China Plus One – Where Foreign Investors Are Really Heading in Asia

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CDE Op-Ed Commentary

Dezan Shira & Associates have just completed their 2015 annual meetings, this year held in Shanghai. Two days were given over to market analysis of foreign direct investment in the Asian region. Although 2015 represented a fairly tough year for foreign investment in China, several interesting trends have emerged, not least surrounding the so-called “China Plus One” strategy, which loosely describes the investment trends of foreign investors in China adding capacity in other, non-China Asian markets.

The practice researched the alternative Asia locations of some 1,500 of its larger China based clients, whose original investment base is typically the United States or Europe. The survey produced some unexpected results: 

Foreign Investors in China – The Most Popular Secondary Investments 

Hong Kong: 17.4%
India: 15.5%
Singapore: 12.7%
Malaysia: 6.8%
Thailand: 5.6%
Vietnam: 5.2%
Indonesia: 4.8%
Philippines: 3.8%
Cambodia: 1.3%

The Hong Kong ratio of 17.4 percent is explained by the typical use of a Hong Kong holding company as an investment vehicle for foreign investors to use for funneling investments into mainland China, as there are tax benefits in doing so. Singapore also provides a similar option. Both are de facto Asian investment capitals, home to thousands of foreign invested regional HQs as well as a plethora of service industries to support FDI into China and the Asian region. We have previously compared Hong Kong and Singapore as holding jurisdictions for investment into China and Asia here.  

The surprise came in the popularity of India, where 15.5 percent of all foreign investors in China have now established operations, making it a more popular secondary investment destination than the large ASEAN markets of Malaysia, Indonesia, Thailand and Vietnam. That is also borne out by the increase of readership traffic to our sister India Briefing website, which has grown by 28 percent year on year and is our fastest growing online intelligence resource. 

Related Link IconRELATED: Getting Into Asia – The India Option

Although India is still viewed as a difficult destination for foreign investment – and navigating its bureaucracy is certainly not easy – it is worth remembering that India overtook China as the world’s fastest growing economy in Q4 last year, a position it has held onto with quarterly growth figures ranging from 7.4 percent to an impressive 8.2 percent. According to the Financial Times, in the first half of 2015, India also surpassed China as a destination for FDI, attracting US$31 billion in investment compared to the US$28 billion attracted by China.

The reasons are clear. Not only is India’s impressive GDP growth rate now outstripping China’s, meaning a higher rate of return on investment, other benefits are also starting to kick in. The average wage of an Indian semi-skilled worker is just 20 percent of that in China, and India has the only workforce size in the world comparable to China, with some 450 million workers in its labor pool. While the corporate income tax rate is higher than China’s, once incentives are taken into account, the effective income tax rate is about 23 percent – lower than China’s base rate of 25 percent. India has also announced a cut in its base CIT rate to 25 percent taking effect in Q2 next year – making the Indian investment environment even more attractive. Coupled with this, India also has a significant middle class consumer market, and while it is the Chinese consumer base that has generated all the media headlines, India’s middle class consumer class is actually about the same size at 250 million.  

The results of our survey of our clients therefore provides definite proof that FDI into India as an alternative destination to China is real and is growing – these are definable bricks and mortar investments. Meanwhile, the hangover from China’s slowdown has also impacted upon ASEAN, although growth there remains reasonable. Malaysia, Thailand, Indonesia and Vietnam have all proven reasonably popular, with an average of five percent of all China foreign investors having also set up operations in one of these countries. We feel, however, that it will be Vietnam that really takes off next year – ASEAN Economic Community compliance, a reduction in corporate income tax rates and the pending TPP trade deal all look as if they will have a considerable impact on China investors looking to increase manufacturing capacity elsewhere in Asia. The final word on India comes from Dezan Shira & Associates’ Country Manager, Rohit Kapur, in Delhi: “India is at about the same level as China 20 years ago. The market is still somewhat fragmented, but a desire for reform is now underway and incentives for foreign investors to enter the market are improving. India will not be quite as spectacular as China has been the past three decades, but it has a reliable and independent legal system and offers good production value at the moment. These figures demonstrate that India is now a real alternative market to the increasingly expensive Chinese economy.”

Chris Devonshire-Ellis
is the Founding Partner of Dezan Shira & Associates – a specialist foreign direct investment practice providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam, in addition to alliances in Indonesia, Malaysia, Philippines and Thailand, as well as liaison offices in Italy, Germany and the United States. For further information, please email or visit

Chris can be followed on Twitter at @CDE_Asia.

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