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China as the center of Asian economic integration
Eric Teo Chu Cheow
8/6/2004

Increasingly, China is being perceived as the locomotive of Asia's economic growth and development, as its imports and trade deficits (with most Asian countries) are helping to fuel the economic recovery and growth of its smaller neighbors. Even Japan has acknowledged that its economic recovery last year has been due in a large part to its massive exports to the Chinese market. Japan's traditional trade deficit with China could even become a trade surplus for the first time this year.

In terms of economic modeling in Asia, a new regional factor has been acknowledged as having a profound influence on the emerging East Asian socio-economic model. There has been a clear shift away from the "flying geese" model of vertical economic integration, which was centered on Japan through capital flow, technological transfer and supply of manufacturing parts. This model was also based on market exchange and a clear regional division of labor and production networks (thanks primarily to the expensive cost of production in Japan and the strength of the yen after the Plaza Agreement).

According to an ADB Institute Research Paper, published in Tokyo in January 2003, this regional model appears to be shifting towards that of "bamboo capitalism" or "parallel development." Based on foreign direct investment (FDI) flows in the region, which create intricate intra-regional production networks, "bamboo capitalism" also focuses on the exchange of parts, components and other intermediate products, and hence a "horizontal network of trade and capital" with China at its core. This FDI-driven supply chain has indeed created diverse and vibrant local industries around the East Asian region; the further the supply chains are decomposed and extended geographically, the faster and more profuse the proliferation of new enterprises and FDI flows across East Asia. There is therefore a new division of labor and production across East Asia, "centered" on China.

Based on the shift from "flying geese" to "bamboo capitalism," the Japanese model of regional "integration" has been called into question, as production networks expand horizontally, and as the social dimension increases in the East Asian economic model. This dimension is especially highlighted in post-SARS Asia. Any future East Asian model would have to better integrate the social dimension into its economic modeling, thus reducing the influence of the "pure" U.S. model, based solely on productivity and shareholders' value. The ultimate East Asian "economic integration model" would need a firm social basis, otherwise, Asian socio-economic development, given its traditional communal base, may not be sustainable in the long run. It is here that China's socio-economic development could play a key role in helping mould a "common" East Asian socio-economic model for development.

The rise of economic nationalism, given the propensity of East Asia to boost domestic demand and growth, has clearly dampened its enthusiasm to be wholly export-oriented. Instead, East Asian countries have seen the importance of building up domestic consumption, as their citizenry becomes more "enlightened" (vis--vis the authorities) and emerge as informed consumers and voters that governments need to court in the post-Crisis and post-SARS East Asia of today. To build up domestic consumption further, more social equity and re-distribution would have to be meted out, thus balancing American productivity and hard-nosed capitalism with the Europeans' "softer social model," based on developmental rights, social equity and societal priorities. East Asia's socio-economic modeling is therefore consolidating, together with rising East Asian regionalism. But central to this Asian regionalism and integration is the growing realization from within Asia that China would be the key and centerpiece of this whole process.

There is indeed potential for a China-led socio-economic growth model. Based on the China-ASEAN FTA (or "ASEAN+1"), there seems to be ample scope for a building-block process of networks of partnerships across East Asia directed and dictated by market forces. The central focus in this case would be to tap the vast potential Chinese market, especially as it develops westwards in its "Go West" policy, consolidates in the Northeast "Rust-Belt" and undertakes its three "long" reforms (agriculture, peasants and rural development). Japan, South Korea and ASEAN could tap into Chinese markets, as China attempts to "bring out" its 900 million peasants into the world of consumerism; through greater economic and monetary cooperation, trade in goods and services, as well as investments, could be enhanced, especially as China modernizes its economic and social structures. ASEAN, South Korea and Japan would then have to dovetail their industries and "plug" them into the Chinese market, looking for "niches" in China's industrial and economic development strategy.

