- China is losing its competitive edge as a low-cost manufacturing base, new data suggest, with makers of everything from handbags to shirts to basic electronic components relocating to cheaper locales like Southeast Asia.
- Total foreign direct investment flowing into China fell 3.7% in 2012 to $111.72 billion, the Ministry of Commerce said Wednesday, the first annual decline since the fallout from the global financial crisis in 2009.
- Economists say the drop in 2012 is partly cyclical, driven by slowing overall growth in China and Europe’s prolonged debt crisis. But it also is the result of a long-term trend of rising wages and other costs that have made China less attractive, especially for basic manufacturing, economists say.
- By contrast, foreign direct investment into Thailand grew by about 63% in 2012, and Indonesia investment was up 27% in the first nine months of last year.
- Coronet SpA, an Italian maker of synthetic leather with production in the southern Chinese province of Guangdong, plans a new factory in Vietnam to take advantage of lower labor costs and to be closer to its customers in the shoe and handbag businesses, many of which have already moved there.
- A breakdown of Wednesday’s figures suggests a tentative move in that direction: Whileforeign direct investment in manufacturing contracted by 6.2% in 2012, investment in the service sector excluding the property market rose 4.8%.
- For China’s neighbors, the trend means more opportunities. Southeast Asian nations, which claimed 2% of global foreign investment in the wake of the 1997 Asian financial crisis, now account for about 7.6%, approaching China’s 8.1%, according to HSBC calculations.
- Asian firms accounted for much of the investment drop in China. Investment from 10 Asian economies—Hong Kong, Taiwan, Macau, Japan, the Philippines, Thailand, Malaysia, Singapore, Indonesia and South Korea—fell 4.8% last year and accounted for about 82% of the total. Hong Kong was the single biggest investor, reflecting in part money from mainland investors being recycled back into the country.
- Japanese investment into China rose 16% from a year earlier, but worsening relations over a set of disputed islands could prompt Japanese firms to look elsewhere. Many Japanese companies are already looking for a second production base to hedge their China exposure.For example, while foreign investment into Vietnam declined by 15% in 2012, a reflection of macroeconomic challenges there such as high inflation, investment from Japan into Vietnam more than doubled due in part to Japanese companies’ efforts to look for alternatives to China.
- In Thailand and Vietnam, Japan was the single largest source of investment last year. In Indonesia, it was second behind Singapore.
- Minoru Ikeda of the Shanghai office of the privately funded Japan-China Economic Relations and Trade Centre, says the center—which encourages Japanese investment in China—has seen inquiries about new ventures dry up; as of Wednesday his team hadn’t handled any new investment-related inquiries since tensions peaked.
- Yoichi Maie, director of Jetro’s China and North Asia Division stressed that there are limits to the ability of Japanese companies to diversify away from China. “There is no alternative to China for Japanese companies,” he said. ”No other country—except for the U.S.—offers such a large market and highly established production networks.”
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