Impact of China trend on Asean

  • Business
  • Monday, 24 Mar 2003

MANY China observers have been warning of the red tide – not communism as feared decades ago – but fervent capitalism that is not slowly, but quickly and inexorably threatening to overwhelm South-East Asian nations that fail to react in time.  

It is estimated that Malaysia's overlap with China in manufactured goods is a hefty 40% to 50%. 

In a research report, JP Morgan noted that Asean economies offered fewer advantages and much lower potential than China.  

While lower-cost China is taking away Asean’s low-value-added production, the report noted that Asean except Singapore which relied on importing talent, was unable to graduate to higher value-added services because it had insufficient skilled labour. Even then, it noted that Singapore got pummelled in electronics export in 2000 when China muscled in on the sector. 

“Asean's share in emerging Asia's total electronics exports is destined to decline further,” warns JP Morgan.  

On the other hand, JP Morgan said that Asean was benefiting from the demand-pull created by the rise of China. While not as impressive as the jump in trade that has occurred between Taiwan and South Korea with China since January 1996, trade between Asean and China is up a solid 38%. 

The demand boost from China is powered by domestic consumers and export-related industries and is expected to benefit those economies that have reengineered their export sectors to take advantage of the rise of China.  

But JP Morgan noted that China’s shares of global GDP (3.7%) and global private consumption (1.8%) were still low compared to those of developed economies. Hence, emerging Asia remains vulnerable to changes in G-3 final demand, even with increasing support from China. 

HLG Research's Lars Henriksson thinks it is too simplistic to write Malaysia off at this point.  

“It is fair to say Malaysia is under pressure, but it is also equally fair to suggest Malaysia will do something about it and try to adjust to the new economic conditions,” he said.  

He cites four main “structural advantages” in Malaysia's favour. The country's institutional framework – schools, judiciary and intellectual property rights – is seen as more robust compared to China’s; its commodities (all things being equal, China with a comparative advantage in terms of labour costs would be less attractive if the cost of raw materials increases in the near term); geopolitical relevance (there is likely to be more trade with China, India and Japan); and China’s supply or logistics bottlenecks which needs to be addressed in the future. 

Henriksson has identified electronics, electrical products, auto-parts, automotive, and textile and apparels as sectors that will generally come under increasing pressure. (Timber, tourism, transportation, plantations, consumer products, petrochemicals, education and healthcare are sectors likely to benefit from the “China-trend”). 

As many have pointed out, China's road to riches is not paved with gold as the country is saddled with its fair share of problems.  

Ensuring a minimum growth of 7% is a constant challenge for the government bidding to head off growing unemployment. To fuel growth, the government has been running deficit budgets which have widened to as much as US$39bil. The robustness of its banking sector is also suspect and its financial institutions are believed to be sitting on mountains of bad debts.  

But perhaps the biggest minefield to the country’s stability is the yawning wealth disparity between the city haves and the rural have-nots. 

China’s headaches aside, Malaysia needs to look ahead to its own future. Along with a few other Asean nations, Malaysia has been sliding in the world competitiveness rankings while China has steadily marched on. 

National Economic Action Council executive director Datuk Mustapa Mohamed has stated that the comprehensive stimulus package soon to be announced by the government is likely to be the most significant economic policy announcement for the year.  

Should the government get it right, it could well be the most significant policy announcement for the country for years to come. 

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