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.