 Good morning, everybody, and thanks for coming out on a rainy afternoon. We never know what kind of a crowd we're going to get on a rainy day here in Washington. Plus, it's World Bank IMF Week, but we're delighted to welcome Trinh Nguyen, who's a corporate economist at Natixus, which is a French corporate and investment bank. She's based out of Hong Kong, has a lot of experience with ASEAN economies in particular, but covers the region as she did in HSBC before she was in Natixus, and she's also affiliated here at Carnegie with the Asia program as a non-resident. Trinh, you picked a good time to do this topic. There's a lot of interest, part of it is the trade war. I keep trying to explain to everybody that economic structure in Asia has been changing for a while, not just because of the trade war. I spent a lot of my time looking at China, and if you go back as early as 2007, which was, what, 12 years ago? I remember Wen Jiabao, who is then the prime minister of China, famously gave this press conference after a session of the National People's Congress where he referred to the Chinese economy as unbalanced, uncoordinated, unstable, and unsustainable. So even 12 years ago, Chinese leaders had reached the intellectual conclusion that something was amiss with the growth model, and it needed to evolve towards something else. Part of that obviously involves an intention to move Chinese industry up the value chain, and as that happens, it creates opportunities for other economies around Asia, first to bottom feed off of some of that, but also to benefit as they make their own industrial transitions. That's partly a function of policy. I talked to lots of business groups and CEO groups where people, particularly in the face of tariffs and the trade war, are looking for magic bullets as they do kind of a supply chain stack of different countries, and they say, will it be Bangladesh, will it be Vietnam, will it be India, will it be Cambodia, will it be Indonesia? Who's going to get the policy environment right? And I think for a lot of businesses in a lot of sectors, there's no magic bullet in any of these countries because the policy environment is not ideal really anywhere. India to me is a great example. Here's a country where Prime Minister Modi was just reelected really with a transformational political mandate. First government since the 1980s, that's won a second term, one party majority, and yet despite that political mandate, he has it at a time when the economy is slowing down, and a lot of the data from India is not looking so good. And what's more, making big structural changes in India is always political. So if you think about something like manufacturing policy, this government has a big push, make in India, manufacture in India. But the last government, the second UPA government in India, also had a national manufacturing policy that if I recall correctly, was designed to take manufacturing from 16 to 25% of GDP. And I think the share of manufacturing in Indian GDP actually shrank during that period because manufacturing, not just about manufacturing policy, it's about land acquisition and labor market flexibility and all these things that governments in India have found very difficult to do. So in that context, the trade war, but also structural and policy change in countries in Asia, we thought it would be a good time to have a trend since you're in town for the Bank Fund meeting to come over and share your thinking about what's happening in the region. Trend is terrific. She has very data-driven insights. She does it for clients through the Texas and we're delighted to have her working with us at Carnegie as well. So with that trend, we'll turn it over to you. Welcome to Carnegie and walk us through what you see happening in Asia. Thank you very much for having me here today. I'm Trin Nguyen. So I look at emerging Asia and particularly, I would say one of my specialties is ability to have a comparative look at regional development, right? Not just looking at China, but North Asia, which includes South Korea, Japan, Taiwan, but ASEAN within it, and also looking at India and how do they view this in the landscape of a fast-moving environment. And today I will take you through three different angles. So we're going to first talk about what's happening economically in the region. Secondly, we're going to talk about how do we get here. And thirdly, what are the opportunities, arbitrage opportunities for the region and how do we move from here? So that is just how we're going to organize. Firstly, the title of the presentation is Can Asia Benefit from the Trade War? We wrote a paper last year looking at the trade war and whether or not the rest of Asia can benefit from the substitution effect. And the reality and the conclusion we had was no, no one can win from the trade war in the short term. That is because the sheer size of China's manufacturing, I just give you a perspective, one out of five items in US dollar term comes out of China. That means China has 19% global market share in manufacturing. If you take labor intensive manufacturing, that's even mass more massive. What that means is that in the short term, if you cannot sell to the US, it can dump to the rest of the world, which essentially has happened, particularly in neighboring countries, which means it's further decompressed the margins for neighbors. And that's essentially happened. So if you look at Asian growth, it has been decelerating. And when we talk about trade war and tariffs, you cannot talk about without talking about investment. Trade and investment go together. And even before the data that we see this year, since December, the contraction of not just exports, but more worryingly imports from the region, because we know that because of the supply chain, you need to import to export. The investment figure coming out of South Korea started contracting in the second quarter of 2018. And it has been contracting since into this year. And what is interesting about this is that it is not alone and it was leading the region in its contraction. So you see a deceleration of investment everywhere. There's not a single country that hasn't seen a deceleration of investment. And obviously we don't have this data for Vietnam because Vietnam doesn't release expenditure decomposition of GDP. It's very likely the investment is doing decently well there. But the point is that if you look at even current account deficit countries, countries that don't have much trade exposure, right, India is a country that's roughly almost $3 trillion. Its trade is very little and its trade to China is 0% of GDP. But why is it why is its investment is selling? Why are imports contracting at double digits? What about the Philippines? The Philippines has been de-globalizing and de-industrializing for some time now and imports are contracting. So across Asia, you see the import contraction. And you already saw that also with China's latest data, this week the imports contracted in US dollar terms by 8.5%. So this is a gloomily picture that we see across Asia with the North Asians leading particularly South Asia, especially because it is at the top of the supply chain with semiconductor. Now, what does that mean? That means that our conclusion that no one wins in the short term