Letters from America: China Losing Its FDI Luster as Asia Takes Prominence

Chris Devonshire-Ellis, Dezan Shira & Associates

Posted: 15th April 2013 08:55

I’ve attended two prominent annual U.S.-Asia investment events this past week, namely the Hot Markets Watch in Cincinnati, and the Asia-Pacific Business Outlook in Los Angeles. These events are high level, attracting many American CEOs, and are fully supported by the U.S. Commercial Service and Department of Commerce – they pull in senior commercial officers from around Asia to speak and present at these events, in addition to inviting a number of prominent speakers. Covering everything concerning U.S. trade with Asia “From Hollywood to Bollywood” as one American businessman told me, they included serious investment sessions on China, India, South Korea, Japan, as well as all the ASEAN nations, with Singapore, Indonesia and Vietnam dominating, although emerging markets such as Myanmar and even Laos got a look as well.
 
What struck me with such an array of American businessmen attending – well over 2,000 – is the range of interests that American businesses generally have across Asia. While it remains true that to be a player in Asian trade generally requires the following:
   
These events were not geared for the new American would-be exporter or opinionated blogger. Dealing with Asia ideally needs some prior experience, and at these conferences the general quality level of participants in terms of experience, proven Asian business tolerance, energy levels and enthusiasm were high. However, this year saw a perceivable difference: China is starting to get sidelined. While the overall American perceptions and experiences of doing business in China were all present and correct, somehow a feeling pervaded that the “China Dream” had gone. American attention is now turning to India, Indonesia, South Korea and Vietnam. I believe that there are reasons for this, and that global interest in investing into China is waning somewhat. In this article, I’d like to examine some of these:
 
1. China’s Continuing Reluctance to Play Fair

This covers a multitude of issues, from China’s appalling IP protection record and currency manipulation at a government level, in addition to an on-going and massive trade deficit, to constant contractual disputes, receivables and quality problems, and on to pollution and corruption. Over the past decade China has done nothing to improve any of these outstanding problems.
 
2. Quality and Pollution Problems

The 2008 Olympics promised a cleaner, greener Beijing. What happened has been a complete reversal away from those standards, and an actual regression. Quality issues remain, increasingly involving polluting contaminants, and these issues combined with the on-going balance of trade deficit have seen the United States seize the initiative to lessen dependence upon supplies from China by seeking to develop its trade partnerships elsewhere. The TPP Agreement is the result, which is bitterly opposed by China, but will see U.S. investment in Australia, Brunei, Chile, Canada, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam increase. Japan has apparently also agreed to join. While negotiations are still underway, the basic premise is that the wealthier nations in the group will invest in the emerging nations’ manufacturing capabilities to help them upgrade their production to international standards. Countries such as Chile, Mexico, Peru and Vietnam will especially benefit. While there are official denials that the TPP has anything to do with a strategic desire to move part of the global supply chain away from China, the intended deliverables seem clear. When the U.S. commercial officer for Vietnam asked a packed room of delegates “Has anyone heard of the TPP?” everyone raised a hand. American businessmen are very much aware of the implications, the stark fact it specifically excludes China, and the resulting shift in supply chains this will bring. The enlightenment is there.
 
3. China’s Continuing and Unreasonable Levels of Expense

It’s well known and understood that China needs to move away from an export-driven economy to a consumer-driven one, and that more money needs to be put in the hands of Chinese consumers overall in order to allow them to buy more “stuff.” Hopefully, some of that will come from overseas imports or foreign-owned, yet China-based, subsidiaries promoting their own international and domestic brands to the new Chinese consumer. To accomplish this, wages need to increase. That’s okay, but what’s not alright are the levels of deliverables and the standards one receives in China. It is cheaper for me now to buy a normal lunch in London or New York City than it is in Shanghai or Beijing. As for real estate, I just acquired a five-bed fully detached house with swimming pool and surrounding land in the up-market, quality residential area of Mississauga, Toronto. The amount I paid for that wouldn’t buy me a one bedroom apartment in Guangzhou. That’s just so out of whack it is insane.
 
4. China’s Diplomatic Belligerence

The treatment meted out to Japan over the Diaoyu Islands spat has been duly noted around the world. As a result, Japan has had enough. Having paid reparations for World War II, and invested hundreds of billions in investments into China, they continue to get beaten up. The issue resulted in a number of anti-Japanese riots across the country, the sacking of factories, destruction of Japanese property, and harassment of Japanese nationals. Bilateral trade plummeted. While China may be smug in the resulting Chinese collapse concerning the purchasing of Japanese goods in their bilateral favor, the Japanese, while not de-vesting from China, no longer see it as a “desirable” investment destination. Japanese efforts at investing in Asia are now being concentrated on India, Indonesia and Vietnam rather than China. The same is true of Vietnam and other Asian nations. Vietnam seeks to supplant China as the premier textiles supplier to the United States through the TPP Agreement, while many Asian nations are seeking wider investment relations internationally to lessen dependence upon China trade. China’s recent behavior in using trade as a political weapon has received a massive thumbs down in the international business community, and it is not one that has gone unnoticed in the United States either.
 
5. Continuing Lack of Transparency

Although many examples exist, this is best observed through the on-going spat that exists indirectly between the SEC and the Chinese Ministry of Finance, with international auditors caught in the middle. Wanting to investigate fraudulent behavior within Chinese companies listed in the United States, many of them partially state-owned, American courts have ordered the auditors of these companies to hand over documentation from their parent companies in China. The Chinese Ministry of Finance has warned the auditors concerned that to do so is in breach of China’s “secrecy” laws and is a criminal offense leading to imprisonment and potential withdrawal of their business licenses. It seems likely Chinese companies may well be barred from listing in the United States and Canada as a result; or the Chinese will simply take their listing portfolios elsewhere. Either way, it is not a satisfactory solution to what remains an issue of ethical compromise concerning Chinese “standards” of corporate governance and transparency. The real loser will be Hong Kong if it cannot remain impartial or aloof from such manipulation and degeneration away from the internationally desirable audit, accountability, and transparency standards it has to date been known and admired for. China messes with that at its peril.
 
6. An Emerging Asia

China’s loss of FDI attractiveness is not all of its own making however. In fact, much is not a retraction of investment from China per se, but an increasing amount of interest concerning investment into alternative Asia as the demographics and opportunities begin to become clearer. Many global companies, having initially cut their teeth in China, are simply broadening their horizons. Huge markets such as India, with its middle class population the same size as China’s, are beginning to lure investors. Pan-Asian infrastructure projects, many World Bank-funded, are being executed as road, shipping and rail throughout the region get upgraded – much of it with overseas investment. Export manufacturing is on the move to Vietnam and Indonesia, while the focal hub for Asia in extremis has shifted to Singapore.
 
China has much to do to repair a damaged reputation, and it remains to be seen whether the decade in power of Messrs. Hu and Wen will be later seen as a missed opportunity. Xi Jinping has much work to do to get China and its involvement with foreign investment back on track – the China dream has become tainted. Meanwhile, the rest of Asia is now ripe for opportunity and investment, and the message I am taking home from what I’ve learned from these two high-profile conferences is that American businesses are expecting to do just that. China is now not the only game in town, and American businesses are becoming increasingly bullish about emerging Asia both as an investment addition – and as an alternative.
 
This article was first published on Asia Briefing.
 
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
 
For further details or to contact the firm, please email info@dezshira.com or visit www.dezshira.com.

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