China defies world economic slowdown

By Alan Wheatley

TOKYO (Reuters): It looks as though someone forgot to tell China that the world economy is slowing down.

To be sure, Beijing acknowledged this week when it reported 8.1 percent year-on-year GDP growth in the first quarter that it was not immune from global trends, but it still forecast growth for all of 2001 to be close to last year's eight percent clip.

That is a performance China's neighbors, hit hard by slumping U.S. demand, would die for and highlights yet again the policy challenges posed by the unstoppable growth of a country whose output will be as big as Japan's within a generation.

"Nobody should underestimate China's progress. The Chinese government is handling the transitions in its economy with amazing skill," said Sir John Bond, group chairman of HSBC bank.

"China's achievements over the last 20 years are remarkable. There is every likelihood that China will become an Asian -- and probably a world -- economic superpower over the next 20 years," Bond told a recent business conference in Tokyo.

The prospect of China's gigantic domestic market becoming an engine of growth for Asia is tantalizing, but in the short term the magnetic attraction of a cheap, well-educated labor force and pending entry to the World Trade Organization is making it hard for neighboring countries to keep up.

"With the better-than-expected Q1 growth numbers -- and against the weak growth outlook for most other emerging market economies -- China will, in our view, further increase its share of foreign direct investment (FDI) and portfolio investment inflows in the developing world," Deutsche Bank said in a report.

It is hefty FDI in recent years that is powering inexorable growth in China's exports, allowing it to gain market share from its competitors, said Arup Raha of UBS Warburg in Hong Kong.

Raha said a rise in the share of exports by foreign investors from less than 30 percent of total exports in 1993 to more than 50 percent in recent months was an indication of this trend.

"In other words, China is one of the -- if not the -- biggest beneficiary of global tech-related exports outsourcing," he said.

In 1988, China accounted for just 12.6 percent of non-Japan Asia's exports to developed countries, according to HSBC. That share has risen every year since then, through good times and bad, and stood at 33.4 percent in 1999.

Last year its surplus with the United States exceeded that of Japan for the first time.

Yet China's domestic economy is so huge that exports make up just 22 percent of GDP, by far the lowest ratio in non-Japan Asia. This fairly small exposure to trade has helped shield China from the global slowdown, as has the make-up of its exports.

Electronics account for around 60 percent of exports in Singapore, the Philippines and Malaysia but only 24 percent in China's case, according to the Asian Development Bank (ADB).

What's more, components like semiconductors and microprocessors -- the segment hit hardest by falling U.S. business investment -- account for just 15 percent of China's electronics exports compared with 80 percent in Taiwan and Korea.

As a result, China still managed 14.7 percent year-on-year export growth in the January-March quarter, with electronics exports up 30 percent.

"If you look at electronics and electrical goods altogether, China's exports are holding up remarkably well, despite the fact that Korea, Singapore, Malaysia and other competitors' exports of electronics goods have been declining," World Bank economist Deepak Bhattasali said in Beijing recently.

Ominously for its competitors, China seems to be succeeding in gaining market share by moving up the value-added chain in growth areas such as consumer electronics.

"There's anecdotal evidence that a lot of the FDI that has flowed into China is actually into electronics-related production facilities," said Sailesh Jha, an ADB economist.

"If that is the case, that is going to have huge implications for lower-end producers in the region," Jha said. "It's become a very serious concern."

As well as unmatched labor costs and the mouth-watering benefits that WTO are expected to bring, Andy Xie of Morgan Stanley in Hong Kong said China has become even more attractive for multinational firms by cutting red tape and vastly improving its infrastructure in the fast-growing coastal regions.

"There's a lot of margin pressure in the world today and the multinationals are being forced to cut costs. They look around and inevitably reach the conclusion that China offers the cost base and the scale for their production needs. And that is going to be a problem for other countries," Xie said.

Illustrating that trend, U.S. foreign affiliates in China increased their exports back to the United States tenfold, and to third markets nearly sevenfold, between 1994 and 1998, according to Morgan Stanley figures.

Trade, of course, is not a zero-sum game, and other countries are already benefiting hugely from China's rapid growth.

Members of the Association of Southeast Asian Nations (ASEAN) have increased their exports to China nearly fourfold over the past 10 years and Beijing's eventual accession to the WTO should give a further boost to regional trade.

A World Bank study says export volumes from Taiwan and Japan are likely to more than double once China joins the WTO, while sales from South East Asia will rise by more than 20 percent.

Still, Ronnie Chan, chairman of Hang Lung Development Co in Hong Kong, said that because of China's competitive threat the future for Southeast Asia is not bright -- except for Singapore.

With ASEAN leaders openly fretting about how to keep up with China, Chan offered some friendly advice for Beijing.

"Leave something for Southeast Asia! Help them! It is good politics and it is good for regional stability," Chan said.