of trade war is true. It is true that it's very difficult to gain from trade war. Why? Because of these two factors I just mentioned to you. A, the US as an economy has a comparative advantage in labor and in land and resources in which many Asian economies cannot match. The only country in Asia that has oil and food surplus, trade surplus truly is really Malaysia to a smaller extent Indonesia and obviously Brunei, which is very small. Most of the Asian countries look very similar to each other, particularly China, Korea and Japan. They look quite similar in the composition. So what does that mean? Because of the tariffs have been primarily on Chinese manufacturing, right? The US imposition of the tariffs so far, the first 50, 200 and recently some of consumer goods are mostly on manufacture goods, whereas the retaliation of China on the US is primarily on agriculture products and some of the respect gas and oil, right? And all of these things Asian countries cannot truly benefit from arbitrage in the short term. And you can see here what we decompose the trade war so far. So we just want to take you from the landscape of the key difference. And then I'm not going to talk too much about what this means for China because it's not the center of this discussion. But truly if you look at China's trade decompositing and by exports and imports, you can see that exports are mostly manufacture goods where imports have more raw materials, particularly where it does not have a comparative advantage and which is also the point we want to say is that many Asian countries are very similar to China, particularly Southeast Asia and the North Koreans. They are similar in that they compete with China at a very different segment of the manufacturing ladder, right? At the lower end in the labor intensive, it's the Vietnamese, it's the Indonesians that try to compete at the higher end, it's South Korea, Taiwan. This is where China wants to go. It wants to be able to make in 2025 these higher end materials. And the results of this in the short term is quite difficult. So how did we get here? So let's, before we talk about can Asia win or benefit from the trade war, we must talk about how did we get here. The really big moment was 2001. And many people forget that in 2001, before China joined the WTO, ASEAN share of manufacturing export exceeded that of China's. And if you look at North Korea's, it was much bigger. And that moment- South Korea. I'm sorry? You said North Korea. North Asia. I meant to say North Asia. Sorry, I don't know why I said that. But what's key is that when a joint manufacturing move, not just from Southeast Asia, FDI move, not just ASEAN into China to arbitrage labor and also incentives through benefits of regulation, but also Mexico, right? We let's not forget that prior to this, Mexico was a huge place where the U.S. had its electronic supply chain and that got uprooted and moved to China as well. And so the key point here, the tectonic shift that you see here, and I want to show you the transformation of the global economy is that the share of China's made global manufacturing has risen to almost one-fifth of the global economy. And that is not only in juxtaposition with the change in Asia, but also relative to that to places like Europe. And this is what's really key here. But what we're looking at is gross exports. And I want to show you the transformation in the supply chain of China and how that impacts the integration of a global supply chain in the world. So one of the key papers that we recently did was the global value chain. Basically, let me just explain what that means. That means that when you look at gross exports, there's a lot of that you don't see, right? For example, you import materials to create foreign inputs and sometimes you then export some of your intermediates then use by other countries to then use as inputs to then export, right? The way we measure the global value chain is that you take out this foreign input component because that is your country's participation in the global value chain. And you also take a look at the ability of that country to produce intermediates then using another country to then export, which means that you're increasingly integrated via your domestic ability to export. And if you look at this, the China's now in terms of its global participation in the value chain is about 45% of its 2.2 trillion of export, gross exports. What does that mean? It means that if you look at the DVX, which is domestic value added in intermediates, has risen quite substantially. But that is also in juxtaposition with a trend that we see, which is that globalization peaked in 2008 and it has declined since, right? So how can that be that you have a country that is ability to rise in its value add, which is basically vertically and more vertically integrated and moving up the value ladder? Meanwhile, the process of global participation in value chain is declining, right? So that's the question that we ask in the research. And the reality is you look at what is driving this decline and look at the different regions. We want to show you what's very clearly here in this chart to juxtapose China and Germany is that China's ability to move up in the value chain is in clear juxtaposition to the decline of Germany in its ability to also export its inputs, right? And that's really what is really key as well in that you look at a cross in the region. In the value chain participation in the region is also quite interesting. If you look at if the global integration is declining, could that be because it's shortening the distance of the value chain? Not so much because we're not integrating, but we're more regionally integrating, right? That's the second question that we ask. And when you dig down into the data, the reality is that regional integration is actually declining in Asia, right? It is declining, but then when you strip out China and you do an Asia X China, then it actually is rising marginally. And if you strip further the Asia X China into regions such as Southeast Asia, India and North Asia, then we see that sub-regional integration is rising in Southeast Asia, rising very marginally in North Asia and declining in Southeast Asia. So the key conclusion we want to say here regarding the Asia region is this, China's ability to integrate itself vertically and move up the value chain has actually, does not mean it's more integrated with the region itself, but what that means is that it must be more integrated elsewhere. And moreover, the trend that we see within the Asia region is that there's a trend of more integration within the Southeast Asia region. Now, I want to show you the third question we ask is that if globalization is de-globalizing, which means that we are no longer at less participation and it's not due to the shortening of the supply chain regionally, then could it be sub-regionally, which we've answered, which is that no, with exception of Southeast Asia and minorly North Asia, then is Asia more integrated with China over time, right? So if China is ability to move up the value chain, then is each of these countries participating more with China, right? And the answer is actually no for Asia and only for Singapore, Vietnam, and Bangladesh. And actually, when you decompose and look at the picture, then it's very clear that many of these countries, what that means is that Vietnam imports more of these inputs from China as this arbitration. And I'll explain that later when we think about this discussion. One of the things I also want, we don't really discuss, and which is not relevant to this discussion, is this question earlier, is that China's ability to move up the value chain through its ability to export intermediate goods, which are then used in other countries of exports, is actually quite interesting because we will not discuss, but its integration with Europe is more interesting, right? Within Asia, the integration with China is really in three countries, Bangladesh, Vietnam, and Singapore. Now, I mentioned earlier the first point we asked the question, in the short term, can Asia benefit from the U.S.