The political void left by the colonialists was filled by a fast growing economic colossus – China, the sleeping giant who, after surviving a “century of humiliation,” was now ready to take her place in the world scene.
Emerging as a super economic power, China has adapted to increase foreign direct investment by making Chinese companies become more multinational. The objective is to improve resource security by acquiring access to foreign resources, as well as to acquire leading-edge technology to boost the competitiveness of Chinese industries.
The implementation of the trade-strategy above will be facilitated by the very rapid growth in Chinese foreign exchange reserves over the last decade due to sustained large trade surpluses, as well as large capital inflows from foreign direct investment. This has provided a large fund of foreign exchange to support China’s foreign trade policy, which, in turn, increased Chinese role in global trade and investment – a development that has created rising political fears among governments about China’s increasing dominant control over their resources; its huge investments in their natural resources; and its huge export market for their products which could lead to a situation where flag follows trade.
It is assumed that technology, research and development, as well as innovation, will become increasingly important drivers of comparative advantage of economies in coming decades in a wide range of key manufacturing and service industries not just in China but also in the rest of the world. Parenthetically, the last five decades, technological leadership has continued to be an important driver of competitive advantage for the US and European multinationals.
One key structural change that will be a game changer for countries like China and India is their significantly improved educational infrastructure. With large numbers of their graduates in science and engineering each year, developed economies are now shifting the location of their global R&D facilities into China and India, where a large pool of highly qualified scientists and engineers is readily available.
In December 2003, Chinese Premier Wen Jiabao in a speech at Harvard said that, “China has laid down her three-step strategy toward modernization. From now to 2020, China will complete the building of a comfortable society in an all-round way. By 2049, the year the People’s Republic will celebrate its centenary, we will have reached the level of a medium-developed country. We have no illusions but believe that on our way forward, we shall encounter many difficulties foreseeable and unpredictable and face all kinds of tough challenges. We cannot afford to lose such a sense of crisis.”
Today, China is being recast from a socialist industrial society in the early 1990s to a semi-capitalistic global economic leader. It is a host to a number of FDIs and a large number of foreign workers from the OECD countries who have flocked to China to find their fortune, or to at least gain experience in the world’s rising economic power.
China’s role as a trade and investment partner has also risen very considerably during the last couple of decades, particularly in the Asia-Pacific region, which sees China as the largest export market for a number of its countries.
Challenges to China
An emerging problem facing the Chinese economy over the next 15 years, however, is the impact of rising labor costs in coastal China. This was brought about, in the first place, by rapid growth in Western Chinese provinces, which has driven up wages as supply of migrant workers for coastal Chinese factories tightened.
Another challenge is flawed demographics, partly a reflection of China’s one-child policy, which has progressively reduced the number of workers entering the labor force each year.
Finally, the marginal productivity of capital is gradually declining, with China having invested heavily in modern infrastructure and equipment, making it progressively more difficult to deliver rapid productivity growth on additional capital investment. This means that strong wages growth, which has the effect of pushing up the annual average rate of unit labor cost rises. In economic terms the incremental-capital to output and employment ratios are rapidly declining.
With wages rising, pushing up the average rate of unit labor cost, the net result is the loss of cost-competitiveness (its comparative advantage) for coastal Chinese provinces – the factory of the world for low-cost manufacturing, such as textiles and clothing, as well as consumer electrical and electronic goods over the next 15 to 20 years.
This is the same ‘hollowing out’ experience of manufacturing industries in Japan, South Korea, Hong Kong, Singapore and Taiwan in the past.
China as a rising superpower
Despite this downside in Chinese economic prospects, China is still expected to become the world’s largest economy by 2030 as the total size of its GDP surpasses the US and the EU. This will have significant geopolitical and economic implications.
As time marches on China will become the key trade and investment partner for Asia-Pacific nations. As we write, it is now the largest export market for almost all Asia-Pacific economies, and for some nations, even as it becomes increasingly important as a source of both foreign direct investment and portfolio capital flows for most Asia-Pacific countries, as its economy becomes the world’s largest.
Expectedly, the role of Chinese corporations in the global economy will continue to increase, supported by the Chinese government’s own policy of encouraging large Chinese multinationals to internationalize. Chinese multinationals will, thereby, become more significant global competitors in international markets.
Growth will increase the purchasing power of an enlarged middle class and boost consumer demand, which in turn, will become the new engine for global consumer spending growth. The multiplier effect of these developments will be wide-ranging. For commodities, the implications are for continued strong growth in demand for energy sources, such as solar and wind energy. That will be accompanied by equally robust demand for agricultural commodities, including grains and soya beans, as well as meat, dairy products and fisheries products. This could be a very positive long-term trend for agricultural exporting nations, such as the US, Australia, New Zealand, Brazil and some sub-Saharan agricultural exporters.
Tourism is an important tool of Chinese trade policy, which nations should take advantage of. The contributions of Chinese tourists’ spending to the balance of payments of emerging economies cannot be understated.
Underlying these developments will be China’s need for energy security, which will be a central focus of Chinese strategic policy, with heavy implications for its political and defense policy initiatives.
With its outward push strategy, Chinese financial institutions will become increasingly international, with banks expanding their international operations both to support their corporate sector and also to play a bigger role in global finance. This will be facilitated by the establishment of the Chinese initiative – the Asian Infrastructure and Investment Bank (AIIB).
Will economic power translate into hegemony?
