Dewey Sim – Indonesia is the "only loser" among Asean countries for failing to attract manufacturers seeking to bypass higher tariffs from the US-China trade war, two private sector economists in Singapore said on Friday.
The pair from brokerage firm Maybank Kim Eng said Vietnam, Malaysia, Singapore and the Philippines had picked up business – mostly in the form of higher foreign direct investment (FDI) – as Washington and Beijing's tit-for-tat tariff impositions over the past 13 months upended supply chains and unleashed economic volatility across the world.
Lee Ju Ye, one of the economists, said Vietnam had emerged as the "biggest beneficiary", with a 73 per cent jump in FDI inflows from China and Hong Kong last year. In the first half of 2019, its FDI applications surged 211 per cent.
Malaysia also recorded an influx of Chinese money, picking up early this year after nearly two years of decline, while Singapore was also a winner as firms moving to Malaysia were likely to take a loan from the city-state's banks.
"Even the Philippines, which is not really known as a manufacturing site, is also receiving FDI applications," Lee said. "The only loser seems to be Indonesia."
Still, she said Indonesian President Joko Widodo's administration was taking notice. Last month, Widodo – who was earlier this year elected for a second term on the back of promises to boost Indonesia's economy – demanded that his cabinet ministers work harder to take advantage of the shift in supply chains.
The president cited World Bank figures that said of 33 Chinese companies moving operations abroad, 23 chose Vietnam while the other 10 went to Malaysia, Thailand and Cambodia, among others.
Lee pointed to how Taiwanese electronics company Pegatron has decided to build a plant in Batam, Indonesia, but other multinational corporations were cautious due to several factors, such as labour laws that require employers to pay high severance payouts even if staff are sacked.
"Indonesia has been missing out, and I think this is a wake-up call for the government to do more," she added.
The Indonesian government recently announced plans to bring corporate tax down to 20 per cent from the current rate of 25 per cent.
Like Jakarta, other Asean governments are actively courting Chinese firms to relocate to their shores.
Thailand, for example, is rolling out a relocation package called Thailand Plus. Some incentives offered under the package include a five-year, 50 per cent reduction of corporate income tax as well as grants for upskilling workforces.
In Malaysia, the government has formed a committee to fast track investment-related applications coming from China.
"[It] used to be a three-month wait for an application to be approved. Now, it can be approved in just one week," said Lee, who was speaking at a seminar organised by Singapore's ISEAS-Yusof Ishak Institute.
She and fellow economist Linda Liu also spoke about the Belt and Road Initiative, China's ambitious infrastructure plan to boost global trade and connectivity.
They noted that even though China Global Investment Tracker, which monitors China's construction activities and global investments, recorded a drop in total investments and construction contracts in 2018, there was a surge early this year.
"[In 2018], investment and construction contracts plunged quite strongly from US$38 billion to US$22 billion... a change in government in Malaysia has caused a holding back of some government projects," Lee said.
The region received US$11 billion worth of Chinese contracts in the first half of 2019, with US$3 billion going to Indonesia and US$2.5 billion to Cambodia.
"[Widodo]'s administration is more receptive to Chinese funds, and it is more open to working with China," Lee said.
Indonesia currently has one belt and road project – a US$6 billion high-speed rail connecting the capital, Jakarta, to the city of Bandung – but is aiming to channel more such investments into four "economic corridors" across the sprawling archipelago.
The economists suggested that a bounceback in the flow of Chinese money to Malaysia was likely given the opening up of more construction projects there, such as the renegotiated US$11 billion East Coast Rail Link.
"Although Malaysia has not seen a comeback of Chinese money yet, we think that the second half of 2019 and 2020, with the revival of these projects, we will see flows coming back to Malaysia as well," they said.
Liu also said Laos and Cambodia had also seen greater exchanges with China under the belt and road scheme – pointing to Cambodia's Phnom Penh-Sihanoukville Expressway, which is expected to be completed in 2023, and the China-Laos High Speed Railway, which would connect Vientiane and Kunming.
"We think that Asean is going to benefit as China focuses on projects nearer to home," she said. "But having said that, when we talk about Chinese investments, we see that China is still not the largest foreign investor in the region."
Japanese-backed infrastructure projects in six Southeast Asian economies were worth US$367 billion, compared with China's US$255 billion, according to data from financial information provider Fitch Solutions.
Lee said investments from the United States had fallen in 2018, and the European Union had lost its spark since 2016.
"Given China's rising role as a foreign investor in the region, I think the US and Japan are also becoming more aware of this, and are launching increased initiatives to be more active in this region," she added.