But problems could flash up and some countries have longer term issues.
Op-Ed Commentary: Chris Devonshire-Ellis
With China becoming embroiled in increasing numbers of regional tensions, the operational risks for foreign investors in a number of these countries should be assessed. Recent riots in Vietnam for example, while going completely unreported in China, have hit the headlines in the West, while Hong Kong Shippers’ Council chairman Willy Lin Sun-mo has said that Hong Kong manufacturers based in the Pearl River Delta are running out of alternative, low-cost factory locations elsewhere.
The issue, especially as many foreign manufacturers are looking at nearby low-cost manufacturing locations, is key to businesses faced with rising China labour costs. The Chinese middle class consumer market is expected to increase by 350 million people over the next seven years, and that additional manufacturing capacity to service them is increasingly being placed elsewhere. This is especially true in light of the China-ASEAN Free Trade Agreement, which impacts upon many countries, including Vietnam, reducing customs tariffs on thousands of products to zero.
All this said, it should not be forgotten that operating a factory in China itself is not always without risk. There have been multiple occasions over the years where real or perceived slights towards Chinese employees – usually financial – by the foreign investor have also resulted in riots. Foreign managers have been incarcerated in their own establishments, their factories burnt down or have had their operations crippled by sustained strike action. Foreign Embassies and nationals in the past, including the Japanese, American and British have all at one time of another had rocks and stones and worse flung at them. Quasi government inspired protests over disputed islands, NATO bombs and other incidents have meant China is not always as peaceful as the Chinese government wish to project, hence the ban on mainland reporting of Chinese factories being destroyed in Vietnam lest too many people ask “Why?”
So, where are the flash points in Asia? The main countries typically considered as being potential stress areas as concerns Asia are as follows:
As mentioned, China has a habit of taking out politically or financially motivated revenge from time to time. This can include specific, nationally targeted incidents against citizens and properties of a particular country, with Japan most recently being the unfortunate recipient of this ire. What should be restricted to diplomatic negotiations is often inflamed towards violence.
Nationals of countries undergoing disagreements with China, and especially those at present involving territorial disputes, are probably advised to be low key. Otherwise, financial disputes have arisen in many different forms, and protests can turn either violent or strategically damaging as in the case of the Cooper Tire plant last year with prolonged strike action concerning an unwanted acquisition elsewhere promoting local workers to effectively sabotage the entire Chinese business operations in retribution. Other foreign executives have been illegally imprisoned in their own factories over payment disputes, workers not entirely unreasonably feeling that they might run away if they are not held captive.
Such instances can be unpleasant, but can also turn unintentionally violent. It is worth remembering that the “hardship” allowance for expatriates working in China, which many companies have quietly dropped, is now being reinstated just to keep China-based executives happy in what can sometimes develop into an unforeseen local crisis.
India is set to enjoy a couple of decades of high growth and prosperity under the new Modi government, provided he can get much needed reforms through. Given the new Prime Minister has the luxury of a majority in government – the first time this has been the case in India for 30 years – his chances of success are increased. The country has border disputes with China, but the governments have kept these diplomatic and not antagonized the situation. Peace is also in the cards for India’s relationship with Pakistan. If Modi can deliver, Sino-Indian relations and bilateral trade are set to boom.
The Chinese attitude towards Japan over the years, and the imposition of a flight zone over disputed islands, together with the on-going harassment of Japanese nationals and attempts to encourage Chinese buyers to shun Japanese goods have meant that Japan has quietly been ramping up its investments in the rest of Asia instead. While not pulling out of China, corporate Japan sees more potential and a greater welcome and appreciation in countries such as India, Indonesia, and beyond, both commercial and in aid. A quick examination of Japanese autos on roads throughout Southeast Asia will reveal how dominant they have become, in a manner that China has not been able to duplicate. China’s loss is Southeast Asia’s gain.
