The Stealthy Decoupling of Asian Emerging Markets from China’s Economy

Asian emerging market equities were hurt by recent concerns over China’s recovery and geopolitical risks. However, there is a hidden trend that investors are missing – a stealthy decoupling of these markets from China’s gigantic economy. Tailored winds from supply chain shifts, favorable demographics, and resilient economic fundamentals are set to underpin long-term gains in emerging markets Asia, despite China’s risks.

Supply Chain Shifts and Emerging Markets

Global companies are actively diversifying their supply chains away from China, resulting in increased business and investment flows to its regional neighbors. For example, Apple’s recent move to diversify iPhone production from China to India highlights this shift. The International Monetary Fund (IMF) reports that China’s global market share of foreign direct investment in strategic sectors has been declining since 2021, while the market share of the rest of Asia has increased. Additionally, the United States’ imports from China have been declining since 2018, with imports from India, Taiwan, and ASEAN economies set to overtake them.

Furthermore, the potential for “friendshoring” – the sourcing of materials from friendly countries – is vast in emerging Asian markets. While China’s manufacturing output far exceeds that of India and Vietnam, these countries offer competitive advantages in terms of low labor costs. As supply chains continue to diversify outside of China, these friendshoring destinations will experience significant investment and growth.

Favorable Demographics in Asian Emerging Markets

Unlike China’s aging population, more populous emerging Asian countries such as India and Indonesia are set to reap the benefits of favorable demographics. China’s fertility rate is weakening, and its working-age population is projected to decline significantly by 2050. On the other hand, India, Indonesia, and Vietnam have younger populations, with lower dependency ratios. These countries will enjoy the advantages of a younger and more energetic workforce for years to come.

Resilient Fundamentals in Asian Emerging Markets

Asian emerging markets boast relatively resilient economic fundamentals. The region has been less affected by inflation, as many global supply chains pass through Asia, reducing transportation costs for local companies. Central banks in countries like Korea, Singapore, China, and Japan have implemented monetary policies to curb inflationary pressures and support liquidity conditions. Additionally, China’s post-Covid reopening is expected to boost demand for Asian goods and services, protecting the region’s economies from a global recession.

Recognizing Opportunities in Asian Emerging Markets

Investors concerned about China’s risks should recognize the vast opportunities present in emerging Asian markets. The trend of supply chain shifts, favorable demographics, and resilient fundamentals are all working in favor of these economies and reducing their correlation with China. By diversifying their investments and considering the unique advantages of these markets, investors can tap into the potential for long-term growth and returns.

An Expanding Universe: Exploring the Potential of Asian Emerging Markets

While China has long been the focus of attention when it comes to Asian economies, the stealthy decoupling of emerging markets in the region presents exciting opportunities for investors and businesses alike. By understanding and harnessing the unique strengths and advantages of these markets, one can unlock significant potential and navigate the changing global landscape.

Diversifying Supply Chains for Long-Term Growth

The trend of diversifying supply chains away from China is gaining momentum, driven by various factors including rising costs, geopolitical considerations, and the need for resilience. As global companies look to reduce their dependence on a single manufacturing hub and mitigate risks, emerging Asian economies stand to benefit. By positioning themselves as attractive friendshoring destinations, these countries can attract investment, generate job opportunities, and grow their economies.

For instance, India’s recent efforts to become a manufacturing powerhouse and Vietnam’s emergence as a manufacturing hub for electronics demonstrate the potential for growth and the shifting dynamics in the region. As companies establish manufacturing facilities and supply chain networks in these countries, they can tap into their competitive advantages, such as a young and skilled workforce, favorable demographics, and supportive government policies.

Favorable Demographics: A Demographic Dividend

The youthfulness of emerging Asian economies is another significant advantage that sets them apart from China. With a young and growing population, countries like India, Indonesia, and Vietnam are poised to leverage their demographic dividend for economic growth. This youth bulge translates into a large consumer base, increased productivity, and a potential boost for the services sector.

Moreover, these countries have been investing in education and skill development to equip their workforce with the necessary expertise for emerging industries. By fostering innovation, entrepreneurship, and technological advancements, they can capitalize on their youthful demographics and create economic opportunities.

Resilience in the Face of Challenges

Asian emerging markets have demonstrated resilience in the face of various challenges, from inflationary pressures to global economic uncertainties. Through prudent monetary policies, robust regulatory frameworks, and proactive measures, countries in the region have managed to weather storms and maintain stability.

Additionally, these economies have been quick to adapt and embrace innovation. From embracing e-commerce to driving digital transformation, emerging Asian markets are leveraging technology to leapfrog and overcome infrastructure limitations. This adaptability positions them as attractive investment destinations and paves the way for future growth.