-China trade war? The answer is no. We know that a year later since the escalation. And I wanted to just so show some data here on just the gross exports. We just showed you the value chain data, but I just want to show you the gross export. China has 19% manufacturing, but in terms of labor-intensive manufacturing, it's quite massive. It's all the way to 30%. And you look at the review comparative advantage, it's even bigger. And the countries that compete with China on that end is too small in scale, right? People talk about Vietnam being a winner of trade war, but Vietnam is a 90 million in terms of population versus 1.4 billion. So where does Vietnam want in the supply chain? It wants electronics, right? It wants textile. It wants a cleaner manufacturing. So that's what it's getting. It's setting up in Northern Vietnam, this China plus one story. Now most of Samsung's phones actually produce and export out of Vietnam. So, but not just Samsung, there's LG, many, many other Korean electronics and Japan, et cetera, et cetera. But Vietnam cannot capture every segment of manufacturing because it's too small. So it has to target. Which means that if we were to avoid the crossfire trade war and if you're a foreign direct investor and you want to arbitrage out of this higher wage cost, higher tariffs, unless favorable regulatory environment in China, where would you go, right? Who's opening the door for you? What can you do? Can you really disrupt and move out of this vertically integrated picture where you have supplier skills and everything already set up for you? That's a key question that many people have to answer. And the one thing we have to also consider is that of this $2.2 trillion of gross exports to China, export, roughly 40% of it is foreign invested. What that means is many of these companies go into China to then either produce, ultimately export elsewhere, or to access this massively large market. And that is potential for disruption in looking out. And so the second point I want to also highlight is that ASEAN and China, although the first kind of domains look very different, they're very similar as well. In terms of, if you look at the comparative advantage they have, very labor-rich land somewhat, but in terms of labor-to-land ratio, it's very similar to that, very crowded, not a lot of arable land, with exception for some countries, such as Malaysia, with exception of Indonesia. And Vietnam is also, land has gone quite expensive recently. So this is one of the key areas, and when you look at this, it's not so easy to completely reshuffle everything and win. Now, we also take a look at how, in terms of in the U.S., whether or not these Southeast Asian, and roughly India, and a lot of the Asian countries can take away some of the market share from the U.S., and the answer is no. What is the largest export out of the U.S. to China? Soybeans, right? Semiconductor, some of this is pork. Now, does Vietnam have the scale to have massive land, agricultural land to create soybeans? No, it has its comparative advantage. It's really cheap labor, and it's a location where it is. So as a result of this, the arbitrage is not so easy. I'm going to take a sip, not to depress you too much. We're going to talk about opportunities. So, but let's not get too depressed. We published this paper last year that no short term, but medium term opportunities. Before we get excited and just start shouting out Vietnam when we talk about trade war, I want to just take a look, just take a step back at someone who looks at Southeast Asia, many of these countries very closely, is that many of these countries have had these structural issues for a long time. Now, what happened after the GFC was that this flood of cheap liquidity that came to Asia, because of this push, thanks to low growth and develop world, and also lots of easy money, through easy monetary policy, not just the Fed, the ECB, the EOJ. As a result of that, there was a lot of what I would call lazy policymaking. Structural reforms do not get done, but you don't need to do it, because there's a huge political cost when you shake the system. And as a result of that, many of these countries have a huge overhang when you have this taper, a Fed-tape rolling tendrum, and more recently last year when the Fed raised interest rates by 100 basis points and started doing QT. The dollar liquidity situation severely affected current account deficit countries, and we're talking about countries like the Philippines, Indonesia, and India. Now, the key issue here is financing. In these countries, we know they're emerging. We know from this picture here, there are quite a few countries with very favorable working age population. What that means is that they need a lot of investment. But what kind of investment? The kind of investment that creates jobs, the kind of investment that is stable, and that is not volatile based on the whims of drone power or the change of the U.S. business investment cycle. And that is not what's happening in Asia. So we think the policy solution for many of these Southeast Asian countries, plus India, is the same policy solution before trade war and after trade war is that they need to work on improving their ability to compete better, to look more outward, and to start tackling some of these basically delay reforms that they haven't done, right? So simply in the Philippines, Indonesia, and India, really about land, labor reforms that needs to be done to really unshackle. But also on the capital market side, not just in portfolio investment but direct investment as well. And the other countries that are already favorable to foreign direct investment such as Vietnam, Thailand, and Malaysia, there are different sorts of reforms that are needed. There are more regarding skill level, right? If you really want to move up the value chain in Vietnam, you really need tertiary education needs to be there. It needs a different set of reforms altogether. And so when we look at here, you can see that Asia is complementary within itself. The story of aging China, the story of higher wage costs of China, and the story of U.S.