China's Thaad Backlash May See South Korea Invest More in Asean

Southeast Asia is already winning more FDI from South Korea
By Brett Miller and Hooyeon Kim

A truck carrying components needed to set up the Terminal High Altitude Area Defense (THAAD) missile defense system arrive at the Osan base, South Korea. 

While economists pencil in smallish cuts to South Korean GDP this year and a big hit to the travel sector, the most enduring impact of China’s clampdown on outbound tourism could be an acceleration of efforts by Seoul to reduce dependence on its giant neighbor.
Analysis by Natixis Asia emphasizes that South Korea is likely to keep winding back risk exposure to China, particularly when it comes to foreign direct investment.
Southeast Asia, with expanding consumer markets and competitive wages, appears well positioned to benefit.

"They will increasingly seek to diversify risks by moving into markets that offer fast growth and cheap labour costs," Trinh Nguyen, senior economist for emerging Asia at Natixis in Hong Kong, said in a note to clients.
Nguyen also highlighted tourism’s relatively small place within the overall economy relative to sectors like manufacturing, and the continuing demand from China’s factories for components from South Korea.
"Korean tech firms still retain technological edge that supports decent demand for their products abroad," she said.

Economists at Nomura International said the decision to ban package tours to South Korea could shave 0.2 percentage point from GDP, assuming the number of Chinese tourists drops by 40 percent over the next 12 months. 

This would be in keeping with the decline in mainland travelers to Taiwan during another diplomatic spat, according to Nomura.
While South Korean exports of consumer goods could be vulnerable, intermediary products that fill China’s manufacturing supply chain are less exposed, according to a note from Nomura economists Young Sun Kwon and Minoru Nogimori.
Nomura forecasts South Korean GDP growth of 2 percent this year. 

The median of estimates compiled by Bloomberg is for expansion of 2.5 percent, slightly lower than 2016.
The curbs on tourism come on top of a host of non-tariff barriers South Korean companies face in China.

"There are many ways for China to torment Korea," said Song Yeong-kwan, a fellow at the Korea Development Institute in Seoul, who said the flareup has come at very bad time, given impeachment proceedings against Park Geun-hye, who's been suspended from power. 

"The situation inside Korea is pretty bad -- we don’t have a control tower."

China Challenges Vietnam With A Revival Of Its World Factory Status

By Ralph Jennings 

China used to be the world’s factory. 

It overtook the United States in 2011 as the biggest producer of manufactured goods. 

Factories were an “engine” that raised Chinese living standards by doubling per capita GDP in the 10 years ending in 2013, according to a McKinsey & Co. report. 

That shift took the United Kingdom 150 years, McKinsey notes. 

But around 2011 China began to lean more on domestic consumption and domestic direct investment in clean, service-linked sectors, all part of an economically and environmentally sustainable rethink to growing what’s now an $11 billion-plus economy.
Now China is trying to revive its status as the best place to to invest. 

That move poses a challenge to Vietnam, China’s main Asian rival for export manufacturing.

In this photo taken on February 6, 2017, employees work on the Honda Civic production line at the automaker's Dongfeng Honda factory in Wuhan, China's Hubei Province. 

Foreign direct investment in China will increase 15% this year, up from 4.1% last year, government think tank China Center for International Economic Exchanges said as reported by the official, English-language China Daily website on Wednesday. 

Policies that open new sectors to foreign capital and fast-track applications from overseas will help raise that total, the think tank says. 

China Daily also cites advances in “new materials” and “new technologies” as drivers of more investment, though it doesn't give specifics. 

This forecast comes from just one think tank, but its state backing and release in a news outlet aimed at foreigners tells you it’s supposed to be policy.
China needs the boost to offset outflows of capital, much of it removed by Chinese firms that find the home market too competitive or restrictive. 

Outflows hurt currency rates. 

The country's outflows reached about $1 trillion in 2015 and estimates for 2016 aren’t far from that. 

“FDI inflows net of FDI outflows have been negative for the past two years,” says Marie Diron, associate managing director with Moody’s sovereign ratings in Singapore. 

“This net outflow is a drag on foreign exchange reserves. Although scrutiny on capital including direct investment outflows has increased, we do not expect this situation to change.”
Foreign investment in China reached $118 billion last year, China Daily says, less than 2% of the Chinese GDP. 

By that measure, foreign direct investment in Vietnam last year led China, India and Indonesia at 6% of GDP, reflecting the country’s aggressive pursuit of factories run by obscure furniture makers all the way to Foxconn Technology Group and Samsung Electronics. 

Vietnam’s boom in factory exports has fostered support industries, created jobs and raised living standards on the back of economic growth at near 6% per year.
There was never really a direct contest. 

China had drawn foreign investors for decades for its range of talent, relatively cheap land (until recently) and ginormous, increasingly well-off consumer market. 

Vietnam was picking up mostly low-end stuff such as garments and car parts while China got value-added investors such as the PC makers. 