A major problem for China would be the collapse of North Korea. While this would not immediately impact upon foreign investment in China, it would likely stress China politically and militarily leading to some clampdowns and likely restrictions on activities in Jilin and Liaoning Provinces, mainly to stem the flow of refugees. Military movements in these areas, especially if China were to ‘support’ a collapsing regime by sending in troops and aid to restore security, could also impact on these Provinces and foreign activities in them, especially those close to the border. A China under stress in this manner would also likely become more belligerent internationally just to discourage other nations from messing with it while it deals with such an event. This scenario remains an on-going dark horse that could become a reality at very short notice.
The fractured northern territories of Pakistan border China, and with U.S. troops pulling out of Afghanistan, China is now starting to learn how much of its own Western regional security was actually provided by the Americans. An upsurge in vicious attacks in Urumqi, Kunming and other cities may be in part to an over-reliance on China’s part to fully understand the dangers just across the border. China’s strategic position in dealing with extremism has been to increase wealth in Xinjiang, and in this it is partially succeeding. But it seems not enough, and divisive local policies have appeared to be ill-conceived. How long it will be before Chinese troops are called in by Pakistan, a major ally, or into Afghanistan, to deal with the problem at a local level, remains to be seen.
Manila is booming right now, and a lot of ex-China expatriates have been moving there, not least because many are following their previous jobs overseeing China factory set up and are now doing the same there. Much has been made of the maritime dispute between the Philippines and China, however this has not at present resulted in any violence in the Philippines per se, and the Government has wisely kept the dispute on a political level only. In fact, China-Philippines bilateral trade has been increasing, as are numbers of mainland Chinese tourists travelling to Manila especially, drawn by the casinos and better quality of beaches than China possesses.
Thailand’s problems are internal, which is why a coup has just taken place. This is nothing exceptional for the country – it is its 19th since the 1930’s. However, the country remains politically divided and with an elderly Monarch seemingly unable to unite his people as was previously the case. Exiled politicians such as Thaksin meanwhile create additional problems by wishing to move the country to a Republic. The military, though, is benign, yet on this occasion likely to be in place for some time given the deep divisions within the nation. That will mean relative peace, but some freedoms of movement curtailed for the immediate future. The tourism industry, given a curfew is in place, will take a battering.
The Chinese Government got a taste of its own medicine when Vietnamese rioters, protesting the presence of a Chinese oil rig in disputed waters, wrecked several “Chinese” factories. The problem here is that little distinction was made between “Chinese” and “Hong Kong” and “Taiwan.” It will not go unnoticed by China that these two foreign investors were not exempt from Vietnamese wrath, and both the Hong Kong and Taiwanese governments will have made overtures to Beijing to cool down their position – which is exactly what appears to have happened. The anti-China riots were not reported in the mainland media. Given China’s bellicosity over the South China Sea, it appears difficult to predict what will happen next, although the typhoon season will commence soon and the offending rig will have to be moved away then anyway. My view is China will probably let the situation cool down. Vietnam is an important production ground for Chinese consumers, and a fight with the Vietnamese doesn’t do anyone any good.
China Border Risks Remain Low
In summary, the biggest potential problems for China and foreign businesses operating in the region are not the minor bust-ups in Vietnam or scuffles with Japan. Most border disputes, despite the Vietnam flare up, are being dealt with diplomatically. Major and game changing flashpoints are instead in West China and Xinjiang, and the Far East, with North Korea. Both would require significant military and political resources to deal with should situations in either deteriorate. Southeast Asia will remain relatively benign. The odd bout of angry worker fisticuffs has always been a sporadic feature of business in any emerging market, and Southeast Asia is no different in that occasional financial or nationalistic disputes flare up. Yet, like a lighted match-head, they quickly die down. Given the potential of China’s West and Far East for more serious trouble – China itself will want to keep Southeast Asia, Vietnam and all – peaceful, quiet, and non-distractive. Foreign executives need not worry so much.
Chris Devonshire-Ellis is the Founding Partner of Dezan Shira & Associates – a specialist foreign direct investment practice providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam, in addition to alliances in Indonesia, Malaysia, Philippines and Thailand, as well as liaison offices in Italy, Germany and the United States. For further information, please email email@example.com or visit www.dezshira.com.
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