amid higher wage costs in China, ……deteriorating Sino-US trade relations, and the BRI-driven infrastructure development in SE Asia
Demand for services investment will also increase
Photo credit: AFP Photo
The Belt and Road Initiative (BRI) is a long-term economic development plan proposed by Chinese President Xi Jinping in 2013. As part of the overall “Go Global” strategy, the BRI aims to enhance China’s economic connectivity with Asia, Europe and Africa, thus helping Chinese companies to broaden/deepen market access, enhance global competitiveness, and secure the supply of important natural resources.
While the short-term focus of BRI is mainly on infrastructure investment, the long-term implications are much more than that. The whole idea of BRI is not only about building a transport route between China and the participating countries, but also a trade and investment corridor, which could generate the goods and services to be transported along the route.
Chinese investment in ASEAN – Manufacturing
China’s Foreign Direct Investment (FDI) in ASEAN has surged since the BRI was launched in 2013. FDI flows into the manufacturing sector rose all the way from USD1.2bn in 2013 to USD3.5bn in 2016, which translated into a compound annual growth rate (CAGR) of 43.9%.
Chinese textile firms like Texhong and Youngor have actively moved their production facilities to Vietnam in recent years, partly due to the rise in domestic wage pressures, partly also due to the anticipation of tariff benefits under the Trans-Pacific Partnership and the Vietnam-EU free trade agreement. Meanwhile, the cases of Chinese automobile makers investing in SE Asia have also started to increase. Geely, for instance, acquired a 49.9% stake in the Malaysian automaker Proton in 2017. SAIC and Wuling built new plants to expand capacity in Indonesia.
Looking ahead, Chinese manufacturers are expected to further boost investment in ASEAN due to a combination of push and pull factors. First, in the context of China’s rapid population ageing and wage cost increases, Chinese manufacturers will likely further relocate the labour-intensive works to lower-cost countries, to protect profit margins and maintain competitiveness.
Second, given the rise in Sino-US trade tensions, Chinese manufacturers would want to expand offshore production bases to avoid tariffs and diversify risks.
Last but not the least, the BRI will help to improve infrastructure conditions in SE Asia, enhance the overall investment environment and attract the general FDI inflows. An improvement in power supply and transportation networks, for instance, will reduce the production and logistics costs. This will, in turn, encourage Chinese (and other foreign) companies to invest and build manufacturing facilities.
Chinese investment in ASEAN – Services
In the services sector, Chinese FDI in ASEAN has also grown strongly during the post-BRI period (20.1% CAGR in 2013-16). Investment in leasing & commercial services, wholesale & retail trade, real estate and financial services increased most notably.
Chinese financial institutions, led by the Big-4 commercial banks, have expanded presence in SE Asia by opening more branches and/or undertaking M&A activities. Chinese tech companies have also boosted investment in ICT services to promote the so-called “Digital Silk Road”. Alibaba, for instance, has increased stakes to control Singapore’s online retailer Lazada, while its spin-off financial technology firm Ant Financial has acquired Singapore’s helloPay to expand mobile payment business. Alibaba has also partnered with the Malaysian government to roll out the digital free trade zone and smart city projects.
Investment from Chinese services firms will likely continue to increase in several areas. Along with a rising number of Chinese manufacturers expand operations in SE Asia, their demand for financing and other business services will increase accordingly. Chinese banks will need to follow their clients to further go abroad, to provide lending, trade financing, FX hedging, bond issuance, and other related services.
Meanwhile, with a rising number of Chinese expatriates localised in SE Asia to grow business, investment will also be needed to meet their living demand. This will include the Chinese-style stores, restaurants, real estates, transportation, mobile payment, e-commerce services, among others.
In addition, the infrastructure projects under BRI will create a value chain for services. This will involve not only project financing, but also engineering consultancy, engineering insurance, infrastructure management, legal, advisory and various other types of professional services. Investment opportunities will also arise in these areas.
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