The New Driving Forces of ASIA FDI

1. The New Driving Forces of ASIA FDI Narongchai Akrasanee, Ph.D. Chairman, Export-Import Bank of Thailand Former Minister of Commerce and Senator of Thailand International Conference Asia Expansion of FDI and Their Implication for the New Development of International Rules on Trade and Investment January 18, 2008

2. The New Driving Forces of Asia FDI • Financial Imbalances • New and Innovative Financial Products • Regional Trade Agreements • Challenges

3. I. Financial Imbalances • Huge US current account deficit, more than 50% with Asia and Middle East Source: Bureau of Economic Analysis, US Department of Commerce

4. I. Financial Imbalances (cont.) • Excess supply of capital in Asia and Middle East from persistent trade and/or capital account surpluses • Substantial accumulation of FX reserve making combined reserve of Asia and ME + Central Asia shared almost 90% of world total in 2007 Source: Regional Economic Outlook Oct 2007, IMF

5. I. Financial Imbalances (cont.) • Rapid growth of sovereign wealth funds (SWFs) from Asia + ME • SWFs’ total assets grew from $500 Bn in 1990 to ≈ $2.5 trillion by end-2007, and expected to reach $10-12 trillion by 2012 • Most of the large SWFs are held by Asian + ME countries • Fast growing local currency bond markets in East Asian countries --- 3 trillion$ by end Jun-07

6. I. Financial Imbalances (cont.) Major Sovereign Wealth Funds Source: “The world’s most expensive club”, The Economist, May 24th 2007

7. I. Financial Imbalances (cont.) Note : East Asia = China, HK, Korea, Indonesia, Malaysia, Philippines, Singapore, Thailand, Vietnam Source: Asia Bond Monitor, Nov 2007, ADB

8. II. New and Innovative Financial Products • Financial innovation + securitization process created new and various kinds of financial products, e.g. asset-backed securities, CDOs (Collateralized Debt Obligations) • Burst in US mortgage market + dubious financial products resulting in defaults and losses in financial institutions • Total US Subprime mortgage loan ≈ $ 2 trillion, estimated defaults ≈ $ 200 - $ 300 billion

9. II. New and Innovative Financial Products (cont) • Flood of SWFs from ASIA + MEinvesting in troubled financialinstitutions in US • Citigroup --- $ 7.5 bn from Abu Dhabi Investment Authority • UBS --- $ 9.75 bn from GIC of Singapore • Morgan Stanley --- will sell its 9.9% stake or $ 5 bn to China Investment Corporation • Merrill Lynch --- expected $ 5 bn investment from GIC

10. II. New and Innovative Financial Products (cont) • High P/E ratios of listed companies in China and India offer opportunities for FDI by these companies

11. III. Regional Trade Agreements • Increasing number of RTAs --- WTO estimated to have 400 RTAs in force by 2010, 90% will be FTAs • Ease barriers / increase investment facilities RTAs notified to the GATT/WTO during 1948-2007* Source : WTO * including inactive RTAs, by year of entry into force

12. IV. Challenges • Asian new money --- not only investing in Asia but outside Asia as well • Cash rich Singaporean, Chinese and Indian listed companies will continue to invest as Asia FDI • From private capital to state capital • 1980s --- Japanese investors bought US properties

13. IV. Challenges(cont.) • Early 2000s • Russian investors bought football clubs • Middle Eastern investors bought race tracks • Currently • Chinese cos. (e.g. Lenovo – IBM PC), Indian cos. (e.g. Mittal Tata, bought into foreign cos.) Generally no opposition

14. IV. Challenges (cont.) • 2005 - 2006 • CNOOC, China’s state-controlled oil company had to withdraw a bid for Unocal because of the national security issue • DP World, a firm backed by Dubai’s govt was forced to leave a deal to acquire American ports • Singapore Temasek’s buying of Shin Corp (Thailand) triggered political unrest in Thailand

15. IV. Challenges(cont.) • 2007 - 2008 • SWFs from China, Singapore and Middle East are buying troubled US financial institutions Will there be national protectionism? New global finance beyond IMF? Liberalization of trade in services outside WTO?