Regional bloc poised for further benefits

Focus: ASEAN Business Club Forum
ASEAN grouping should take advantage of China’s growing needs in agriculture, healthcare and finance sectors

China’s two-way investment with the Association of Southeast Asian Nations (ASEAN) has been on the rise, although its full potential is yet to be realized, experts say.

Part of it has to do with “the natural complementary aspect of the Chinese and ASEAN economies”, said Xiang Bing, dean of the Cheung Kong Graduate School of Business in Beijing.

At a China Daily co-branded session on the sidelines of the ASEAN Business Club Forum on Sept 8, Xiang spoke on China’s forthcoming transformation and its global implications.

Three decades after China opened up its economy in the late 1970s, it became a magnet for foreign direct investment (FDI), second only to the United States.

But those were the days. The reality is that China’s outbound investment has surpassed its inbound investment since July. In short, Chinese enterprises are eager to leverage resources regionally and globally.

China’s FDI, excluding financial investment, has been growing at its weakest pace in two years. In July, it plummeted 16.95 percent from a year earlier to $7.81 billion.

Meanwhile, China’s outbound direct investment (ODI) by non-financial companies surged nearly 85 percent from last year to $9.21 billion in July.

So now the question is, where are Chinese enterprises headed? The 10-nation ASEAN bloc is a natural choice for China, Xiang theorizes, due to the geographic and cultural proximity of the two.

Not surprisingly, Chinese investment in ASEAN has soared. It reached $5.9 billion in 2011, up from just $120 million in 2003, official data show.

China is already the largest trading partner of ASEAN. And ASEAN has overtaken Japan to become the third largest trading partner of China since several years ago.

With a population of 600 million people, ASEAN has a combined GDP of 2.3 trillion, making it the largest economy in Asia after China and Japan. Annual growth, above 6 percent, makes it an attractive market compared to the global average of 4 percent.

“ASEAN is a fantastic place when you look at the 4.2 percent growth rate in the United States,” said Rodney Ward, chairman of global corporate and investment banking at Bank of America Merrill Lynch in Asia Pacific, adding that a strong euro has dampened exports.

“(ASEAN) has come a long way to become the most attractive investment destination,” Ward added.

ASEAN’s attractiveness to foreign investment could heighten with the launch of the ASEAN economic community (AEC) to create a single market with free fl ow of goods and services by the end of 2015.

“The world is inevitably coming together as one because of globalization. ASEAN only makes a better place to deal with China and India,” said Tony Fernandes, founder and chief executive officer of AirAsia, the region’s largest low-cost carrier.

“The pie is much bigger with ASEAN. I am a living proof of it. If you embrace economic integration, you may have a smaller slice but the pie will be much bigger,” he said.

Numerous opportunities exist in infrastructure investment, such as in power plants, roads, railways and sanitation facilities. According to the Asian Development Bank, ASEAN requires infrastructure spending of $600 billion by 2020.

In contrast, ASEAN investment in the Chinese mainland only shares a small piece of a big pie. Hong Kong, Japan, Singapore, South Korea, Taiwan and the US are top investors, dominating 94 percent of overseas direct investments in the Chinese mainland.

However, in the absence of mega projects, investment flow from ASEAN to the Chinese mainland fell nearly 13 percent from last year to $4.18 billion in first seven months.

Part of this has to do with intense local competition facing ASEAN investors while robust local players already enjoy handy access to capital and technology.

With a changing landscape and China being the second largest economy, “(ASEAN members) have to be among the very best from around the globe to play in the China market,” Xiang said.

The silver lining for ASEAN-China synergy however lies in agriculture. For instance, rice-exporting economies such as Thailand and Vietnam enjoy a comparative advantage. “China needs to feed itself — a 1.3 billion population,” said Xiang.

Rapid urbanization in China also means an unprecedented opportunity for foreign players, including ASEAN investors. The official urbanization rate in China was about 53 percent last year, compared to about 80 percent in the US.

Xiang believes a bigger game changer for investors lies in China’s gradual deregulation in sectors such as finance, telecommunications, education, culture, sports and healthcare.

For instance, the healthcare sector only contributes 5.3 percent of China’s GDP, compared to 18 percent in the US.

“Chinese economic openness is often understated,” Xiang said, assuring investors. “China is far more open than you think.” For example, Cisco Systems, a Silicon Valley-based network provider, is said to have built a 70 percent share of China’s leading Internet infrastructure projects, said Xiang.

Other global companies have also done well. Yum Brands, parent company of fast-food chain Kentucky Fried Chicken, had half of its revenue generated in China last year, while electronics giant Samsung made a record $13 billion sales in China.

“Given that the Chinese economy continues to open, there will be great opportunities for ASEAN,” Xiang concluded.