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Fear of Terrorists May Push Investors Toward China - 2002-11-09

Regional surveys indicate growing pessimism about the risks of doing business in Southeast Asia following the recent terror bombings in the region. Analysts say security fears will push investors toward China - which is seen as a more secure business environment.

Foreign investor confidence in Southeast Asia is another casualty of last month's bombing on the Indonesian island of Bali.

The October 12 bombing at a popular tourist nightclub left almost 200 people dead, most of them foreigners. It has shaken regional confidence, especially among foreign business people. Bomb attacks in the Philippines last month add to their worries.

Recent business surveys show that many companies are increasingly worried about security in the region. Economists forecast lower foreign investment and slower growth in Southeast Asia, partly as a result of the bombings.

One survey by the International Air Transport Association finds that more companies are cautious about having staff travel to Southeast Asia since the Bali bombing.

Thomas Verlohr, managing director of Commerzbank in Singapore, says security is now foremost in the minds of business travelers in the region. "To tell you the truth it wouldn't matter to me personally in Asia anywhere I would go, but I certainly would like to avoid places like a nightclub or discotheque you had in Bali where 90 percent [of the visitors] were foreigners," said Thomas Verlohr.

A survey by the Political and Economic Risk Consultancy, or PERC, in Hong Kong found a mood of pessimism over rising external security risks, especially among business people from Australia, the United States and India. About half the casualties in the Bali attack were Australians.

PERC managing director Bob Broadfoot says the bombings in Bali made Australians and Americans simply feel more vulnerable. "Terrorism is a global problem and it has a potential to hit a country like Australia in a way that people weren't anticipating," he said.

As a result of those fears, economists expect to see capital shift rapidly away from Southeast Asia. Analysts say much of that money is likely to go to China.

Businesses find China appealing for two reasons. First, it has cheap labor. Second, China has an authoritarian government that closely controls who enters the country. Unlike the porous borders of Southeast Asia, it would be relatively difficult for potential terrorists to move in and out of China.

Cliff Tan is a senior economist in Singapore for investment bank Salomon Smith Barney. He says Southeast Asian countries may find they face a more difficult time in attracting much needed foreign capital. "I think its almost unavoidable that this tragedy [in Bali] is going to have some dampening effects over, say, a six-month horizon on foreign investment coming into Southeast Asia - including both direct and portfolio investment," said Cliff Tan.

Mr. Tan says until the investigations into the Bali bombing are done, businesses will hold off on new investments. As yet, no one has taken responsibility for the explosion and investigators are still tracking possible suspects. "It's also impacting - I believe - some regional domestic plans or business expansion and new lines of business," he said. "That will probably have an impact on growth somewhat larger than has been factored into the market so far."

While foreign businesses are not likely to entirely write off Southeast Asia, PERC's Bob Broadfoot says security concerns are now more important in investment decisions - especially when considering China. "To the extent that foreign businessmen are treating security much more as a strategic consideration than they used to, it's likely to make China look that much better relative to Southeast Asia," he said.

The bottom line, analysts say is that Southeast Asia's security concerns will enhance China's regional position just as the country is set to become a major driver of global economic growth.