/pidsbk01-china by Ronald Yacat

C_hina'l Economic 6rowth and t.he AS[AH

China's Economic 6rowth

and the AS[AH edited by Ellen H. Palanca

PASCN PHILIPPINE

APEC

STUDY CENTER

NETWORK

p_s PHILIPPINEINSTITUTEFORDEVELOPMENT STUDIES

Printed

in the Philippines.

The findings, interpretation and conclusion in thisl volume are those of the authors and do not necessarily reflect those of PASCN and PIDS and other institutions associated with the project. The publication of this book was funded in whole_ by the PASCN whose members include: Asian Institute of Management, Ateneo de Manila University, Central Luzon State University, De La Salle University, Foreign Service Institute, Mindanao State University, Philippine Institute for Development Studies (Lead Agency), SilUman University, University of Asia and the Pacific, University of San Carlos, University of the Philippines and Xavier University.

Please address PHILIPPINE PHILIPPINE

all inquiries

to:

APEC STUDY CENTER NETWORK SECRETARIAT INSTITUTE FOR DEVELOPMENT STUDIES

NEDA sa Makati Building 106 Arnorsolo Street, Legaspi Village 1229 Makati City, Philippines Tel. No.: PASCN (63-2) 8939588, 8925817; PIDS (63-2) 8935705, 8924059 Fax No.: PASCN (63-2) 8939588; PIDS (63-2) 8939589, 8161091 E-mail: pascn@pidsnet.pids.gov.ph; publication#@pidsnet.pids.gov.ph URL: http://pascn.pids, gov.ph; http://www.p!ds.gov.ph I

ISBN 971-564-032-X RP 2-01-500 Cover and book design by Joel C. Lozare Printing by Raintree Publishing, Inc.

Table of Contents

Foreword

............................................................................................................

Preface ................................................................................................................... Chapter One China's Economic Growth: Implications

xix

to the ASEAN

and the Philippines (An Integrative Report) by Ellen H. Palanca ................................................................................................. Introduction

xvii

......................................................................................................

1 1

Perceptions of China as a Rising Power in Southeast Asia ....................... 2 China's Post-Reform Economic Growth ....................................................... 3 Impact of China's Economic Growth: A Theoretical Analysis .................. 5 China's External Sector Growth .................................................................... 7 China's Trade with the ASEAN-5

...............................................................

Bilateral Relations with Singapore, Thailand, Malaysia and Indonesia ................................................................................ Bilateral Economic Relations with the Philippines ................................... Effects of China's Growth on the ASEAN ..................................................

10 11 16 18

Current Problems in China's Economy: Reform of the SOEs ................. 21 Prospects ......................................................................................................... 23 Bibliography .................................................................................................... 26

Chapter Two The Macroeconomy

of China in the Late Nineties

by Joseph Y. Lira ....................................................................................................

Abstract ........................................................................................................... Introduction ....................................................................................................

27 28

Underlying Reasons for China's Success Story ......................................... The Market Reforms ......................................................................................

28 34

Strong Macrofundamentals of China: The Pre-crisis Period ................... 48 Effects of the East Asian Crisis .................................................................... 51 On the Exchange Rate Dilemma .................................................................. On Problems of a Transition Economy .......................................................

6,5 74

Summary and Conclusion ............................................................................ 81 Bibliography .......................................................................... â&#x20AC;˘........................ 83 V

Chapter Three The Great Dragon Effect: Mainland China and the Asian Slowdown by Raul V. Fabella ..................................................................................................

85 85

Emergence of a Dragon: A Static Three-Country Model ............................ East Asian Growth with a Dragon ...:..........................................................

86 92

The Great Dragon Effect: Dynamics ............................................................. Conclusion ......................................................................................................

97 99

Bibliography

.................................................................................................

101

Chapter Four China's Changing Trade Patterns: Implications for ASEAN-China Trade by Ellen H. Palanca .............................................................................................

103

Abstract ......................................................................................................... Introduction .................................................................................................. The Asian Miracle ........................................................................................ China's Trade Trends and Patterns ............................................................

103 103 105 110

Domestic Factors Affecting China's External Trade ................................ China's Trade Pattern with ASEAN-5 ......................................................

112 122

Bilateral Trade Commodity Structure ........................................................ Comparative Advantage ............................................................................. Bilateral Trade and Direct Investments in China ..................................... China After the Asian Economic Crisis .....................................................

139 147 156 157

Summary and Conclusions ......................................................................... Bibliography .......................................... ,...................................................... Appendix ......................................................................................................

158 160 163

Chapter Five Direct Foreign Investment by Rosalina

Flows To and From China

P. Tan .........................................

i...................................................... i

169

Abstract

...................................................

Introduction

............................................

!...................................................... I !.....................................................

169 169

Trends and Patterns of Direct Foreign Investment Flows To and From China ...............................................................................

170

Factors Affecting Direct Foreign Investment Flows ................................. Effects of Direct Foreign Investments in China ........................................ Summary and Conclusions ......................................................................... Bibliography .................................................................................................

193 213 222 226

Chapter Six The Political Economy of China's Relations with SoutheaSt Asia by Arleen S.P. Baviera ..........................................................................................

229

229 229

China-ASEAN Political-Security Relations .............................................. 233 Trends in China-Southeast Asia Economic Relations ............................. 238 Bilateral Relations with Selected States: Strategic Perspectives ............. 250 Conclusions .................................................................................................. 263 Bibliography

.................................................................................................

268

Chapter Seven The Political Economy of Philippines-China Relations by Benito O. Lim ..................................................................................................

271

Abstract ............................................................................... _......................... 271 Introduction .................................................................................................. 272 Pre-Colonial Political Economy .................................................................. Political Economy Under Spain ................................................................. Political Economy Under the United States .............................................. Political Economy After Independence ..................................................... Political Economy Under the Marcos Government .................................. Political Economy Under the Aquino Administration ............................ Political Economy Under the Ramos Administration ............................. Direct Foreign Investments in China ......................................................... Conclusion ....................................................................................................

272 273 276 278 278 284 291 295 298

Bibliography

.................................................................................................

300

About the Authors .............................................................................................. About the PA$CN ...............................................................................................

303 305

List of Figures Chapter Two Figure 1 ....................................................................... :.................................... Real Exchange Rate of Various East Asian Countries (1990=100), 1990-1998 Chapter Four Figure la ......................................................................................................... ASEAN-5's Export to China and China's Export to ASEAN-5, 1980-1996

125

Figure lb ....................................................................................................... ASEAN-5's Export to China: Values as Percentage of ASEAN-5's Export and as Percentage of China's Import, 1980-1996

125

Figure lc ........................................................................................................ China's Export to ASEAN-5: Values as Percentage of China's Export and as Percentage of ASEAN-5's Import, 1980-1996

126

Figure 2a .................................................................. ...................................... ASEAN-5's Exports to China: Values, 1980-1996 Figure 2b ....................................................................................................... ASEAN-5's Exports to China: Values as Percentage of Total Country Exports, 1980--1996

134

Figure 2c ................................................... I..................................................... ASEAN-5'S Exportsto China: Values as Percentage of Total ASEAN Exports to China, 1980-1996

135

134

Figure 3a ................................................... _............................... ..................... 135 China's Exports to ASEAN-5 Countries: Values, 1980-1996 Figure 3b ....................................................................................................... China's Exports to ASEAN-5 CourRries: Values as Percentage of Country Imports, 1980-1996 Figure 3c ...................................... .................................................................. China's Export to ASEAN-5 Values as Percentage 1980-1996

136

Count_:ies:

of China's Exports I, I

viii

to the ASEAN-5

Countries,

Chapter Six Figure la ........................................................................................................ China's Trade with Southeast Asia, 1988--1996 (In US$ Million) Figure lb ........................................................................................................ China's Trade with Southeast Asia

240 241

as Percentage of China's Total Trade,1988-1996 Figure 2a ........................................................................................................ ASEAN-5's Trade with China

241

as Percentage of the Country's Total Trade, 1988-1996 Figure 2b ........................................................................................................ Vietnam's, Laos', and Burma's Trade with China

242

as Percentage of the Country's Total Trade, 1988-1996 Figure 3 .......................................................................................................... China's Exports to ASEAN Countries as Percentage of China's Total Export, 1980-1995 Figure 4 .......................................................................................................... ASEAN's Imports from China as Percentage of the Country's Total Import, 1980-1995 Figure 5 .......................................................................................................... China's Imports from ASEAN Countries as Percentage of China's Total Import, 1980-1995 Figure 6 .......................................................................................................... ASEAN's Exports to China as Percentage of the Country's Total Export, 1980-1995 Figure 7a ........................................................................................................ ASEAN-5's Investments in China, 1989-1996 (In US$ Million) Figure 7b ........................................................................................................ ASEAN-5's Investments in PRC as Share in Total DFI, 1989-1996

243

244

246

247

249 249

List of Tables Chapter Two Table 1 ............................................................................................................. Some Micro Indicators of China Table 2 ............................................................................................................ Price Ratio of Rural Farm Products to Rural Industrial Products

29 35

(1978=100) Table 3 ............................................................................................................

China: Balance of Payments (In US$ Million and as Percentage of GDP) Table 4 ............................................................................................................

Shares of State and Nonstate Sectors in Industrial Output (In Percent) Table 5 ............................................................................................................

China: Trends in Labor Force and Employment, 1980-1996 Table 6 ............................................................................................................

China: Structure of the Financial System, 1985-1996 Table 7 ............................................................................................................

China: Monetary Survey Table 8 ............................................................................................................

China: Government

Budget and Expenditure,

1980-1997

(As Percentage of GDP) Table 9 ............................................................................................................

China: The Structure of State Budget Revenue, 1985-1996 Table 10 ............................................................................................................

Comparison of Capital Inflows, External Debt and Import Cover for Selected East Asian Countries i Table 11 .................................................... _.......................................................

China's Exports and Imports withlBiggest Trading Partners, 1995-1998 Table 12a .........................................................................................................

Value of China's Exports by CategOry of Commodities (In US$100 Million) Table 12b ................................................. i....................................................... Value of China's Imports by Categr_ry of Commodities (In US$100 Million)

Table 13 ............................................................................................................ Comparison

of Macro Indicators Across East Asian Countries

Chapter Four Table I ..........................................................................................................

I06

Average Annual Growth Rate of GDP: China and ASEAN-5, 1970-1996 (In Percent) Table 2 ..........................................................................................................

107

Export of Goods and Commercial Services: China and ASEAN-5, 1995 Table 3a ..........................................................................................................

108

Trade Volume: China, ASEAN-5 and World, 1980, 1988 and 1996 (In US$ Million) Table 3b ..........................................................................................................

109

Trade Volume: Average Growth Rate, China, ASEAN-5 and World, 1980-1996 (In Percent) Table 4 ..........................................................................................................

111

Exports and Imports Dependence Ratio: China and ASEAN-5, 1980-1996 (In Percent) Table 5 ...........................................................................................................

113

Commodity Structure of China's Merchandise Exports, 1980-1993 (In Percent) Table 6 ..........................................................................................................

114

Commodity Structure of China's Merchandise Imports, 1980-1993 (In Percent) Table 7 ..........................................................................................................

