Once a Savior, It Now Saps Region's Recovery : China's Growth Weighs On Neighboring Countries
International Herald Tribune
August 18, 2001
Michael Richardson 

CORRECTION PUBLISHED IN THE INTERNATIONAL HERALD TRIBUNE DATED August 24, 2001: An article Saturday about the effect of China's economic strength on its Asian neighbors overstated the amount of production that ON Semiconductor Corp. will shift from Malaysia to China. The move will involve only some of ON's operations in Malaysia.
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From the shadow of the global downturn, China has emerged as the sole beacon of rising economic power in East Asia as the rest of the region struggles to escape recession.

But an increasing number of observers fear that China's rise harbors a dangerous paradox: Rather than helping to pull East Asia out of the doldrums, as it did during the 1997-1998 financial crisis, the world's most populous country is instead developing into a major business competitor, depressing growth in nearby countries.

During the previous crisis, neighbors looked to China, as well as to the United States, as locomotives to pull them out of trouble. This time, with the U.S. economy out of steam and Japan stalled as it has been for a decade, China's growth is blamed for drawing investment, business and jobs away from countries as far apart in distance and development as Japan is from Indonesia.

"In the short run, China's emergence is triggering a second Asian economic crisis more severe than the first," said Kenichi Ohmae, the managing director of the business consultancy Ohmae & Associates in Tokyo. "But unlike the currency speculators who triggered the 1997 crisis, China won't go away."

China's phenomenal expansion — growth is expected to exceed 7 percent in 2001, as it has each year for much of the last generation — and huge domestic market are likely to get a further boost if the country joins the World Trade Organization in November, as expected. That would allow it to tap more fully into the global trading system.

Sensing major investment opportunities from the WTO ruling, foreign companies are moving faster than ever to expand business operations in China. The latest government figures show that planned foreign direct investment almost doubled in July, while contracted foreign investment, an indicator of spending in coming months, rose 98.6 percent from a year earlier last month. Cumulative foreign direct investment in China now amounts to over $350 billion, swept in from companies in Taiwan, Hong Kong, Japan, Singapore, the United States and Europe.

The Chinese production economy is "about to explode with accelerating vitality, and the rest of the world is unprepared for it," Mr. Ohmae said.

Chinese companies, he said, are developing innovative, low-cost export businesses that compete in many of the areas — including electronics — that the so-called tiger economies of Singapore, Hong Kong, Taiwan and South Korea used as springboards to economic strength.

"China is rapidly supplanting industries that took other Asian countries 15 years or more to build," Mr. Ohmae said. "Some countries like Japan, Singapore and Taiwan are being hit much harder by this new competition than they were by the economic crisis in 1997."

According to Ernest Bower, the president of the U.S.-ASEAN Business Council, most economic sectors in Asia have experienced a reversal of the situation in the early 1990s, when more than 70 percent of East Asia's foreign direct investment went to Southeast Asia and less than 30 percent to China.

"Today, China receives over 70 percent and Southeast Asia gets less than 30 percent," he said.

The Asian tigers are not the only ones to have been taken by the tail.

Malaysia — a major manufacturing base for many U.S. multinationals since the 1980s — is one of the smaller East Asian economies now losing out to China. For example, Astec Advanced Power Systems Sdn. in Penang announced recently that it would shut two electronics plants, shedding at least 1,000 jobs, and move them to China and the Philippines.

ON Semiconductor Corp., a global supplier of high-performance integrated circuits and computer chips, said it would shift its three manufacturing plants from Malaysia to China by early 2002, but with no major job losses. Its chief executive, Steve Hanson, said that the company had decided to consolidate its chip assembly and testing in China because its plant at Leshan, in Sichuan Province, had shown that it could produce "world class quality products at benchmark cost levels" since it opened in 1995.

During a recent visit to Malaysia, a leading U.S. business lobby group, led by Mr. Bower, urged Southeast Asian countries to hasten toward regional economic integration — a concept that has been lurking for several years but has failed to take off. If members of the Association of South East Asian Nations fail to make the region more attractive to investors, the business group said, they risk spurring a further flight of foreign direct investment to China.

"We're afraid that there will be a continuation of foreign investment flows going to China, rather than coming to Southeast Asia," Mr. Bower said after the group met with the Malaysian prime minister, Mahathir bin Mohamad.

Taiwan has already gotten a bitter taste of this trend. The island made itself into the world's No. 3 producer of computer hardware over the last two decades, enjoying growth rates in the sector of about 20 percent annually. That was until last year, when China surpassed it, boasting annual output of $25.5 billion, compared with $23 billion from Taiwan.

Stan Shih, chairman of Taipei-based Acer Inc., the No. 3 maker of personal computers worldwide, cautioned that the country's information technology sector would have to reinvent itself by moving away from a dependence on manufacturing to more reliance on design and services. If not, the industry is in danger of losing its competitiveness, he said.

"We must transform fast enough," he said. "If we are too slow, we will be quickly overtaken by China."

The Singapore government has issued similar warnings to industries based there. "In the short term, the entry of a major player into the market will mean dislocation, as industries restructure and relocate, and patterns of trade change," said Lee Hsien Loong, the deputy prime minister. "Countries which are in the same market, competing head-on with China, may suffer painful adjustments."

Japan is a prime example of the "hollowing out" of industries that fail to insulate themselves against Chinese competition. Though a regional powerhouse a decade ago, Japan has still not fully healed from the blow dealt to its manufacturing base as its factories, seeking cheaper production costs, migrated to China to fashion goods that were then shipped back to Japan for sale.

Despite the short-term threats that China's economic growth poses to the region, there are some positive side effects, Mr. Lee said. As China increases exports, it will also import more, making it a bigger market that offers greater investment and trading opportunities for other countries.

As a result of such growth, he said, China's wages — and probably its exchange rate — will rise, narrowing its cost advantage and bringing the international trading system to a new equilibrium. "However," Mr. Lee said, "this is a long-term, Olympian view."

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