The risks for Asia of China's retreat from globalisation
Some Asian markets will benefit from the reconfiguration of global trade, particularly the implementation of new supply chains, in the post-pandemic world. But China’s retreat from globalisation may harm the region’s exports, according to various market experts.
“It is possible to finally start imagining a post-pandemic world, and with it a global trade order that will be sculpted by vaccine rollouts and economies rebounding,” David Chao, global market strategist for Asia Pacific ex-Japan at Invesco, told AsianInvestor.
Notable developments on trade and economic cooperation, such as the Regional Comprehensive Economic Partnership (RCEP) and the precariously balanced EU-China Comprehensive Agreement, provide some optimism that global trade arrangements could move back towards a more constructive phase, after the tensions of the Trump years.
China is likely to emerge stronger because of its stranglehold on the production of key components for a range of products that are sold around the world and the relatively smaller impact of Covid-19 compared to other countries.
“From a regional perspective, China will continue to dominate the supply chain, and may have emerged stronger after the pandemic, as there were few disturbances to its factory output,” said Chao.
Other North Asian export-oriented economies should also benefit from a cyclical recovery and a pick-up in global economic activity, he added.
China's decision to focus on its role in the global economy are partly a result of the trade war with the US and the pandemic. Under the ‘dual circulation’ strategy, announced last year in response to the de-globalisation trend, the country aims to boost technological innovation and move up the global value chain.
“It reflects China’s new world view of de-globalisation, forcing a structural shift in the global supply chains and prompting industrial upgrading and import substitution,” Chi Lo, senior economist at BNP Paribas Asset Management, told AsianInvestor.
Such an inward policy shift will disrupt global markets. “This has far-reaching implications for investing in China,” he added.
The view of Lim Chow Kiat, chief executive of Singapore's GIC, is that this is likely to hurt global productivity growth. "And be particularly detrimental to emerging markets that have historically relied on foreign investments and export-led growth".
DIVERSIFICATION BENEFITS
However, certain countries, given their lower production costs, comprehensive supplier ecosystems or large domestic markets, could benefit from the diversification of global supply chains away from China.
Based on relative attractiveness, Vietnam, Malaysia and Singapore are among the countries best positioned, according to Bert Burger, senior researcher at credit risk specialist Atradius.
“Bangladesh and Cambodia stand out as countries able to raise their share of global production of textiles and textile products, also because they are already producing for the biggest clothing companies in the world,” said Burger.
“However, Vietnam is most often the destination of companies relocating parts of the supply chain out of China.”
Erik Norland, senior economist at CME Group, told AsianInvestor he thinks “the death of globalisation is greatly exaggerated," given that shifting supply lines to new locations takes a great deal of coordination and planning.
He acknowledged, though, that “there is greater pressure to diversify supply lines in the aftermath of the Sino-US trade dispute”.
Probable beneficiaries of this diversification, in Norland's view, include India, Vietnam, Indonesia and the Philippines.
A recent spate of regional cooperation initiatives, such as the EU’s Strategy for Cooperation in the Indo-Pacific, point to Asia’s increasing importance, as well as how countries are managing China’s growing power, said Invesco’s Chao.
While Asia has been hard hit by less consumer spending, tourism and exports, it has performed well compared to other regions. World GDP is expected to be 4.9% in 2021, but economic activity in Asia is forecast to reach about 6.5% this year.
The uncertainty for investors is how regional supply chain changes pan out for emerging Asia, said Chao.
“At the heart of the issue for the rest of Asia, is how to create an agreed framework for countries to engage and compete with China. The by-product of the increased engagement could be more investments in regional trade, infrastructure and supply chains with Asia.”
If a framework is not established, tensions could lead to a downward spiral in relations, he said.
A potential shift in the global supply chain presents both opportunities and challenges to the regional economies, Cyn-Young Park, a director of the Asian Development Bank’s Economic Research and Regional Cooperation Department, told AsianInvestor. Much depends on how prepared and competitive their industries are in global markets, she said.
“Strengthening industry competitiveness and forging greater regional cooperation to create synergy among the regional suppliers would place the region at competitive edge in the new global trade landscape.”
A DIFFICULT DECISION
Countries in Asia could be forced to choose sides, between the EU or China, and the US or China. This may not be easy, said Chao.
“China is the top trading partner for 20 Asian economies and is also the biggest source of FDI in the region.”
Its increasing self-reliance is also a threat to the stability of world trade. Lo noted that Beijing has offered local tourism companies tax incentives to keep them offering appealing local packages, for example.
He said this makes Chinese firms with a high overseas exposure, such as consumer electronics, less appealing investments, while investors should invest more in "companies and sectors that are related to state investment in the priority sectors on the ‘dual circulation’ policy agenda, such as aerospace, defence and domestic high-tech industries”.
Over the longer term, China appears on course to become a high-end producer, added Norland. "It may come to compete with Germany, Korea and Japan for the highest value-added industrial goods."
And China focusing on domestic consumption "offers a chance for spectacular growth in other countries like India, Cambodia, Vietnam, Indonesia and the Philippines, as well as industrial centres closer North America and Europe, like Mexico and Eastern Europe," he added.