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Thursday, November 27, 2003

Mainland FDI in Southeast Asia

What follows is a brief summary of a talk I've prepared for a Conference on the Impact of WTO Membership on Chinese Workers and the Response of the International Trade Union Movement, to be held at City University of Hong Kong, 29-30 November 2003.

Most people will know that China now attracts more foreign direct investment (FDI) than anywhere else. Last year the mainland surpassed the US as the biggest recipient (sucking in over US$52 billion), with cumulative FDI during the reform period exceeding US$400 billion by the start of this year (to which we can add the US$43.6 billion that entered during the first ten months of 2003). China accounts for around 20% of global FDI in developing countries and mainland officials forecast that it will reach US$100 billion for every year during the 11th Five-Year Plan (2006-2010).

It ¡s no surprise then that for the last five years the big story has been about FDI inflow. If Southeast Asia has been mentioned at all it has been in the context of what it has lost to China. In the 1980s and early 1990s, Southeast Asian countries like Thailand, Singapore, Malaysia and Indonesia attracted large amounts of FDI. But by the mid to late 1990s, China had become a monster in their midst, sucking up ever increasing amounts of investment.

The fear in Southeast Asia - whether made public or not - was that China was taking investment away that might otherwise have gone to them. Thus, in 2002, people like Dr Mahathir in Malaysia were bluntly arguing that China was an economic threat to Southeast Asia due to its ability to suck up investment from all quarters. What the Economist magazine in London referred to as a "transfer of affection away from Southeast Asia to China" was perhaps the most striking outcome of the 1997 financial meltdown. Indonesia, for instance, saw a US$6 billion FDI inflow in 1996 - the year before the crisis - turn into a US$4 billion outflow in 2000. With global FDI still growing at that stage (there has been a downward trend in the last few years), the steady rise in the Chinese figures were proof enough to the Southeast Asians that what they lost, China gained.

Given these numbers and the kind of "China fever" they've generated in corporate boardrooms across the globe, it's no surprise that the main story has been on FDI inflows. But there's another story, too; and it's one that hardly rates a mention in the press but is, I believe, becoming much more important. And that story is the increase in FDI outflows.

China has encouraged outward investment since the late 1970s and the start of the reform period, but it was not until the early to mid 1990s that mainland companies began to explore it as a serious option. Official figures state that by 1998 the number of approved projects since 1979 totalled 2,409, with a total cumulative investment of US$2.6 billion. This figure seriously underestimates the outflow of Chinese FDI given that the United Nations Conference on Trade and Development (UNCTAD) World Investment Report 2002 asserts the "top 12 Chinese TNCs, mainly State-owned enterprises [SOEs], now control over US$30 billion in foreign assets with over 20,000 foreign employees and US$33 billion in foreign sales". More important from my point of view, however, is the Report's conclusion that "private enterprises are now following the SOEs abroad, although most of them are small and medium-sized TNCs".

Where does mainland money go in Southeast Asia? The short answer is all over. The Mekong River Region is an obvious target; Cambodia, Burma and Laos have all been the recipients of mainland FDI. In Cambodia, for instance, China is now either the largest or second largest investor. The Chinese government provides "aid" to Cambodia (and Burma and Laos, too) in the form of commercial credit to Chinese companies (a large number of which are SOEs). In the late 1990s, the mainland provided around US$240 million worth of such "aid"; I've been able to trace US$14.15 million worth of credit supporting projects worth US$40.37 million, much of it in the garment sector, which accounts for around 95% of the country's exports of US$1 billion, and employs 200,000 people in around 250 factories. Mainland companies have direct investment in 23 of them (making them the third largest investors in the sector after Hong Kong and Taiwan). For instance, one company, Guangda International Trade Company Ltd has invested US$3 million, double the mean for investment in the sector. Another company, China Jilin Textiles Corporation, was the recipient of a US$500,000 loan by the China Import-Export Bank in 1999 that shored up a US$1 million investment.

Cambodia is the country I've most closely researched to date, but figures across the rest of Southeast Asia are as equally interesting. By September 2003, there were 242 mainland companies with operations in Thailand and cumulative investments of US$258 million (mainly in textiles, garments and home electrical appliances). In Malaysia, which has attracted the most mainland investment in Southeast Asia, there are now 104 established Chinese businesses with US$387 million worth of cumulative investment. In Singapore, 250 Chinese businesses have set up shop, a 56% increase over last year when there were 160. In the case of Singapore, mainland companies are attracted by recent free trade deals (with the US for instance) and the island-state's capacity for high-end laboratory research.

Cumulative mainland investment in Southeast Asia is miniscule compared to either Southeast Asian investment in China (Singapore has poured more than US$40 billion worth of cumulative contractual investment into the mainland) or FDI inflows in general. China may not even account for US$2 billion worth of direct investment across the region (thought the figure is certainly higher than US$1 billion), but the figure is rising rapidly. The Chinese government is encouraging outward investment and the numbers of companies acquiring assets abroad will grow sharply over the next couple of years.

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