(posted April 12, 2004)

China Takes Center Stage in Manufacturing Resurgence in Asia

By Peter Gourlay

"We believe that in the next five years, Asia will be the fastest-growing region in the world, dominated by China,” said Maurice R. Greenberg, chairman and CEO of AIG, at the company’s annual financial analyst meeting last October. Not too long ago, Japan was Asia’s benevolent investment partner and a catalyst for the new Asian growth model. Korea, Taiwan, Singapore and Hong Kong were heralded as “Asia’s Tigers,” the future juggernauts for Asia’s economic growth. Terms like the “Pacific Century” and the “Asia Miracle” were commonly understood to reflect this new emerging boom in East Asia. Not much could alter this perception, both within and outside of the region during the late 1980s-1997 period. This was the boom time for Asia as whole new cities emerged and cranes marked the skylines of its major cities.

Then, the property bubble burst in 1997, triggering a worldwide financial crisis. Foreign speculators withdrew billions from Asia. Currencies devalued and countries rapidly lost decades of hard-fought wealth. As economies tanked, proud Asian leaders from Korea, Thailand and Indonesia were forced to accept bailouts from the International Monetary Fund (IMF). The IMF then required the governments to clean up their cozy relationships with their business conglomerates and create new transparent financial systems.

This humbling experience marked a huge transition for the emergence of China as many in East Asia began to view China, not Japan or the United States, as the key to their future prosperity. China has played a critical role in re-energizing the region and its stable currency and continued growth was widely viewed as the key factor in mitigating the contagion during the Asia financial crisis. China made the critical decision not to devalue its currency; had it done so, it could have set off a new cycle of disastrous devaluations.

Asian countries decided to export their way out of their debt and build up local cash reserves to insulate themselves to further currency crises. According to Morgan Stanley, the surge in China’s equipment imports was the most important factor in the revival of the region. Last year, 73 percent of Japan’s total export growth went to China, as well as 40 percent of Korea’s, 99 percent of Taiwan’s and 20-30 percent of the rest of developing East Asian countries. The question is whether Asia’s ramped-up exports to China are the prelude to the hollowing out of their industries.

“China’s massive population, its natural resources and its well-educated work force position it well for becoming the growth engine for the region,” says Andreas Pericli, Ph.D., chairman and CEO of Euclid Financial Group, a global financial services/asset management firm headquartered in Washington, D.C. The economist suggests that China’s GDP growth was 11 to 12 percent for 2003, rather than the purported 9 percent growth rate quoted from various government sources. This phenomenal growth has acted as a catalyst for the region.

UPS Supply Chain Solutions, a $2 billion company comprising 8 percent of the revenues for its parent, United Parcel Service (UPS), has established beachheads in Singapore, Hong Kong, Shanghai, Taipei, Tokyo and Seoul to continue to meet export and import distribution capabilities for its clients working in Asia. “We followed our customers like IBM, Cisco and National Semiconductor to better service their inbound and outbound transportation and order fulfillment work,” says Lynette McIntire, director of UPS Supply Chain Solutions. “In addition to our inbound/outbound distribution service, our Asia operations provide a variety of different capabilities including post-sales logistics and facilitating warranty service, ensuring critical parts will be there to service clients.”

While many U.S. firms have established manufacturing operations in China, its medical device and pharmaceuticals market is drawing U.S.-made products to China. “The healthcare market is huge – our revenues are growing 25 percent annually in China,” says Bob Goodwin, executive vice president and general counsel of Chindex International, the largest independent American distributor of Western healthcare products and services in China. Chindex owns and operates a hospital in Beijing, and is building another in Shanghai. The $71 million publicly traded firm is filling an important market niche providing local pharmacies and Chinese consumers with a number of popular health-related products such as L’Oreal skin cream. Chindex realizes that China has critically important health needs that go beyond selling product into the market.

An added benefit to many U.S. exporters has been the weakness of the U.S. dollar because U.S. goods are comparatively more attractive. “Asia is definitely the No. 1 market for our customers,” says Peter Senica, vice president in the trade finance unit with M&T Bank.

New Power Broker
China has made extraordinary overtures to its neighbors. Although much of Asia recognizes China’s preeminent role in their future economic well-being, China is also using its economic influence to shore-up regional relationships in Asia and beyond. China now shares a seat with Japan as the largest holders of U.S. Treasury bonds. “China is purchasing U.S. Treasury bonds at an incredibly accelerated rate,” notes Dr. Christine Warnke, governmental affairs advisor with Hogan and Hartson LLP. While some may be alarmed, others see that China’s inflow of capital is critical to support the U.S. balance of payments on its current account deficit. “These assets may be reinvested into the U.S. economy, thereby creating further economic opportunities for Americans,” she explains.

Beijing has used its considerable influence throughout Asia as it has broken out of its mold of having territorial disputes with every nation on its border except for Laos. Now China is helping to bring North Korea to the global bargaining table over the country’s nuclear weapons program, has reached out to India to resolve a long-simmering border dispute and recently met with leaders from Southeast Asia to discuss a mutually beneficial trading block.

Perhaps the biggest shift in China’s foreign policy lies in the way it handles Taiwan. China is steadily chipping away at Taiwan’s sovereignty through its new multilateral and bilateral engagements. When push comes to shove, few countries can afford to choose Taiwan over China.

As the China juggernaut moves forward, it has been buoyed by many recent achievements, including the selection of Beijing for the 2008 Olympics and, most recently, its joining the space race in 2003.

In the meantime, China faces three major challenges:

Health Concerns – SARS lies dormant, but for how long? HIV/AIDS could be explosive in China. According to the World Bank, a 30 percent increase in HIV infection rates in China occurred between 1995 and 2000, with a 58 percent increase in 2001 alone. The willingness to confront the problem is critical. “We stand ready to work with China’s hospitals to help communicate health solutions via telemedicine,” says Peter Hu, chief technology scientist for the University of Maryland’s National Study Center for Trauma and Emergency Medical Systems. China will be challenged, as the recent SARS crisis demonstrated, to share information in reporting outbreaks and health remedies.

Banking Crisis – The West perceives China’s banking crisis as a top priority with potential major global repercussions given China’s major role in the world economy. The head of the China Banking Regulatory Commission, Liu Mingkang, recently said that the four large state-owned commercial banks, which control about 56 percent of all banking assets, had non-performing loans of $240 billion in late September. “There is great potential danger here and China recognizes it,” observes Pericli of Euclid Financial Group. “China’s government is limiting guarantees for new companies to ensure the country doesn’t slip into a financial crisis that would be similar to the U.S. savings and loan crisis.”

Social Instability – There continues to be a great divide between perceptions in the West and within China as to the benefits of China’s growth engine. China recently joined the World Trade Organization and is now on course to implement structural reforms. China fears social instability and sees its top challenge as maintaining its massive growth machine to absorb millions of workers unemployed due to the privatization of state owned enterprises.

Peter R. Gourlay has helped U.S. firms win more than $730 million in Asian business, and is currently the vice president of the World Trade Center Institute. He can be reached at 410-576-0022