US-China trade war pushes firms to accelerate supply chain shift to Asean, Citigroup says
- Outbound investment from China up 5.1 per cent this year
An escalating trade war between the US and China is causing companies caught in the crossfire to accelerate plans to shift portions of their supply chains out of the mainland, with Southeast Asia slated to benefit from the disruption of trade flows, according to a Citigroup official.
Gerry Keefe, Citi’s head of corporate banking for Asia-Pacific, said that rising trade tensions have caused some clients to bring forward plans to move capacity out of China to other parts of Asia, a trend that has been ongoing for several years as labour costs rise in China.
“Plant capacity is opening up around Asean. These decisions are definitely at the board level. For many companies, these have risen to that level of significance,” Keefe said. “These are large, strategic, long-term decisions that companies need to think about”.
The US has placed tariffs on some US$250 billion of Chinese made goods as it seeks to reduce a massive trade deficit with China and force Beijing to stop engaging in what it claims are unfair trade actions, including forced sharing of technology. Chinese authorities have responded with a series of tit-for-tat tariffs.
Two separate surveys conducted in September by the American Chamber of Commerce in China and the European Union Chamber of Commerce in China highlighted that these tariffs could lead to higher production costs and lower profits for businesses on the mainland. Many were even considering relocating to Southeast Asia, echoing Keefe’s sentiments.
US President Donald Trump is set to meet his Chinese counterpart Xi Jinping at the G20 Summit in Argentina later this month. There is hope in the markets that the countries can work out a trade agreement when the two leaders meet.
On Thursday, President Trump tweeted that he had a “long and very good conversation” with Xi, including a “heavy emphasis on trade”.
Just had a long and very good conversation with President Xi Jinping of China. We talked about many subjects, with a heavy emphasis on Trade. Those discussions are moving along nicely with meetings being scheduled at the G-20 in Argentina. Also had good discussion on North Korea!
— Donald J. Trump (@realDonaldTrump) November 1, 2018
Asian markets moved higher in trading on Friday after the positive comments by President Trump.
Despite rising trade tensions, overseas investment from China has increased this year after slumping in 2017, according to the latest data from the Ministry of Commerce.
China’s non-financial outbound direct investment rose 5.1 per cent to US$82.02 billion in 4,597 overseas enterprises in 155 countries and regions in the first nine months of this year, according to the Ministry of Commerce.
That came after non-financial overseas investments fell 29.4 per cent to US$120.08 billion in 2017 – the first time it had declined in nearly a decade – as Chinese authorities restricted capital outflows amid an effort to reduce the country’s debt levels.
The increase in outward investment by China comes two years after Citigroup reconfigured part of its corporate banking business around key corridors in Asia, where trade and capital have historically flowed. The corridors include China to Asean, which is up 22 per cent in the first nine months of the year.
Overall, the bank’s business in those corridors is up 20 per cent through September compared with the same period last year.
Incremental manufacturing capacity is coming online in Asean, but moving all production out of China is impractical as it can take years to replicate the existing supply chains that exist in China, particularly in countries like Vietnam or Malaysia, Keefe said.
“These things aren’t like flicking a light switch”, he said. “It takes some time”.
Companies “in almost all cases” will continue to maintain capacity in China, Keefe said.
“They’ll have good relationships with Chinese suppliers and Chinese companies and Chinese consumers and the government,” Keefe said. “That will be important to them for a generation to come. China is not going anywhere. It’s an enormous market. A lot of this is where the next plant goes or the incremental plant goes”.
At the same time, a rising middle class in Asia – while an important demographic in the future – has not yet reached the level where companies can hope to replace their American customers with Asian ones.
“The last 20 years have been very good to emerging Asia and have created new classes of consumers who stand ready and able to buy what China has to sell,” Keefe said. “The population is large, but the purchasing power is not what developed market economies have. So, I think there’s a limit to that argument that Asia is going to replace the US or certain parts of Europe. It certainly will be increasing the relative importance of Europe to China.”
The Belt and Road Initiative, China’s massive infrastructure initiative with projects in more than 60 countries, is also sparking investment in Southeast Asia and other countries as China seeks to create new trade ties and bolster its economic influence.
The initiative is garnering interest from multinational clients who are looking for potential ways to participate, Keefe said.
“On the M&A side, we’re certainly seeing increased interest in Belt and Road countries, particularly Southeast Asia and particularly from our Chinese clients. We expect those flows to increase significantly. I think the flows to Southeast Asia and the flows to Europe in terms of M&A activity will increase in the near term.”