The ASEAN region has seen a surge in foreign direct investment (FDI) inflows, due to the global supply chain reconfiguration after the Covid pandemic. Western multinational corporations (MNCs) are crucial in driving investment in ASEAN, as they diversify supply chains and implement the China+1 strategy. Concurrently, there has also been a noteworthy influx of Chinese capital into ASEAN. In the second part of our two-part series on FDI dynamics in ASEAN, we delve into the increasing role of Chinese capital.

From BRI to trade war – the past decade

Chinese investment in ASEAN has witnessed substantial growth over the past decade, initially driven by the launch of the Belt and Road Initiative (BRI) in 2013 and subsequently influenced by the China-US trade tensions that emerged in 2018. The BRI, a government-led initiative, encouraged Chinese firms, particularly state-owned enterprises, to invest in ASEAN's infrastructure and energy sectors. Furthermore, the China-US trade conflicts compelled Chinese firms to relocate parts of their manufacturing operations to ASEAN countries to circumvent US tariffs.

China's outward direct investment (ODI) into ASEAN recorded a compound annual growth rate (CAGR) of 13.5% between 2013 and 2018, followed by a continued rise of 8.0% between 2018 and 2022. ODI flows into ASEAN reached an impressive USD 18.7 bn in 2022, contributing 11% of China's total ODI. This elevated ASEAN beyond Europe and the British Virgin Islands, establishing its position as China's second largest ODI destination since 2018, trailing only Hong Kong SAR.

Among ASEAN’s total net FDI inflows, China’s share also increased to 7% in 2022, up from 5% in 2013. China consistently held the position of ASEAN’s fifth largest FDI investor, following the US, ASEAN itself, Japan, and the EU.

Examining by geography and industry, Singapore and Indonesia were the top destinations for Chinese ODI, with the manufacturing sector prominently standing out.

Singapore, a thriving regional business and financial hub, attracted the highest investment flow of a cumulative USD 33.9 bn between 2018 and 2022. Indonesia closely followed with USD 15.2 bn during the same period. Strong growth rates were observed across Indonesia, Thailand, and Vietnam, with 10-25% CAGR.

By industry, manufacturing sector drew the largest investment, totaling USD 33.3 bn over the past five years. Subsequently, wholesale and retail trade received USD 14.7 bn. Strong growth rates of 10-20% CAGR were observed in manufacturing and electricity and gas sectors. In addition, the information and software sector witnessed a sizeable 50% growth.

Aside from direct investment, there is evidence of increasing Chinese capital into ASEAN through equity investment over the past decade, particularly in the form of Venture Capital. These investments have concentrated in Singapore and Indonesia, with a focus on the TMT and financial services sectors. One standout example is Grab, a prominent provider of mobile-based transportation, food delivery, and digital payment services across Southeast Asia. Grab successfully secured a substantial USD 2 bn in funding from Chinese firm Didi Chuxing and Japan's SoftBank in 2017, prior to its public listing on NASDAQ in 2021. Several other noteworthy instances also include Singapore’s Lazada and Sea, Indonesia’s Gojek and Tokopedia, Vietnam’s Tiki, and Thailand’s Ascend Money. These dynamic internet and fintech companies have all received strategic investments from Chinese firms, such as Alibaba, Tencent, JD.com and ANT Group.

Post-Covid resurgence

Chinese investment in ASEAN is experiencing a strong resurgence this year, as China's economy reopens after the Covid pandemic.

According to the China Global Investment Tracker by the American Enterprise Institute, Chinese investment and construction projects in ASEAN-6 countries reached a total of USD 8.5 bn in 1H23, a substantial 82.3% YoY surge compared to the same period of last year.

Indonesia remains the primary investment destination, while Malaysia is emerging as a new destination for strong growth. Notably, Indonesia saw nearly a 400% increase, reaching USD 5.3 bn in 1H23. Investment in Malaysia more than doubled, amounting to USD 1.6 bn in 1H23. Vietnam also maintained its steady upward trajectory, reaching USD 530 mn.

The manufacturing sector remains a hotspot for Chinese investment this year. For instance, Shandong Xinhai and BaoWu committed USD 1.3 bn to establish a ferronickel processing facility on Sulawesi island in partnership with Vale Indonesia. Zhejiang Huayou Cobalt invested USD 2.4 bn in partnership with Ford and Vale Indonesia to supply high-quality nickel for electric vehicle batteries. Meanwhile, automotive giants like Zhejiang Geely and BYD strategically invested in Malaysia and Vietnam to expand their car production bases. In addition, the alternative energy and construction sectors also saw a notable rebound in Chinese investment.