116

Rural Enterprise Share of National Exports: China, 1985-1991 Table 8 ..........................................................................................................

117

Structure of Rural Enterprise Exports: China, Selected Years Table 9 ..........................................................................................................

119

Direct Foreign Investment Exports of China, 1985-1996 Table 10 ..........................................................................................................

119

Share of Manufactured Products in Total Exports, China and ASEAN-5, Selected Years (In Percent) Table 11 ..........................................................................................................

121

Standard of Living in China, 1978 and 1998 Table 12 ..........................................................................................................

121

Household

Consumption

Pattern in China, 1997

Table 13 ..........................................................................................................

123

ASEAN-5's Export to China: Annual Values and Annual Growth Rate, 1980-1996 Table 14 .................................................. ,.......................................................

124

China's

Export to ASEAN-5:

Armual Values and /

Annual Growth Rates, 1980-1996 Table 15 ................................................... i.......................................................

127

China's Export to ASEAN-5: Average Growth Rate, 1980-1988, 1988-1996 and 1980-1996 (In Percent) Table 16 ..........................................................................................................

128

ASEAN-5's Export to China: Average Growth Rate, 1980-1988, 1988-1996 and 1980-1996 (In PerCent) Table 17a .......................................................................................................

129

Philippines' Bilateral Trade with China, 1980-1996 Table 17b ................................................ :......................................................

130

Singapore's Bilateral Trade with China, 1980-1996 Table 17c ........................................................................................................

131

Indonesia's Bilateral Trade with China, 1980-1996 Table i7d .......................................................................................................

132

Malaysia's Bilateral Trade with China, 1980-1996 Table 17e ................................................. :...................................................... Thailand's Bilateral Trade with China, 1980-1996 Table 18 .......................................................................................................... Balance of Trade: China and ASEAN-5, 1980-1996

133 138

(In US$ Million) Table 19 .............................. :...........................................................................

139

Export Similarity Indices: China and ASEAN-5, 1987, 1990 and 1995 Table 20a ......................................... I..............................

141

Philippines-China Trade Commodity Structure, 1980, 1988 and 1996 i Table 20b ........................................................................................................

142

Singapore-China Trade Commodity Structure, 1980, 1988 and 1996 I Table 20c ........................................................

143

Indonesia-China Trade Commodit) Structure, 1980, 1988 and 1996 Table 20d ................................................. _.....................................................

144

Malaysia-China

Trade Commodit_ xii

Structure,

1980, 1988 and 1996

Table 20e ........................................................................................................

145

Thailand-China Trade Commodity Structure, 1980, 1988 and 1996 Table 21 ..........................................................................................................

149

Revealed Comparative Advantage: By Factor Intensity Groups, China and ASEAN-5, Selected Years Table 22 ..........................................................................................................

150

Spearman Correlation Coefficients Between China's Revealed Comparative Advantage Indices and Those of ASEAN-5, 1987, 1990, 1995 Table 23 ..........................................................................................................

156

ASEAN-5's

Investments

in China: 1993 and 1996 (In US$ Million)

Chapter Five Table 1 ............................................................................................................

175

Direct Foreign Investments in China Table 2 ............................................................................................................

176

Direct Foreign hwestments in China by Sector (Contract Amount) Table 3 ............................................................................................................

177

Capitalization of Registered Enterprises with Foreign Capital by Sector, 1993 Table 4 ............................................................................................................

179

Direct and Other Foreign Investments in China by Province/City of Destination (Utilized Amount) Table 5 ............................................................................................................

183

Direct and Other Foreign Investments in China by Region/Country of Origin (Utilized Amount) Table 6 ............................................................................................................

184

Direct Foreign Investments in China by Country of Origin and Province/City of Destination, 1993 (Contract Amount) Table 7 ............................................................................................................

190

Direct Foreign Investments in China by Arrangement Type Table 8 ............................................................................................................

192

Approved Overseas Investments of China Table 9 ............................................................................................................

194

Approved Overseas Investments of China by Country/Region of Destination, 1979-1996 Table 10 ..........................................................................................................

199

Inward

Direct Foreign Investments xiii

Table 11 ..........................................................................................................

200

Intensity Index of Investment in China and the ASEAN-4 Table 12 ..........................................................................................................

201

Intensity Index of Investment in China and ASEAN-4 Countries Table 13 ..........................................................................................................

202

Real GDP Growth Rate (In Percent) Table 14 .................................................. ,.......................................................

203

Average Wages and Unit Labor Costs in the Manufacturing Sector Table 15 ............................................................................................................ 206 Comparative Investment Incentives Table 16 ..........................................................................................................

209

Regression Results: Factors Affecting DFI Flows in China Table 17 ..........................................................................................................

214

Exports of Foreign Invested Enterprises in China Table 18 ..........................................................................................................

216

Contribution of DFI to China's Gross Capital Formation Table 19 ..........................................................................................................

217

Employment and Average Wages in China Table 20 ..........................................................................................................

218

Average Wages in China by Region, 1996 Table 21 ...........................................................................................................

219

DFI (Utilized Amount) and GDP Growth Rates (in Percent) Table 22 ..........................................................................................................

221

Per Capita GDP by Region, 1996 Table 23 ..........................................................................................................

222

Regression

Results: Effect of Inward

DFI on China's GDP Growth

'i I Table 1 ...................................................... !..................................................... China's Export to ASEAN Countries as Percentage of China's Total Export, 1980-1995 Table 2 ............................................................................................................

Chapter Six

ASEAN's Imports from China as Percentage of the Country's Total Import, 1980-1995 Table 3 ....................................................... !.................................................... China's Import from ASEAN Counlries as Percentage of China's Total Import, 1980- 1995 Table 4 ............................................................................................................ ASEAN's Exports to China as Percentage

of the Country's

Total Export, 1980-1995

xiv

243

244

246

247

Chapter Seven Table 1 ............................................................................................................

282

Foreign Trade of the Philippines with China (F.O.B. Value in US$) Table 2 ............................................................................................................ 287 Philippine-Taiwan Trade (F.O.B. Value in US$) Table 3 ............................................................................................................

289

Philippine-Taiwan Trade (F.O.B. Value in US$) Table 4 ............................................................................................................

294

Philippine Trade with China (In US$ Million) Table 5 ............................................................................................................

297

Direct Foreign Investments into China from the Philippines (Contract Amount in US$ Million)

Foreword There is no doubt that China stands as the fastest growing economy in Asia. No longer the sleeping dragon, this country has grown tremendously in the last decade, not just in terms of population, but more importantly, in terma of export and investment potential. Its exports are exploding at a phenomenal rate and its foreign direct investments surged tenfold between 1990 and 1995; Within China, the domestic economy is also changing as a result of its growing economic strength. How do all these developments in China's economy impact on its Asian neighbors such as the Philippines? This volume entitled "China's Economic Growth and the ASEAN" provides an m-depth analysis of the issue. This volume is the output of a project funded in whole by the Philippir_ APEC Study Center Network (PASCN) that aimed to look into the rise of China's economy and its implication to the Asia-Pacific region from a Philippine perspective. The project involved the conduct of individual various aspects of China's economy such as the macroeconomy,

studies on the foreign direct

investments, political economy and security, and trade patterns and how the.qe will impact on the ASEAN. Six noted social scientists who have considerable work and teaching experience in Chinese studies authored the papers. As the lead convenor of PASCN, the Philippine Institute for Development Studies (PIDS) takes pride in publishing this volume, which is proof of its continuing commitment to research, particularly on issues that have a bearing on Philippine economi c development. It is the hope of the Institute that through this volume, policy'makers and decisionmakers can draw insights and lessons from China's experience in climbing the economic ladder. The volume opens with the integra[ive report in Chapter I by the volume editor, Dr. Ellen Palanca, who put together the results of the six independently written papers in a logical fashion and drew from them the overall conclusion for the entire study. What follows the integrative report are the five papers presented in the volume as chapters. Chapter 2 looks into the macroeconomy of China and its likely direction in future years and pro_,ides a general assessment of how its economic performance and policies will affect trade and investment in the world and the ASEAN. Chapter 3 presents a theoretical analysis of the possil_le outcomes in the region of the opening up of China and its ensuing economic growth. Chapter 4 analyzes the changing trade patterns of China in the last two decades and explores how the ASEAN countries can continue to promote trade with China given the rapid changes in its trade patterns and socioeconorltic

xvii

conditions. Chapter 5 discusses the pattern of foreign direct investment flows to and from China and the effects of the changes of these flows on the so-called ASEAN--4 countries (the Philippines, Thailand, Malaysia and Indonesia). Meanwhile, Chapter 6 examines the political-security relations between China and the ASEAN and how these may have influenced China's economic policy toward Southeast Asia. And lastly, Chapter 7 examines the history of the Chinese-Philippine economic relations, which dates back to the pre-Spanish period and analyzes the reasons why said relations did not prosper along with the expansion of China's economy and foreign trade.

MARIO B. LAMBERTE, Ph.D. President, PIDS and Lead Convenor, PASCN

xvii

Preface The opening up of China's economy coincided with the start of the period of dramatic globalization. Both China's economic growth and the globalizatiol of the world economy took off in the past two decades. Undoubtedly the increase in trade and capital flows due to globalization has been a catalyst foÂ˘ China's economic growth. At the same time, the globalization process has also been enhanced by China's dynamic growth. The effect of this interactive phenomenon is clearly observed in the Southeast Asian region, whose growth in GDP and trade picked up dramatically during this period up to 1997. The synergy created by China's economic growth in the eighties and nineties contributed to the development of the entire region. The rise of China as an economic dragon poses a paradox to the ASEAN countries, which have been relying on exports for their economic growth. Having similar factor endowment as the ASEAN countries, China is considered a competitor in the world market for labor-intensive products. Neverthelesl, China's open-door policy in 1979 also provides investment opportunities as well as access to its immense market of over 1.25 billion consumers whom purchasing power has been increasing since then. Much of whatever effect China's economic growth has on these countries depends on the economic dynamics and political relations the countries have with China. It is, therefore, important to understand China's economic growth and its impact on the region. Only through careful study can we meet the challenge to engage China both in economics and politics and benefit from it_ growth. Given this challenge, the Philippine APEC Study Center Network (PASCN) research project on China's Economic Growth and its Implications the ASEAN was an expedient one. This book, which compiles the six studies of the project, provides insights and information on the ASEAN countries' bilateral relations with China in both political and economic fronts. So far, studies on China and its impact on the Philippine economy had only been at a conjaw'tural level. The Philippines was among the first ASEAN countries to establiah political and economic ties with China. Yet in the last decade, our trade with China lagged very much behind the other ASEAN countries. The empiriaal analyses in this study demonstrate that engaging China economically and IX>" litically is very much to the interest of the individual ASEAN countries and the region as a whole.

xix

The importance of having China became even more obvious

regional economic cooperation involving after the onset of the Asian financial crisis in

