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AB Weekly

This week: Adam Livermore, Dezan Shira & Associates Shanghai

We have just entered November 2020 and as I write, results are coming in from the US election. The result of that contest will be one significant factor in how 2021 develops for foreign investors as they expand in Asia. But there will be a number of other important aspects which need to be understood and considered. There will be a lot of big opportunities for companies that have the capability to devote resources towards FDI in the current economic climate, but I suspect the best destinations for those investments may well differ depending on where in the world your organization is based. Geopolitical factors are likely to be more of a determining factor for selection of investment destination in 2021 and beyond.

COVID, of course, cannot be ignored when we look at the current economic climate. Here in China, business seems to be booming again as only isolated incidents of COVID are flaring up from time to time. Mainly because of the effective control of the virus in the second half of the year, China is one of the few countries around the world that will manage to post GDP growth in 2020. Estimates for growth in 2021 are as high as 8%, suggesting that the slowdown in 2020 will be only a temporary phenomenon.

One major driver of this growth comes from the fact that factories in China are able to produce at capacity again, and domestic logistics is also functioning normally. More product may be diverted to the domestic market due to anticipated ongoing weak demand in export markets while the pandemic holds its grip on large areas of the globe. E-commerce is flourishing in the consumer sector, and the heightened levels of consumption are exactly what Chinese leaders want to see at the moment

However even export markets may prove more receptive to imported Chinese products in the coming months, since alternative supply chains may be more disrupted by COVID restrictions. So for foreign investors with production facilities in China, this may be a good time to look at ramping up operations, especially if you are able to sell into the domestic market. In the absence of growth opportunities across most the rest of the world, China looks like being a rare bright spot in 2021.

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The other large market in Asia is of course India. The pandemic has wreaked havoc there, but new cases do seem to be tailing off now and there is more optimism for the coming months. The more interesting angle for India is the geopolitical situation that has developed along with the pandemic during 2021. The relationship with China has worsened considerably since the military tensions on the border around the Galwan Valley in May, and looks unlikely to improve in 2021. Imports from China are facing more regulatory hurdles, compared with those from other countries. Investment from China into India can also be expected to fall dramatically in the current political climate.

This provides a window of opportunity for foreign investors from the rest of the world, particularly because India’s domestic capital and credit markets have been weakened over the past months. In fact, India was not in a healthy financial position even going into the COVID crisis, with a number of key sectors struggling with high levels of debt. Compared with other economies, the Indian government has not been in a position to extend tangible support to businesses across the economy, so many domestic Indian companies will be in a weakened position which is likely to worsen in the coming months. As the

rupee continues to lose value, M&A deals should be looking more and more attractive to companies looking to get a foothold in the market.

So if you are a European company that can maintain a forward-looking investment perspective even in the midst of the current COVID crisis, both China and India present big opportunities for 2021 and beyond. If you are a US-based company, China is probably not going to look quite so attractive to you irrespective of whether Biden manages to win the POTUS contest in the coming days – both political parties are committed to shrinking the US’s perceived over-reliance on China in the coming years. Logically speaking, that should drive US companies into the arms of India, as the world’s only other “mega-market” in terms of population size, GDP, and growth prospects in the coming 20 years. The prominent US tech firms have already led the charge into India this year. I expect to see other sectors of American industry following that initial wave during 2021.

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In comparison, for all those investors based elsewhere in the world, China is probably going to look like the more attractive of the two markets. In particular, exporters from South America are in a great position both geopolitically and because of the strengthening of the RMB over the course of this year. Products from these economies will be getting cheaper in China, just as domestic demand flourishes. As the US reduces its imports from China, we can assume China will also look to source what it wants from outside of the US whenever possible.

Adam Livermore
Equity Partner, Dezan Shira & Associates

A Changing Asia 

Welcome to the first issue of our Asia Briefing weekly editorial.
For many years now, our firm, Dezan Shira & Associates, has been publishing business intelligence relating to foreign investment in Asia. These have included titles such as ‘China Briefing’, which we originally began publishing in 1999. In subsequent years as our practice has grown, so has the number of titles we produce. Now we have individual titles and websites for ASEAN, India, Vietnam, Russia and the Belt & Road Initiative. A challenge has been to place them all under one umbrella – the newly designed Asia Briefing portal allows readers to access the best of our published articles each week in just one, easy to access location. It also allows both me, as Practice Chairman, to provide a weekly ‘Asian overview’ and Partners from the firm to contribute regional updates and commentary.

This week in Asia is dominated by the US elections, which are taking place as we write, and which my colleague Adam Livermore discusses in this week’s Partner commentary. Whoever wins, at least for the first 12 months of the Presidency is unlikely to be changing much in terms of relations with China, the largest economic and political power in Asia. Attitudes towards China will take time to soften, while the Covid-19 pandemic will remain the overarching priority. The United States, and the Global Business Community, need to heal, and approach trade, bilateral and multilateral differences with renewed vigor and insight. We need to get over Covid-19 first to allow that to happen. 2021 therefore will not be entirely dissimilar to 2020 other than the latter half of the year should prove more optimistic in terms of defeating the virus.

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However this doesn’t mean that planning has just stopped. The BRICS grouping of Brazil, Russia, India, China and South Africa hold their annual summit later this month. With estimates that they will be responsible for 50% of global GDP by 2030, what is decided upon at BRICS 2020 will begin to lay the path ahead in terms of at least 50% of total global trade, and the majority of that in Asia. We will of course be bringing you updates on how this progresses.

Covid-19 has also ushered in, perhaps more quickly than would otherwise have been the case, both new and some old technologies. In new tech, the development of software and apps that allow working from remote locations rather than in the office have and will continue to change the way employees interact with the body corporate. Online retail has boomed. Technologies such as blockchain are improving delivery times and services. Both China and next year, Russia are set to introduce digital versions of their sovereign currencies. This will and already are changing the way that business works and how we process this.

Meanwhile, old technologies have been dusted off, revamped and shown to offer considerable efficiencies when partnered with new tech. Rail Freight between China and Europe has doubled this year, with customs officials able to wave trains across borders as blockchain allows them to see what is on board. That, coupled with the high-speed networks that China is building on a global basis as part of its Belt & Road Initiative mean new opportunities lie in service sectors supplying rail hubs. 2021 will be a year of bumps along the way, and especially the first quarter. However new consumer trends are emerging as are new growth markets and trade corridors. At Asia Briefing we hope we can provide you, the reader, with a snapshot of what is going on, and the bigger picture.

I hope you enjoy and will find our new format useful and informative to your businesses.

Chris Devonshire-Ellis 
Chairman, Dezan Shira & Associates
Publisher, Asia Briefing 

Email: editor@asiabriefing.com
Web: www.dezshira.com



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