Vietnam has swung toward electronics over the past five years.
But more foreign companies are wondering how welcome they are with China’s official shift to promoting domestic investment, says Scott Kennedy, director of the Project on Chinese Business and Political Economy at American think tank Center for Strategic and International Studies. “Surveys by the American Chamber of Commerce, the EU China Chamber and others all show that MNCs feel less welcome than in the past, and a portion of them have or are planning to move some of their investments out of China as a result,” he says.
Vietnam, which began gearing up as an export center in the 1980s, had come along as a place you could move that investment.
China’s re-launch as a world factory could also make Vietnam more viable as a place for expanding investments, suggests Oscar Mussons, international business advisory associate with the Dezan Shira & Associates consultancy in Ho Chi Minh City. 

“The type of manufacturing industries that draw foreign investors to Vietnam service a lower position on the production value chain,” he says. 

“Taking this into consideration, Vietnam still has loads of room to grow.”

China: Soon the most visible victim of deglobalisation

China's exports are falling and millions of jobs are at risk.
By Salvatore Babones

Container boxes are seen at the Yangshan Deep Water Port, part of the Shanghai Free Trade Zone, in Shanghai.

When you buy anything, anywhere in the world, there is a good chance that it comes from China. 

We all know China as the great export powerhouse of the 21st century. 

But China's exports hit an all-time high in December, 2015 and (ignoring season fluctuations) have been declining ever since. 

China is increasingly turning inward for growth -- and having trouble finding it.
China accounts for about one-eighth of the world's merchandise exports, far more than any other country. 

Even this figure understates the true importance of China's export economy. 

Most other countries export intermediate goods that are just parts and components of the finished goods that consumers actually buy. 

China more often exports the finished goods.
When China's exporting juggernaut slows down, the world slows down. 

Or maybe it's the other way around: when the world slows down, China slows with it. 

Either way you look at it, both Chinese and global exports are falling.
Global exports as a percentage of global gross domestic product hit an all-time high of 30.8 percent in 2008. 

They fell precipitously during the global financial crisis of 2008-2009 and have since stabilised at just under 30 percent.

Global export volumes
These figures cap off a remarkable quarter-century of global export growth that began back in 1973. In that period global GDP roughly doubled, but global export volumes grew by a factor of 5.6 (based on inflation-adjusted data from the World Bank).

China played a leading role in that story, but it was the rise in international trade that pulled the Chinese economy along, not the other way around. 

China rode the coat-tails of a quarter-century of globalisation.
Most people think of globalisation as a process that began in the 1990s with the collapse of the Soviet Union in 1991 and the foundation of the World Trade Organization in 1995. 

But the roots of today's global economy really go back to 1973, when the United States went off the gold standard and most countries moved from fixed to floating exchange rates.
Floating exchange rates meant that the era of managed trade was over. 

The global economy moved into a new phase driven by market forces. 

The oil exporting countries of the Gulf were the first to benefit as the market price for oil quadrupled between 1973 and 1974. 

China came to the party just a few years later.
Since then the global economy has become more and more open. 

After the currency liberalisation of 1973 came a huge increase in international trade and then, in the 1990s, in foreign investment. 

Both trade and investment peaked in 2007-2008.
Since then international trade has declined by roughly half a percent. 

Foreign direct investment, or FDI, has fallen by half.
That is not half a percent. That is half. 

Annual global FDI is down roughly 50 percent from its 2007 peak of just over $3 trillion. 

It's still much larger than it was in the 1990s or earlier decades, but global FDI has stabilised at roughly the levels of the early 2000s.

Tourists browse through T-shirts for sale in a night bazaar in Temple Street, Hong Kong.

Unlike global FDI, foreign investment into China hasn't fallen in absolute terms. 

But it too has stabilised and is no longer rising. 

China is firmly on the world's shortlist for companies looking to invest, but it is no longer the only country on that list. 

These days China has to compete with India, Southeast Asia, Latin America and even Africa for scarce foreign investment dollars.
That's many more countries chasing fewer and fewer dollars. 

So far China has been very successful at holding its own against tough competition. 

But China is holding its own in a slowly declining market.

Exports and jobs
No one knows exactly how many people in China are dependent on foreign investment and export industries for their livelihood.
But by any count the numbers are huge. 

For example, China's export-oriented garment industry employs about 10 million people. 

These jobs are increasingly threatened as companies move production to lower-cost countries such as Vietnam.
The Taiwanese contract manufacturer Foxconn, once famous for for employing 1.2 million people in China, is now automating its Chinese plants. 

It has announced plans to move up to 1 million jobs to India. 

And Foxconn is just the tip of a very big, rapidly melting iceberg.
For the past quarter-century China has been the most visible beneficiary of the increasing globalisation of the global economy. 

Soon it may be the most visible victim of deglobalisation.
The global economy is still growing. 

But it is no longer globalising. 

Like everyone else, people in China will have to work much harder to capture growth in the next quarter-century than they did in the last.