1997. The crisis highlighted the role of China's economy in the region. China's res0raint in not devaluing its currency during the crisis period was a relief to the Asian countries embroiled in the crisis. With the creation of ASEAN-Plus 3, ASEAN now involves the important economic players in Northeast Asia-China, Japan, and South Korea--in its various fora. China's participation in such a multilateral organization, a topic not covered in this book, will certainly promote further economic cooperation among the coantries in East Asia. The effectiveness of its participation will depend on its bilateral relations with the countries in the Association. Most of the studies done for this project are heavy on statistics. A couple of points regarding the data have to be mentioned. Undertaken in 1998, the researchcould only avail of data up to1996. The project studies therefore pertain to situations before the Asian economic crisis. The financial meltdown in many Asian countries affected the performance of their external trade. On the other hand, China, although spared from the crisis, was confronted with drastic and sharp devaluations of many Asian currencies. The consequences of all these, which certainly had their effects on the economic relations between the ASEAN countries and China, will require another project to unravel. Another caveat regarding the use oh statistics in this study is that the statistics cited in the various studies are not uniform. There are several data sets for international

economic

statistics. For example, for trade statistics,

there are

five major data sets available. The International Monetary Fund (IMF) publishes two sets of such data, namely, the IMF International Financial Statistics and the IMF Direction of Trade Statistics. The United _Nations publishes the United Nations International Trade Statistics while thel Asian Development Bank (ADB) publishes the ADB Key Indicators. Anotherlmajor source of economic data is the National Asia Pacific Economic and Scientific Database (NAPES). Bilateral trade statistics for the Philippines are also I found in the Philippine Statistical Yearbook and the Foreign Trade Statistics of the Philippines published by the National Statistical Coordination Board and National Statistics Office, respectively. Since the researchers did not discuss[ at the start which data set to use, readers will find differences in data cited. Nevertheless, the general trend in the statistics over time is the same for these data sets. This means that the basic findings of the studies, although based on different sets of data, are consistent i with each other. I

The authors of the research papers are grateful to the Philippine APEC Study Center Network (PASCN) for the financial and institutional support for their studies. In the last decade, studies on China's transitional economy have multiplied rapidly in most developed countries and international agencies for both policy as well as academic purposes. We are happy that the Philippine Institute for Development Studies (FIDS), through PASCN, is also including China's economy in its research agenda. We would like to thank Dr. Mario Lamberte, president of PIDS and convenor of FASCN, and Dr. Myrna Austria, head of the PASCN Secretariat, for initiating this pioneering, even though long overdue, project. The researchers of this project are also grateful to the PASCN Secretariat staff for their help throughout the course of the project--following up on our research, arranging for our discussions and organizing conferences---and to the PIDS Research Information Staff for coordinating the publication of this book. The authors would also like to acknowledge the service of their respocrive research assistants: Mr. Alvin Firmeza for Dr. Joseph Lira, Mr. Ronald Tamangan for Dr. Ellen Palanca, Ms. Desiree San Pablo and Ms. Mary Grace MirandiUa for Ms. Aileen Baviera, and Ms. Grace del Prado and Ms. Johanna Zulueta for Dr. Rosalina Tan.

ELLEN H. PALANCA, Editor

xxi

Ph.D.

Chapter One

China'sEconomic Growth: implications tothe ASEAN andthePhilippines (AnIntegrative Report) by Ellen

H. Palanca*

INTRODUCTION

e last couple

of decades

saw the prominent

orld economy. China's economic growth,

emergence

of China in

the fastest among the ma-

J jor countries in the world, has been at an average annua!, rate of over _F 10 percent since 1979 when it adopted an "open-door policy and undertook economic reforms. With such economic performance, China's GDP of 1980 quadrupled by 1995, five years earlier than the target year 2000. In conjunction with China's open trade policy was its policy on export industrialization. For the period 1980-1996, total exports grew at an average annual rate of 14.2 percent. The rate accelerated in the 1990s, averaging close to 20 percent. Direct foreign investments (DFIs) also grew at unprecedented rates, averaging at an annual rate of 57 percent in terms of contract amount and 45 percent in terms of utilized amount. For about three decades up to the onset of the Asian economic crisis in 1997, the original ASEAN countries, except for the Philippines, were also growing at rates that impressed the entire world. 1 Singapore grew at an average annual rate of 8.5 percent for the period 1965 to 1980, slowed down to 6.6 percent in the 1980s, and then picked up to grow at almost 9 percent in the

* Professor of Economics and DiK=ctor, Chinese Studies Program, Ateneo de Manila University. 1. The original ASEAN consists of five nations: the Philippines, Indonesia, Malaysia, Singapoce, and Thailand. These nations are now referred to as the ASEAN-5.

China's Economic Growth and the ASEAN

1990s before the Asian crisis. In the 1970s, the other countries--Indonesia, Malaysia, Philippines, and Thailand (called the ASEAN-4--forsook the import-substitution industrialization growth strategy and adopted also the export-led growth strategy that transformed Singapore, as well as Hong Kong, Taiwan and Korea, into newly industrialized economies. Since the 1970s up till 1997, Malaysia, Thailand and Indonesia grew at impressive rates of between 7 and 9 percent annually. In the case of the Philippines, although a trade liberalization program was adopted since 1981, it could not fully implement the program because of political and economic crises in the 1980s. Its average annual economic growth of 3 per cent for the period lagged very much behind those of the other ASEAN countries.

PERCEPTIONS IN SOUTHEAST

OF CHINA ASIA

AS A RISING

1980-1996

POWER

Due to the size and dynamism of its economy, China has been perceived by the countries in Southeast Asia to be a competitive force as an export market and foreign capital destination. At the same time, China is a cheap source of raw materials and, with i_s huge population enjoying rising incomes, has also become an ideal market for food and other consumer goods. Because of this growing economic strength as well as its political influence and military strength, China is considered a security threat by most of the ASEAN countries. With the pending South China Sea dispute that involves China and four of the ASEAN-10, some sectors in these ASEAN countries consider this threat imminent.' The perception of China as a threat in the region is the rationale for the research project "China's Economic GroWth and Its Implications to the ASEAN." This project analyzes the effects_f! China's growth on the ASEAN5 nations considering the past bilateral eqonomic and political relations of these Southeast Asian countries with Chin_. It is expected that understanding the situation will enable one to have a rational approach to the rapidly changing scenario taking place in the regio_n since China opened up. This paper integrates the six research studies conducted for the project. J. Lim's study on China's macroeconomy analyzes the country's economic performance in the 1990s as well as the f,roblems it faces since the Asian economic crisis. Fabella presents a theoreti.:al analysis of what the outcomes on the region would be with the opening up and the subsequent dynamic economic growth of China. Palanca investi_ ates the pattern of trade between 2. These four countries are the Philippines, Vietnam,_lalaysia, and Brunei.

China's Economic Growth: Implications

to the ASEAN

China and the ASEAN-5 countries since China opened up while Tan analyzes China's foreign direct investments, both inflow and outflow, in the postreform era. Economic cooperation between countries is, to a great extent, influenced by their political relations. This is more so for relations with China where economic relations are mostly stateqevel and easily influenced by the state-tostate political relations. Cognizant of the importance of politics on economic relations, the project also investigates the political economy of China's relations with the ASEAN countries. Baviera considers the political economy of China's relations with Singapore, Malaysia, Thailand, and Indonesia; while B. Lira looks at the political economy of Philippines-China relations. ASEAN-China economic ties are generally on bilateral basis. Gradually, however, the Association, which now consists of 10 countries, is working toward joining economic forces with China and the other major powers in Northeast Asia. For lack of a formal name, ASEAN-Plus 3 is the formed alliance between ASEAN-10 and China, Japan, and South Korea. Welcomed by all members, such a confederation can be seen to be a very positive approach in acknowledging China's growing economic power and the mutual dependence between the ASEAN as a region and China. The ASEAN had already invited China in 1991 to become a "consultative partner" and eventually to become a full dialogue partner. The large intraregional trade volumes and investment flows in East Asia are a rational basis for such an economic Northeast

cooperation. With the experience and Southeast Asia have come

Asia regionalism even in ism. Such a cooperating dress not only East Asian as well. ASEAN countries towards faster economic

the face of globalization and Asia-Pacific regionalassociation is expected to provide a forum to adeconomic interests but political and security issues feel that it is no longer sufficient to simply work integration of the member countries but it is neces-

sary to also adopt a more coordinated with China, Japan, and South Korea.

CHINA'S

POST-REFORM

The phenomenal tributed to the market

of the Asian economic crisis, bo_h to realize the importance of East

approach

ECONOMIC

to economic

development

GROWTH

growth of China's economy since 1980 has been atand incentive reforms undertaken since then. These

reforms were, however, built on some initial conditions that were very fundamental and important for the growth process. From 1949 to 1979, despite periods of turbulence, about some important

the Chinese socialist government was able to bring structural and distributional changes. These changes

China's Economic Growth and the ASEAN

include agricultural reform, physical and social infrastructure, development of basic, industries such as steel and textiles, a high degree of provincial and local autonomy, and reduction in income disparities. Another important favorable condition is that China enjoys strong historical ties with Hong Kong and the ethnic Chinese in Southeast Asia. Moreover, the state, which provides political stability and a coherent, credible economic program, has always been strong. Nevertheless, the self-reliant system before the reforms suffered the lack of competition and incentive to improve the products and increase productivity. The market reforms that were instituted with the opening up changed the incentive structure. A mix of policies was designed to integrate China into the global economy while, at the same time, strengthen its domestic base and market. Such reforms include rural reforms, the opening up of the country to direct foreign investments, foreign trade, reforms in stateowned enterprises, as well as financial and fiscal reforms. The reform policies have brought about gradual changes in its industrial structure and trade commodity structure. Rural industrialization, the core of rural reform, has attracted direct foreign investments and promoted export-oriented development strategy. EXport of light manufactured products has gradually replaced primary resource-intensive products. Needless to sa)_ trade, financial and fiscal reforms have been formulated to support such changes. While the foreign sector and rural areas have successfully responded to market reform, much remain to be desired in the transformation of the state-owned enterprises to more efficient production units through reform. Continuing reforms, particularly in the fiscal and financial sectors, have been instituted to support and improve the state-owned enterprise sector that faces increasingly difficult situation due to competition from the nonstate sector and imports. This will be discussed in a separate section later. The changes and growth that followed have, nonetheless, been met with problems

of inflation,

corruption,

anc_ periods

of slowdown

and 1990s. These problems have prompte_t some analysts bility of China to sustain the initial growth it experienced reforms. However, the favorable initial Conditions and

in the 1980s

to doubt the capaafter undertaking the gradualist ap-

proach countries pean to reformsin the seemtransition to have distinguished from a pl_rmedChina economy from to the a Eastern market Euro one. 3 Aside

from much

faster growth,

China h_s shown

greater

resilience

to the

i 3. There is, however, a theoretical debate on Chinese path to development. The gradualist or 'experimental' school believes that the tremendous productive forces in China have been released with the gradual opening of the economy by giving market- and performance-based incentives to market players and exposing them to domestic and forOib_mcompetition. This school is espoused by Peter Nolan,

Barry Naughton,

Thomas

Rawski, Gary !efferson

and, more recently, Joseph Stiglitz.