-China competing and everyone trying to get out of this cost fire, it's all the same story. It's just getting accelerated with the trade war, right? I'll give you an example. Korea started making the move out of China before the trade war. Japan as well. It started with geopolitics. Let's not forget that in 2014, there was a huge commotion over China and Japan. What happened is that as a result of that, there's diversification. So geopolitical risks now where people are thinking of a grander scheme through two major problems, but within the region, there are geopolitical risks as well. There's before this, there was a fat incidence with Korea and China. And as a result of this, there was a lot of tourism. But the diversification that we see is really a result of a lot of structural trends getting accelerated. So the key point is to say that the Asian region is very complementary with one another. Where in North Asia, we have Japan leading the aging race and showing us what will happen and where China is quickly falling, but not just China, but also the likes of Singapore. We can see that we are not just looking at trade war arbitrage, but really a long-term structural story in Asia with the excess savings of a lot of these countries and also the slowing growth story will also have to be re-channel within the rest of Asia as well. So where do we stand in terms of who can benefit from the trade war? This is a very simplistic look at wage costs. What we look here, we don't look at labor productivity. We don't see anything. You don't see other factors that investors think about when they open a factory, right? Investors have to look at the regulations, political risk. But what we see here is very clear for manufacturing wages already in 2017, China has risen quite significantly relative to 2012. And what that means is that if you are very labor intensive, you have already begun that process and we start seeing the data and a lot of the FTs of foreign trade zones in China is already seeing that the interest to set up shop there has declined quite substantially. The manufacturing inflow into China shows that as well. It peaked in 2011 and it's declined by 20-something percent by 2018 and within textile, that decline is sharper than 50 percent. However, there's an increase in manufacturing into China. It's in the higher end manufacturing and where the inflows into China if you look at FDI is really on the financial services side on the new story of China. The new story is that it's moving up the value chain, people are wanting more quality and people are aging and in that aging process you want diversification and investment, you want a better hunt for your yield so it's really the financial service story. On the other end, the old China story is the new story for the rest of Asia which everyone is hoping is the story for India. And so here is a more holistic look at opportunities for Asia. So we just look at the wage there but what we did was we took a look at some input costs such as electricity and some of more soft indicators. Investors, when they invest in countries they think about the business environment, the ability to enter the exit, property rights, etc. Particularly with opening a factory, they tend to look at political risk. So we look at some of the rankings and we did a study of what does that mean in terms of a relocation index within the region. And we found that for many of the regions of the countries there are plenty of opportunities for relocation with the exception of several which is that the Philippines and Indonesia essentially particularly the Philippines where it is nowhere to be seen in the story of how to benefit from the trade war. And you really haven't heard much about it and that has to do with the fact that it continues to look more inward for sources of growth rather than outward. And when you do so the ability to compete in the global marketplace is impeded even though you get a more captive market for your investors but in the long term that's not where you want to head. So finally I'm going to end with this note. Is that if you look at the history of not just Asia but generally in terms of development story it's actually and this is something I did when I work at the World Bank briefly for two years studying foreign direct investment and what are different strategies of countries to foreign direct, right? So if you look at one of the successful stories people look at is Ireland, right? Ireland focused on a used FDI for pharmaceuticals, etc. and it's able to capture that. And then you know and then there's a different story where in South Korea didn't really use FDI but more through its own industrial fight. And then China is a bit of a mix between the Ireland and the South Korea model. But the reality is that to develop you can't have this basically a neoliberal Washington consensus approach where you just lasso fare let the market dictate because if the market dictate you get nowhere essentially, right? There is some, you need some targeted liberalization in economics people tend to say that there are steps to liberalize an economy, right? You don't open your portfolio account first before your FDI account, for example, right? Look at Vietnam, the stock market cap is so small. The whole entire market is not, Apple is a trillion dollar market cap. So if BlackRock or anyone wants to go into Vietnam it can basically overflow and create crisis very easily. So the key point here is that it's very difficult to move up the value chain and in this chart I show you the decomposition of foreign value added and domestic value added intermediates use then to then use in other countries as exports. And you can see here is that Vietnam is still very low in DVX which is a gray line. And what China has achieved is that it's allowed, it's grown and it's doing so with a very, very forceful policy and this is not a policy prescription for the rest of the region but in order to grow and to move up the value chain governments have to take a targeted approach of what they want to develop what sector they want to attract and use the policy to support that. The good example is the government Vietnam decided that since it is a lot of labor very unskilled and we need people to just have sustainable labor so therefore what it's going to do is decide on cleaner manufacturing so to speak. So it takes two sectors that it thinks it can do well and because it kind of does well in mathematics but not necessarily in tertiary but more in just fundamentally it's just targeted electronics. So a lot of these countries we need to take that and for Vietnam it needs to take a much bigger step because if it doesn't do more in developing tertiary education it doesn't do more in textile beyond just assembling to move into design to move into creating the inputs to move into creating the zipper that in itself is a huge right and you know there's a brand that China has eventually worked so hard to compete with this YKK zipper. So many of these little things that we don't think about as consumer products these countries when they think about developing have to take these overt approach without which we end up with a status quo and that is a more likelihood of development path than we're to have a more targeted policy. So that's the key conclusion that not conclusion but more of a thought it's not a conclusion because I just want to leave with in terms of whether or not emerging Asia can benefit from the trade war and I'm one of those people that's more of a cup half full right recently I've become kind of a huge hit in India because I thought it's reading