“While it is true that Asean runs a widening trade deficit with China, there are nuances,” the economists say.
Roughly 30% of Asean’s exports to China are electronics and electrical machinery products while 30% of their imports from China come from the same sector. This will benefit tech-exposed economies like Singapore, Malaysia and Vietnam, HSBC says.
When it comes to agriculture and commodities, Asean actually runs a trade surplus with China. Thailand, the Philippines as well as newcomer Vietnam engage in agricultural trade with China. As for Indonesia, their exports to China are more commodities-focused.
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As for foreign direct investment flows (FDI), HSBC notes that flows have been picking up since the trade tensions that arose from the first Trump administration back in 2018. According to HSBC, the “Asean-6 now captures 14.5% of global FDI, though 65% of this goes to Singapore.”
The Asean-6 refers to the six members in the region with the largest economies and comprise of Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam.
“Despite being a latecomer, China has been expanding its FDI footprint quickly in Asean’s manufacturing sector, investing heavily where each economy has a comparative advantage,” says HSBC economists. Indonesia and Thailand have been the key beneficiaries of Chinese FDI for EV-related sectors, while Malaysia and Vietnam have been the outperformers for Chinese FDI inflows to the technology industry.
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‘China+1’ still works
President Donald Trump has reignited trade tensions between the US and its trading partners since returning to office. In April, Trump announced his “Liberation Day” tariffs which saw a baseline tariff of 10% being levied on imports from over 180 countries. The new wave of tariffs from Trump has raised questions on whether the “China+1” strategy that became popular during his first term is still sustainable.
Companies implementing the strategy will try to diversify their supply chains away from China, by moving some of their production and sourcing to an additional country, such as Vietnam and Thailand.
“A common question we receive from clients is: Can the ‘China+1’ strategy be sustained amid Trump 2.0 tariff dynamics? Although still at an early stage, high frequency data suggests the answer is yes – trade continues to flourish and FDI trends have intensified,” HSBC says.
In particular, countries such as Malaysia, Vietnam and Thailand have seen their FDI flows from China picking up this year. There has been a healthy stabilisation in FDI applications from China for both Malaysia and Vietnam, and they account for 5% and 4% of their GDP respectively. On the other hand, 40% of Thailand’s total approved FDI applications this year originate from China.
“All in all, Asean’s and China’s economic relationship carries significant weight with regards to many different metrics. Despite the tariff challenges, bilateral trade and investment continue to flourish and have more room to support the regional economic transformation,” says HSBC’s economists.
