Contagion from China’s property market crash to the country’s wider economy could have profound effects on the global economy and the future of globalisation.

Real estate and related services account for one-quarter of China’s GDP, and a property slump is slowing the country’s economy. The International Monetary Fund is predicting GDP growth of just 3.2% for China in 2022, the slowest rate since the 1980s if Covid-affected 2020 data is excluded.

This, combined with a continuing chill in US-China relations, may see a reallocation of foreign direct investment (FDI) from China to other emerging economies, according to Lawrence Brainard, chief economist at TS Lombard.

During a recent webinar in partnership between GlobalData and TS Lombard, Brainard said that in the next few years he predicts a sluggish Chinese economy, rising social tension and a property sector that “will take five to ten years to bottom out”.

“What we are going to see at the margin, it is important to emphasise the margin, is the reallocation of FDI in large amounts to other emerging markets, particularly those that have advantages in labour force, infrastructure and so forth,” Brainard said. He highlights India, Indonesia and Vietnam as potential winners in this redirection of FDI.

Preliminary FDI data for 2022 shows that these countries may already be benefitting from a reallocation of capital from China. India, Indonesia and Vietnam have already recorded more FDI projects by the end of October 2022 than they did in the entire of 2021, according to our FDI Projects Database.

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China, meanwhile, recorded 32.3% fewer projects by the end of October 2022 than it had in the full-year 2021. While China will record more FDI projects in November and December 2022, Investment Monitor chief economist Glenn Barklie still expects its project numbers to be down by double digits for the full-year period.

“Chinese companies' preferred FDI route is through mergers and acquisitions,” says Barklie. “The low volume of greenfield investments is not surprising; however, the falling levels are more worrisome. I would expect greenfield levels to be between 10% and 20% lower in 2022 than they were in 2021.”

India witnessing surge in FDI

Of the countries identified by Brainard, India is seeing the strongest growth in FDI in 2022. While Brainard concedes that India still has a problem with bureaucracy, he argues that it “has a leader, Prime Minister Narendra Modi, who wants to welcome that investment”.

“Apple is going to move more and more of its assembly and other operations to India,” Brainard said. “It is going to be facilitated by Indian states that are welcoming to foreign investment. It is going to happen.”

Electronics is one of India’s four largest FDI sectors, in terms of total number of projects. All four sectors recorded more FDI projects by the end of October 2022 than they had in the entirety of 2021.

Pharmaceuticals was the fastest-growing FDI sector in India in 2022, with 27 projects in the year up until 31 October. This represented an increase of 1,250% on the total number of projects in 2021.  

“India is seeing a significant uplift in the already popular sectors of software and IT services and business and professional services,” says Barklie. “It could come close to doubling investments in these areas. Companies are investing in software as a service and computer programming subsectors. Many are opening offices or R&D operations. While accountancy, consultancy and engineering are popular professional services areas.”

FDI potential in Indonesia and Vietnam

The growth in FDI projects seen in Indonesia and Vietnam in 2022 represents a return to pre-Covid volumes, rather than long-term growth, but Brainard believes both countries have potential to benefit from a weakened China.

“Vietnam is another winner,” he said. “The problem that Vietnam has is space and logistics. It is a country from top to bottom that measures 1,000 miles. You don’t have a lot of space to absorb a huge volume of foreign investment.”

While the return of tourism FDI projects (up 106% from 2021) will have been expected following the lifting of Covid-related travel restrictions, Vietnam has also seen strong growth in FDI projects in software and IT services (61%), electronics (93%), and business and professional services (73%) in the first ten months of 2022.

Automotive was the fastest-growing FDI sector in Indonesia in 2022 with 12 projects, compared with just one in 2021. Other fast-growing sectors in the country include chemicals (233%), electronics (233%) and software and IT (108%).

“Indonesia is a big country, the fourth-largest population of any country,” Brainard said. “It is clearly supportive [of investment] and has good economic policy. It has not got on the bandwagon very much, but clearly it can get on the bandwagon for welcoming foreign investment.”

Losers from Chinese decline

Brainard argues that not all countries in Asia will benefit from a slumping Chinese economy. “The primary losers are South Korea and Taiwan because China is a critical market for them,” Brainard said. “[They will have] slower growth and less demand.”

He also highlighted that the US is likely to exert a lot of pressure on emerging markets to pick sides between it and China when it comes to sensitive exports.

Association of South-east Asian Nations countries will try to stay on the fence, but there is going to be tremendous pressure,” said Brainard.

Yet he also cautioned that the decoupling of the US and Chinese economies can be overstated. “China makes all the things US consumers want to buy… That economic interdependence is going to continue,” he says.

Even without a systemic 'de-globalisation', which some have predicted, a weakening Chinese economy still looks set to offer FDI opportunities to some of its near neighbours.