about this tax reform that they did where they cut 10% tax and where the manufacturing tax rate is now on par with Singapore and I think you probably have seen that and they basically reverse some of this portfolio investment policy that they did that's very ill perceived by the market but really India would need to do much more but it took that first step in the market basically cheer it on because it has the most expensive equity market essentially in the world and despite of you know 5% growth decelerating investment etc etc investors are betting it on right so so so here the message is that investors want these stories to succeed they are betting on it because the valuations of Southeast Asia and India are much higher than if you look at for example Heng San composite in Hong Kong what PE ratios is about 10 or China the Shanghai composite valuations are quite depressed right because investors are thinking this is the future but the reality is that no matter how much cheerleading investors have for these economies what they truly really need is more of a foreign direct investment to really have this sustainable funding to really address these issues so that every time the Fed says a hawkish word you don't have an investment cycle decelerating or a liquidity crisis that we have seen in Southeast Asia and you know even much worse elsewhere right like Latin America or Turkey for example so maybe I'll just stop there for Q&A sure so can I just ask that you're an economist but it sounded like a lot of what you were describing ultimately is about politics it's essentially which countries have the political wherewithal to take structural decisions that are going to be difficult politically fraught painful for some constituencies so I know you don't necessarily follow the political risk directly as much as the economics but when you look at that and you say your glass half full are you glass half full because you think countries have the political wherewithal to do that or are you just guessing that they will because they need to well actually I came I started doing this quite an interesting time in 2011 so I may look young but I'm not that young no I work at the World Bank before so some more books but but essentially I came when Vietnam had a huge crisis so when the Philippines and Indonesia all these countries were attracting full investment real estate prices were going up everyone's partying like you know I don't know assets were just going up everyone was really happy in these emerging economies right so it's very hot sorry China was hot everyone was hot Vietnam was not its CPI was I think it was like by August I started my job August it was like 23 or 24% year on year the dong was depreciating we had a governor that was like doing all kinds of weird things and so the market had no confidence and there was a huge question was like oh my god what's going on with NPL ratios right and so many banks had conference calls with very limited data and the only conclusion was like because we don't know what's going on we're going to assume the worst so no one was financing it and it was going it was there was a distressing up so the question at the time was we need to reform right and they asked me what should we do with the banking systems I started looking at what China did in the 90s and you know and I was like okay let me give you through my experience and how how you should do this but the reality is when you go through the stress scenario the question is we need to reform well what is the pace of reform we need to do because reform is very costly right you reform but you have to reform at a certain pace because if you reform too fast you can risk destabilizing your economy right right because you can't change from A to B too quickly but you still need to do it so so that's a key question the second one is obviously political costs and we see that already playing out in many anyway so when you look at in my opinion when you look at Asia you look at who owns what so the first thing I did was you know like any economist you look at you know expenditure production the excel sheet you do all this and then I have to actually look at who owns what right because that's really tells you what's going on with this economy and it tells you ultimately who makes the decisions and when something goes on etc so good examples the Philippines you know looks like what you see but reality is owned by a few families is very more inwardly so when you have reforms so when a politician comes and and he wants to reform he has to have a buy-in of a certain circle right it's like when jacoi comes in he wants to reform what does that mean if you open up your economy you liberalize it which means that the domestic firms have to compete with external firms so that is a huge that's a political risk right so you have people resisting this change and also you have also your labor market resisting this change as well because your labor is not able to move about but capital is more mobile but labor isn't especially in the lower end so I think there's a huge risk particularly in countries and particularly if you look at the countries that haven't been managed to do this very well is really the Philippines and Indonesia where it's more difficult for it to take this step to liberalize due to the political economy of it so jacoi has managed to make some steps and then one of the things I would say is that if you look at his ambitious infrastructure plan which everyone knows Indonesia needs to build traffic is horrible in Jakarta we need infrastructure now he has a plan to build 40% of GDP in infrastructure right fine but he needs to finance it how do you finance 40% of GDP infrastructure if your revenue ratio is like tax revenue is 10% and your expenditure is 15% so it's adding non-revenue ratio you roughly get about 12% and you have a constitution mandated you can't exceed 3% deficit right but then you also don't liberalize your FDI so what means you need your portfolio investors what that means is just you know the likes of these funds that go in and just do investment and they can go out any time so it's very hard to do these long-term projects which have stable cash flows but you know you need to do it when you build a road it's not going to have a total return over time so this is a huge question for Shukowi and I think for me looking at Indonesia it's very difficult for Indonesia to take this leap unless it addresses the fundamental question the financing side of it and I think for all these countries that needs to be the key and when we go back to the Vietnam story in 2011 it had that problem it had a current account deficit it had a fiscal deficit and it didn't know how to plug this hole and the only way it knew how to do it was to inflate it so all the way out of it and that's what it did just double digits inflation now ultimately it realized that you know the only way we can get out of this is that we need to attract money sticky money and we are going to do everything we can to get it right so Samsung they went to Samsung said please come and came and you know we're going to even build you a little you know in the Hanoi Airport do you have a little area where we give you land rights we give you tax rights and it did all these things and as a result