This past month, Singaporean Minister for Foreign Affairs Vivian Balakrishnan traveled to China at the invitation of the Chinese Minister of Foreign Affairs Qin Gang. During several meetings with senior Chinese officials, Balakrishnan reaffirmed Singapore’s long-standing ties with China and proposed more economic cooperation – even though Singapore’s sovereign wealth fund, GIC, recently announced its decision to end investment in China, citing deepening financial risk.
The end of ‘zero-COVID’ policies may have produced some private sector optimism about the country’s growth trajectory, but clearly, Singapore isn’t buying it.
If policymakers and investors— there and elsewhere— remain skittish on China, the hesitancy could be a boon for Southeast Asia with governments, companies, and investors seeing the region as a haven of financial promise and stability.
The Chinese bond market is the first sign of trouble. Chinese government bonds (CGBs) present lower capital gains than alternative markets. Due to inflationary forcing, global interest rates are at an all-time high. Investors must allocate limited cash to better yield markets. United States Treasuries now offer roughly a 3.7% yield on 10-year bonds compared with China's 2.9%. In 2022, foreign investors sold off nearly USD 90.63 billion (RMB 616 billion). Nikkei Asia reported, foreign investors bought a net USD 2.41 billion (RMB 16.6 billion) in mainland stocks in February, down from USD 12.9 billion (RMB 89.1 billion) in the same period last month.
Chinese equity markets are not much better. MarketWatch reported in mid-January, global funds' net buying of Chinese stocks exceeded 2022 totals in the first three weeks of 2023. Over the three months, the Shanghai Composite Index (SE) sustained steady growth, but the index stabilized at around 6.42% in February. Investors looking to ride China’s Post-Covid boom will not find large returns. China's share in Asia's total private equity deal value dropped to 28% in 2022 from 41% in 2021. Large institutional investors will carry this decline into the coming year. Blackstone President and COO, Jon Gray admitted geopolitical factors were making it increasingly difficult to do business in China noting the company has increased its exposure in Southeast Asian markets. The property crisis and Xi’s “Common Prosperity” were contributing factors to investor hesitancy even for retail investors. After nearly three years of lockdown, Chinese consumers are flush with cash but remain cautious about reentering Chinese markets.
The property market is a big what-if for China. China’s decision to keep interest rates low forces the People's Bank of China (PBC) to pump liquidity into the system to stimulate growth. Nikkei reported that corporate borrowers received 96% of these funds. A portion is believed to be earmarked for state-owned enterprise-funded infrastructure projects. It is not new to investors that Chinese real estate markets are a distressed asset class. Chinese consumer demand is largely contingent on real estate performance and if the Chinese Government uses this sector as its main vehicle to stimulate the economy further challenges could arise.
Southeast Asia will be the largest benefactor of China's slower-than-expected growth and associated geopolitical risks. Investors now increasingly see countries like Vietnam and Malaysia (and to a degree Indonesia) as countries with governments oriented toward attracting greater foreign direct investment – and able to ensure geopolitical stability (if not domestic stability). The region will benefit, too, from its central bank's interventions over the last year. Countries like Indonesia and Thailand responsibly balanced their currencies and will attract foreign investors hungry for economic stability. Supply chain shocks triggered by China’s lockdowns forced companies to shift investment strategies and diversify to new markets. Even Chinese companies are looking to the region as an outlet for new cross-border investment opportunities and political consistency.
There is always opportunity in chaos and Southeast Asia should take advantage. The optimism surrounding the end of ‘Zero Covid’ will not be enough for China to meet above-average growth for at least a year. China still needs time to reposition and adjust to new economic realities. For now, China escaped inflationary pressure but property markets and lackluster activity in bond and equity markets signify deeper weakness in the system. The economies of Southeast Asia are ripe for development and ready to meet global needs. This could be a huge turning point for countries like Vietnam and Malaysia which have the potential to box China out—now is their moment.