This new regional division of labor in-the-making could also include more mobility in terms of human resource deployment, out-sourcing in third countries within the region and flexible supply and logistical chain management. The Chinese reckon that the "ASEAN+3" framework (comprising the ten ASEAN countries, China, Japan and South Korea) could be built upon a successful ASEAN-China FTA, as the first building block or initial foundation for regional cooperation. The Chinese envision that the Koreans and Japanese would eventually join in, thus building a greater East Asian Cooperation Entity on the "ASEAN+3" framework. Hence China intends to "grow" the "ASEAN+3" framework from what they now affectionately call the "ASEAN+1."

The basis for an ASEAN-China FTA or Economic Partnership is premised on the need for China to ensure that there is stability in its southern flank (in ASEAN) for its own developmental goals and objectives. Its willingness to accord special "early harvest" privileges to the ASEAN countries for agricultural products and "Most Favored Nation (MFN) facilities" to Cambodia, Laos, and Vietnam (even before they join the WTO and ahead of reciprocity from them) was a major Chinese concession. China has faced some internal pressure, but given its strong commitment, it should be able to accede to these "concessions," namely more access to the Chinese market by ASEAN, as a political gesture to the latter. Chinese investments abroad are expected to increase, as China takes a larger stake in key areas and sectors in ASEAN countries, like the purchase of Spanish Repsol by CNOOC for US $600million, thus giving China a strategic foothold in Indonesia's oil industry. Chinese ODA would also increase towards the less developed countries in ASEAN in order to help encourage the implementation of the ASEAN-China FTA/Economic Partnership, thus increasing China's stake, bargaining power and influence in the region.

By building on the ASEAN-China FTA instead of competing outright within the region, other countries would try to complement and satisfy China's vast potential needs and tailor their niche industries accordingly. Japan could offer high-end technological industries and research, as well as provide capital and financial services, whereas Singapore and South Korea would plug into China's needs for hi-tech industries and services of all sorts. They could also take in Chinese labor and students. Mid-range economies, like Malaysia, Thailand, Philippines and Vietnam would have to find niche markets and "chain component manufacturing niches" to be effectively competitive, like in agricultural products and their derivatives; Indonesia and Malaysia already have a place in supplying China with oil, gas and palm oil. These countries could also be potential tourism markets for enriching the Chinese, who thirst to travel abroad; last year some 10 million Chinese are supposed to have traveled abroad, with some 1 million of them visiting Singapore, Thailand and Malaysia.

This model of centering common growth in East Asia on China and its potential economic development is de facto gathering pace, especially if China manages to maintain its phenomenal 7-9% economic growth annually for the next ten years and beyond. FDI would continue to flow into the region and their direct or indirect spin-offs could trickle down to peripheral countries in terms of goods, services, tourism or educational needs. In fact, China has reported that its trade in 2003 totaled some US$400 billion and investments reached almost US$53 billion, both figures having increased substantially from 2002. Growing monetary stability, as a result of the ChiangMai initiative and the bilateral swap agreements, should enhance financial flows throughout the region. It is foreseeable that China could eventually lift the inconvertibility of the Chinese Renminibi (RMB or yuan) for capital accounts, once stability is achieved and as the economy grows further. By that time, the RMB together with the Japanese yen could form the basis of a common Asian currency, especially if their combined reserves amount to half of the world's total monetary reserves.

Economic and monetary cooperation in East Asia is set to grow and intensify. But the East Asian model for economic and monetary cooperation would be less of an institutional model (as in Europe) than a functional one. Whatever its future modality, Asian integration appears to be centered on a China-inspired East Asian growth. The "ASEAN+3" framework should constitute the primary vehicle to drive this economic and monetary cooperation forward and China is already playing a key role in Asia's budding economic integration.

Dr Eric Teo Chu Cheow, a business consultant and strategist, is Council Secretary of the Singapore Institute for International Affairs (SIIA).

This article appears on AFAR with permission from Jamestown Foundation, China Brief.

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