A strong China may give boost to its neighbors
International Herald Tribune
January 23, 2003
Thomas Crampton

Asia may be the brightest spot in the world economy, but within the region many now wonder how other countries can survive in the shadow of China's growing economic might.

Growing at an average of more than 7 percent annually, the Chinese economy has outpaced every economy in the region. Low wages, an abundant labor supply and a cheap currency have fueled fast export growth while the country's policy of opening up has attracted increasing amounts of investment.

In the early 1990s, Southeast Asia received the bulk of Asia-bound foreign direct investment from Japan and the United States, while China received the remainder. Today the situation is reversed.

China's factories have turned into workshops for the world, undercutting competitors around the region and producing increasingly complex high-tech products. The pull of China has been felt as far as Mexico, where Royal Philips Electronics last summer closed two thirds of its television production lines, relocating them to China.

Within Asia, Singapore's senior minister, Lee Kuan Yew, and Malaysia's prime minister, Mahathir bin Mohamad, have warned business leaders that they will face increased challenges as China grows.

For all the angst and fear, however, regional economists stress that an ascendant China will also bring opportunities to the region.

"People simplistically believe there will be a giant sucking sound as China absorbs Asian economies," said Jim Walker, chief economist for CLSA Emerging Markets. "The reality is that for every dollar of exports, China imports 92 cents."

These imports, Walker said, represent a growing trend of intra-Asian trade that is reshaping the region into an increasingly prosperous and China-centric economic zone.

Companies and countries that align themselves with the supply chain leading to China can find new benefit from China's growth, Walker said.

"China's renaissance is not a zero-sum game for Asia or the rest of the world," Walker said. "In addition to niche opportunities in other countries, increasing demand for all kinds of goods by China's growing middle class will open up."

In China, consumer demand has been fueled by a 17 percent annual increase of urban incomes since 1998. Rural incomes in China have risen 6 percent annually over the same period.

Walker also noted how increasing domestic demand throughout Asia has already fueled an intra-regional trade boom. In the decade before the 1997 Asian economic crisis, trade within Asia grew faster than any other component of Asian exports and eventually outstripped the size of exports to the United States. By 2001, intra-regional exports accounted for 34 percent of the region's total exports.

"The situation's reality is really quite contrary to popular perceptions," said Thomas Dawson, director of external relations at the International Monetary Fund. "China's gains have not come at the expense of labor-intensive Southeast Asian economies." Instead, he said, China and Southeast Asia have together displaced the more industrialized economies in sectors such as apparel, footwear and household products.

"This is a healthy rather than a disturbing development," Dawson said. "This mimics the earlier period when newly industrialized economies moved into industries relinquished by a more advanced Japan."

While the more industrialized countries have moved into sectors beyond the realm of China's manufacturers, many of Southeast Asia's labor-intensive industries will face competition with China.

Adjusting to the economic changes brought to Asia by the emergence of China may prove wrenching in some cases. Led by Mahathir, Malaysian policymakers leveled colonial-era rubber plantations to build industrial parks specialized in electronics manufacturing. Such projects symbolized Malaysia's economic upgrading from agriculture into the world of high-tech manufacturing.

With China's growing economic influence, however, interest in electronics manufacturing in Malaysia has waned while sales of decidedly low-tech palm oil to China have tripled in the last three years. Thailand has lost some manufacturing to China, but the country has experienced a surge in tourism from China.

"China will impose broad structural changes across Asia's economies," said Dong Tao, chief regional economist for CSFB. "There will be negatives and positives for many economies, you cannot simplify it into one bottom line."

One of the most certain changes, prompted by China's vast rural population, will be a lack of wage growth for unskilled labor across the region.

"Excess labor will flood the market for the next decade as China liberalizes the agricultural sector," Tao said. "The government's continued investment in roads and power supply will help make those rural labor pools even more accessible to factories."

Nonetheless, Tao does not expect China to replicate the rapid growth of electronics exports in other sectors. "Much of the fast growth in textiles, toys and electronics manufacturing in China was driven by the relocation of production facilities from Hong Kong and Taiwan," Tao said. "That will slow down for now."

The next stage of manufacturing will be driven by multinationals, Tao said, whose interest and presence are either regional or global.

"So far, the major multinationals have demonstrated an interest in diversifying geographically," Tao said. "Even with the fast growth of electronics manufacturing in China, countries across the region have also increased their exports."

Thomas Crampton is the International Herald Tribune's correspondent in Hong Kong.

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