The US-China trade war is over, runs an often-made joke in Singapore. “And the winner is Vietnam.”
Actually, the war shows little sign of easing, even as the combatants reel from the coronavirus, but the punchline still captures an important truth.
For a decade all eyes were on China but now the focus of global growth is shifting towards south-east Asia, a patchwork of 10 nations and nearly 700m people to the south of China and east of India. If every region has a moment when the stars align — economically, demographically, geopolitically — then south-east Asia’s may be now.
With rapid urbanisation and industrialisation, a young demographic, sweeping digitisation, growing access to education and rising female empowerment, south-east Asia is poised to acquire a new standing in the world.
Largely this is because it can build on its neighbours’ successes, thanks to Asia’s postwar history as one of mutually reinforcing growth waves.
Percentage of total trade across Asia that is now internal to the region: borders have come down, and poverty with them.
First came Japan’s meteoric ascent, followed by the rise of the so-called tiger economies of South Korea, Taiwan, Hong Kong and Singapore. These territories both inspired and led investment into China, which became Asia’s largest centre of growth. Now all of them are investing in south-east Asia.
The 10 members of the Association of Southeast Asian Nations join India, Japan, Australia and China in constituting a mega-region that accounts for nearly 40 per cent of the world’s gross domestic product in purchasing power parity terms.
China trades more with south-east Asia than with the US, in effect favouring more reliable neighbours over a capricious superpower. Its venture capitalists also see opportunity in the region: for instance, they invested more than $650m in its tech companies in the first half of 2019, according to data provider Refinitiv.
Corporate America is also tilting towards south-east Asia. Although US president Donald Trump withdrew the US in 2017 from the planned Trans-Pacific Partnership (TPP), whose other members were to include Japan, Australia and Vietnam, US imports from Vietnam kept growing. By 2019 they were up 40 per cent year on year, while those from China had fallen more than 20 per cent.
Foreign direct investment to south-east Asia in 2019
It is because the US did not join the TPP that companies from Mastercard and Qualcomm to Exxon and Pfizer have invested more in Asia. That is the only way they can gain the kind of access enjoyed by rivals from the other countries that signed a successor TPP deal. In 2019, south-east Asia had $150bn in foreign direct investment, behind China’s $200bn but ahead of India ($50bn).
There is more to come as the EU seeks a trade agreement with Asean based on its existing deal with Singapore, and a post-Brexit UK strives for a stronger presence in Asia. Investing in China will remain attractive because of its market size and industrious efficiency, but the trade war and the pandemic have underscored the risks of reliance on a single country. More companies are opting to “make where you sell”.
Now is the time for asset managers and private equity to expand allocations to emerging Asia
Many multinationals want to diversify into south-east Asia, both as a hedge and to access its fast-growing markets. Samsung phones were already made in Vietnam before South Korea shifted more production there after the outbreak of Covid-19. True, companies with sophisticated production processes such as Apple cannot yet replicate elsewhere the quality and scale of output achieved by Foxconn’s “iPhone City” plant in Zhengzhou, China. But even before coronavirus hit, Apple was scouting Vietnam to set up similar special economic zones.
Vietnam expects about 5 per cent growth in 2020. Yet with a GDP of just over $200bn, it is one of the poorer countries in a wealthy region. Resource-rich Indonesia’s GDP has passed $1tn, Thailand’s is nipping at $500bn; Singapore’s nearly $350bn is on a par with Hong Kong’s; and Malaysia and the Philippines have GDP above $300bn. In the past, poverty and border restrictions kept intraregional trade low, but across Asia 60 per cent of total trade is now internal to the region, according to McKinsey. Borders have come down, and poverty with them.
At the same time, if Asean were a country, it would be among the world’s most unequal, with Singapore and Brunei exhibiting Crazy Rich Asians-levels of wealth: annual per capita incomes are more than $80,000, while the figure for Myanmar and Papua New Guinea is under $3,000.
Yet, unlike in the west, south-east Asian nations attack poverty through investments in infrastructure, education, jobs, mobile banking and agricultural development, among other areas.
Coronavirus will affect export orders, but Asean countries are better placed to weather the storm than in 1998 or 2008
A common mistake about Asia in the 2008 financial crisis was that a drop in western demand would cripple its export-dependent economies. In fact, Asia continued the reforms begun after its own 1998 crisis, to focus on building trade surpluses and currency reserves and shift towards flexible exchange rates while controlling inflation. The 2008-09 export contraction was 35 per cent but was offset within the region by growth and lowered trade barriers.
Coronavirus will affect export orders, such as for garments and car parts, but Asean countries are better placed to weather the storm than in 1998 or 2008.
