The emergence of ‘fat tails’, or low-probability high-impact events, subsequent to the recent developments in West Asia and North Africa, may prompt foreign investors to be more careful while putting money into China, even as the world’s second largest economy has begun taking evasive action to contain pro-democracy protests that have surfaced primarily on the internet.
Officials of the World Bank’s Multilateral Investment Guarantee Agency (MIGA), which is tasked with promoting foreign direct investment (FDI) into developing regions, indicated that firms may be now looking to “diversify” their investments away from China, particularly after the revolutions in North Africa underscored the political risks that remain in the world’s most populous nation.
Although pro-democracy protests in China, christened the ‘Jasmine Revolution’, have largely remained limited to the internet, authorities have come down hard on the movement, including imposing restrictions on foreign journalists operating there.
“Investors are recognising that the people (of a particular country) may demand change after reaching a point in economic development and the government’s reaction to the needs and demand of the people is important. That is the learning from West Asia and North Africa, and investors are now more careful about what political risks remain,” MIGA executive vice president Izumi Kobayashi told Business Standard.
She added that companies could be looking to “diversify investment” in cognisance of the potential risks in China, a phenomenon that has already started, according to a recent report, with major Asian economies like Japan and South Korea cutting back on the FDI into their neighbour.
“I think, one (factor) is cost and the other is diversification. You don’t want all your investments in the same country. People do want to diversify away from China. They don’t want to be over-reliant on China,” said Ravi Vish, MIGA chief economist and director, economics and policy group.
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And the possibility of ‘fat tails’, he added, “could be a potential risk in China because it is a centralised system”.
“Looking at West Asia, people would be saying ‘Look, can this happen in China?’ Things like that are potentially possible in China,” Vish said.
Moreover, rising labour costs and high inflation in China are also playing their part in dissuading further foreign investments and the seepage may not stop soon.
“It is an interesting trend because China’s labour costs have been increasing on a regular basis, higher inflation and also I think the labour market is getting tapped out, at least on the eastern side. Vietnam has emerged as a very important destination because of labour costs but also other countries like Philippines and Thailand. We see that trend continuing,” added Vish.