In _China_ , investment growth slowed sharply from a 22.8 percent peak in 2009 to 6.5 percent on average, in 2015-16. The deceleration reflected a rebalancing towards more sustainable growth. The rebalancing of the economy has involved a shift from capital accumulation (in excess of 40 percent of GDP) and exports to domestic consumption, and from manufacturing industry to services. By 2015-16, the drivers of investment growth had changed. Large debt stocks resulting from record-high credit growth in 2010-13 continue to weigh on investment growth. Nevertheless, China’s investment rate remains elevated at 43 percent of GDP in 2016.

Until 2015, _commodity importers other than China_ faced investment headwinds from tight monetary, fiscal, and prudential policies that were designed to contain rapid credit growth. Also, the uncertainty due to political problems in Thailand and delays in investment project approvals in the Philippines held back investment in these countries.

In _commodity exporters_ in the region, investment growth slowed sharply during 2012-14. In large commodity-exporting economies (Indonesia and Malaysia), this slowdown mainly reflected policy tightening in response to financial market stress during the 2013 Taper Tantrum, and to weaker terms-of-trade as a result of declines in commodity prices (especially raw materials, fertilizers, metals and minerals) from their early-2011 peaks. In smaller, more heavily commodity-dependent economies, investment contracted as FDI for mining sector projects declined, and as domestic policies tightened sharply in response to balance of payments stress (World Bank 2015b).

Since 2015, investment growth has begun to recover in the EAP region, with the exception of China, where it stabilized at around 6.5 percent (Figure 6). This has reflected a number of developments: stabilizing commodity prices; more accommodative policies amid low inflation and benign global financial conditions; and buoyant FDI. Various factors contributed to the increased FDI: a reduction of political turbulence in Thailand; improved prospects for electronics manufacturing under WTO membership for Vietnam; and the opening up in Myanmar that began in 2011. In China, the composition of FDI has shifted from manufacturing—held back by rising wages and production costs, especially in coastal regions—towards services, and from lower value-added products towards higher value-added products such as cars (UNCTAD 2016).

# **II.2. What are the remaining investment needs in the EAP region?**

_Infrastructure needs and priorities._ Income and demographic shifts, and rapid urbanization are the three main forces driving investment needs in the region (World Bank 2015c, 2016b). Rapid urbanization, large-scale migration, and population aging place heavy strains on urban infrastructure for housing, transportation, healthcare, and education. Meeting the growing demands of these forces requires choosing a balance between economic growth and environmental protection (ESCAP 2015).<sup>4</sup> Estimates of costs vary widely (Inderst 2016; Bhattacharyay 2012; McKinsey 2014). The largest costs involve road construction and upgrading, energy infrastructure, and real estate development (McKinsey 2014). The region shows a significant disparity in density and quality of transport networks, electricity provision and housing, with greater gaps in China,

> 2 For example, in addition to 170 cities in China with populations exceeding 1 million, China is expected to gain 292 million city dwellers by 2050 (World Economic Forum 2015).

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