Against this background of unparalleled growth China will gradually play a much more central role in global geopolitics. As it becomes the world’s largest economy, it will join the big boys as it participates in heavy-lifting initiatives as behooves its economic weight in international policy-making bodies such as the G20, IMF, World Bank and the Asian Development Bank and the newly minted Asian Infrastructure and Investment Bank. This will undoubtedly allow it to win friends and influence countries while also allowing it to project its foreign policy objectives more effectively and successfully, thereby enhancing its geopolitical role.
The question is, will China’s superpower status create a friendlier or a more unstable geopolitical global order? As China’s economy grows to become the world’s largest, this will inevitably lead to rising defense spending and increasing military capability. As China’s GDP increases and eventually overtake the US, the size of Chinese GDP as a share of total Asian GDP, which is already one-third, will increase further.
This implies that among the Asia-Pacific nations, China’s military capability will become significantly larger than that of any other Asian nation, including Japan and India. With China’s technological capability also rising rapidly, the future use of military power as an extension of Chinese foreign policy could become a key risks to regional peace and security. Whether this will actually happen is uncertain. However, given that China remains a one-party state and will have a rising military capability, other Asian countries are increasingly concerned about the potential for the growing asymmetry in Asian military power to become a source of geopolitical instability in the Asia-Pacific. How this will play out in regional geopolitical terms will depend on the foreign policy and defense policy of future Chinese governments, which could lead to the Thucydides Trap.
The Asia-Pacific region is increasingly becoming the center of gravity for the world economy as China, India and Asean have emerged as key engines for global economic growth that could lead to an Asia-Pacific century.
Today, Asia is beleaguered by sovereignty issues, the center of which is that involving the South China Sea. While there is some subliminal saber-rattling egged on by outside superpowers with interest in Asia, there is considerable scope for optimism that Asean can form the hub for regional security dialogue, most notably reflected in the recent achievements of a number of Asean countries in combating piracy in the Straits of Malacca through close cooperation and coordination among their government and military forces.
Asean Defense Minister Plus with Eight Dialogue Partners forum (ADMM+), which was established by Asean in October 2010, and the Asean Regional Forum (ARF), as key platforms for regional dialogue on defense and security. The ADMM+ process has already made significant progress, with the establishment of Expert Working Groups under the auspices of the Asean Defense Senior Officials’ Meeting Plus. The five expert groups are in:
• Humanitarian Assistance and Disaster Relief
• Maritime Security
• Peacekeeping Operations
• Military Medicine
Mechanism for rapid implementation of new measures to improve cooperation in these key areas have been offered by experts. For example, given the succession of major natural disasters that have afflicted the Asia-Pacific in recent years, including the Indian Ocean tsunami, the major flooding of Myanmar and the Japanese earthquake and tsunami in 2011, the importance of greater cooperation in humanitarian assistance and disaster relief is one very important and practical priority for the Asia-Pacific region, given the considerable logistical difficulties in relief operations that have been evident in such catastrophic events.
Obviously, with China acting as the big brother, it being the largest economy in the Asia-Pacific, any regional security dialogue would need to have the full support and cooperation of China. At the Shangri-La Dialogue on June 5, 2011, the Chinese minister of national defense made a strong statement in favor of regional multilateral security dialogues and cooperation mechanism.
Four pillars of Asia growth
If, indeed, the 21st century is the ‘Asian Century,’ there are four main growth engines within Asia that will continue to support this Asian ascendancy during the 21st century.
It is obvious that China will become the key driver of Asia’s rapid economic growth. Its long-term growth rate over the next two decades is still expected to be the super engine driving the rapid expansion of economic growth, trade and investment within the Asia-Pacific region. It will be the centripetal force that lifts the rest of Asia into its growing orbit.
With India projected to overtake Japan in around 15 years’ time in terms of overall size of GDP in nominal terms, it will contribute to the growth engine provided by the Chinese colossus, with Indonesia and its big population not far behind, and with membership of the population-rich BRIC economies proving a supporting role.
Last but not the least of the economic quartet will be the agglomeration of Asia’s next new frontier economies, combined with the rest of the Asean economies. Most of the countries comprising Asia’s fourth growth engine are well positioned to benefit from strong trade and investment flows with China, India and Indonesia, as well as sustained strong growth from domestic demand in the more populous countries such as Bangladesh, Vietnam and the Philippines.
Asia–Pacific to replace the OECD
High consumer spending in the Asia-Pacific region, with its rising middle class, will result in emerging Asia replacing the OECD economies as the key contributor to global consumer demand growth over the next three decades.
The rapid urbanization and growth of emerging Asian cities is another important structural trend that will create vast opportunities for companies related to urban infrastructure development, as well as residential and commercial construction projects. Asian countries will also require massive investment in infrastructure, creating major opportunities for investments.
There has been immense economic progress in the Asia-Pacific over the last 50 years, as rapid economic growth has lifted hundreds of millions out of extreme poverty. A number of Asian nations have succeeded in transforming their economies into advanced economies with high average living standards. These Asian miracle economies with high average living standards — these Asian miracle economies — are Japan, South Korea, Taiwan, Hong Kong and Singapore.
However, the driving force that is reshaping the balance of global economic power from West to East is the rise of China, as its population of over 1.2 billion people move out of poverty and into the ranks of the middle class. India, which is also a nation of over 1.2 billion people, is further behind on its development path than China, but will also be contributing significantly to the tidal wave of consumer-led growth that will change the shape of the global economy over the next three decades.
In the circumstances it behooves governments of the Asia-Pacific region to embark on a determined program of building the regional architecture for political, security and economic cooperation, to avert the risk of future conflicts in regional geopolitical flashpoints, which remain a threat to Asia’s dream of producing a zone of peace and prosperity through sustained economic progress and human development.