China's Economic Growth: Implications

to the ASEAN

economic obstacles it faces. It was able to address in 1988-1989 and 1993-1995 and to easily bounce economic difficulties in 1989-1990.

the spurts of high inflation back from the political and

in the 1990s, with very strong macrofundamentals, China grew at rates highest in the world. Its gross domestic savings and gross investments in the last decade were more than 40 and 34 percent of GDP, respectively. Performance in the external sector was also spectacular. Exports grew by an average annual rate of more than 15 percent in the 1990s, enabling the international reserves in 1997 to reach a level more than 12 months equivalent of its imports. Foreign inflows were mostly direct investments, which increased 275 times from 1983 to 1996: Fiscal deficits were reduced from more than 2 to 1.5 percent from early 1990s to 1996, and inflation was reduced from double-digit in 1993 to 1995 to 8.3 percent in 1996 and 2.8 percent to 1997. With these strong macrofundamentals combined with the non-convertibility of its currency, China was not affected by the Asian economic crisis the same way other Asian countries were affected.

IMPACT OF CHINA'S ECONOMIC A THEORETICAL ANALYSIS

GROWTH:

For three decades since 1949 when the communists took over China, its foreign trade reflected its international relations as well as its economic needs in the development process. 4 In the 1950s, foreign trade with Soviet Union and other socialist countries expanded rapidly. When the political relations with Soviet Union turned sour, China became relatively autarkic as it adopted a self-reliance polic3a In the 1970s, China's foreign trade became more open (this time toward Japan, the United States, and West Europe) although import-substitution strategy continued to guide its foreign trade. And in late 1978, China really opened up its economy and embarked on major economic reforms. It embraced the growth strategy of export industrialization, the same strategy adopted by the newly industrialized economies and the ASEAN countries. Such a drastic policy has enabled China's exports and foreign investments to grow at remarkable rates in the last couple of decades.

Opposed to the gradualist school is the convergence school represented by Jeffrey Sachs, MichaelBruno,GangFan,Geng Xiaoand WingThyeWoo.Also calledthe "bigbang' theory,th_ convergenceschool "views the Chineseeconomicsuccessas thetypical EastAsian successstory of countries openingtheirmarketsand trade sectors.It defends the one-shot andblanket libeP ali_ation and privatizationof the economy and the state sector as the best path for transition economies." SeeJ. Lira,this vol., pp. 27-84. 4. Eckstein(1977),

China's Economic GTvwth and the ASEAN

The impact of China's growth based on theoretical analysis is rather forbidding. Following the Heckscher-Ohlin-Samuelson theory, which relates the resource endowment of a country to the economic characteristics of the commodities traded, it is expected that countries that produce labor-intensive commodities growth in China's

for the world market would be affected by the rapid external sector. Before China opened up, tlle ASEAN-4--

Thailand, Malaysia, Indonesia, and the Philippines--were pliers of labor-intensive manufactures for the developed

the principal supworld market. In

the 1970s, these labor-abundant ASEANI countries adopted the export promotiort strategy of development and supplied the world much of its light manufactured imports. They also were destinations for foreign investments of the developed and the newly industrialized countries. On the other hand, China, despite its labor abundance, did not have a share of the market and capital from the West because of its dormant external sector. Consequently, labor productivity in China declined as its rapidly growing population had less and less capital to work with. With the opening up of China, whose comparative advantage in laborintensive products is stronger than those of the ASEAN countries, it gradually took over the supply of such import demand of the developed economies. Nevertheless, the labor-intensive light manufactured products produced by China and the ASEAN fell within a broad spectrum of products with different capital-labor ratios. Hence, it is expected that there would be specialization within this spectrum of manufactured exports among the countries concerned. Being more advanced than China, the countries which used to supply these labor-intensive products would now concentrate on the relatively more capital-intensive items among these light manufactured goods, while China would specialize in the labor-intensive goods that have lower capital-labor ratio, s Aside from Having such specialization in their supply of manufactured goods to the rest of the world, China and these Asian countries would also trade with each other based on such specialization. China, which would be growing and industrializing rapidly by then, would become labor-intensive

a market for the relatively more capital-intensive among the goods of tile ASEAN countries while the ASEAN countries

would find it cheaper capital-labor ratio.

to import from China labor-intensive

goods with lower

Another significant impact of Chinals open econolny on the rest of the world would be on international capital _low. Growth irt China would certainly attract investments. Moreover, capital in China would be expected to ! I

5. This is due to the large pool of labor China technologically advanced.

has; there are some

sectors

i.n which

Clai,na is

China's Economic Growth: Implications

to the ASEAN

become more productive vis-a-vis the other Asian countries because of the bigger labor force to work with. With trade between China and the other labor-abundant Asian countries now based on the relative degree of laborintensiveness in the production of light manufactures, this development of capital flow would again affect the structure of trade between them. With more capital from the West as well as from the more developed Asian countries, China (where thei'e is no mass labor emigration) would now be able to produce labor-intensive export products with higher capital-labor ratio. With the increase in China's labor force productivity, the ASEAN countries would lose their comparative advantage vis-h-vis China in the production of higher capital-labor ratio labor-intensive goods. Because China would now be enjoying higher capital endowment than the ASEAN countries, it would become more productive in exports where scale economies are significant. This would give China an absolute Ricardian advantage in most of the laborintensive exports over these countries. The exception might be the technologically more advanced, higher capital-labor products in the spectrum of labor-intensive exports of the newly industrialized Asian economies. Based on the Heckscher-Ohlin-Samuelson theory of trade, the impact of China's phenomenal growth could be very detrimental to the growth of the developing countries in Asia. The potential negative effect of China's economic growth on the ASEAN has led to conjectures concerning the likely significance of China's role in the recent Asian economic crisis. 6 China could be putting pressure on the rest of Asia through its lower real wage rate and its capture of a large share of direct foreign investment aside from the higher exchange rate at which China pegs its currency. Fortunately, the empirical investigations of this project do not substantiate such theoretical prognoses. The research findings show that, so far, China's economic growth presented to the ASEAN countries market opportunities rather than impediments to their economic growth. CHINA'S

EXTERNAL

SECTOR

GROWTH

The largest component contributing to China's growth is the external sector. With respect to trade, the market-oriented economic reforms brought about expansion in its trade with the rest of the world as well as changes in its commodity structure. With trade liberalization policies and some institutional changes, the demand for economic efficiency has gradually moved its trade pattern towards conforming to its resource structure. 7 6. Fabella(1999). 7. Song (1996).

China's Economic Growth and the ASEAN

Another important objective of the.open-door policy was to absorb foreign investments for capital and foreign,exchange. Focus was on direct foreign investments as they also introducedl management skills and production technologies. China ranks tenth among the world economies in terms of export value of goods and commercial services in 19!97. Total trade volume grew at an average of 1.3.5percent in the period 1980-1996. The average growth rate for total exports and imports were 14.2 and 12.9 percent, respectively, for the period. Hence, trade dependence, Le., trade as a percentage of gross domestic product, grew significantly. Despite its large internal market, export and import dependence ratios (export/import as a percentage of.GDP) both grew from less than 10 percent in the 1980s to more than 20 percent in the 1990s. China now trades with 220 economies in the world, from 173 in the late 1980s. Its major trading partners remainl the developed economies--Japan, the United States, and Europe--on which China is heavily dependent for its imports. In 1995, Hong Kong ranks first lamong China's trade partners as a buyer of its exports although it is only second to Japan in terms of total trade. Trade with the ASEAN trails far behind these countries although the growth rate of this trade has been rapid. Exporlis and imports from the ASEAN-5 each constitute around 6 to 7 percent in China's totals in 1995. Since 1980, the share of imports from the ASEAN-5 in Ithe total imports of China has increased while the share of exports to these countries in its total exports has declined slightly. The commodity structure of China's trade also transformed dramatically from the 1980s to the 1990s. China's exports and imports have adjusted to the country's changing comparative advantage over time. Trade liberalization and economic structural development have transformed China's competitive advantage profile significantly. China has lost comparative advantage in many of its agricultural and mineral products and gained instead comparative advantage for capital-intenslve products. '_ Both exports and imports shifted from agricultural to industrial products. For exports, the ratio of primary iproducts to manufactured goods changed from 50:50 to 1.8:82from 1980 to[1993. Rural reform and direct foreign investment promote the growth of n0n-state enterprises and export-oriented industrialization. The share of rurej enterprise export in total exports increased from 5 percent in 1985 to 16 percent in 1991.9 By 1995, this share increased to 33 percent. _째 Many of the eXport-oriented enterprises are for8. Song (1996). 9. Findlay et al. (1992). 10, Liu (1997)_

China's Economic Growth: Implications to the ASEAN

eign-funded. China's DFI exports grew from US$320 million in 1985 to US$61,506 million in 1996, contributing 1.1 percent and 41 percent respectively to total exports. 11 The rapid increase in China's export sector since reform took place has been essentially in the area of labor-intensive exports as the manufacturing sector takes advantage of China's low wage of labor. This phenomenon is expected to continue for several more decades. The wage rates in the coastal areas are likely to rise, but labor in the inland is still cheap and foreign and domestic investments are moving further inland. In the case of imports, the ratio of agricultural to manufactured products declined from 35:65 to 14:86 for the period 1980-1993. Capital-intensive imports also rose very rapidly. In 1993, they occupied 72 percent of total imports and 82 percent of manufactured imports. 12 Dominating China's imports are machinery and technology as well as materials necessary for the manufacturing of exports. With increasing economic prosperity, the demand for consumer goods imports is also on the rise and is expected to continue to increase more sharply. Direct foreign investments in China have also increased rapidly as a result of more economic liberalization and structural changes in the domestic economy. China's potentially expansive market and abundant supply of low cost labor are important pull factors for investors. Devaluation of its currency in 1988 and 1994 also increased foreign investments. The Chinese government also provides incentive policies that further attracted foreign investors to China. The incentive package to foreign investors in special zones is comparable, if not better, than those offered by the ASEAN-4.13 The impact of China's direct foreign investments on its income growth has been strong--in fact, much stronger than the impact of domestic capital. 14 The share of foreign direct investments in China's gross capital formation has increased from less than half a percent in 1980 to 15 percent in 1994. Of the direct foreign investments that totaled US$175 trillion from 1979 to 1996, most were invested in Beijing, Shanghai and the coastal areas where the Special Economic Zones are located. Hong Kong is the largest source of DFI in China, although its share has declined from 67 percent in 1987 to 56 percent in 1990 to 49 percent in 1996. The United States and Japan occupy second place, each having a share of between 10 tO 14 percent. Taiwan, Southeast Asian countries, Europe and Korea also have substantial invest-

11. 12. 13. 14.

Lardy (1998)_ Song (1996). Tan, this vol., pp. 169-228. Tan, this vol., pp. 169-228.

