China invests in Asean

China invests in Asean

Joseph Incalcaterra, HSBC Economist

Malaysia and rest of region will benefit from the Chinese Belt & Road Initiative

China’s links with members of Asean, the Association of South-East Asian Nations, are boosting trade, investment and tourism. But the Chinese government’s Belt & Road Initiative has the potential to alter the region’s economic landscape.

The ‘Belt’ is the ancient overland Silk Road trading routes that connected China and Europe via Central Asia and the Middle East. The ‘Road’ is the maritime routes linking China, Southeast Asia, India and Africa. Together, they should improve infrastructure and connectivity for more than half of the world’s population and 29 per cent of world GDP.

Asean’s importance to the Belt & Road Initiative is clear. Vietnam, Singapore, Thailand and Malaysia are among China’s largest trading partners in the grouping, which is inextricably intertwined with the Chinese economy through a deep network of supply chains. Moreover, a large share of China’s trade flows through the Straits of Malacca.

Belt-&-Road-related commitments for Asean – specifically in Malaysia, Indonesia and the Philippines – total more than $77bn and some of the most ambitious projects, such as Malaysia’s East Coast Rail Link or Indonesia’s High Speed Rail project, have committed financing with work set to start soon.

There is also a wide array of projects without concrete financing so far but which can boost growth and affect finances, not least through increased debt. And an ambitious investment programme could mean a significant deterioration in current accounts.

Centuries of trade between these countries have been bolstered by China joining the World Trade Organization in 2001 followed by the China-Asean Free Trade Agreement and subsequent pacts. Regional supply chains, particularly in electronics and machinery, meant firms in Singapore, Thailand, and Malaysia exported high-value-added components to China, which incorporated them in goods exported to the West.

However, these chains are losing importance. And although 10-15 per cent of Indonesia’s and Malaysia’s oil and gas exports go to China, stocks are declining and sales falling. Further, increased infrastructure construction requires higher imports, so Asean’s trade deficit with China has grown noticeably.

We have estimated the region’s infrastructure funding gap at $1.2 trillion until 2030. Not surprisingly, Indonesia and the Philippines, with the widest gaps, have moved quickly to secure Chinese financing. Malaysia’s basic infrastructure is better but its government’s high debt means private and foreign financing is necessary for upgrades that can make the economy more competitive.

And even if Singapore does not benefit directly, most projects will require some non-Chinese financing which may be raised there, and it remains a large investor in other Asean countries.

Tourism is also key in Asean’s economic relationship with China. Arrivals from China grew by double digits in every country in 2016 – and have increased 50 per cent since 2010. We estimate that Chinese tourists contribute 3.2 per cent of Thailand’s GDP.