For one thing, they depend for trade not on the west but on each other, as well as China, Japan, and India. While China’s growth has decelerated, it is importing more from its neighbours. Equally important, most Asian economies are now service-based, with large populations and consumption driving growth more than trade.
Given the strength of the US dollar, now is the time for global asset managers and private equity to expand their allocations to emerging Asia, where currencies are weaker and businesses can be acquired more cheaply than western counterparts. Corporate debt is rising, but most of it is now in local currencies, meaning that concern over a “taper tantrum” of rising US interest rates has receded.
Manufacturing, real estate, banking, technology and agriculture are all ripe for infusions of foreign knowhow to build on solid bases of assets and customers. When thinking of how we will view Asia in the decades ahead, the most apt axiom will be: they used to make for us; now we make for them.
This article was originally published on FT.com on 11 May 2020. This article has been reproduced with permission from FT.com
The writer is managing partner of FutureMap, and author of ‘The Future is Asian’
© 2020 The Financial Times Ltd. All rights reserved.
The contents of this article have not been prepared or reviewed by Bank of Singapore Limited (the “Bank”). The Bank is not responsible for the accuracy or completeness of the information contained in this article which may change without prior notice. This article may contain views which are not representative of the views of the Bank, and such views may have been derived without discussion, consultation or agreement with the Bank. You will need to decide as to whether or not the contents are suitable for you. When you are in doubt, please seek your own independent financial, legal, tax or other advice as you deem fit. Neither the Bank nor any of its officers accept any liability for any loss whatsoever arising out of or in connection with your use of the information in the article.
Australia: Bank of Singapore Limited (i) is exempt from the requirement to hold an Australian financial services (AFS) licence under the Corporations Act 2001 (Cth) in respect of all financial products or financial services it provides in accordance with ASIC Class Order 03/1102 (as continued in force by ASIC Corporations (Repeal and Transitional) Instrument 2016/396) to any person in Australia who is a wholesale client, and (ii) is regulated by the Monetary Authority of Singapore under Singaporean laws which differ from Australian laws. Brunei: This document has not been delivered to, licensed or permitted by the Autoriti Monetari Brunei Darussalam, the authority as designated under the Brunei Darussalam Securities Markets Order, 2013 and the Banking Order, 2006; nor has it been registered with the Registrar of Companies, Registrar of International Business Companies or the Brunei Darussalam Ministry of Finance. The products mentioned in this document are not registered, licensed or permitted by the Autoriti Monetari Brunei Darussalam or by any other government agency or under any law in Brunei Darussalam. Any offers, acceptances, sales and allotments of the products shall be made outside Brunei Darussalam. Hong Kong SAR: Bank of Singapore Limited is an Authorized Institution as defined in the Banking Ordinance of Hong Kong (Cap 155), regulated by the Hong Kong Monetary Authority in Hong Kong and a Registered Institution as defined in the Securities and Futures Ordinance of Hong Kong (Cap. 571), regulated by the Securities and Futures Commission in Hong Kong. Indonesia: The offering of the investment product in reliance of this document is not registered under the Indonesian Capital Market Law and its implementing regulations, and is not intended to constitute a public offering of securities under the Indonesian Capital Market Law and its implementing regulations. According, this investment product may not be offered or sold, directly or indirectly, within Indonesia or to citizens (wherever they are domiciled or located), entities or residents, in any manner which constitutes a public offering of securities under the Indonesian Capital Market Law and its implementing regulations. Japan: The information contained in this document is for general reference purposes only. It does not have regard to your specific investment objectives, financial situation, risk tolerance and particular needs. Nothing in this document constitutes an offer to buy or sell or an invitation to offer to buy or sell or a recommendation or a solicitation to buy or sell any securities or investment. We do not have any intention of conducting regulated business in Japan. You acknowledge that nothing in this document constitutes investment or financial advice or any advice of any nature. Malaysia: Bank of Singapore Limited does not hold any licence, registration or approval to carry on any regulated business in Malaysia (including but not limited to any businesses regulated under the Capital Markets & Services Act 2007 of Malaysia), nor does it hold itself out as carrying on or purport to carry on any such business in Malaysia. Any services provided by Bank of Singapore Limited to residents of Malaysia are provided solely on an offshore basis from outside Malaysia, either as a result of “reverse enquiry” on the part of the Malaysian residents or where Bank of Singapore Limited has been retained outside Malaysia to provide such services. As an integral part of the provision of such services from outside Malaysia, Bank of Singapore Limited may from time to time make available to such residents documents and information making reference to capital markets products (for example, in connection with the provision of fund management or investment advisory services outside of Malaysia). Nothing in such documents or information is intended to be construed as or constitute the making available of, or an offer or invitation to subscribe for or purchase any such capital markets