Chin_'s Economic Growth apzdthe ASEAN

ments. The historical and cultural affinity of the ethnic Chinese in Taiwan and Southeast Asian countries is an important factor for investinents from these areas. China's capital minuscule compared

outflow in terms of long-term investments to its inflow although overseas investnlents

abroad is have in-

creased in recent years. With the high res6rve position it gradually acquired, China expanded its scope of enterprises eligible for overseas investments in 1985. The period 1986-199{) witnessed the rise of big Chinese transnational corporations such as China National Metals and Minerals Import and Export Corporation and China National Chemical hnport and Export Corporation. Based on the number of Chinese enterprises set up overseas from 1979 to 1996, the recipients of the most number i of Chinese investments were the United States, Russia, Hong Kong and Macao combined, and Thailand. In terms of the value of investments, Canada, the United States, Australia, and Hong Kong and Macao combined were the biggest recipients. We have mentioned the growing share of foreign-funded enterprise exports in China's total exports. The regression of total exports versus the amount of inward investments shows a ihigh correlation between the two variables and indicates a significant positive effect of foreign investment inflows on exports: each US dollar of DFI inflow generates US$2.55 of exports} s Most of the DFIs in China are in the industrial sector resulting in the tremendous expansion of export manufaetures. _6

CHINA'S

TRADE

WITH THE ASEAN._5

From China's perspective, the value of Southeast Asia is mainly strategic rather than economic. Therefore, to a certain extent, China's economic relations with the ASEAN are politically motivated. In the last couple of decades, the ASEAN as a whole has become an important trading partner of China although still lagging behind China's major partners. During this period, the trend shows that China's imports from the ASEAN is increasing faster than its exports to the ASEAN. The ASEAN countries have increasingly been exploring China as an alternative market to the developed countries during this period, given the prolor_ged recessions in both the United States and Europe in the 1980s.

15. Tan, this vol., pp. 169-228. 16. The share of investment share declined in mid-1990s

value in industry was _s high as 80 perÂ˘ent in 1991. However, as investment in the real estate sector increased.

the

China's Economic Growth: Implications to the ASEAN

11f

Between 1975 and 1990, all ASEAN-5 countries established diplomatic ties with China giving economic relations full opportunities to develop from the extremely low levels of the 1970s. The share of trade with China in a particular country's total trade for all the ASEAN-5 has increased from less than one percent in the early 1980s to almost 3 percent in 1996. The share of these exports in China's imports was around 3 percent in the early 1980s and increased to almost 7 percent in 1996. These increases show increasing dependence of the ASEAN on China's market. On the other hand, China's dependence on the ASEAN's market is not as evident. The share of exports to the ASEAN-5 in China's total exports peaked at 10.3 percent in 1985 and gradually declined to around 6 percent in 1995 and 1996. China's exports constituted an average of 2.45 percent of the ASEAN's imports for the period 1980-1996. Hence, although for the most part of the period, China's export value to the ASEAN exceeded its import value from the bloc, the trade imbalance has declined as exports of the ASEAN countries to China has been increasing much faster than the countries' imports from China. Trade between China and the ASEAN as a bloc is now roughly balanced. In terms of value, however, growth in trade with China has increased dramatically. This is because the total trade volumes of China and the ASEAN countries have increased at unprecedented rates. Both the ASEAN's export to China and China's export to the ASEAN have grown at increasing rates. The value of ASEAN-5 exports to China grew from US$539 million in 1981 to US$9553 million in 1996, an increase of 1600 percent! On the other hand, the value of China's exports to the ASEAN increased 638 percent during the period, from US$1196 million in 1980 to US$8829 million in 1996. In the last couple of decades, ASEAN-China trade has been vigorous despite similarity in resource endowment between China and the ASEAN countries. In varying degrees, China and the ASEAN countries are losing their comparative advantage in agricultural exports and increasing their comparative advantage in labor-intensive exports (except Singapore and, to some extent, Malaysia). The commodities topping the exports of these bilateral exchanges are converging toward labor-intensive manufactured products. Certain resource exports such as petroleum of indonesia, rubber of Malaysia, and rice of Thailand are still important trade commodities. Other than these, the ASEAN countries and China have engaged each other economically "by exploring diversity in their similar resource endowment and exploiting differences in their developmental needs. ''_7 The trade structures of these industrializing countries have rapidly changed in the same direc, tion. The share of manufactured goods within total exports has increased 17.

Palanca,

this vol.,

pp.

103-167.

Chi_za's Economic Growth and the ASEAN

sharply as these countries exploited their low-cost labor comparative advantage in manufactured exports. With such developments, the bilateral trade between the ASEAN countries and China has been based on complement째 arities within manufacturing industries, iexploiting horizontal division of labor. The products in the machines, transport and equipment industry dominate the bilateral trade of China ar(d the ASEAN countries in more recent years making

intra-industry

division

of labor the basis for bilateral

ex-

changes. 18At the same time, niche products for exchange are being explored and identified for more exchanges. Diversity of manufactured products in aspects of designs, etc. makes trade possible despite similar export profiles and seeming competitive nature of tradestructure. Besides trade, direct foreign investment is also an active component of ASEAN-China economic relations. Foreign investments of the ASEAN-5 in China increased from US$37 million ir_ 1987 to US$3,185 million in 1996. These levels represent 1.4 percent and 7.5 percent, respectively, of total direct foreign investments in China. China's investments in these countries for the period 1979-1996 is only US$134 million China's direct investments abroad.

making

up 6.2 percent

of total

How were the ASEAN countries affected by the tremendous surge of direct foreign investment in China in the 1990s? Tan's study shows that the dramatic increase in China's direct foreign investments has had no negative ,effect on the ASEAN but instead presented the emerging economies investment opportunities. 19The much-improved share of China in the global supply of DFI has not been accompanied by reductions in the shares of the ASEAN-4 nor of all developing countries as a group. There is no indication that DFIs in China have crowded*out DFIs in the ASEAN. Rather, ASEAN countries, particularly Thailand and also invested substantially growth of China's economy for vestments have been observed to to the host country.

and Singapore, join the world bandwagon in China. They see opportunities in the their foreign investments. Such foreign instimulate exports of the investing countries

BILATERAL RELATIONS WITH SINGAPORE,THAILAND, MALAYSIA AND INDONESIA I

This section discusses the bilateral economic cooperation between China and Singapore, Malaysia, Thailand, and Indonesia with the given the bilateral political relations. 18. Palanca, this vol., pp. 103-167. 19. Tan,this vol., pp. 169-228.

China's Economic Growth: Implications

For both China

to the ASEAN

and the ASEAN

countries,

bilateral

trade

is not just

based on economic interests but on political and security interests as well. From China's perspective, individually as well as collectively, the ASEAN member states help China realize its vision of a multipolar order. On the other hand, these ASEAN countries accept China's interests in the region although they are also generally apprehensive of the effect of China's increasing military and economic power in the region. Most of them, however, believe in befriending China, engaging it politically as well as economically. Structural development in China and the ASEAN countries has affected their bilateral trade commodity structure, which has evolved from exchange of primary products such as food and crude materials to trade of manufactured goods as well as machines and equipment from 1980 to 1996. Singapore Among the ASEAN countries, Singapore has the highest share in trade with China accounting for approximately two-fifths share in total ASEAN5's trade with China since 1980. Trade volume grew from US$728 million in 1980 to US$7147 million in 1996, increasing more than ninefold. Initiall_ Singapore traded machines and equipment for China's primary products. Among the ASEAN countries, only Singapore has revealed comparative advantage indices that are not significantly correlated with those of China. However, comparing 1987 and 1995 data, the correlation coefficient increased in value. By 1996, as in the case of China's bilateral trade with other countries, machines and equipment dominated the exports and imports of Singapore to and from China. With respect to foreign investments in China, Singapore also greatly exceeds the ASEAN-4. For the last 13 years, the amount of Singapore's investments in China is more than twice that of all the ASEAN--4 combined. The increase has also been rapid--from US$37 million in 1987 to US$53 million in 1990 to US$492 million in 1993 to US$2247 million in 1996. In contrast, China's investments in Singapore are very US$15 million for the period 1979-1996.

small.

They amounted

to only

The spectacular growth in the levels of Singapore's trade and investment ties with China can be attributed to Singapore's large total trade volume and investment capability as well as the high degree of complementarity between exports of the two countries. Much of it, however, can also be said to be due to Singapore's conscious effort to engage China economically reflecting its recognition of China's huge economic potential and power status. Politically, Singapore is a strong supporter of China having similar political cultures based on Confucian authoritarianism. A common cultural and

China's Economic Growth and the ASEAN

language affinity has also enabled Singaporeans to trade and invest heavily in China. However, despite its large ethnic Chinese base (or perhaps because of this), Singapore strives hard to be identified with the Southeast Asians rather than with the Chinese. Singapore considers establishing friendly relations with its Southeast Asian neighbors more important than with China. As a matter of fact, Singapore is the last among the ASEAN-5 countries to establish diplomatic ties with China. It was done in October 1990, two months after Indonesia established formal ties With China. Malaysia Malaysia-China trade has also been robust. From the early 1980s to mid-1990s, Malaysia's exports to China increased over 1127 percent, from an annual average of US$157 million for the period 1980-1984 to US$1926 mib lion for the period 1994-1996. These values correspond to share in total exports of around 1.2 percent and 2.8 percent, respectively. Malaysia's import ,from China, which maintains about the: same percentage share in its total imports for the whole 1980-1996 period, has not grown as fast. The growth from the early 1980s to mid-1990s was about 573 percent, from an annual average of US$188 million for 1980-1985 to US$1258 million for 1993-1996. Wood and rubber are among the top 10 exports of Malaysia to China for the entire period 1980-1996. China's exports to Malaysia have progressed from basically food items (rice, meat, fruits, and spices) in the early 1980s to basic manufactures and chemicals in 1988. In the 1990s, intra-industry trade of machines---electrical and non-electrical, office machines, and telecommunication equipment--<tominates trade between the two countries, although the crude materials, wood and rubber, remain important exports of Malaysia to China. Until the mid-t990s, Malaysia's 4irect foreign investments in China were insignificant. From a value of US$1 million in 1991), they increased to US$91 million in 1993 and US$460 million in 1996. The spurts in exports to China for the mid-1990s

period

can probably

be explained

by the increase

investments during this period. _ Among the ASEAN countries, M_laysia is most sensitive to Chma's dominant presence in the region. It has, isince early on, been reacting with utmost pragmatism. Malaysian Prime Minister Mahathir Mohamed, in his visit to China in 1993, suggested that China and Malaysia should "seize the present opportunity to contribute to regional peace and stability and promote mutual devek)pment

by actively bo!)sting economic [

cooperation.

20. McDougall (1997),pp. 214. (Quoted in Bavie "a,this w_l.,pp. 229-269.)

"2째 As

China's Economic Growth: Implications to the ASEAN

has been shown, economic relations with China have increased very significantly since 1993. As a matter of fact, Malaysia, which has been criticized by the West for its authoritarian government, now sees relations with China as a leverage

with these powerful

countries.

