Loong on China: Chinese investment: ASEAN’s strong hand

Loong on China: Chinese investment: ASEAN’s strong hand 
Originally published in TheEdge Malaysia, 25th – 31st December edition.

China’s Belt-Road programme is breath-taking in its ambitious vision of how the world’s economic and financial relations could be reshaped. For many participating nations, a major attraction is the chance to start a commercial relationship with the world’s second biggest economy on a scale which had not previously seemed possible.

ASEAN is different. The 10-member group has long had commercial dealings with China. Business ties date back four decades to when Deng Xiaoping opened up the country to the outside world. China has since become ASEAN’s biggest trade partner and is now its fourth largest investor after the United States, Japan and Hong Kong. Initial ASEAN estimates put inflows from China last year at US$9.8 billion and the United States at US$12.2 billion.

ASEAN too has come of age during this time. The recently-established ASEAN Economic Community links 625 million consumers in 10 nations with a combined GDP of more than US$2.6 trillion. Although lacking the unity and clout of the single-currency European Union, its economic maturity as a group among Belt-Road participants gives it a significant edge in its commercial dealings with China.

Beijing is keen to expand its footprint in the region. And investment in ASEAN can make good commercial sense, which is not necessarily the case with the peripheral economies in the Belt-Road programme where the focus is on the strategic dimension.

ASEAN as a unit is now the world’s sixth-largest economy and on track to become fifth-largest by 2020. The region is emerging as a strong manufacturing alternative to China with its lower labour costs and a young expanding workforce. Domestic demand is rising – with consumer spending supported by a burgeoning middle class of some 150 million people. Even Vietnam now boasts of 10 million middle income consumers.

But China must make some tough choices in 2018.

Domestically, it has pledged to double the size of the economy within this decade, implement structural reforms to the economy and, most importantly, maintain employment. Externally, it is committed to Belt-Road investments, trumpeted as the nation’s foreign policy centrepiece.

Crucially, it must decide where and how to allocate limited resources to achieve its goals – including hard targets laid out in the nation’s Five Year Plan which ends in 2020.

Outside China there is a perception encouraged by media hype that the nation has unlimited funds at its disposal. Its $3 trillion in foreign exchange reserves is often cited as evidence of endless wealth – even though those reserves are no more the state’s own assets (akin to tax revenues) than, say, customer deposits are a bank’s own money free of obligations.

The better measure of China’s wealth is good old GDP. And the pace of Chinese GDP growth is falling. Beijing itself admits to a “new normal” of a decelerating economy. Yet a stubborn belief persists that the current slowdown is but a hiccup and that a return to the days of heady expansion is just around the corner. Every decimal point increase in the monthly numbers is regularly seized upon by die-hard bulls as a sign of the impending “rebound”.

In the opposite corner are the prophets of doom who see systemic implosion at every turn as though China’s highly controlled hybrid economy responds similarly and in a comparable time frame to the stresses that would bring an advanced market economy to its knees.

Reality is less dramatic – and far more reassuring for client countries in the Belt-Road programme. The Chinese economy is no more likely to implode than it is to make a miraculous recovery to headline-grabbing growth over the next few years. A modest expansion of between 6.3% – 6.5% a year on average until the end of the decade is the most likely scenario.

Modest is good. A modest pace of growth is both desirable and achievable for China. Desirable because it would deliver the promised doubling of GDP by the end of the decade, ensure full employment and improve living standards in a nation where official show 43.4 million people living on less than $1 a day. Desirable because it frees up resources for much-needed structural reforms of the economy. And desirable because China’s incremental output ratio or the bang-for-buck gauge is already unsustainably high. By one estimate the economy now needs six renminbi in investment to produce one additional renminbi of output.

And modest is achievable. China’s policy toolbox is the envy of mature market economies everywhere. Beijing can respond to crisis and reverse regulatory policies literally overnight without the distractions of public debate and political opposition. Should a slowdown in Chinese exports drag down overall economic growth, Beijing has its own remedies: give imports a little regulatory squeeze, for instance, to boost net exports and increase its contribution to GDP.

Of course, funding for the Belt-Road programme is not restricted to Chinese sources. But the reality is that most of the action to date has come from China. Even special purpose institutions set up to support regional development, such as the Asian Infrastructure Investment Bank and the five-nation New Development Bank, have been taking a back seat.

China is therefore key to how much infrastructure financing might flow to the region in the near and mid- term. The outlook for Belt-Road investment into ASEAN hinges very much on the outlook for the Chinese economy.

Not imploding is one thing. A sound economy is quite another. And a sound economy with solid growth is still a work in progress for China. In other words, if ever there had ever been free lunches for ASEAN, they are now over.

Money will continue to be made available for Belt-Road projects given its central role in China’s foreign policy strategy. And China will doubtless use its influence to raise funds for the programme from other sources. But ASEAN can expect every deal, every loan, and every contract to face the toughest negotiations.

In the background is an important historical legacy that is seldom highlighted. ASEAN nations have significant numbers of Overseas Chinese who made Southeast Asia their home generations ago. Malaysia and Singapore are the obvious examples of states which have the advantage of business people and professionals who retain family ties with China, and many of whom are literate in Chinese.

All things considered, ASEAN is in a strong position to profit from the Belt-Road programme. But there is an important caveat.

Success is contingent on Belt-Road partners being fully conversant with China’s distinctive approach to doing business. China’s governing ideology of “socialism with Chinese characteristics” diverges from current practices in the international marketplace which are predicated on the primacy of market forces. Getting this wrong will not be good for the bottom line.