product. Myanmar: The provision of any products and services by Bank of Singapore Limited shall be solely on an offshore basis. You shall ensure that you have and will continue to be fully compliant with all applicable laws in Myanmar when entering into discussion or contracts with Bank of Singapore Limited. Oman: This document does not constitute a public offer of investment, securities or financial services in the Sultanate of Oman, as contemplated by the Commercial Companies Law of Oman (Royal Decree No. 4/1974), Banking Law of Oman (Royal Decree No. 114/2000) or the Capital Market Law of Oman (Royal Decree No. 80/1998) and the Executive Regulations of the Capital Market Law (Ministerial Decision No. 1/2009) or an offer to sell or the solicitation of any offer to buy non-Omani investment products, securities or financial services and products in the Sultanate of Oman. This document is strictly private and confidential. It is being provided to a limited number of sophisticated investors solely to enable them to decide whether or not to make an offer to invest in financial products mentioned in this document, outside of the Sultanate of Oman, upon the terms and subject to the restrictions set out herein and may not be reproduced or used for any other purpose or provided to any person other than the original recipient. Additionally, this document is not intended to lead to the making of any contract within the territory or under the laws of the Sultanate of Oman. The Capital Market Authority of Oman and the Central Bank of Oman take no responsibility for the accuracy of the statements and information contained in this document or for the performance of the financial products mentioned in this document nor shall they have any liability to any person for damage or loss resulting from reliance on any statement or information contained herein. Russia: The investment products mentioned in this document have not been registered with or approved by the local regulator of any country and are not publicly distributed in Singapore or elsewhere. This document does not constitute or form part of an offer or invitation to the public in any country to subscribe for the products referred to herein. South Korea: The document does not constitute an offer, solicitation or investment advertisement to trade in the investment product referred to in the document. The Philippines: The information contained in this document is not intended to constitute a public offering of securities under the Securities Regulation Code of the Philippines. Dubai International Financial Center (DIFC): Bank of Singapore Limited has a branch registered in the Dubai International Financial Centre ("DIFC") which is regulated by the Dubai Financial Services Authority (“DFSA”). Bank of Singapore Limited (DIFC Branch) is not a financial institution licensed in the United Arab Emirates outside of the DIFC and does not undertake banking or financial activities in the United Arab Emirates nor is it licensed to do so outside of the DIFC. This material is provided for information purposes only and it is general information not specific in any way to any particular investor, investor type, strategy, investment need or other financial circumstance. As such this information is not financial advice or a financial promotion, nor is it intended to influence an investor's decision to invest. It is not to be construed as an offer to buy or sell or solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy in any jurisdiction. The material is only intended for persons who fulfill the criteria to be classified as “Professional Clients” as defined under the DFSA rules and should not be reviewed, received, provided to or relied upon by any other person. United Arab Emirates (U.A.E): The information contained herein is exclusively addressed to the recipient. The offering of certain products in this document has not been and will not be registered with the Central Bank of United Arab Emirates or Securities & Commodities Authority in the United Arab Emirates. Any products in this document that are being offered or sold do not constitute a public offering or distribution of securities under the applicable laws and regulations of the United Arab Emirates. This document is not intended for circulation or distribution in or into the UAE, other than to persons in the UAE to whom such circulation or distribution is permitted by, or is exempt from the requirements of, the applicable laws and regulations of the United Arab Emirates. The distribution of the information contained herein by the recipient is prohibited. Where applicable, this document relates to securities which are listed outside of the Abu Dhabi Securities Exchange and the Dubai Financial Market. The Bank of Singapore Limited is not authorized to provide investment research regarding securities listed on the exchanges of the United Arab Emirates which are outside of the DIFC. United Kingdom: In the United Kingdom, this document is being made available only to the person or the entity to whom it is directed being persons to whom it may lawfully be directed under applicable laws and regulations of the United Kingdom (such persons are hereinafter referred to as ‘relevant persons’). Accordingly, this document is communicated only to relevant persons. Persons who are not relevant persons must not act on or rely on this document or any of its contents. Any investment or investment activity to which this document relates is available only to relevant persons and will be engaged in only with relevant persons. Relevant persons in receipt of this document must not distribute, publish, reproduce, or disclose this document (in whole or in part) to any person who is not a relevant person. United States of America: This product may not be sold or offered within the United States or to U.S. persons. In Hong Kong, Bank of Singapore Limited is a branch of Bank of Singapore Limited incorporated in Singapore with limited liability.
© 2019 Bank of Singapore Limited. All rights reserved.
Version: December 2019