of that it started gaining investment and this sticky FDI now the banking system liquidity has improved the LDI loan to deposit ratio has improved so significantly that being out even though it's junk it's actually so very very junky in terms of sovereign rating what that means is people say high yield but it's below investment grade but it funds cheaper than investment rated countries like India, Indonesia right fund somewhere about the 10 year in local currency it's only about 4% something to give you that perspective it's very close to what China funds at the moment which is a much higher rated right so it's a liquidity matter so what that means is that Vietnam can fund its deficit on its own it issue on $1 billion debt in 2014 investors kept asking when are you going to issue again right it doesn't need to issue again it doesn't have the problem its problem now is how to move up the value chain right you have all these arbitrage people relocating its packaging so is it going to be an issue where when China now has a problem higher wages it actually has productivity and moving up the value chain to make up for it because as firms move out which they inevitably do it has something left right its ability to produce its own good when this happens to Vietnam say 10 to 20 years later is it going to be a Mexico story because when these electronics firms move out it hollow out Mexico's electronics sector because it didn't take the ability to tap into this watch and this is why I show this chart is that to move up you have to really you know when you do you create the same thing and you assemble do you want to also create the packaging you know get into this segment so to start inserting yourself in this production process and when you are able to do so I think that's key right the ability to then organically have capability to produce goods that is demanded and is not exposed to the winds of investors which ultimately will leave they come to you for cheap wages that will leave when your wages rise and that's inevitable in the development story so that's why I have this chart all right so let's give the audience a crack at you and we have a mic that will go around questions comments questions Yukon let's just give you the mic enjoyed that quite a bit I have two questions sure you had the wage chart yeah and I've always been puzzled by this because wages in China have been increasing two to three times as much as other countries in Asia okay despite a growth slow down all these problems so ultimately when you talk about what countries benefit I think people feel like they benefit if their salaries are going up right so all these other East Asian countries almost uniformly the wages aren't going up except for China's okay and that people are speculating what China's going to come down but as it comes to what tells me is something sort of like strange they're all linked by production sharing network which you just described so for China's wages to continue rising much higher than other countries it tells me that productivity increases in China are still continuing to be much greater despite all the things going on so one question I have is why is is this what why is this happening why is it that productivity increases in all the other East Asian countries having sort of like kept pace one question the second question I found at your chart about who's benefiting and what's happening interesting because what you showed was that Bangladesh Singapore and Vietnam what's interesting is that China runs trade deficits with every country in East Asia except for those three okay and these three are quite strangely different Singapore, Vietnam, Bangladesh economically structurally are so different yet they run they incur a huge trade deficit with China whereas everybody in East Asia runs the opposite and they never sort of like quite understood what is it about a Singapore Vietnam and Bangladesh that makes them different from the other dozen countries in East Asia okay so let me first address your first question it is true that productivity has gone up but it's also when you have wages higher like this it's also input cost for firms right and it's not just wages but also land prices have gone up so if you go to a place where I close to where I live in Guangdong it's very expensive to produce there now it's not just wages you have land also tax benefits are not just there so yes when you have higher just similar to the U.S. when you have higher wages it's very good for the workers but really you also have to look at also relative to spending power but at the same time CPI has gone up real wages haven't gone up as much as nominal wages right especially in urban centers we consider the cost of housing and therefore I think that this is this is a double-edged sword so to speak yes it is positive but it's negative from a labor cost comparative advantage particularly in labor intensive manufacturing particularly when you consider input cost right electricity land and labor all those three so if you're capital intensive it's and then you're on the higher end skill you can still build a factory and just get rid of this labor cost input and then that's what people do right but not everything you can create a robot for especially if your product changes too much if you have a repetitive product you can build a robot right because it does this and does this all the time but if you have a product that changes too often then when you have a robot then you have to make a new robot right doesn't make sense to create a robot so there's only some sectors where you can make it more capital intensive so so so second and I think the the second issue for China is that there is a sense of of cost risen too much right so you can see that CPI recently risen three percent PPI is deflated so so there's a huge divergence in terms of ability firms that profits margins are being squeezed we're going up actually finding yeah the main factor because right right right right when I'm struck by this vital and rapid cost of production in China actually haven't written by as much adjusted as one would expect yes in certain segments of the production chain right so so this is why if you look at FDI inflows into China there's a certain segment that's rising still rising right so this is what I I said earlier in the textile and the labor intensive is declining very sharply so if you're decomposing after the manufacturer inflow into China is minus so on 20 something percent since 2011 but decompose it further then you have two ends right where you have textile declining very sharply and on the higher end it's rising so as a net it's declining so so the second question and then the second thing the second issue is that there's a generational impact right this where this you know this rise ball effect is no longer it's true for younger generations the millennials that are facing a more difficult housing environment where the job opportunity and it's not as there as before also in China so so there's a different the development story is very different right we no longer have an essential shortest story that you have in the 80s and 90s we have a different sort of inequality story in China and so that's a distributional story and the second question you have is Singapore and Bangladesh