East Asia contains many of China’s strongest allies and trading partners, but also its greatest (potential) foes. There are flashpoints abound which could simultaneously spark regional conflict as well as derail the Chinese economy and its global expansion. The Korean Peninsula, the Taiwan issue, and the dispute over the Spratly Islands are all manageable for now. In fact the threat of conflict has not hampered the economic performance of South Korea nor Taiwan with the two countries outperforming their peers economically in almost every respect. But conflict is not always predictable, and events could unexpectedly spiral out of control at any point.
These tensions aside, China has integrated strongly with East Asia, forming economic ties with the likes of Korea, Japan and Taiwan as well as South East Asian countries. Indeed, despite all the noise around growing ties with the US, Africa, and Latin America the majority of China’s overseas investment has flowed into East Asian countries. This trend has been accelerated by the growing prominence of ethnic Chinese businessmen in countries such as Singapore, Malaysia, and Indonesia. As China becomes more successful, suspicions rise of their economic and political intentions towards these smaller nations. Many countries in Asia have military and political alliances with the US. This raises the question as to whether these alignments will come under threat as Chinese power grows, or if the region will cling to existing alliances due to fear of China’s embrace.
Sino-Japanese relations have been poor since the Second World War. Now arguments over infinitesimal islands have perhaps obscured the bigger picture of a China in economic ascendancy, steadily overshadowing its neighbor to the east. Japan had been the most powerful economy in the region for a long period of time. Although the amount of business and trade conducted with China has been significant and highly beneficial for Japan, the pride of the nation’s leaders has no doubt been fractured by their loss of economic superiority over the region.
However stand further back and things look begin to look slightly different. Japan has a strong alliance with the US together with other smaller regional allies such as South Korea, Thailand, Australia and the Philippines. This means that the US remains the hegemonic power in the region. China has close relations with the likes of Cambodia, North Korea and Laos, but these are minnows in comparison to other nations in the region. In short, China is an economic giant, but is not yet as politically powerful as its profile would suggest.
China’s trump card is its economic heft. Its huge demand for the likes of wood, oil, and metals means that those same countries who are the “beneficiaries” are also the “victims” depending on your viewpoint. China’s banks are also taking on a greater role in financing infrastructure projects throughout the region. The newly founded Chinese dominated Asian Infrastructure Investment Bank (AIIB) will cement this impression. The sum of the expansion of FDI, trade, and finance means that China’s economic footprint in the region is becoming ever more significant. Eventually this commercial influence should translate into more political power. However, Beijing will be torn between enjoying the US led peaceful status quo – which has allowed them to prosper – and asserting themselves more vigorously. The latter could potentially provoke a backlash with inevitably negative economic consequences.
China is still reaping the benefits of the current US dominated system of global trade and investment, but at the same time challenging it by setting up new institutions to pushing its own interests in defiance of the US.
From a commercial point of view China looks set to continue their investment charge across the region, which will have various “knock on” effects and see certain trends begin to emerge.
First, investment in agricultural assets will grow thanks to China’s declining agricultural output along with rising demand for foodstuffs. China Highland Capital Management was formed with the backing of the southern province of Yunnan, and will inject as much as USD 2.4 billion into agribusiness and natural resources in neighboring countries. We can then expect this to be repeated across Asia and other parts of the world. While some of this demand will be met in Latin America and Africa, the majority will be met within the region, which will be a boon for regional food producers in the region.
Second, there will be a growing trend towards offshore production facilities in Indonesia, Myanmar, and Cambodia as the “end of Cheap China” arrives. Rising production costs in China combined with the government’s desire to become a more innovative economy will force the dirtier, low-tech, margin manufacturing to relocate to less expensive shores. This process has already begun, but as China is the world’s biggest manufacturer, the transition will be ongoing for decades to come.
Offshoring also represents a threat though. Industries such as garment manufacturing, plastics, shoe, leather and so on are difficult to justify on labor and environmental grounds. They cause pollution and workers have to toil for long hours in miserable conditions. The advantage is that the country begins its journey to developing an industrialized economy, much in the same way that the British, Germans, and most recently the Chinese have done.
Merlin Linehan has worked in development finance within Eastern Europe and Asia, and spends much of his time investigating the risks and opportunities that are created from the ongoing expansion of Chinese businesses that invest overseas in emerging markets.
This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.