China: Will Asia's 800-Pound Giant Crush Its Neighbors?Published: January 22, 2004 in Knowledge@Wharton
The answer, according to panelists at last month’s Wharton Asia Business Conference, is no. To be sure, they said, China’s neighbors will have to contend with its new economic muscle, but they won’t necessarily be injured by it, at least not in the long term. “I’m bullish about China’s growth,” said Heng Chee, Singapore’s ambassador to the United States. “It makes China a status quo power, giving it a stake in the world’s stability. It will spur Japanese economic reform, too, as Japan retools to compete. And it will keep the U.S. engaged in Asian growth.”
Yet China’s economic emergence is indeed shaking up the region, noted Yongzheng Yang, a senior economist who specializes in trade policy for the International Monetary Fund. Foreign direct investment, he added, is shrinking in other Asian countries even as it grows in China, which suggests that dollars are being diverted to China from elsewhere in the region.
What this means, according to Yang, is that China’s growth is presenting its neighbors with new economic opportunities. “China is sucking in imports – which are compensating for the diversion – and will continue to do so” as it seeks raw materials, especially minerals, for its manufacturing sector. Thanks to their proximity, China’s neighbors are well suited to provide these goods. “Chinese imports are increasingly coming from developing countries,” Yang added.
Chee put it another way. Growth, she said, isn’t a zero-sum game; as China’s economy expands, its neighbors’ economies can expand too. And despite what has seemed to be a tradeoff between China’s growth and the rest of the region’s, “foreign direct investment in ASEAN [the Association of Southeast Asian Nations] decreased not because of China but because of the Asian financial crisis,” she pointed out. “If you look at the amount of foreign direct investment that China gets and its share of world GDP, they are not out of proportion.”
What’s more, the threat of Chinese growth may be an idea that came about because of insufficient analysis. Many commentators overstate the importance of China’s cheap labor, said Jiro Suzuki, managing director and CEO of Malaysia Debt Ventures Berhad. Granted, China’s labor edge is intimidating; its labor costs, for example, are one-twentieth of the United States’ costs and 20 million new laborers are migrating annually from its countryside to the cities. That supply of new workers should prevent wage inflation and help China sustain its competitive advantage. Manufacturing sectors that require substantial labor probably will continue to migrate there.
“But labor costs aren’t the whole story,” Suzuki said. “You have to look at the entire value chain, the total cost of production, which includes legal costs, intellectual-property protection and logistics.” IBM, he noted, engaged in that kind of calculus when it moved a factory from Malaysia to China – and then moved it back again. “Though China’s labor was cheap, other costs were more expensive.”
Malaysia, for its part, is responding to China’s challenge by trying to “complement, not compete,” Suzuki added. “It’s trying to move into higher value-added” goods and services and looking for opportunities to do business with the Chinese people living in Malaysia.
Stoyan Tenev, chief economist for East Asia and the Pacific at the Washington-based International Finance Corp., agreed that the overseas Chinese will be key players as China and its neighbors build economic links. Indonesia and the Philippines – in addition to Malaysia – are home to substantial numbers of ethnic Chinese. “These countries will be able to use overseas Chinese as a gateway to China,” said Tenev, whose organization is an affiliate of the World Bank. To the extent that they do this, they will be pulled along by China’s powerful economic engine.
China, of course, has its own challenges to face, even though it’s often portrayed as a monolithic economic bulldozer. “China isn’t one economy,” Yang said. “The coast is different from the inland. Beijing is different from Shanghai. There are huge disparities in China.” The Chinese government will have to grapple with those disparities, such as finding ways to ensure that the people in its rough, rural west participate in its new prosperity.
In addition, China still has to convince its global trading partners that the country has fully embraced the rule of law. It would only take another incident like the government’s brutal response to the protests in Tiananmen Square in 1989 to chill trade with the West. The Chinese regime will have to allow its citizens more freedom if it expects them to grow into entrepreneurs in knowledge-based industries, Chee said. “Can an authoritarian regime change enough to deal with innovation in biotech, in information technology?” she asked. “Yes, but that change won’t come easily.”
Moreover, as China tries to build its information technology industry, it is demanding concessions that not all companies will be willing to give, said Paul DiPaola, a managing director at Bain & Co. “You don’t get access to China’s markets without giving something in return,” he noted. Microsoft gave $200 million worth of software at a time when the Chinese are looking to create a local software business, DiPaola noted. “For Microsoft to get enforcement of its licensing agreements, it’s going to have to invest in the local software business.”
In the end, China’s economic growth is probably neither the unalloyed good that its boosters claim, nor the danger that its detractors predict. “People tend to get carried away sometimes,” Yang said. “China’s growth will moderate. There is overcapacity in the manufacturing sector, so growth there will slow. China won’t grow as fast as it has.”
Yet over the long run, even a Chinese economy that’s growing more moderately can serve as a counterbalance to the zigs and zags in the U.S. economy, he pointed out. “China’s growth came as the U.S. economy was slowing down. So it happened at the right time. It acted as a stabilizing force. China’s growth adds another engine to the world economy.”