Bernardo M. Villegas
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Rebalancing Strategy
published: Mar 31, 2017



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China`s Slowdown and Philippine Growth (Part 3)

           With more amicable relations with China under the Duterte Administration, we may attract more Chinese companies to participate in our massive infrastructure projects in the coming six years.  In more than twenty years of building the most modern infrastructures in the world today, Chinese companies have accumulated a great deal of expertise in building airports, tollways, bullet trains, dams, and other infrastructures.  Some of them can participate in the Swiss challenges that will be highly encouraged by the Duterte Administration.  Also, we may obtain substantial financing from the China Infrastructure Bank that was recently established, in which the Philippines is a participating member.  The slowdown in China may actually benefit us in that their infrastructure companies will be aggressively looking for business opportunities in the ASEAN economic community.  

          In fact, the slowdown of the Chinese economy can also be partly attributed to the shift of Foreign Direct Investments away from China to the emerging ASEAN Economic Community, especially to the so-called ASEAN-5 (Indonesia, the Philippines, Thailand, Vietnam and Malaysia) in which 550 million people live, 40 percent of the Chinese population.  As pointed out by Dr. Harry G. Broadman, a faculty member at John Hopkins University, in an article entitled “China Slack Need Not Hurt Asia” (Gulf News, March 12, 2016), these countries are attracting factories away from China that is already suffering from high wages.  The average monthly wage rate in China has risen to more than $600, whereas among the ASEAN-5, Thailand’s monthly wage of about $400 is the highest and Indonesia’s of about $200 is the lowest.  It is the competitiveness of the cost of labor—coupled with policies that facilitate industrial clustering—that is motivating MNCs, especially from Japan, South Korea and Europe—to use Southeast Asia as both a regional and a global hub for network investment, production, and trade, oftentimes in competition with China. 

          Rising production costs in China have been driving the momentum of manufacturing and production location decisions towards the ASEAN countries.  In fact, the next six years under the Duterte Administration can see a renaissance of manufacturing, especially if as promised by the President-elect, there can be a significant improvement in infrastructure investments as well as in peace and order.  This renaissance will be especially true in labor-intensive manufacturing.  As an indicator of what could happen in the Philippines, Vietnam has surpassed China to become the largest production venue for Nike, while Coach, citing rising labor costs, has been shifting a substantial portion of its production activities from China to neighboring ASEAN countries.  Japan’s direct investment flows into the ASEAN countries has been rising so much so that they now account for about 16 percent of all of Japanese overseas direct investment worldwide.  This is more than twice as large as the share of Japan’s global foreign direct investment currently flowing into China.

          To illustrate the greater confidence that foreign investors have in the prospects of the ASEAN countries in comparison to China, Dr. Broadman cites a significant contrast:  Whereas stock of foreign direct investment in China as a share of GDP is about 11 per cent, for the ASEAN-5, it was 38 percent in 2014—a threefold difference.  Also a trend favoring the ASEAN is the increased integration of the ASEAN economies.  From 2000-2014, intra-regional investment within the ASEAN countries grew 28 percent, as opposed to investments into ASEAN from outside the region which increased only by 12 percent.  What is counter-intuitive, despite being one country, China’s domestic market is far from being integrated.  China is a composite of provinces that do not open themselves up to anything close to a nationwide network that engenders free cross-border trade and investment.  To the contrary, there exist significant inter-provincial barriers to trade and investment within China.  Until this changes (and the prospects of such do not seem to be offing any time soon), China will find it difficult to present itself as a bona fide integrated economic space.  These considerations make it imperative that the Duterte Administration should give a very high priority to removing the barriers to an accelerated participation of the Philippine economy in the ASEAN Economic Community, avoiding the ultranationalistic moves that countries like Indonesia and Malaysia have introduced through non-tariff barriers such as increased domestic equity requirements for foreign firms investing in strategic sectors or the banning of exports of certain unprocessed ores or raw materials.  Amending the restrictive economic provisions in our Constitution will definitely be a move in the right direction.   From the initial pronouncements of the economic advisers of President Duterte, I am glad to detect a more FDI-friendly tone.  It would be impossible for us to attain the needed 8 to 10 percent annual growth in GDP to combat massive poverty without a massive dose of Foreign Direct Investments.   For comments, my email address is bernardo.villegas@uap.asia.