According to the China Going Global Investment Index compiled by EIU, ASEAN has made a significant leap in its ranking this year. Among the 80 major investment destinations, Singapore has ascended to the top spot as the most attractive destination for Chinese investors, with Indonesia following closely in the 2nd position, Malaysia in 3rd, Thailand in 5th, and Vietnam in 6th.

New catalysts, new trends

Looking ahead, the landscape of Chinese investment in ASEAN is poised for new transformation over the next decade, driven by emerging forces from both the supply and demand sides.

The concept of supply chain regionalization is expected to assume a new role in propelling Chinese investment into ASEAN in the post-Covid era. According to McKinsey’s surveys, global supply chain leaders will increase crucial product inventories, adopt dual sourcing for raw materials, and embrace supply chain regionalization after Covid, to strengthen their supply chain resilience (here). The large Chinese firms will also likely pursue the establishment of regionalized supply chains, expanding their sourcing and production footholds in the neighboring Asian countries. This strategic shift will help them to shorten the supply chain lengths, mitigating the exposure to unforeseen disruptions like pandemics, natural disasters, and geopolitical events in the future.

ASEAN is poised to be a prime destination for Chinese firms pursuing regional supply chain strategies, given their geographical proximity, established manufacturing bases, and strong trade relations with China. The China Going Global Investment Index for 2023 highlights ASEAN as the most appealing destination for Chinese investors in supply chain development. Singapore leads the rankings at No. 1, with Malaysia in 2nd place, Thailand in 3rd, Indonesia in 4th, and Vietnam in 5th.

On the demand side, ASEAN is becoming an increasingly alluring market for Chinese investors in the post-Covid era. With a substantial population of 664 mn, ASEAN ranks third globally in terms of population size, trailing only China and India. ASEAN also boasts a youthful population, with a median age of 31 years. Furthermore, the Covid pandemic has accelerated the process of digital transformation and decarbonization, creating new growth opportunities within the ASEAN region. In contrast, the Chinese economy is grappling with multiple challenges, including an aging population, heavy debt burdens, scarring effects of Covid, and policy uncertainties. According to the IMF, the ASEAN-5 nations will maintain steady GDP growth of around 4.6% between 2023 and 2028, while China's growth will decelerate from 5.2% to 3.4%. This positions ASEAN as an attractive opportunity for Chinese investors, providing fresh avenues for market expansion in the years ahead.

Chinese investors are expected to focus on key sectors in the coming decade:

Electronics: China currently dominates global production of mobile phones, PCs, and various other consumer electronics products. Notably, it contributes to 80-90% of the global iPhone assembly. Major manufacturers within the global electronics supply chain are expected to strategically diversify their production facilities after Covid. This diversification will involve not only the western electronics manufacturers based in China but also the Chinese manufacturers. Among Apple’s top 200 suppliers in 2022, more than 40 were Chinese companies based in mainland China.

On the demand side, the acceleration of digitalization process after Covid is expected to generate rising demand for various electronics devices and components within ASEAN. This encompasses a continued rise in smartphone penetration rates, establishment of smart factories, planning and construction of smart cities, among others.

Vietnam, with its well-established production network, particularly in the smartphone domain, is expected to remain a preferred investment destination in the electronics sector for Chinese firms. Other ASEAN countries like Malaysia and Thailand, which possess electronics manufacturing capabilities, also hold potential to attract Chinese investment within this sector in the coming years.

Electric Vehicles (EVs): China currently dominates the downstream global EV supply chain, including a 50-70% share in certain material processing, 70% in EV battery production, and 50% in EV production. The upstream EV supply chain, particularly mining, is dominated by the resources-rich countries like Australia, Indonesia, and Congo. Indonesia's embargo on nickel ore exports in recent years has triggered realignments in the EV supply chain. Chinese firms have been compelled to localize their processing facilities for EV metals in Indonesia to secure the supply of nickel resources. It is possible that ASEAN countries may introduce similar protective measures on critical minerals in the future, to further encourage supply chain localization.

Meanwhile, Chinese EV manufacturers are eyeing the ASEAN market, due to its promising demand prospects. EV adoption in ASEAN remains nascent compared to China, with EV sales constituting 1-10% of new vehicle sales. ASEAN countries are introducing strategic policy measures to accelerate EV adoption, ranging from tax incentives, subsidies for EV purchases, to the facilitation of EV charging infrastructure. Singapore, Thailand, and the Philippines have set ambitious targets of achieving a 100% EV adoption rate by 2030-2040. This presents significant opportunities for Chinese EV manufacturers looking to tap overseas markets for expansion.

Renewable energy: Investment in renewable energy is expected to align closely with the global push for decarbonization. In response to this imperative, the Chinese government is actively promoting the transition of SOEs overseas investment within the BRI framework, moving from the traditional coal and mining activities towards renewables projects.  

