Figures this week showed surging foreign direct investment in China — up 23.4 per cent to $10bn in January from a year earlier. But they hide a number of key trends — including a steady shift in the direction of Japanese and Korean FDI, away from China to other emerging economies of the region.
Macquarie Securities picks up on this in a research note suggesting that China’s reduced tax incentives and higher labour costs have been driving the shift in Japanese and Korean intra-regional investment flows over the last couple of years.
Another factor, Macquarie says, is the growing proportion of FDI flows going into resource-related investments elsewhere in the region. This, the bank says, probably explains much of the swing in Japanese FDI into Asia, excluding China.
FDI out of Korea meanwhile tends to be more heavily concentrated in manufacturing, which accounts for about two-thirds of the country’s total FDI, whereas for Japan it accounts for less than a third, as FDI is more concentrated into developed economies, according to Macquarie. After being the dominant recipient of Korean FDI in the past three years, China has now fallen behind the rest of the region.
A further sign of a relative shift away from China in favour of the rest of the region comes from the overseas subsidiaries of Japanese companies. In China they are increasingly focusing on local sales and serving the local market, rather than using it as a base from which to increase exports to third countries, according to Macquarie.
Why does all this matter?
For many regional economies, FDI is a key element in the capital spending cycle. While its impact on the balance of payments has become less important for many economies, “it still involves technology transfers and trade linkages”.
The note continues:
Most countries only release detailed FDI data with a considerable time lag and, combined with the lumpy nature of the flows, it can be hard to spot a change in the trend in a timely fashion. Although our image of FDI usually involves a new factory turning out labour-intensive manufactured goods, in reality FDI is defined as ownership of 10% or more of an asset. In the developed world, where most FDI takes place, this is most often in the non-manufacturing sector, but manufacturing is more important in developing economies.
Stepping back for the bigger picture, the FT suggested last month that 2010 FDI inflows to Asia “may have been less buoyant than expected” in light of forecast average economic growth of 8.2 per cent in 2010 for Asia excluding Japan.
Nomura, however, sees a rosy future, saying in a recent note that burgeoning domestic demand and free trade agreements are set to drive inward FDI.
Its overall Asian FDI figures for 2010 indicate that inflows bounced back strongly although with “mixed results across countries”. According to Nomura’s 2010 data:
Net FDI inflows by non-residents increased substantially in Malaysia (400% y-o-y), Indonesia (161.2%) and Singapore (122.6%), while they grew steadily in China, Vietnam (10.0%), Thailand (6.0%) and Taiwan (3.9%). By contrast, FDI fell in the Philippines (-31.8%), India (-31.4%) and Korea (a net outflow of US$0.7bn was recorded in January-October). The decline in the Philippines and Korea is likely to be temporary as the approved FDI increased by 130% in the Philippines for the first nine months and by 12.1% in Korea for the whole year. For India, the level of FDI fell in 2010 to a more normal level from historically high levels in 2008 and 2009.
But the big investment story for Asia, as the note suggests, is about the shift in the balance of FDI flows, and how China’s rising labour costs is prompting foreign companies to relocate or rethink investment plans.
As Peter Tasker, a Japan-based analyst for Arcus Research, observed in a recent FT column, there seems to be no good way out of the corner into which China has painted itself. Stuck between looming labour strife and spiralling inflation, and the need for monetary policy tightening, it faces growing pressure to rebalance its economy.
All the while, if recent trends are an indication, much of the rest of Asia is readying itself for a likely wave of FDI in the year ahead.
Related links:
Richard Koo goes unconventional on China – FT Alphaville
The hot money speaks on emerging markets – FT Alphaville
Gavyn Davies: China is bigger than you think – FT.com
In-depth report: China labour - FT.com