Thailand Like Malaysia, Thailand has had very strong economic relations with China since the 1980s, maintaining relatively substantial trade shares and volumes with China. Also, similar to Malaysia, Thailand has reduced its trade balance with China since exports to China have been increasing at faster rates than imports from China. From the early 1980s to mid-1990s, exports increased by 870 percent, from an annual average of US$181 million for the period 1980-1984 tO US$i755 million for the period 1995-1996. On the other hand, imports increased by just 552 percent, from an annual average of US$231 million for 1980-1984 to US$1505 million for 1995-1996. Thailand is an exception among the ASEAN countries in that food products are still among the top exports to China. Rice, Thailand's eighth top export to Chinain 1980, became the third in 1988 and the second in 1996. Sugar topped the list in 1988 and occupied the fourth position in 1996. The decline in the revealed comparative advantage of agriculture-intensive exports has been stronger for China than for Thailand. Aside from trading different items of machines and basic manufactures with China, Thailand continues to export primary and basic products, i.e., rice, sugar, crude mate* rials and chemicals. In contrast, imports from China consist mostly of manufactured products. Thailand-China economic relations are based on very pragmatic strategic considerations. Thailand considers China a dominant power and wants to align with it. China, on the other hand, sees Thailand's strategic importance in Indochina politics. Trade balance has generally been in China's favor but is getting even because of a rapid increase in Thailand's exports to China. This increase in exports may in part be explained by its capital outflow to China that started in the late 1980s, when Thailand invested heavily in the hmnan capital-intensive and technology-intensive industries. A rapid increase in direct investments in China is seen for the 1990s. Utilized amount was US$234 million for 1993 and US$328 million for 1996.

21. Baviera, this vol., pp. 229-269.

China 's Economic Growth and the ASEAN

Indonesia Indonesia-China trade grew remarkably from very negligible levels starting 1985. In fact, Indonesia ranks first among the ASEAN countries in terms of the growth rate of the country's export to China for the period 19801996. In 1996, the share of its trade withl China in the country's total export and total import is highest among the ASIEAN-5. While trade has grown very rapidly, capital flows to and from China are still small. Indonesia is strategically important to China due to its size and status in the ASEAN as well as its strategic location in the Straits of Malacca. With the rise of China as a major power in world politics, Indonesia saw the importance of recognizing China in international diplomacy. Such formal relations became imperative when China and the United States improved their relationship in the 1980s. Indonesia finally normalized diplomatic ties with China in August 1990. Indonesian trade with China increased significantly since then with exports to China far exceeding imports from China. It can be surmised that "China was using trade t_o help consolidate newly restored political relations with a strategically important neighbor. ''2_ China also gained political points with Indonesia by offering a substantial assistance package when the 'latter suffered the Asian financial crisis in 1997. The assistance consisted of US$3 million worth of medicine and materials, US$200 million worth ,Indonesian

of export credits, bailout package.

and US$400 million contribution

CHINA'S BILATERAL ECONOMIC WITH THE PHILIPPINES

for the IMF's

RELATIONS

Philippines-China economic relations dated as early as the 9_hcentury when the Philippines, together with other Southeast Asian countries, con ducted trade under the "vassal tributary missions." Trade continued to prosper despite discriminatory policies durir_g both the Spanish and American colonial rules. But with the establishment_ I of the People's Republic of China under the Chinese Communist Party on October 1, 1949, trade between China and the Philippines was suspende_l. Instead, the Philippine government signed an agreement with Taiwan qn trade relations and exchange of specialists and information. Commercial ties with China were _enewed only in 1971 and became vigorous when then Philippine President Ferdinand Marcos established dip22. Baviera, this vol., pp. 229-269.

China's Economic Growth: Implication

to the ASEAN

lomatic relations with China in 1975. Trade volume rose from US$1.4 million in 1971 toUS$72.3 million in 1975 to US$250.7 million in 1980. Due to the positive political decisions deliberated by the leaders of both countries, trade volume grew significantly, although the balance of trade had been in China's favor. Essentially; crude oil at concessional prices and high-grade coal were the Philippines' imports from China and coconut oil was its major export to China. In the 1980s, however, when the Philippines was beset with political and economic crises, trade volume dropped markedly, The trade balance policy pursued in 1977, which attempted to balance trade with China, also contributed to this decline in trade. The Aquino government, which toppled the Marcos dictatorship in 1986, worsened the Philippines' relation with China by focusing its attention on Taiwan, which was offering economic support to the Philippines. As a consequence, trade volume between the Philippines and Taiwan rose dramatically while trade volume between the Philippines and China plunged to a new low. With Taiwan's "money diplomacy," some Philippine legislators proposed "a review of the country's 'OneChina Policy,' the passage of a Philippine-Taiwan Relations Act, and granting diplomatic status to Taiwan officials and businessmen in the Philippines."23 The policy of the Aquino government to focus on Taiwan happened during the period when economic development in China was very rapid. Hence, unlike the other ASEAN countries whose economic growth was stimulated by China's dramatic economic growth, the Philippines did not benefit much in that respect. On the other hand, sad to say; Taiwan's promises to help build the Philippine economy failed to materialize when Aquino stepped down as president. Under the Ramos government (1992-1998), Taiwan remained a sensitive issue in the Philippines" diplomacy with China. In its first year, the issue was aggravated with the meeting Ramos had with Taiwan President Lee Teng-Hui in Subic in February 1993, which the Chinese considered a violation of the One-China Policy. A state visit to China by Ramos in 1993 and a return visit by Jiang in 1996 softened the cold diplomatic situation. Notwithstanding these visits, the Spratlys issue provoked much national reaction from the Departments of Defense and Foreign Affairs of the Philippines. China's occupation of the Mischief Reef in 1995 and, later, the attempted occupation of the Scarborough shoal were considered by the Philippines as threats to its national security. pines

Despite the tense and cold diplomatic relations between the Philipand China since the Spratlys issue in 1995, economic relations have

23. B.Lim,this vol., pp. 271-301.

China's Economic Growth and the ASEAN

been relatively vibrant in 1995 and 1996. Contrary to expectations, trade and investment activities between the Philippines and China increased sharply. The basis for such increase in economic relations can be traced to economic policies taken by both governments. These policies provided better trade and investment opportunities for business people. Traders and investors from both sides respond to market sigl_als and government policies_ The lifting of the trade balance policy by Ramos shortly after he took office in 1992 was a positive factor in stimulating Philippin_s-China trade. China, on the other hand, further adopted market liberalizdtion program for its foreign trade system in 1994. Policies that increased investments include the liberalization of foreign exchange in the Philippines arid China's improved incentive program for foreign investment. Attracted by these incentives, Filipinos, particularly the ethnic Chinese, responded by investing in China. However, the biggest Philippine investment in China has been by San Miguel Corporation, a non-ethnic Chinese business. The investments of the Philippine Chinese were mostly small and medium scale, lÂ˘_w-tech enterprises in manufacturing, services and real estate development. It is obvious, therefore, that with _market liberalization in China, its economic relations with other countries ate affected not just by political relations but are also dictated by market f(Irces and government policies. Increasingly, the trade and investment entitties are no longer the governments but individual corporations. As it is the case with the other ASEAN countries, with regard to Philippine trade with China, there has also been a development iowa rd horizontal division of labor over the years. While in the 1980s Philippines-China trade was in the area of agricultural products and basic material, in 1996 several commodity classifications under the "machines and equipment" category were among the top Philippines' exports:to China and also the top among China's exports to the Philippines. This kirid of exchange reflects intra-ind ustry trade relations between the two countries.

EFFECTS

OF CHINA'S

GROWTH

ON THE ASEAN

China's economy has grown in leafs and bounds since it decided to open up and undertake a program of econ_ nnic reform in late 1979. What are the impacts of this growth on the ASEAN countries, all of which have been striving to achieve "NIC-hood" ward-looking market economies,

even befi_re China opened up? Being outChina an ] the ASEAN-5 countries focus on

exports as the engine of growth. China, h(_wever, has not been a competing force in the region but instead has been anlimpetus for greater growth.

China's Economic Growth: Implications to the ASEAN

For the period 1980-1988, China's external trade volume grew at an annual average of 13.2 percent. This growth rate was much more than that of any individual ASEAN-5 countries. Growth of the external trade of the ASEAN-5 countries as a whole was at an annual average of 5.9 percent, faster than the average with its extraordinary ASEAN countries. This in the years following,

of the world (4.8 percent). During this period, China, growth, did not pose as a competing force to the can be seen from the growth of the ASEAN countries in 1988-1996, trade of all the ASEAN-5 grew at un-

precedented high rates, with the annual average being 16.3 percent for total trade volume. China, still growing very fast, experienced an average growth rate of 13.8 percent for total trade volume. The average trade growth rate for the world was 8.5 percent, much lower than the ASEAN-5 countries and China. Here, the synergy effect of China's growth in the region and in the world since it liberalized its economy is illustrated. China's open economy has been an important market for the ASEAN countries. Bilateral trade between each of the ASEAN-5 countries and Chin_ has been such that the export of each of the association countries to China increases as a sha,'e in the country's total exports. With respect to direct foreign investments, statistics show that massive flow into China did not have any crowding out effect on the ASEAN-4. 24 Global supply of DFI increased significantly as a result of China's "opendoor" policy. Due to the synergy effect, East Asia, both Northeast and Southeast, became a region of focus for investors. The share of the developing countries in general and the ASEAN-4 in particular in global supply of DFI did not decrease even as China increased its share, indicating that the volume of DFI inflow to the developing countries actually increased. On bilateral terms, Thailand and Malaysia have been able to establish active two-way DFI flows with China. These flows were based on the complementation with respect to raw materials, labor skills and technology, aside from the rationale of easier access to China's enormous market. Based on the ASEAN-5 cases, evidence of a positive correlation between export to China and investment in China was found. The data on ASEAN-China bilateral relations supports the likelihood that trade relations do improve through investment linkages. These positive effects of China's growth on the ASEAN countries are contrary to expectations based on traditional trade theories. The ASEAN countries generally have similar factor endowment as China but cannot compete with China in the extent of labor abundance. China's large population increases its advantage of low labor cost and economies from larger scale of 24. Tan, this voL, pp. 169-228.

China's Economic Growth and the ASEAN

production. It also attracts foreign investments that may be diverted from the ASEAN countries_ Therefore, based on a traditional trade theory that explains the existence of a country's comparative advantage by its factor endowments, China and the ASEAN countries would not have much to trade but instead would compete for markets. However, the synergy effect of China's economic growth has provided vigor and increased both trade and investment activities in the region. The Heckscher-Ohlin-Samuelson tirade model explains trade based on comparative advantage determined by Ifactor and resource endowments. This principle explains traditional international trade, the basis of which has been trade of inter-industry products. It describes exchange of very different types of commodities, usually between countries of very different factor endowments, and generally different levels of development. An investigation of the top commodities being exchanged between China and the ASEAN countries shows that the bilateral trade Structures have moved towards intra-industry

trade. Due to the semblance

of their resource

endowment,

the

trade profile of China and the ASEAN c0untries----except for Singapore and, to a certain extent, Malaysia--are similar.! s Among the ASEAN-5, Thailand's and Indonesia's export commodity structures are most similar to China's. Despite this fact., the bilateral trade of Thailand and Indonesia with China has grown the fastest among th e ASEAN.5 in the last two decades. Manufactured prod ucts dominate trade between the ASEAN countries and China. As a result of the export industrialization program followed by these countries, their industrial structure has been changing and manufactured exports have been growing much faster than traditional primary exports. The manufacturing industry consists of a broad spectrum of goods, not only in terms of capital-labor ratio but also, due to the heterogenous nature of the goods, the variety and forms each product can have. Because product differentiation characterizes manufactured products, the opportunities for intra-industry exchanges of manufactured goods are particularly plenty. Consequently, bilateral exchange S between China and the ASEAN countries are converging towards manufactured goods. Besides competition in price, non-price competition such as quality and style is now important in their bilateral trade and their trade with the developed countries. despite

It is evident therefore that for the ASEAN nations' trade with China, similar resource endowment and industrial structure, competition

and specialization is possible through horizontal division of labor. Given this kind of trade structure, the level of competitiveness and zeal in exploring 25. This is based dexes.

on the strong

correlation

between

i their revealed

comparative

advantage

in-

China's Economic Growth: hnplications

trade niches are key factors

to the ASEAN

in determining

trade volumes.