and Vietnam so the story of Bangladesh and Vietnam is also related to your first question is if you look at FDI inflows into China in textile it's collapsed by basically 50 something percent since 2011 so that means I went somewhere else right so new investment have gone to Bangladesh and Vietnam well what do they do when they open up these factories they still take the inputs from China right the cotton the buttons the zipper so as a result of this and then you can see here that that for Vietnam the DVX right the FBA for Vietnam is high so foreign value added inputs so it's so input quite a lot of components for production that's why you see Bangladesh and Vietnam and why do you see Singapore because Singapore is a tree center so so what you look at Singapore trade is not a lot of its domestic trade you have to strip that out and this data doesn't do that right so for example Singapore's trade as a share of two views massive more than 100 something budget but if you look at the organic Singapore non-oil and none of that is only about roughly 50 percent so Singapore because of this the China story is salient because it inputs a lot of inputs and then as a result of that and that's why it's integration with China is rising because it's a facilitator of trade in the region as well so it's a reflection of these reshuffling of the supply chain so to speak but still even though segments of the supply chain has moved out it's still it's more integrated with China because it gets the inputs from China so the question is will Vietnam get this it's a huge debate also is that a lot of these if it wants to do so does it have the scale does it really want the pollution and all these things that come with it if you want to produce fabric for example certain things are quite and also do you have the scale should you move in that direction to create the intermediates or should you go from sewing and then assembling these goods to go up to the design or just a different segment all together whereas in China it specializes everything so what gets offshore is really the final end of it essentially yeah please let's let's give you a mic thanks John Goyer with the U.S. Chamber of Commerce so we're not seeing a lot of new FDI going into Southeast Asia that's that's what I'm hearing but as a result of the trade war are you seeing trends in terms of sourcing so for example the likes of Walmart or Home Depot or Target are you seeing them seek out new suppliers utilize new suppliers in Indonesia or Malaysia or Thailand or other countries so not new investment but maybe utilizing existing capacity in some of the Southeast Asian markets or maybe expanding some existing capacity short of actual new FDI what are you seeing there okay so actually there's a lot going on so there's two things so actually quite a few factories have started to move to Vietnam in terms of the electronic end they've announced recently and on the two countries there are three countries that will benefit from this really essentially is Vietnam Thailand and Malaysia Thailand and Malaysia at a bit of a higher tech level than Vietnam and then the reason many of the firms go to Vietnam is that it has this China plus one story where it's very close to China essentially northern Vietnam and southern China and Vietnam has an FTA with the EU right so no other country except for Singapore has it in Southeast Asia and China doesn't have an FTA with the EU so so Vietnam does have this market access so you do this for market access for example for Thailand it's getting a lot of FDI inflows is rising actually the data and a lot of people that need to source will try to look for it and in Thailand will try to relocate the Thai government has announced the tax benefit package and Malaysia has traditionally been a key intermediate in terms of electronics for the region and now there's a sense of there's a resurgence and recently in the latest budget the government has targeted electronic as a way to revive from Malaysia so you do get some of that segment but to make the point is that these countries are benefiting but to really fully grab that if you look at 40% of China's gross export is foreign invested 40 something percent I don't remember the exact stats 41 or something is that really the only country that's comparable in size is really India right but India doesn't have that infrastructure yet and if you look at the FDI into India so far it's primarily for tap into India as a market in itself right the likes of Apple the likes of countries that tap into India as a large market rather than India as an arbitrage to then use the cheap labor to then re-export elsewhere so I think the story is primarily a Southeast Asia story so far and the Indian government is trying to make it an Indian story and I think it is gaining traction and more needs to be done and if you look at the one area if you want to look for from a US side is look at the ISM survey in the ISM survey there are two one is manufacturing one is services within that they always talk about sectors contracting and etc but they have anecdotes for every sector and I've looked at this over the past several months is that one key point is that their tariffs is a huge issue and they're working on diversifying the supply chain the question is how do you do it right due to the reasons I mentioned but people are working actively to do it and the longer the trade war lasts and the longer people think you know this back and forth Trump said that she's you know this back and forth who said what are we escalating the escalating the reality is that it's escalating is that investors will need to arbitrage and not just Americans but Chinese investors right already before trade war there was a survey in Wangdong where people talk about manufacturing and they already before that 40 something percent wanted to relocate before trade war because the cost of production there is so massive and now with the trade war and the tariffs and one thing you have to remember is that 86% of China's trade is in voice and dollar what does that mean when you have a depreciation of the RMB which is basically let's say 10% on the Chinese side you have cheaper input cost but as I mentioned wages are still rising so it's so you know a 10% cheaper cost was still offset by still input cost rising so let's say you get five five ish percent cheaper but then it's still priced in dollar right so what that means is that when you add a tariff to your dollar relative to last year and you want to remain competitive you then need to pass on of some of that input cost savings in dollar term so there is still some margin compression on your end right to stay competitive and that's what has happened is that they are passing on some of the savings and on the US side the importer side they haven't fully passed on to their American consumers yet they absorb some of the cost so if you look at the PPI on the US it's risen kind of plateau but what that means is they're absorbing a lot of this cost whereas CPI is low right it's 1.7 something percent right it hasn't increased so so the key point is that everyone is looking for ways to arbitrage this margin compression right the margin compression it is happening quite severely and it's not just trade war also there's a structural trend