China lure risks crowding out Southeast Asia

China lure risks crowding out Southeast Asia

HONG KONG (Reuters): Southeast Asian economies must make an effort to attract more investment if they are to close the gap with China in the region's north/south investment divide, a global investment conference was told on Thursday.

China was an attractive market for foreign direct investment (FDI), despite large gains there already this year, while India needed to address its chronic fiscal problems, participants said.

"I think China is taking away FDI from the likes of Thailand and maybe Indonesia," said Chris Tracey, investment director at JP Morgan Fleming Asset Management, told a media briefing.

"Thailand has not gone up the value added chain to a degree to which Taiwan and (South) Korea have," he said.

China, one of the fastest growing economies in the world, attracts $40-$50 billion of FDI, accounting for nearly 80 percent of the total foreign investment received by the region.

"Five years back, China received 20 percent while rest of Asia's share was about 80 percent," Tracey said.

Greater outsourcing of high value added products by U.S. technology firms to Taiwan and South Korea will increase the investment inequality as Thailand clings to its traditional industries like textiles.

"That divide as the secular trend continues will get wider," Tracey said.

That meant Southeast Asia also risked lagging an expected U.S.-led recovery in stock markets in the final quarter of 2001.

Markets like Taiwan and South Korea, which are dominated by technology firms, will lead the regional recovery, Tracey said.

China, which has bucked the trend of global equity sell-offs and emerged as the best performing regional equity market, is still seen as a good bet for investors.

"We believe that in the short-run there will be a technical correction. But China has great growth momentum and will achieve a seven to eight percent growth target," said Geoff Lewis, Investment services manager at JF Asset Management.

China's hard currency B-share bourses in Shanghai and Shenzhen are Asia's best performing asset markets, rallying 127 percent and 162 percent respectively so far this year, and have pulled China-linked shares listed elsewhere along with them.

Lewis said despite a jump in China's H-shares -- mainland incorporate companies listed in Hong Kong -- by 35 percent year- to-date, the market remains very attractive with a price-earning (P/E) ratio hovering at around 10 times.

Tracey said Indian shares also offered cheap valuations but the government's massive fiscal deficit clouded the outlook.

India's fiscal deficit in 2000/2001 (April-March) stood at 5.2 percent of gross domestic product, slightly above the target of 5.1 percent.

Chronic fiscal deficits bloat government spending and limits the ability of the central bank to lower interest rates.