This is well sum-

marized by Ariff: "International trade is too complex a phenomenon to be adequately explained in terms of factor and resource endowments. The new literature tells us that it is competitive advantage based on policies and strategies, not comparative advantage based on factor and resource endowments, that determines the trade pattern (Porter 1989). How else can one explain the creditable performance of Singapore which is resourceless and yet so resou rceful."26

CURRENT PROBLEMS IN CHINA'S REFORM OFTHE SOEs

ECONOMY:

Since opening up, the biggest economic problem China faces has been the state-owned enterprises. A series of reforms that aim to shed redundant labor and make the SOEs responsible for their performance has been undertaken since the early 1980s. Output share of state sector declined from 78 percent in 1978 to 55 percent in 1990 and 34 percent in 1995. However, reform of this sector is too slow to cope with the increasing competition from the non-state sector and imports. Over time, the SOEs deteriorated in efficiency and financial performance. In 1996, half of these enterprises reported losses and the sector as a whole also made a loss. Most of these SOEs are plagued with redundant labor, estimated to be a third. The wages plus social benefits given to labor of the SOEs are very much above rates commensurate wiita productivity. The SOE problem is of great concern to the Chinese government. How the problem is addressed will determine to a great extent the economic prospects of China. The sector, with its inefficiency, can also limit the further liberalization of the trade system and financial sector. It is also a fiscal burden. However, reforming the SOEs means massive lay off of workers and shedding of their welfare provision function. The unemployment and/or the lowering of living standards of SOE workers due to the reform can have consequences on social and political stability. 27 Because of this, the pressure on SOEs to become profitable or go out of business was eased despite the draft bankruptcy law being in place since 1986. Major banks continued to extend stabedirected lending of working capital to money-losing state enterprises.

26. Ariff (1994), p. 38. 27. SOE workers are mostly in the urban sector, which is more politically areas.

sensitive

than the rural

Chi_a_ Economic Growth and the ASEAN

The economic slowdown due to the Asian crisis put more pressure on reforming the state-owned enterprises as well as the financial and fiscal sectors. In recent years, SOEs have been under stricter budget constraints with less subsidies and loans from the government. Laying off of workers for the enterprises that go bankrupt and those that try to streamline their personnel means transferring of social service obligation from the SOEs to tile private sector and national and local governments. The fiscal and financial sectors face constraints posed by reforms in SOEs. With increasing losses and deficits fin the SOEs and reforms that allow profitable SOEs to retain part of their profits, the tax effort (tax revenue to GDP ratio) fell substantia Ily from 28.4 percent in 1980 to 10.5 percent in 1997. On the other hand, government expenditures have increased due to the need' to take over the provision of social safety nets and social insurance that used to be provided by the failed SOEs. Althot)gh government subsidies to SOEs are reduced, the government is still expected to raise large amounts of money in the short run to capitalize a v_ry troubled financial sector as the state-owned banks are saddled with non-performing loans. 2_ Recently, a solution to this huge problem was made by the creation of asset management corporations which, thi'ough debt-equity swaps, will help restructure many major enterprises. For example, Cinda Asset Management is to buy fl3e non-performing loans from China Construction Bank, one of the four state-owned banks. State-owned enterprises with the bad loans are forced to restructure, layoff workers, and become more efficient in order to repay the bad loans. It is expected that the management companies will start the adoption of basic commercial and market-based banking practices for loan transactions to the corporate sector. It is also expected that the nonperforming loans of the other commercial state-owned banks will be taken care of as well, thus helping the recapitaliZation of these banks. With respect to ownership reform Of state-owned assets, the Chinese government tries to retain its domifiant control over enterprises in the upstream and strategic industries, those thatiinvolve economies of scale, externalities and "learning-by-doing." There is evidence l:hat the government has indeed been privatizing or closing small axld medium SOEs involved in trade and, the downstream industries and keep!ng firms in the upstream industries, industries important to the developlnent of high technology and the industries of public utilities_ 29 The government is also focusing on housing, education and health sectors. Housing supports the SOE and labor reforms and, at the same time, has

28. 29.

Non-performing Nolan and Wang

loans are estimated (1999), pp. 169-200.

I to be 24 peretent

o[ total

loans

in 1997.

China's Economic Growth: hnplications

to the ASEAN

strong repercussions for growth. It contributes to labor mobility and has significant multiplier effect on domestic demand and labor multiplier. Education and health for the general public are also critical sectors as they are important for social stability, particularly if seen in the light of the unequal distributional effect of growth. PROSPECTS China's economic growth has slowed down since the Asian crisis. _ One important negative consequence of the crisis is the effect on China's exports, which declined due to the currency depreciation of countries affected by the crisis. Growth rate has gone down from 8 to 9 percent in 1997 to just 6 to 7 percent in 1999. The economy now faces structural changes in patterns of both domestic and international demand as well as a less favorable world environment. With such problems, the sense of urgency for reform is stronger than ever. The experiences of countries affected by the,Asian crisis provide lessons for reform in China's financial institutions and regulations. Even the crackdown on corruption is believed to have been influenced by the economic crisis including the political developments in Indonesia. China has been vigilant all throughout the crisis keeping its economy as resilient as possible. The economy has bounced back quickly. The most recent statistics show that China's economy is again accelerating, after slower growth at 6 to 7 percent due to the Asian financial crisis. China's GDP grew 8.1 percent in the first quarter of 2000 while the growth forecast for the whole year is between 7 and 8 percent. 31 China's economic growth prospects, on which relies its political stability, depend strongly on its domestic and external economic environmer_t. The re-absorption of displaced labor and viability of the state enterprises and financial institutions also depend on such an environment. Trade continues to be a strong stimulating factor in the growth process. The expected entry of China to the World Trade Organization will pressure it to further promote its trade volume and efficiency. Much depends on its SOE and financial reforms that can mean either more efficiency and profitability or, if unsuccessful, can mean financial turmoil as the system will have to conform to the regulations of global trade and finance. If the reforms are realized, we can expect that in the medium and long term, given a positive world environment, China will be heading towards real economic development. 30. China was spared from the crisis because of its strong maerofundamentals, plus the fact that its capital market was not open, currency not convertible, and most of its foreign investmetllts were direct investments. 31. Brown (2000).

Chh_a s £conomic Growth attd the ASEAN

What prospects lie ahead for ASEAN-China economic relations? China's increase in efficiency due to liberal policies as well as institutional •changes and international exposure can gradually erode the competitive advantages that the ASEAN countries now have over China. The ASEAN nations will face stronger competition and will have to adopt policies and strategies to likewise increase also their efficiency and competitive levels. Following the direction of intra-industry exchange in their trade with China, they will need to look more intensely for new niches and develop a new pattern of specialization. China is experiencing a downward trend in agricultural comparative advantage. With this trend, plus the strong focus on industrialization, it is expected that the import demand for food products and basic materials for China will increase. The demand for better quality and more variety in consumer goods, for both food and non-food items, is expected to rise with per capita income increasing. All these trade opportunities are expected to multiply following China's accession to the World Trade .Organization. China's demand for imports will increase when it opens its ••entire economy. So far only the coastal areas and some key cities are open. With respect to industries, more will be open up for foreign investment. Premier Zhu has indicated that China "will t_ake on an active role in economic globalization by gradually opening ance, securities, telecommunications, investors. ''_ Correspondingly, vestment outflow as well.

commerce, tourism

foreign_ trade, banking, insurand media services to foreign

we can expect that China will increase

its in-

In the past decades, the general political relations between China and the ASEAN nations set the conditions for bilateral economic cooperation. More recently, with China's economy becoming more market oriented, many trade and investment decisions of the Chinese and the ASEAN nationals have been based on the profit opportunities available to them. From 1993 to 1996 when China experienced a boom in direct foreign investments, business people in the Philippines .joined the global bandwago n in investing and trading with China despite the political tension between, the two countries created by the Spratly issue. From a long-term-t_erspective , it is _mportant that "both the ASEAN and China exert greater efforts to expand mutual trust and define the norms that will g-uide their political security

as we_l as economic

relations. "_:_For the

Philippines, the long-term imperatives of itS"security require the maintenance of peace and stability in the regional envirof_ment. This means a friendly relationship with China, one of the major powdrs in the neighborhood. 32. Brown (2000). 33. Baviera, this vol., pp. 229-269.

China's Economic Growth: implications to the ASEAN

Over the last couple of decades, all the ASEAN nations have developed favorable political relations that can boost future economic cooperation, both bilaterally and multilaterally. As a bloc, the ASEAN and China can collectively move for a comprehensive multilateral trade negotiating strategy to promote their interests. With the current trend of regionalism, countries in East Asia have come to realize that they stand to lose market access and export demand if they do not develop multilateral trade negotiations and agreements. The experience of the recent financial crisis also shows that regionalism is important not only to address regional economic, political and security issues but also to safeguard against another regional crisis. It is hoped that the formation of the ASEAN-Plus 3 will increase the mutual economic dependence between the ASEAN nations and China even as these countries increase their integration with the global economy. _

34, ASEAN-Pltis 3 refers to a new emerging framework for regional economic cooperation among the East Asian states of the ASEAN, China, Japan and Korea that was given impetus by the Asian crisis.

Chi_a's Economic Growth and the ASEAN BIBLIOGRAPHY

Ariff, M. 1994. ASEAN's Comparative Advantage in a Changing Pacific Division of Labor: Implications for ASEAN-China[ Economic Relations. In ASEAN-China Economic Relations: Industrial Restructuring in ASEAN and China, edited by Joseph Tan and Luo Zhaohong. Institut_ of World Economics and Politics and ASEAN Economic Research Unit, Institute of Southeast Asian Studies. Asia-Pacific Economic Cooperation, Economi_ Committee. 1997. 1997 APEC Economic Outlook. November. Brown, O. 2000. China's Economy Aces Test, Says Zhu. In The Asian Wall Street Journal.

_une15.