of consumer habits right retail is getting hammered by the change of consumer habits by the way people are becoming the new millennials are more interested in services etc so so so there is a huge shift also for Asia for many of these Asian countries that thinking about how to benefit from trade war they have to think well do we try to attract yes sir decades you know last decades trends how do we target FDI so we actually don't just get a sector that's already stale right if you look at the retail sector in the US it's totally hammered it's not just in the US but globally so so there's that question as well the decline of FDI into China is can we arbitrage some but reality is that sector in itself is under stress right so so so there's a huge margin compression globally and this is why to really benefit from the trade war these emerging Asian economies we need to really wake up and I think they're waking up in a so I think that's one of the positives of trade war is that Indonesia is waking up Jokowi have to seeing this World Bank report which is basically so sobering he then order his ministers come up with a package in a month right because up until that point they were just thinking about I&R they wanted to move up the value chain or I&R so they banned the export of it so that they can get more smelting right to move up the value chain so they weren't thinking about we have almost 300 million people how do we take advantage of this etc etc so I think a lot of these countries are waking up and I think the rise of China in my opinion is also positive for these countries and that it's put a lot of pressure on them right from a competition point of view you move up so well if we if you grow so fast and we're so behind you have to catch up you have to grow things stable is totally behind right for many of these countries not only that you have competition from the good coming to your economies competing with your domestic friends so if you don't shake them up they will be hollow out by the flood of goods right one out of five goods globally it's coming out of China manufacture goods that's that's a lot that world bankrupt it came out about a couple of months ago well actually it was just it was just a presentation they they didn't they actually like some press I saw it written up in the indonesian press it was pretty negative yeah yeah yeah it's quite negative any other questions for Trent yes please let's give you a microphone let's give you a microphone because yeah I'll have to run yeah we're gonna end up we'll make this the last one yeah yeah we got it okay the short answer is yes so if you look at Vietnam for example what do you do like Vietnam is actually quite rural right the urbanization rate is not that high so if you're just hanging around in the rural area you do like like very similar to many of these developing countries where you sell some goods and you don't have a stable income right um so so when you have a firm like Samsung and obviously it's not glamorous jobs for you but for many of these people it's stable employment and and you are relatively unskilled and so you're able to go somewhere and have stable income and that stable income allows you to then consume to then make big purchases to move up so so for a lot of these economies this is the question is would they the the the the ability to afford a better living from this or whether or not the wages are not rising as fast right it's the cost of goods this is a key question but yeah like for many of these countries it is a positive and obviously from this there's negative externality when you have fdi and you know you hear a lot of this for for for for areas where you don't gain from employment but you have pollution etc etc but generally speaking it's an ability for a country with a large population that's relatively unskilled to provide jobs a good example is India most of the population is informal that's like I think I don't remember the exact it's 80 something percent now if you're able to put even 10 percent of this in a factory that will have stable employment what do they do when they have stable employment they go somewhere they collect it and they're able to have stable consumption and over time move up the the consumption chain so countries that think that they can leapfrog out of this and you can just go straight to services and that's the Philippines right the Philippines was actually doing pretty well in the 50s and the 60s and they decided to look at the U.S. how it moved from you know from manufactured services and the U.S. is a developed economy is now services so let's just go there skip industrialization so it started providing skilled labor in services nurses etc etc but then there's no demand for this because the lower end doesn't have jobs right the productivity is very low our culture sector is very low there's no jobs for these people and as a result these higher end skilled people on services have to leave these Philippines to provide services for countries that have industrialized right like Hong economies like Hong Kong and the Saudis and etc etc they have to go to the U.S. for nurses etc here the high demand or Singapore so that story can only work for a certain segment and today in the Philippines you can make a couple thousand U.S. dollars doing call centers right but your hours are off because you're doing it for the U.S. but reality is really fully develop an entire economy you have to provide jobs for a lot of your your otherwise you have a lot of people loitering around as well right that's an issue in India where you have so many people that's 1.3 billion people and by 2050 they're going to have like 1.6 that's 300 million people that's a lot of people now if these people already we have a huge issue of people loitering and you know men there's a lot of energy a lot of testosterone and you're not channeling that to productive energy you're going to look for trouble right and now adding to that in the future you're going to have more of these people and that's a lot of problems so we can see that huge developmental problem as well if you don't give these people to occupy them to keep them busy and to you know to demand goods for the economy etc etc so yes the answer is yes and frankly speaking you know I've heard this before you know a lot of people comment on my twitter and also just in feedback to my research in general that you know India doesn't need this the future is India but I say yes India needs it it needs it because yes maybe the wealthier Indians so it can go to services it can go to tech it can go to software but what about the rest of them there are so many of them right you get as many jobs as you can in an economy particularly for your low-skill workers because they're not mobile they're not flexible and they cannot do so much and if they're the ones that you really need to look out for and these jobs and you may turn your nose at them but they're very important in the development story without which you're not going to be able to get people to move up in the durable goods right from basics to you know durables having a car etc okay great well Trin we know you're only here for one day from Hong Kong so we're glad we got you on stage at corny yeah thank you so much please join me in thanking Trin thanks