Meanwhile, the ASEAN region, endowed with abundant natural resources including wind, hydro, and solar power, holds substantial technical potential for renewable energy expansion. The majority of ASEAN countries are aiming to achieve a 30-40% share of renewables in their power generation mix by 2030-2035. This underscores substantial demand for renewables investment in the years ahead.

TMT services: Investment in TMT services will be influenced in part by policy and regulatory changes. Chinese internet, fintech and other private enterprises in the TMT services sector are facing challenges due to the complex regulatory environment in China’s domestic market, and stricter investment scrutiny in the US. As a result, they are exploring opportunities in the ASEAN market more extensively.

Within ASEAN, demand for TMT services, spanning e-commerce, online food delivery, transportation, media, and digital payments, is also witnessing a strong growth trend. This is attributed to the post-Covid lifestyle shifts, a youthful population, and improved internet accessibility. According to a collaborative report by Google, Temasek, and Bain & Company, Southeast Asia's digital economy will surge from USD 200 bn in 2022 to USD 600 bn-1 tn by 2030. Emerging markets like Indonesia and Vietnam are poised for substantial growth in this sector. Singapore, with its role as a regional investment and financing hub in the TMT startup domain, stands to benefit as well.

Challenges and concerns

Despite the promising prospects of Chinese investment in ASEAN, several challenges and concerns will persist, encompassing both economic and geopolitical considerations.

From the perspective of Chinese investors, they encounter challenges such as underdeveloped infrastructure, scarcity of skilled labor, and incomplete local supply chains when venturing into ASEAN. Emerging ASEAN economies, such as Indonesia and Vietnam, still lag behind China today in terms of infrastructure development and labor skills. Unstable power supplies and inefficient port operations could hinder electronics manufacturing and trade expansion. The shortage of EV charging stations and renewables storage infrastructure might impede the transition towards a green economy. Meanwhile, the scarcity of skilled workers could also lead to additional costs associated with labor training and retention.

Furthermore, Chinese firms tend to face hurdles in establishing both upstream and downstream suppliers upon entering ASEAN, leading them to resort to imports from China. In ASEAN-6, the proportion of intermediate goods imports from China increased from 15.9% in 2013 to 21.7% in 2018, and further to 22.3% in 2020. Vietnam is most heavily reliant on Chinese imports, with a substantial 35% of its intermediate goods sourced from China. Indonesia, Malaysia, the Philippines, and Thailand also depend on China for around 20% of their intermediate goods imports.

From the perspective of ASEAN, while they generally welcome the influx of Chinese capital that fosters economic growth, there is also a growing sense of concern about China's expanding influence in the region. Past projects under the BRI triggered worries regarding potential environmental impacts, debt sustainability, and corruption-related issues. Historical instances of China leveraging its economic power for retaliation during diplomatic disputes further heightened anxieties. In the current context, the increasing intermediate goods imports from China raise concerns about ASEAN’s dependence on Chinese supply chains and the widening trade deficits with China. The increasing market shares of Chinese firms within ASEAN also give rise to anxieties about the resultant competition pressure on local firms.

According to a recent survey conducted by the ISEAS-Yusof Ishak Institute, which involves over 1,000 Southeast Asian respondents from various sectors, about 60% of respondents view China as the most influential economic power. However, a significant majority of 65% also express reservations about China's expanding global reach. The Philippines, Thailand, and Vietnam have witnessed a notable increase in concerns regarding China's growing regional economic influence, with percentages exceeding 80% this year.

Conclusion

As the driving forces evolve from the BRI, trade war, to post-pandemic supply chain reconfiguration and economic transformation, the potential for Chinese investors to engage with ASEAN in the upcoming decade is on the rise. However, Chinese investors are relatively new entrants compared to western MNCs, requiring time to gain a comprehensive understanding of the business environment in individual ASEAN countries and how to effectively integrate into the local ecosystem. Meanwhile, ASEAN countries also face the challenge of managing the rapid increase in Chinese capital, while balancing economic, social, and geopolitical considerations.

Striking a balance between these potentials and challenges, we anticipate that Chinese direct investment in ASEAN will grow at a CAGR of approximately 10% in the next decade, reaching USD 40 bn by 2030. This would constitute around 15% of China's total ODI, an increase from the current 11%. As a share of ASEAN’s total FDI, we expect Chinese investment to rise to 9% by 2030, also up from the current 7%.


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Ma Tieying 馬鐵英, CFA

Senior Economist - Japan, South Korea, & Taiwan 經濟學家 - 日本, 南韓及台灣

[email protected]