Last year witnessed China receiving a smaller share of foreign investments compared to previous years, a trend that started with former US President Trump's trade war with China.
Although his successor, Joe Biden campaigned on a promise to end the trade war saying the steep tariffs on Chinese imports are hurting US consumers, farmers and manufacturers, his administration is now continuing to enforce the so-called "phase one agreement" made by China with the Trump administration in early 2020.
Phase One among other things commits China to purchase an additional USD200 billion of not only US agriculture, but also manufacturing, energy, and services exports, by the end of 2021. As of now, China is estimated to have purchased only slightly more than 60 per cent of the goods it promised.
The phase one agreement also commits China to make progress on enforcing intellectual property rights, removing non-tariff barriers to farm imports, and liberalising its financial services sector.
It is possible that the Biden administration is using the trade tariffs as leverage in its negotiations with China. However, some former and current administration officials have commented to the media that there is no better alternative to achieve its trade objectives with China at the moment. They also say that it is not expedient to remove the tariffs all at once. This despite more than 30 business associations in the US appealing to the government and complaining that tariffs are "costly and burdensome." There is also a political dimension to this in that US public opinion has turned negative towards China and rolling back tariffs will be seen as being weak on China.
The trade war has resulted in a diversion of foreign investments away from China for the benefit of China's competitors. Vietnam and India are two countries that have benefited the most, and it makes sense for both to foster closer political and economic ties as a counterbalance to China.
Vietnam like China is a communist state with a centrally planned economy and has pivoted to a similar version of free-market state capitalism. There is where the parallels end. The two have enjoyed a cordial but uneasy relationship. There has been some measure of distrust and bitterness between the two since fighting a bloody 28-days border war between February and March of 1979. Current diplomatic relations are complicated by maritime territorial disputes, security concerns and geopolitical competition. It does not help that China has in recent times grown more assertive in its dealings with its various partners.
Last December, Vietnam National Assembly Chairman Vuong Dinh Hue visited New Delhi to mark the 5th anniversary of the Vietnam-India comprehensive strategic partnership. He also attended the "Vietnam India Business Forum organised by the Embassy of Vietnam and the Confederation of Indian Industry. To cement the relationship, a total of 12 Memorandums of Understanding worth billions of dollars were signed, encompassing such fields as pharmaceuticals, information technology, oil and gas, and the environment.
In his address at the event, Chairman Vuong revealed that bilateral trade turnover between India and Vietnam saw an average growth of 20 per cent per annum, and despite the complicated evolution of the pandemic, trade between the two countries totalled USD 11 billion for the first 10 months of 2021, on track for a year-on-year increase of around 40 per cent.
The US-China trade war is not the only factor having an impact on investments in China. Perceived human rights violations in Xinjiang, the erosion of Hong Kong's autonomy, China's zero COVID strategy, supply chain challenges, and rising costs are resulting in many global companies leaving China's shores.
Research firm Gartner revealed that in 2020 that a third of supply chain leaders had plans to move at least some of their manufacturing out of China before 2023. Another study by UBS Evidence Lab found that in 2020, 76 per cent of US companies with factories in China were in the process of or considering moving operations to other countries. Some of the companies that have moved or considering a move include sportswear giants Nike, Adidas, Puma, and South Korean conglomerates Samsung and LG.
India has been a beneficiary of firms looking for alternative locations to site their manufacturing operations. Apple contractors Foxconn, Wistron and Pegatron have factories in India. So has Apple's rival Samsung. Samsung has established large handset manufacturing plants in Noida and Sriperumbudur. The former which has a capacity of 120 million, is said to be the world's largest mobile phone factory. Reports also say that it is set to pump another USD90 million into its Noida plant by end of this year.
In addition, China is also not doing itself any favours by its crackdown on its big tech firms which started with the blocking of Alibaba's fintech arm, Ant Group's IPO in 2020. Then, last year, it pressured app-based transportations services company Didi Chuxing into delisting from NYSE citing privacy issues. It also introduced curbs on private education companies. Presumably, these moves are properly considered and calculated. However, this has scared away investors who sold down Chinese stocks.
This coupled with the crisis in its property sector precipitated by troubled developer Evergrande, a slowing economy and continued strict COVID lockdowns has led to dwindling investor confidence in the Chinese market. Analysts are saying that these problems are expected to continue into 2022.
Chinese company stocks especially those traded in the US market have performed poorly in 2021. The Shanghai Stock Exchange SSE Composite Index managed to eke out a four per cent gain for the entire year which is good for a Chinese company linked index. The FTSE ST China Index which tracks companies that do business in China on the Singapore Exchange was flat, the Hang Seng index declined almost 15 per cent while the Invesco Golden Dragon ETF which tracks 98 of the largest Chinese companies listed in the US declined a whopping 42.4 per cent. During the same period, the SENSEX climbed 20.9 per cent and the S&P 500 rose 28.8 per cent.
This market uncertainty has led to a diversion of tech money - venture capital and private equity funds - to other countries. Once again, India, which has previously been a second choice for investors, has been a beneficiary.
"Because China is off the boil, it has accelerated investor attention at alternatives such as India," said Timothy Moe, chief Asia-Pacific equity strategist at Goldman Sachs Group Inc. to The Financial Times.
Daulet Singh, the managing partner of Touchstone Partners which advises foreign investors, concurs. He added, "The regulatory crackdown that China has undertaken over the last 12 months has pushed investors to look at India more favourably. But it's not just push, there's pull as well. The pull is the rapid digitalisation that's taking place (in India)."
