China aims to heavily increase its investment in Southeast Asia ahead of the formation of the ASEAN Economic Community in 2015, and plans for the amount to increase by a factor of five to US$150 billion by the year 2020.
Although China and the ten member nations of ASEAN used to compete on exports and attracting foreign capital, the two regions have since found opportunities for cooperation and synergy in manufacturing, services and other industries, according to Noel Quinn, the general manager of Asia-Pacific commercial banking at HSBC in Hong Kong.
Quinn also noted that while China exports a large amount and variety of goods to ASEAN, Southeast Asia is now a major exporter and producer in its own right. “Trade flows between China and ASEAN are driven as much by the evolution of regional production networks and trade integration initiatives as by rising regional domestic demand”, he elaborated.
Facilitating ASEAN-China investment and trade will of course, require the proper infrastructure. Some the larger projects between the two regions are numerous highways, as well as a high-speed rail line between Kunming, China and Singapore. The line will run through China, Laos, Vietnam, Cambodia, Myanmar, Thailand, Malaysia, and Singapore and is expected to cost US$7 billion.
There are several factors that are causing the dynamics of trade in Asia to shift, but the most important might be the increasing costs of labor and manufacturing in China. The country is moving further up the value chain and producing more high-tech goods, while countries in ASEAN such as Vietnam, Indonesia, and the Philippines are using their lower costs as an advantage.
In addition, the Chinese economy is changing from one dominated by exports, to one driven by its 1.3 billion consumers. This trend is expected to continue by many experts, as the number of people belonging to China’s middle-class increases from 250 million to 600 million by 2020.
Because of these two reasons, China is searching for ways to sustain an increasingly wealthy population that is showing less of an ability to produce goods on a large scale and at a low cost. This means looking at regions such as ASEAN, as well as Africa, which have potential to develop their manufacturing and agricultural sectors
Dealing in the Yuan
As the U.S. Dollar fluctuates and the future of the Eurozone looks bleak, an increase between ASEAN-China trade will also boost the yuan’s prospects of becoming a major international currency for settlement.
The movement of yuan into ASEAN usually goes through Singapore, the de-facto financial hub of the region. Yuan deposits in the city-state grew from US$195 billion to US$220 billion in the first quarter of 2014 alone, while loans in yuan increased by nearly 25% to more than US$300 billion, according to data by SWIFT.
In summary, ASEAN will lead the world in adopting the yuan as a global currency as it begins using it for trade settlement, financing, and investment purposes and the region’s dependence on the U.S Dollar weakens. While Asia as a whole will benefit from increasing trade and the flow of capital, the western world may lose out.