Our clients are always talking about where they should invest in Asia. Even more so of late in light of recent concerns that China is no longer a preferred destination for foreign investment. I have argued consistently that China is the most attractive place for investment in Asia. There simply is no other alternative. The recent Global Competitiveness report issued by the World Economic Forum supports my basic position. The Report is quite interesting and bears reading by all international investors.
Though pretty much ignored in the U.S., this Report was greeted with headlines in China. The Chinese are justifiably proud of having moved up in the rankings by two points to number 27. At the same time, the U.S. has fallen in the rankings from number 1 to number 4. China is solidly now in the top 30 competitive economies in the world, and is ranked far better than its BRIC competitors: Russia (63), India (51) and Brazil(58).
There is a more interesting issue hidden in the Report that helps to explain my point of view on China. The report divides world economies into three stages: 1 is the least competitive, 3 is the most competitive. Focus on individual ranking is relatively uninformative. It is much more informative to look at where countries fall in terms of these three groups. This three tier ranking explains where China actually stands as an investment target.
The break out of the East Asian countries in terms of the three stages is as follows:
Stage 3: Singapore (3), Japan (6), Hong Kong (11), Taiwan (13), Korea (22).
Stage 2: Malaysia (26), China (27), Thailand (38).
Stage 1: Bangaladesh (107), Cambodia (109), India (51), Indonesia (44), Pakistan (123), Philippines (59), Vietnam (85).
China is firmly entrenched in the upper tier of the Stage 2 countries. China is joined by Malaysia and Thailand. The rest of the “developing” countries of Asia, however, are all classed in Stage 1. For investment purposes, a Stage 1 country is fundamentally different from a Stage 2 country. Thus, when a client says it will leave China to invest in one of the Stage 1 countries, this means it is planning to make a fundamental change in its investment strategy. Usually this means it is manufacturing low margin, low technology product and is seeking the absolute minimum wage. If that is its motivation, it is completely rational to move from a Stage 2 to a Stage 1 country. However, the notion that a move from China to Bangaladesh is a move from one similar country to another is belied by the competiveness data. Without any deep thought it is obvious that a move from a country rated number 27 to a country rated number 107 involves a fundamental change. It may make economic sense, but only if the investor understands the fundamental differences between the two stages of development.