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Analytical Commentary on India's Foreign Investment Competition with China
The trade war has resulted in a diversion of foreign investments away from China for the benefit of China's competitors.
Last year witnessed China receiving a smaller share of foreign investments compared to previous years, a trend that started with former US President Trump's trade war with China.
Although his successor, Joe Biden campaigned on a promise to end the trade war saying the steep tariffs on Chinese imports are hurting US consumers, farmers and manufacturers, his administration is now continuing to enforce the so-called "phase one agreement" made by China with the Trump administration in early 2020.
Phase One among other things commits China to purchase an additional USD200 billion of not only US agriculture, but also manufacturing, energy, and services exports, by the end of 2021. As of now, China is estimated to have purchased only slightly more than 60 per cent of the goods it promised.
The phase one agreement also commits China to make progress on enforcing intellectual property rights, removing non-tariff barriers to farm imports, and liberalising its financial services sector.
It is possible that the Biden administration is using the trade tariffs as leverage in its negotiations with China. However, some former and current administration officials have commented to the media that there is no better alternative to achieve its trade objectives with China at the moment. They also say that it is not expedient to remove the tariffs all at once. This despite more than 30 business associations in the US appealing to the government and complaining that tariffs are "costly and burdensome." There is also a political dimension to this in that US public opinion has turned negative towards China and rolling back tariffs will be seen as being weak on China.
The trade war has resulted in a diversion of foreign investments away from China for the benefit of China's competitors. Vietnam and India are two countries that have benefited the most, and it makes sense for both to foster closer political and economic ties as a counterbalance to China.
Vietnam like China is a communist state with a centrally planned economy and has pivoted to a similar version of free-market state capitalism. There is where the parallels end. The two have enjoyed a cordial but uneasy relationship. There has been some measure of distrust and bitterness between the two since fighting a bloody 28-days border war between February and March of 1979. Current diplomatic relations are complicated by maritime territorial disputes, security concerns and geopolitical competition. It does not help that China has in recent times grown more assertive in its dealings with its various partners.
Last December, Vietnam National Assembly Chairman Vuong Dinh Hue visited New Delhi to mark the 5th anniversary of the Vietnam-India comprehensive strategic partnership. He also attended the "Vietnam India Business Forum organised by the Embassy of Vietnam and the Confederation of Indian Industry. To cement the relationship, a total of 12 Memorandums of Understanding worth billions of dollars were signed, encompassing such fields as pharmaceuticals, information technology, oil and gas, and the environment.
In his address at the event, Chairman Vuong revealed that bilateral trade turnover between India and Vietnam saw an average growth of 20 per cent per annum, and despite the complicated evolution of the pandemic, trade between the two countries totalled USD 11 billion for the first 10 months of 2021, on track for a year-on-year increase of around 40 per cent.
The US-China trade war is not the only factor having an impact on investments in China. Perceived human rights violations in Xinjiang, the erosion of Hong Kong's autonomy, China's zero COVID strategy, supply chain challenges, and rising costs are resulting in many global companies leaving China's shores.
Research firm Gartner revealed that in 2020 that a third of supply chain leaders had plans to move at least some of their manufacturing out of China before 2023. Another study by UBS Evidence Lab found that in 2020, 76 per cent of US companies with factories in China were in the process of or considering moving operations to other countries. Some of the companies that have moved or considering a move include sportswear giants Nike, Adidas, Puma, and South Korean conglomerates Samsung and LG.
India has been a beneficiary of firms looking for alternative locations to site their manufacturing operations. Apple contractors Foxconn, Wistron and Pegatron have factories in India. So has Apple's rival Samsung. Samsung has established large handset manufacturing plants in Noida and Sriperumbudur. The former which has a capacity of 120 million, is said to be the world's largest mobile phone factory. Reports also say that it is set to pump another USD90 million into its Noida plant by end of this year.
In addition, China is also not doing itself any favours by its crackdown on its big tech firms which started with the blocking of Alibaba's fintech arm, Ant Group's IPO in 2020. Then, last year, it pressured app-based transportations services company Didi Chuxing into delisting from NYSE citing privacy issues. It also introduced curbs on private education companies. Presumably, these moves are properly considered and calculated. However, this has scared away investors who sold down Chinese stocks.
This coupled with the crisis in its property sector precipitated by troubled developer Evergrande, a slowing economy and continued strict COVID lockdowns has led to dwindling investor confidence in the Chinese market. Analysts are saying that these problems are expected to continue into 2022.
Chinese company stocks especially those traded in the US market have performed poorly in 2021. The Shanghai Stock Exchange SSE Composite Index managed to eke out a four per cent gain for the entire year which is good for a Chinese company linked index. The FTSE ST China Index which tracks companies that do business in China on the Singapore Exchange was flat, the Hang Seng index declined almost 15 per cent while the Invesco Golden Dragon ETF which tracks 98 of the largest Chinese companies listed in the US declined a whopping 42.4 per cent. During the same period, the SENSEX climbed 20.9 per cent and the S&P 500 rose 28.8 per cent.
This market uncertainty has led to a diversion of tech money - venture capital and private equity funds - to other countries. Once again, India, which has previously been a second choice for investors, has been a beneficiary.
"Because China is off the boil, it has accelerated investor attention at alternatives such as India," said Timothy Moe, chief Asia-Pacific equity strategist at Goldman Sachs Group Inc. to The Financial Times.
Daulet Singh, the managing partner of Touchstone Partners which advises foreign investors, concurs. He added, "The regulatory crackdown that China has undertaken over the last 12 months has pushed investors to look at India more favourably. But it's not just push, there's pull as well. The pull is the rapid digitalisation that's taking place (in India)."