China-RI ties: Challenges and opportunities

China-RI ties: Challenges and opportunities

Jusuf Wanandi, Member, Board of Trustees, Centre for Strategic
and International Studies, Jakarta

China is already a big influence in East Asia. If she can
overcome her political and economic challenges, she will become a
great power regionally and globally in the next 20 years or so.

The strategic challenges arising from such a development will
be great. Will China be able to adjust to her status and power?
Will she become a revolutionary power that wants to change the
international and regional system and the balance of power? Or
will she become another status quo power? Given this uncertainty,
it would be wise for East Asia to commit China to the web of
rules and institution in the region.

In the economic field China will be an immediate competitor
but can be a partner in the medium term. Southeast Asia should
study the Chinese economy and its future development. It should
prepare itself to adjust to this reality, and restructure as well
as integrate its markets to have a fighting chance in competing
with China. Its accession to the World Trade Organization will
open up China's market, and will make the Chinese economy more
competitive.

In any event, the Association of Southeast Asian Nations,
including Indonesia, has to pay more attention to China's
challenges and opportunities.

Bilateral China-Indonesia relations are good, but more needs
to be done. Indonesia must come up with initiatives and bring
these initiatives to the attention of China. Indonesia is
considered a leader of ASEAN by China. Indonesia should explore
areas of cooperation with China both at the regional and
bilateral level.

Bilateral and regional relations between China and Indonesia
are now focused on economic relations. China has become the main
and more urgent challenge economically. These economic relations
and challenges are not a zero-sum game.

In view of China's competition, Indonesia needs to find niches
and complementary opportunities to benefit from China's fast
growing domestic markets. Over half of China's trade is with
Asian partners and the most important one is Hong Kong. For
Japan, China is the second most important trading partner. For
Taiwan and Korea, China, is third, for ASEAN, China is fourth,
and for Australia, China is its fifth most important trading
partner.

Roughly three quarters of China's cumulative inbound foreign
direct investment (FDI) has come from Asian economies. China has
become the largest FDI destination for Hong Kong, Taiwan and
Singapore, the second leading destination for South Korea and the
leading Asian destination for Japan. At the same time almost 80
percent of all FDI into East Asia last year went to China.

Malaysia, Thailand, the Philippines and Indonesia have relied
on the foreign investment and technology that now flow into
China. They have to move up the value-added ladder more quickly.
The displacement of export-oriented manufacturing activities from
Hong Kong, Taiwan, South Korea and Singapore has occurred with
limited disruption. The migration of their lower manufacturing
activities has enhanced their competitiveness by the redeploying
of their resources to more valuable activities.

Low labor costs, flexible labor practices and large foreign
investments have allowed China to become the world's leading
producer and exporter of textile and garment. These products now
account for about a quarter of China's exports, a seventh of
industrial employment, and 6 percent of total industrial output.
This has been achieved despite its limited access to major
markets. Once China joins the WTO it will have greater access and
will become even more competitive.

According to the U.S. International Trade Commission, China's
share of the U.S. clothing market could increase to more than 30
percent, and that of the world clothing market to more by 38
percent by 2006 -- to a large extent at the expense of other
Asian countries. China's vast reserve of relatively inexpensive,
highly productive labor, combined with improved infrastructure,
has already caused several Hong Kong companies to shift
production from Southeast Asia to China.

In addition to its complementary and competing role, China
will emerge as a market, an investor, and a development partner
for East Asian economies. Indonesia has an advantage in resource-
based products such as oil, timber products, materials,
agricultural goods, and some niche manufacturing products in the
Chinese market.

China is becoming an important international investor in the
sectors of banking, foreign trading, and construction in Hong
Kong. This is only a recent phenomenon, and therefore is still
small in comparison with the size of the economy. She also faces
some constraints and difficulties in obtaining capital and the
heavy burden of state ownership.

China can be a partner of the economies in the region through
participation in specific regional infrastructure and development
projects, such as the Mekong Development Project, focusing on
transportation, energy, trade, communication, and investment.
China is also helping to develop oil fields and pipelines in
Central Asia, and in the future most likely also in Siberia.

In conclusion, ASEAN will face tough competition from China in
export markets and for investment. Political and economic
difficulties in the ASEAN countries are hurting the region. The
economic weight of North East Asia threatens to make ASEAN a
sideshow. Therefore, they have to accelerate the integration of
their markets and their domestic reforms. They have to maintain
their domestic reforms. They have to maintain their traditional
export markets while serving the growing demand for resource-
based products and niche consumer goods in China.

The economies that will benefit from China are those that can
penetrate the growing Chinese markets, develop complementary
relations with the Chinese economy, attract investment from
China, and forge a partnership with China.

Box: In view of China's competition, Indonesia needs to find niches
and complementary opportunities to benefit from China's fast
growing domestic markets.