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China's Economic Boom Means Problems, Opportunities for Southeast Asia - 2004-09-30


The economic boom in China is causing concern in the export-oriented economies of Southeast Asia. However, China is taking diplomatic steps to make its expanding economic might less threatening.

For decades, Southeast Asian governments worried about only one Chinese export: communist ideology. They blamed China for fostering violent revolutionary parties around the region in the 1960s and '70s.

Now, leaders in Southeast Asia fear China's latest exports - billions of dollars worth of consumer goods ranging from simple plastic toys, to sleek household appliances.

China has become a manufacturing powerhouse, competing with factories around the region. It also competes for investment capital - Western investors have shifted money from Southeast Asia to China.

Li Nan, with Singapore's Institute of Defense and Strategic Studies, says China's size gives it unprecedented clout.

"The Chinese market is so potentially huge [as] to attract all the foreign investment to the point that Southeast Asian countries lose their jobs and investment capital," said Li Nan.

Manu Bhaskaran heads the Centennial business consulting group in Singapore. He says the shift of foreign investment to China is a short-term problem, due primarily to Southeast Asia's financial crisis of 1997, fears over terrorist attacks and last year's SARS epidemic.

"In the longer term, as large multinational companies find that they have sufficient exposure to China, then they will realize that there are very strong reasons to invest in Southeast Asia," said Manu Bhaskaran.

Mr. Bhaskaran says those reasons include the fact that Southeast Asia investments usually are more profitable over time than China projects, and that the region is more competitive in certain exports.

Analysts also note that China's weak legal system, rigid foreign exchange rules and poorly managed banks hinder foreign investment - giving Southeast Asia an edge.

The director of Hong Kong's Political and Economic Risk Consultancy, Bob Broadfoot, says Southeast Asian countries will have to adapt to compete with China. But overall, he says, China's growth is good for the region.

"Five years ago there was a great deal of attention on China as a threat," said Bob Broadfoot. "And now it just seems to be shifting 180 degrees to where everyone is really focusing on it as an opportunity."

Mr. Broadfoot says China is soaking up raw materials from Southeast Asia to feed its manufacturing and construction boom, which means many Southeast Asian countries have seen exports to China surge. And travel by China's growing middle class is bolstering the region's tourism industry, hard-hit by terrorism fears and SARS.

China is aware of its neighbors' fears, and over the past few years has worked to reduce them. Beijing is negotiating a free trade agreement with the Association of Southeast Asian Nations, ASEAN, which promises rapid benefits to the region.

On the security front, China has signed an agreement with ASEAN to defuse longstanding tensions over the Spratly Islands, tiny rock outcroppings claimed by several Asian governments.

Mr. Li at Singapore's Institute of Defense and Strategic Studies:

"Generally speaking, on both the security and diplomatic front China has been very proactive in alleviating the concerns of the ASEAN countries," he said.

Moreover, there are signs that Southeast Asia is not necessarily losing market share to China. China's exports to the United States, the world's biggest consumer market, jumped 28 percent in the first seven months of this year, but some Southeast Asian countries also saw U.S. sales rise, by as much as 15 percent in the case of Thailand.

Economists say the issue is not just rivalry and cooperation between China and Southeast Asia, it also is the fact that competition everywhere is becoming fiercer. Mr. Bhaskaran advises businesses to prepare.

"There will be a shakeout," he said. "There will certainly be pain, everywhere including in China, as this restructuring happens. But it will not be the case where China takes everything and nothing's left on the table for Southeast Asia. That's not reality."

China's economic power and political influence do weigh more and more heavily on Southeast Asia. But many experts, such as risk analyst Bob Broadfoot, say the nature of that concern has been changed, particularly as the region's exports to China have risen.

If you ask Asians, especially Southeast Asians, today what are they afraid of, it's not so much that they are afraid of China's success," said Bob Broadfoot. "It's that they are afraid of China's failure."

He says that if China's move to a market economy falters or fails, the repercussions for the entire region will be serious. As a result, China's economic boom is of less concern today than the possibility of an economic bust.

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