Foreign investors in 2013 favored the ASEAN-5 – Indonesia, Malaysia, Philippines, Singapore and Thailand – over China for the first time since 2007, data compiled by Bank of America Merrill Lynch shows.
The bank estimates that foreign direct investment (FDI) into the five ASEAN countries climbed to US$$128.4 billion last year, up 7% from 2012, while FDI into China, based on official FDI utilized numbers, fell to US$117.6 billion, down 2.9% from 2012.
FDI to ASEAN-5 surpassed FDI to China in 2013
China FDI refers to FDI utilized; Indonesia FDI refers to foreign investment realization; Philippines & Thailand FDI refers to FDI approved. Malaysia and Singapore FDI data on BOP basis. 2013 FDI data for Philippines is BofAML estimate. Sources: BofA Merrill Lynch Global Research estimates, CEIC
In a report, Bank America points to three reasons for the trend:
- more favorable ASEAN demographics versus an ageing China (with a labor force which is starting to shrink)
- rising wage differences (higher wage growth in China compounded by a stronger RMB)
- a fast growing ASEAN domestic market
China is also starting to emerge as an outward FDI investor given its growing savings and wealth, the report added.
Among the ASEAN-5, the Philippines experienced a “remarkable surge in FDI” – 188% increase in the first three quarters of 2013. Super typhoon Haiyan may have hurt FDI in the fourth quarter, however, so Bank of America estimates full-year growth at 24%.
That is still stronger than FDI expansion in Malaysia (+19%), Indonesia (+17%) and Singapore (+5%). But political uncertainty and social unrest in Thailand weakened FDI, which Bank of America says shrank by 12% from 2012.
“FDI has been a bright spot in Indonesia despite current-account deficit concerns last year,” says the report. “A large domestic market (population: 250 million), low relative wages (despite minimum wage hike) and a weak rupiah may be helping to lure foreign investment.”
“Malaysia seems to be succeeding in attracting FDI as part of its transformation drive, with more than a third going into its manufacturing sector in 2013,” the report adds. “Singapore as a FDI investment destination may be hampered by the current restructuring and stricter foreign worker policy.”
The “structural forces” that are making China less attractive for foreign direct investment are likely to persist, Bank of America concludes. Manufacturing wages in China continue to outpace levels in ASEAN, for example, particularly against Indonesia, Vietnam and the Philippines.
Manufacturing wages in China now higher than in ASEAN
Sources: BofA Merrill Lynch Global Research estimates, CEIC
“Less favorable demographics in China (because of the one-child policy), stronger GDP growth and a steadily appreciating RMB has widened the wage gap with ASEAN,” says the report.
The Japan factor
One other driver is Japanese investment. While Japan’s FDI into ASEAN declined 3.2% in 2013 after jumping 26% in 2012, a larger share of the inflow now go to Southeast Asia compared to the inflow to China. “Escalating geopolitical tensions between Japan and China are driving this material shift,” reckons the report.
Japanese FDI: Rising in ASEAN, Falling in China
Based on FDI utilized for China; foreign investment realized in Indonesia; FDI approved in Thailand and Philippines; and BoP FDI inflows for Malaysia and Singapore. Sources: BofA Merrill Lynch Global Research estimates, CEIC
In ASEAN, Japanese investment interest is growing strongest in Singapore (up 111%). Some analysts ascribe the increase possibly to anticipation of fuller ASEAN integration on 1 January 2015, when Cambodia, Laos, Myanmar and Vietnam join the ASEAN-5 in cancelling import and export duty taxes on goods and services traded among the ten ASEAN members. The exemption is based on geography. Despite its tight labor market and escalating costs, Singapore has made sure that setting up a business in its territory is far easier than anywhere else in ASEAN.
Japanese investment into Indonesia also grew strongly at 92%. But interest in Vietnam (minus-68%) and Thailand (minus-21%) waned last year. Overall, concludes the Bank of America report, “rising FDI into ASEAN will likely remain a favorable structural trend over the next few years given favorable demographics, competitive wages and geopolitical competition between the superpowers (which remain the major investors).”