Unlocking Potential: Investing in Asian Emerging Markets

Investors looking to diversify their portfolios and tap into the growth potential of emerging markets should consider allocating a portion of their investments to Asia. By recognizing the unique advantages offered by these markets – from diversified supply chains to favorable demographics and resilient fundamentals – investors can position themselves for long-term success.

However, it is crucial to conduct thorough research and due diligence to identify the most promising opportunities and understand the risks associated with investing in emerging markets. Engaging with local stakeholders, seeking expert advice, and staying informed about market trends and regulatory changes will be key to navigating the evolving landscape.

Summary

Asian emerging markets are undergoing a stealthy decoupling from China’s economy, presenting unique opportunities for investors and businesses. Supply chain shifts, favorable demographics, and resilient economic fundamentals are driving this decoupling and supporting long-term growth in the region. By diversifying supply chains, capitalizing on favorable demographics, and leveraging resilient fundamentals, emerging Asian markets are becoming less correlated with China and offering significant investment potential.

Asian emerging market equities were hurt by recent concerns over China’s recovery and geopolitical risks. But while the region’s markets have historically been correlated with Chinese assets, investors are missing a stealthy decoupling from the country’s gigantic economy.

Tailored winds from supply chain shifts, favorable demographics and resilient economic fundamentals are set to underpin long-term gains in emerging markets Asia, despite China’s risks.

First, global companies are actively tilting supply chains further Chinaresulting in business and investment flows to its regional neighbours.

Apple’s recent move to diversify iPhone production from China to India is the most striking example. According to the IMF, China’s global market share of greenfield foreign direct investment in strategic sectors, such as semiconductors, has been declining since 2021, while the market share of the rest of Asia has increased. In the United States, the percentage share of imports from China has been declining since 2018 and is set to be overtaken by imports from India, Taiwan and ASEAN economies.

Plus, this is likely to be just the start of things. For emerging Asian markets, the scope of potential “friendshoring” – the sourcing of material from friendly countries – is vast. China’s manufacturing output is 10 times that of India, the second largest emerging economy in Asia, and more than 50 times that of Vietnam.

Diversifying supply chains outside of China will require considerable investment over the years, significantly impacting key friendshoring destinations. Part of China’s global competitive advantage in manufacturing is the relatively low cost of its workforce. Many Asian economies, such as India, Indonesia and Vietnam, are competitive with China in this respect.

Compared to China, however, the lack of high-quality infrastructure and large pools of educated workers has made these economies better suited to labour-intensive industries and lower-value goods, such as clothing, for now.

Over time, the demand for higher value products, such as electronics and machinery, will increasingly be met in these friendshoring destinations. While overall development, in terms of manufacturing automation and supply chain ecosystems, is less advanced in emerging economies in Asia than in China, this offers room for faster long-term growth.

Second, in contrast to China’s aging population, more populous emerging Asian countries, including India and Indonesia, are set to reap the benefits of favorable demographics in the coming years.

China’s population is declining due to the weakening fertility rate. China’s dependency ratio, defined as the number of dependents in its population relative to those aged 15 to 64, is likely to rise unfavorably. At the same time, the United Nations projects that the working-age population will potentially decline by a quarter by 2050.

Currently, the median age in China is around 38 years old. Conversely, India, Indonesia and Vietnam have a younger demographic with an average age below 33. Dependency ratios in these countries are projected to remain favorably low over the next decade. China’s regional rivals are therefore likely to enjoy the comparative advantages and consumer power of a younger, more energetic workforce for years.

Third, Asian emerging markets enjoy relatively resilient fundamentals. The region has been less affected by inflation, as much of the world’s supply chains pass through Asia, significantly reducing transportation costs for local companies. Several central banks rushed to tighten monetary policy to curb inflationary pressures, including the Bank of Korea and the Monetary Authority of Singapore.

Additionally, the People’s Bank of China, faced with subdued inflation in the country, is likely to maintain its accommodative policy stance, favoring liquidity conditions across the region. Likewise the Bank of Japan, which is determined to consolidate inflation around its 2 percent target after three decades of weak inflation and growth.

Furthermore, China’s post-Covid reopening is likely to boost demand for the rest of Asian goods and services and lead to stronger tourism flows to the region. The reopening should also help protect Asian economies from recession this year amid a challenging global growth environment.

For investors concerned about China’s risks, recognizing that emerging Asian markets are a universe beyond the Middle Kingdom will present significant opportunities. Friendshoring, demographics and fundamentals are all helping the region’s economies become less correlated with their giant neighbor.