OREANDA-NEWS. September 01, 2014. China and ASEAN are a natural fit as trade partners. The links have strengthened in the last 20 years thanks to regional trade pacts, the integration of supply chains and rising incomes.

Since 1995, trade between China and the ASEAN economies has grown an average of close to 20 per cent a year, reaching USD358 billion in 2013 or 14 per cent of total ASEAN trade. For example, around 25 per cent of China’s coal imports originate from Indonesia, more than from any other country. China has been ASEAN’s largest trading partner since 2009, with more than 16 per cent of ASEAN’s imported goods coming from China in 2013, up from less than 8.5 per cent in 2003.

While ASEAN and China trade links are robust, investment flows between the two are relatively weak. China’s foreign direct investment (FDI) into ASEAN between 2003 and 2012 was only USD23 billion and just USD14 billion if Singapore is excluded; that is less than the USD18 billion China invested in Africa during this period (Latin America and Europe received the most funds).

China’s FDI has been strong only in the smaller, resource-rich ASEAN economies of Laos, Cambodia and Myanmar. The fact is that more ASEAN funds are going the other way. From 2003 to 2012, total investment by Thailand, Indonesia and the Philippines into China was USD7 billion, versus USD6 billion heading in the other direction.

It is clear that trade and particularly investment between China and ASEAN have a lot of room to deepen further as a result of rising domestic demand, their growing importance as global producers of goods and efforts to integrate economically through regional trade pacts. Three major drivers will change this process in the years ahead: the first is a series of regional trade pacts, such as the Regional Comprehensive Economic Partnership (RCEP), the Trans-Pacific Partnership (TPP) and the ASEAN Economic Community (AEC). RCEP will link ASEAN with six partners with which it has free trade agreements, including China and Japan, representing 30 per cent of global GDP and 24 per cent of global FDI. Negotiations are expected to be completed in 2015.

The TPP is a 12-nation bloc that, once finalised (perhaps next year), could be the world’s largest free-trade deal. Singapore, Vietnam, Malaysia and Brunei are the only ASEAN members of the TPP. As China is not likely to join in the near future, it will want to enjoy the benefits offered by the TPP through trade relationships with ASEAN members. Meanwhile, the goal of the AEC is to have a single ASEAN market for goods, services, capital and skilled labour by 2015.

The second driver is China’s increasing role as an exporter of capital into ASEAN. This is the result of its high level of savings, the saturation of its domestic sectors (especially property and infrastructure), rising costs of production and domestic deregulation of FDI that will make investing overseas easier for Chinese companies. For example, overseas investment projects valued below USD1 billion are no longer subject to government approval.

Thirdly, rising incomes in ASEAN and China and their different demographic profiles will also be an important part of this process. Tourism is booming as Chinese people get richer – Singapore, Thailand and Vietnam received record numbers of Chinese tourists in 2013. This trend can also accelerate FDI from China as these countries take advantage of rising demand for hotel, restaurant and shopping services. Meanwhile, China’s large population, labour force and economy will continue to attract FDI both from ASEAN and other parts of the world.

At the same time, ageing populations, while putting pressure on wage costs, represent major opportunities for members of ASEAN to increase consumption and service exports to China. China’s workforce will age more rapidly than Thailand’s in the years ahead, pushing up wages. As China moves up the high-tech, value-added ladder, labour-intensive firms are increasingly moving production from areas such as the Pearl River Delta to ASEAN countries like Vietnam.

We believe ASEAN and China are only at the beginning of their journey to further strengthen trade and investment links. The relationship may not necessarily travel on a linear path, given ongoing geopolitical complexities. But if recent history is any guide, then pragmatic politicians and business leaders in ASEAN and China will choose what is best for their economies and their citizens. In the years ahead rising prosperity and growing economic links will help shape the region’s trade and investment landscape.