ASEAN and China are better together in trade and investment

Recent data from FDI Markets shows that manufacturing FDI into ASEAN now exceeds that going into China. This could be presented as evidence of the view that ASEAN’s gain is China’s loss, as geopolitical tensions drive international businesses to diversify their supply chains.

But this conclusion misses two facts. First, that Chinese manufacturers are themselves expanding their presence in Southeast Asia. A third of the region’s manufacturing FDI last year came from China, which was more than three times the amount from the US, Korea or Japan, according to FDI Markets. In Vietnam alone, leading Chinese manufacturing firms have ramped up their investments in 2023, with almost 20% of newly registered FDI from China.

Japan and Korea are both traditionally big investors in Vietnam, but China has been expanding its FDI footprint quickly in the country. 2023 marks the first time that mainland China has the largest share among investors, beating its two neighbours. Combined, Greater China accounted for almost half of Vietnam’s new FDI inflows in 2023.

Second, what these headline numbers don’t show is that Chinese investment in ASEAN goes well beyond low-cost assembly to encompass advanced manufacturing, technology and even professional services. China isn’t just the biggest source of FDI into ASEAN, its investment in the region is driven by ASEAN’s broad fundamental strengths more than narrower ambitions to simply diversify supply chains or reduce the cost of production.

We are seeing this trend among our own clients. At HSBC, we recorded an 80% increase in the number of Chinese corporates entering new Southeast Asian markets in 2023 versus 2022. Among our Chinese clients, we’re seeing strong interest in expanding into Singapore, followed by Vietnam, Thailand, Malaysia and Indonesia.

ASEAN’s appeal

Chinese businesses are drawn to ASEAN primarily by growth opportunities – and they are ahead of global peers in engaging with the region. A survey of 3,500 global businesses that we conducted last year found that its skilled workforce, growing digital economy, competitive wages and sizeable regional market were among ASEAN’s top attractions. Beyond that, 28% of respondents indicated that Vietnam’s economic resilience was ranked foremost in attracting international firms. The country, which has become known for its rapid GDP growth, is expected to be the fastest growing economy within ASEAN, at 6.5%.

The study also found that, compared with businesses from the US and Europe, a higher proportion of firms from mainland China and Hong Kong had already achieved organic growth in the region and were looking to increase mergers and acquisitions activity there.

ASEAN, already China’s largest trading partner, offers a wide range of growth opportunities to Chinese businesses, underpinned by its solid economic fundamentals, increasingly sophisticated manufacturing capabilities, supply chain and logistics efficiencies, cultural similarities and growing middle class.

Electric vehicles are a case in point. China is the world’s biggest EV producer and market. Leading Chinese EV makers are now becoming dominant in Southeast Asia, where they account for some 75% of all EV sales and brands including BYD, Geely and Great Wall Motor are scaling up their manufacturing operations. This expansion in EVs – which is also reflected in strengthening ties in the wider electronics sector - is underpinned by ASEAN’s move up the manufacturing value chain and the promise of large consumer markets in which the middle class is growing by 5% a year. A similar bright spot is in renewable energy, as Chinese corporates show increasing interest ASEAN markets, supported by government efforts across the region in the transition to net zero.

For Vietnam, China is already one of its trading partners, with bilateral trade exceeding USD106BN, driven by electronics, textiles and machinery. Within 10 years since 2014, the trade relationship between China and Vietnam has risen to be one of top 20 corridors globally. Regional agreements like the Regional Comprehensive Economic Partnership (RCEP) mean that economic ties between China and Vietnam will likely continue to strengthen, with a growing emphasis on digital.

According to the e-Conomy SEA 2023 report, Vietnam was the fastest-growing digital economy in ASEAN with impressive growth of 20%. Measured by gross merchandise value, the country has the potential to become the second-largest digital market in the region by 2030, just after Indonesia. The expansion is expected to be led by a rapidly developing e-commerce ecosystem, supported by a rising consumer base which is set to become the 10th largest global consumer market in 2030, bigger than Germany, the UK and Thailand.

With China having pioneered and then scaled up these digital technologies, it isn’t surprising that Chinese businesses now see growth opportunities in neighbouring ASEAN as the region seeks to unlock an additional USD2 trillion of growth by 2030 through the implementation of its Digital Economy Framework Agreement. Notable examples include TikTok's acquisition of 75% of GoTo's e-commerce unit Tokopedia in Indonesia for USD840 million and Alibaba’s investment of an additional USD630 million into its Singapore e-commerce subsidiary Lazada.

The synergies between China and ASEAN are clear. Over the last few decades, China has achieved leadership positions in many of the sectors that define today’s economy, including digital, advanced manufacturing, renewable energy and EVs. ASEAN’s own remarkable growth journey means it is now in a position where it can also manufacture or develop these products and has large-scale demand for them. Opportunity, proximity and these complementary strengths will continue to drive growth in this economic relationship.