COMMENTARY: Outflow From China Has Started, but Not How Trump Envisioned

Manufacturing, investment shift moving to Vietnam, elsewhere in Asia in a likely preview of where the global economy is headed.

Mark Melnicoe
    Aug 24, 2019 5:05 AM  PT
COMMENTARY: Outflow From China Has Started, but Not How Trump Envisioned
author: Mark Melnicoe   

A pair of dynamics are combining to drive Chinese investment heavily into Asian countries to the nation's south – a phenomenon that may carry great weight as the global economy shifts to the world's most populous continent.

The trade war, working in tandem with China's Belt and Road Initiative, is stirring a move among multinational companies, as well as Chinese domestic firms, to shift manufacturing to Vietnam, India, Indonesia and other countries. The result, according to a report out this month, is a virtual doubling of Chinese FDI – foreign direct investment – into Southeast Asia.

A report from the Malaysian bank Maybank says that Chinese construction and investment contracts in the region hit $11 billion in the first half of this year, up from $5.6 billion in the final half of 2018.

Vietnam is the big winner of this great trade diversion so far. During the first seven months of this year, pledges of FDI in Vietnam from China leaped 134 percent to $2.5 billion, said the Foreign Investment Agency of Vietnam.

This movement shows what has been predictable from the start - that neither the U.S. nor China is "winning" the trade war, despite what President Trump would have you believe.

China's Influence Grows Through BRI

One of the great questions has been to what extent companies would shift their supply lines out of China to avoid the 25 percent tariffs the U.S. has already placed on some $250 billion worth of goods. Trump has scheduled 10 percent tariffs to hit another $300 billion-plus in goods from China, with some coming a week from now and the others hitting in mid-December.

Trump has claimed the tariffs would drive companies to return manufacturing to the United States, but instead, they simply are moving to other countries. The Phnom Penh Post noted that total newly registered FDI from China and Hong Kong into Vietnam surged 200 percent in the first seven months of this year from the same period last year.

No one knows whether this is the start of a mass exodus from the Middle Kingdom. It's much easier to move manufacturing of lower-cost items like clothing and toys than it is for advanced technology. Still, tech companies such as Apple (Nasdaq: AAPL), Google (Nasdaq: GOOGL), Dell (NYSE: DELL) and Nintendo are among the big firms announcing plans to shift at least some of their production out of China.

Chinese President Xi Jinping's BRI is the other driver of shifting investment. Launched in 2013, the idea was to remake the ancient Silk Road that saw trade between China and Europe flourish during the Middle Ages. China aims to spend trillions of yuan over the next several decades to build roads, ports, railways, ships and other facilities to deliver goods efficiently by land and sea.

Although China has invited other countries to take part, so far its mainly Chinese companies moving their production as they build infrastructure projects across swaths of Asia and Africa.

Since Xi's plan was unveiled six years ago, China's investment in BRI countries has risen faster than in other parts of the world. Southeast Asian nations have benefitted the most during the past six months, and Maybank expects the surge to continue. The new contracts largely have come in transportation and energy projects in Vietnam, Cambodia, Indonesia and Singapore.

Back at home, China's GDP growth slowed to 6.2 percent in the April-June quarter – its slowest in 27 years. Trump claims his tariffs are the reason, but, of course, the reality is much more complex. China's nearly $15 trillion economy is being buffeted by high debt, a global slowdown and reform that is moving too slowly, among other factors.

Unlikely to Move Back Home

And while the exodus of companies can't be denied, things aren't all going in the same direction. Apple, while moving some manufacturing out, also is reported to be in the final stages of sealing a deal to have advanced screens for its iPhones made by a top Chinese display maker.

Japan's Nikkei Asian Review reports that Apple is working with BOE Technology Group to test the firm's OLED displays in a deal that would make BOE the supplier of Apple's single most expensive iPhone component. BOE reportedly would build a second factory in Chengdu dedicated to Apple.

Many other companies are staying put in China for now, despite the tariffs and despite the difficult regulatory environment, because of the myriad manufacturing advantages the country has to offer.

The telling trend is that even when companies do move, they're largely going elsewhere in Asia – to Vietnam, Malaysia, Cambodia, Sri Lanka and elsewhere.

Much of this would have happened anyway, as China moves up the value chain and wages there increase well beyond its neighbors. But it's easy to see where the global economy is going, and it's remaining in China's neighborhood.

Numerous countries in the Asia-Pacific region are negotiating the Regional Comprehensive Economic Partnership (RCEP), a proposed free-trade agreement that would involve a huge swath of humanity – and economic activity. The group would include China and India, all 10 members of the Association of Southeast Asian Nations (ASEAN), plus Japan, South Korea, Australia and New Zealand.

Right now, those countries constitute about 40 percent of world trade, and together they would form the biggest trade bloc on the planet. Further out, according to projections from PwC, in 2050 they would have a combined GDP that constitutes half of the world economy.

That is something that no amount of tariffs or other trade war tactics are going to stop.