China-Asean links set to deepen as capital flows increase

China and the Association of Southeast Asian Nations are a natural fit as trade partners. Not surprisingly, then, the links have strengthened in the last 20 years, thanks to regional trade pacts, the integration of supply chains and rising incomes.

Since 1995, trade between China and Asean economies has grown by an average of close to 20 per cent a year, reaching US$358 billion in 2013. China has been Asean's largest trading partner since 2009, with more than 16 per cent of imports coming from China in 2013.

But while Asean and China trade links are robust, investment flows between the two are relatively weak. China's foreign direct investment into Asean between 2003 and 2012 was only US$23 billion, and just US$14 billion if Singapore is excluded; that is less than the US$18 billion China invested in Africa during this period (Latin America and Europe received the most funds).

It is clear that trade and particularly investment between China and Asean have a lot of room to deepen further as a result of rising domestic demand, their growing importance as global producers of goods and efforts to integrate economically through regional trade pacts.

Three major drivers will change this in the years ahead.

The first is a series of regional trade pacts. The Regional Comprehensive Economic Partnership will link Asean with six partners with which it has free-trade agreements, including China and Japan. The Trans-Pacific Partnership is a 12-nation pact that, once finalised, could be the world's largest ever free- trade deal. Singapore, Vietnam, Malaysia and Brunei are the only Asean members of the pact. As China is not likely to join in the near future, it will want to enjoy the benefits offered by the Trans-Pacific Partnership through trade relationships with Asean members.

Meanwhile, the Asean Economic Community aims to have a single Asean market for goods, services, capital and skilled labour by 2015.