Ongoing geopolitical tensions between the U.S. and China have resulted in significant shifts in global capital flows, with India and the ASEAN (Association of Southeast Asian Nations) region emerging as primary beneficiaries. This trend, highlighted by a recent Moody’s report, underscores how political friction is reshaping investment landscapes, particularly as global companies and investors seek to diversify their exposure from China amid rising risks.
Rising US-China Friction and Its Economic Repercussions
The escalating trade wars, technology restrictions, and political tensions between the U.S. and China have amplified uncertainties for businesses operating in or relying on Chinese markets. This friction, intensified by tariffs, sanctions on technology, and recent concerns over the reliability of Chinese supply chains, has made investors wary of concentrating their capital in China. Companies are increasingly adopting a “China Plus One” strategy, where they maintain a presence in China but explore other regions to minimize risks and diversify their supply chain dependencies.
India and ASEAN: Rising Destinations for Global Capital
In response to this shift, India and the ASEAN bloc are drawing attention as viable alternatives. Both regions offer competitive advantages such as burgeoning consumer markets, young workforces, and rapidly growing economies, which appeal to global investors.
India, in particular, has been positioning itself as an attractive destination for manufacturing and technological investments. Its government initiatives like “Make in India” and the production-linked incentive (PLI) schemes have succeeded in luring foreign direct investment (FDI), especially from companies seeking alternatives to China. In FY 2023, India received FDI inflows of approximately $71 billion, with significant contributions from technology and manufacturing sectors. The country’s focus on digital infrastructure and green energy also offers fresh avenues for capital inflows as companies seek sustainable investments.
ASEAN economies, including Vietnam, Thailand, and Indonesia, have similarly become strategic hubs for industries like electronics, textiles, and machinery. Vietnam, for example, has witnessed a sharp uptick in FDI, with the first half of 2023 recording nearly $15 billion in foreign investments, particularly in electronics and high-tech industries. Investors value the region’s access to multiple free trade agreements, which provide an advantage for manufacturing exports.
Key Sectors Benefiting from this Capital Realignment
- Technology and Electronics: The global semiconductor shortage has forced companies to diversify their production bases. India’s semiconductor strategy and the rapid expansion of electronic manufacturing services (EMS) in ASEAN are set to benefit from this capital realignment. Apple, for instance, has already begun expanding production in India and Vietnam.
- Automobiles and EVs: The electric vehicle (EV) sector is another key beneficiary. Both India and Southeast Asia are focusing heavily on EV production and infrastructure, with India aiming for 30% electric vehicle penetration by 2030. Foreign automakers and component suppliers are increasingly shifting operations to these regions.
- Supply Chain and Logistics: With companies reconfiguring global supply chains to avoid over-dependence on China, logistics infrastructure in ASEAN and India is set to receive substantial capital. Investments in ports, rail, and highways are critical to accommodating increased trade flows.
Challenges Ahead
While India and ASEAN stand to benefit from the capital exodus, they face challenges in ensuring this trend translates into sustained economic growth. India’s complex regulatory environment, infrastructure gaps, and land acquisition issues can hinder the scale of investment needed to replace China. ASEAN countries, meanwhile, must manage political risks and infrastructural constraints while competing with one another for foreign investment.
Conclusion: A New Phase of Global Capital Realignment
The intensifying US-China tensions are shifting the global investment paradigm, with India and ASEAN positioned to be major beneficiaries. However, the true potential of these regions can only be realized if they continue to improve their business environments, infrastructure, and policy frameworks. As businesses rethink their global strategies, India and ASEAN have a golden opportunity to attract long-term capital and become key players in the global economy.