Eckstein, A. 1977. China's Economic Revolution. ILondon: Cambridge University Press. Fabella, R. 1999, The Great Dragon Effect: Whose Lunch Is China Eating? PASCN Discussion Paper No. 99-02. Philippine IAPECStudy Center Network. Findlay, C., Xiao He Zhang and A. Watson. 1992. Growth of RuralEnterprises, UrbanRural Relations and China's Foreign Trade. Working Paper Series. Center for Asian Studies, The University of Adelaible. Lardy, N. 1996. The Role of Foreign Trade and lhvestment in China's Economic Transformation. In China's Transitional Economy, edited by Andrew Walder. Oxford University Press. Liu, Jun. 1997. An Introduction to China's Tov_nship Enterprises. In China Currents. Philippine-China Development Resourc_ Center. McDougall, D. 1997. The international Politics of bheNew Asia Pacific. Institute of Southeast Asian Studies. Nolan, P and xiaoqiang Wang. 1999. Beyond I?rivatization: Institutional Innovation and Growth in China's Large State-OWned Enterprises. World Development 27(1):169-200. i Song, Ligang. 1996. Institutional Change, Trade[Composition, and Export Supply Potential in China. In Inflation and Growth and China, edited by Manuel Guitian and Robert Mundell. international Monetary Fund. State Statistical Bureau. 1998. China Statistical Yearbook.China Statistical Publishing House.

Chapter Two

TheMacroeconomy ofChina in the LateNineties by Joseph

Y. Lim*

ABSTRACT

hina's socialist experiment effected important structural and distributional reforms that laid the conditions for an environment conducive to growth. The market and incentive reforms un-dertaken in the late 1970s to the present built and released productive forces that brought about higher and sustained growth. However, the East Asian crisis came at a crucial time when important changes in the Chinese economy were taking place. China is, more than ever before, dependent on its export sector and high GDP growth to stave off a slackening of domestic demand and, at the same time, allow laid-off workers to be absorbed in either the nonstate sector or the more productive state-owned enterprises (SOEs). This is exactly where the East Asian crisis has affected China negatively. Although there are pressures to devalue the renminbi.h, the Chinese authorities would most likely try to delay this as much as possible since they would not want to ruin an Asian recovery vital to their own export growth. Also, they can win vital political points in the region if they delay a significant devaluation of China's currency. Postponing a devaluation is very f_asible because of high labor productivity, negative inflation and strong external balances. * Professor,School of Economics, University of the Philippines, Diliman.

China's Economic Growth and the ASEAN i

Despite these problems, China's economy is still resilient and even growing at 7 percent annually. The commitment to strong reforms in the stateowned enterprises, the fiscal sector and the financial and will strengthen and deepen economic!development cessfully overcoming the difficulties of the'late 1990s.

sector is encouraging especially after suc-

INTRODUCTION China has been lauded as the grea t dragon and potentially the most powerful addition to the East Asian high-growth economies. It has been in the forefront of economic growth in the 1980s and especially in the 1990s, its GDP per capita quadrupling during the period from 1980 to 1997 (see Table 1)3 China enters a critical crossroad in the late 1990s as the rest of East Asia finds itself mired in the most serious crisis and recession it has ever faced. China must deal with painful

structural

based economy and structural phase of development.

demand

UNDERLYING

REASONS

Good Initial Conditions

reforms changes

FOR CHINA'S for Economi_

in its transition

to a market-

in its climb towards

SUCCESS

a higher

STORY

Take-Off

China's socialist experiment, despit e periods of significant turbulence and excessive restrictions, effected important structural and distributional reforms that laid the conditions for an environment conducive to growth. The market reforms undertaken in the late 1970s to the present were able to build on these conditions and release producti,Oe forces that have brought about much higher and sustained growth. The changes instituted by the socialist government include: 2 â&#x20AC;˘ Successful land reform and a diversified and self-sufficient peasant agriculture; meaning crucial investments in rural infrastructure, in particular, irrigation facilities, the use of improved seeds and fertilizers, and support services for marketing and credit. â&#x20AC;˘ Sufficient social infrastructure in both rural and urban areas for the provision of health services, caUy generated funds.

1, While that of the Philippines 2. Harrold (1992).

and universal

had sunk below its 1980 per capita

education

through

GNP level in 1998.

lo-

Table 1. Some

Macro Indicators

of China

Real GDP per capita(inyum_)

757.4

781.6

836.0

906.4

[023.3

L172.2

GDP by expenditure(inbillions of yuan) GDP by Lndush-ial Origin % Share of GDP by Industrial Origin Agriculture

455.1 451.8 100.0 30.1

490.1 486.2 100.0 31.8

548.9 529.5 100.0 33.3

607.6 593.5 100.0 33.0

716.4 717.I 100.0 32.0

879.2 896.4 100.0 28.4

48.5 44.2 4.3 21.4 4.7

46.4 42.1 4.3 21.8 5_3

45.0 40.8 4.2 21.7 3.8

44.6 40.0 4.6 22.4 3.9

43.3 38.9 4.4 24. 7 5.7

43.1 38.5 4.7 28.5 9,8

T_ksport & Commamications F'mance, Public Admin. & Others

4.5 12.1

4_3 12.2

4.5 13.5

4.5 14.0

4.6 14.4

Employment (in thousands) Agricultme (as % of e_mployment) Manufacturing (as % of employment) Other (as % of employment) •

'.3,610 68.75 15.85 15.40

U,250 68.10 15.95 15.95

L52,950 68.13 15.90 I5.97

54,360 67.08 15.93 16.99

Gov't Deficit (as % of GDP) Revenue (as % of GDP) Expenditure (as % of GDF0

2.80 23.85 26.66

0.52 22.23 22.75

0,53 20.48 21,01

2,545 1.44

5,0,58 2.99

7.82

Onempioyment Rate Labo¢ Productivity Growth Rate of Labor Productivity Gnus Domestic Savings (as % Of GDP) Gross Faxed Capital Formation {as % of GDP)

[v.dustry Mining, Mlg., & Electricity, Gas & Water Ccmstruction Services Trade

256.7

L379.9

i511.2

54_7

fl13.3 D20.2 100.0 27.1

,178.4 ,196.3 100.0 26.8

,&F0.4 A92_ 100.0 25.7

£)46.6 L_90.9 100.0 25.0

44,0 38.9 5,2 28.9 9.2

43.9 38.3 5.6 29,3 9.7

44.1 38.7 5.4 30.2 10.8

43.0 38.3 4.7 32.0 10.0

4.5 14.2

4.7 15.0

4.6 15.1

4.4 14.9

4.6 17.3

31#70 64.05 16.4,5 19,50

_,730 62.42 16.74 20.84

2,820 60.95 17.51 21.54

._7,830 59.99 17.70 22.31

13,340 59.35 17.78 22.87

9,290 60.05 17.29 22.66

_-_ _.

0.72 20.56 21.27

0.62 20.96 21.59

--0.25 21.23 20.98

0.8_ 20.94 21.76

0,53 18.66 19.20

0.91 16.03 16.94

0.97 16.18 1Z15

11,349 8.07

14,987 9.61

17,366 8.72

.2,7"28 4.00

1,4,53 3.94

[6205 5,38

[8,541 4.80

7,960 4.41

4.48

8 25

10.44

14.56

16.21

8.86 6.50

11.57 722

11.27 18.74

4.06 18_33

4.9 1,781

3.8 1,803 1.22

3.2 1,884 4.49

2.3 2,029 %73

1.9 2,240 10,37

1.8 2,515 12.31

2.0 2,663 5.87

2.0 2,887 8.40

2.0 3,120 8.09

2.6 3,189 Z19

34.61 28.96

32.48 25.57

33,72 27.20

33.82 28.13

34.46 29.68

34.34 30.04

35.44 30,57

36.77 3L75

36.34 31.45

35.89 26.35

6.09 6.99

19.12 --4.48 %66 7.0¢_

-4.09 -16_3 7_?.8 S.82

-1.98 10.91 6.73 6._

15.44 27.64 7.74 7.74

5.03 60.02 8.39 12.77

2.58 -8.72 8.78 II.IW

34.86 4.30 " 10.97 _

18.20 27.40 10.39 X1..74

5.28 5.33 9.88 11.17

,_ _. _" _" t_

' Total Reserves minus Gold (wdllions oI dollars) Import Cover (Reserves in # of months of imports) GDP Growth Inflation

Export Import _t in_t

growth rate (%) growth rate (%) _ % of GDp as % oicGD'P

Table t (,..continued)

Exchange Rate (average) % Change in Nominal Exchange Rate %Ciuange in Real Exchange Rate Nominal F2tective Exchange Pate Real Eh_c'dve Exchange Rate

1,4984 -3.64 -3.64

1.7045 13.75 13.75

1.8925 11.03 11.03

1,9757 4.40 4.40

2.3200 17.43 17.43

2.9367 26.58. 26.58

3,4528 17.57 11.07

3.7221 7.80 0.58

3,7221 0.00 -18.74

3,7651 1.16 -17.17

Nominal h'_.terestRate Ra_e. Deposit Rate Lending Rate

5.40 5.04

5.76 7.20

7.20 7.92

72.0 7.92

7.20 7.92

8.64 9.00

11.34 11.34

Real Interest Rate Bav.kRate Deposit Rate Lending Rate

5.40 5.04

5.76 7.20

7,20 7.92

-6.50 0.70 1.42

-7.22 -0.02 0.70

-18.74 -10.10 -9.74

-18.33 -6.99 -6.99

4,504 4,304

5,798 4,913

8,358 5,220 2,300 838

9,609 5,301 3,984 324

12,082 6,179 5,600 _

16,696 9,937 6A19 3/10

23,719 16,571 6,076 I,(Yg2

35_4(} 25,963 8,221 1,155

42,439 32,620 8,806 1,013

44,933 37,118 6,907 908

Total External Debt (in millions of US$) Long-term fi_ort-term

884

_. _r__

Total External Debt (as %of GDP} Long-term Short-term

1.48 1.48 0.OO 0.00

2.02 1.71 0.00 0.31

2._8 1.80 0.79 0.29

3.12 1.72 1.30 0.11

3.91 2.00 1.81 0.10

558 332 2.14 0.11

8.08 5.65 2.07 0_7

11,16 8.20 2.60 0.36

10.74 8.26 223 026

10.27 8.49 158 0.21

Debt Service (in millions US$) Principal Repayments on Long-term Debt _t Pa_ts Long-term Short-term

931 613 318 318

1,723 1,205 518 518

2,091 1,302 789 541 248

2,189 1,389 800 523 277

2,283 1,287 996 610 386

2,477 1,297 1,180 586 594

2,936 1,8Y4 1,062 645 417

3,721 1,956 1,765 1,125 640

4,430 2,285 2,145 1,611 534

5,504 2,365 3,139 2,511 628

8.85

9.44

8.55

8.80

9.92

9.50

9,65

11.51

Debt Service (as % of exports of goods & services)

_, $:_

rrl

Table I (...continued)

_;_

Real GDP per capita (in yuans)

1585.7

L709.6

930.7

167.8

_.417.2

!644.4

ff'/l.8

4)97.7

GDP by expenditttre (in billions of yuml) GDP by Industrial Origin % Share of GDP by Industrial Origin Agriculture Indasffy Mining, Manufacturing, & Electricity, Gas & Water Construction Services tirade Transport& Communications Fman_, Public Adminislffati(m & Others

['832.0 1,854.8 100.0 27.0 41.6 37.0 4.6 31.3 7.7 6.2 17,5

,128.0 ,161.8 100.0 24.5 42,1 37,4 4,7 33.4 9.7 6.5 17.3

586.4 _x3.8 100.0 21.8 43.9 38.6 5.3 34.3 10.3 6.3 17.7

A50.1 _63.4 100.0 19.9 47.4 40.8 6.6 32.7 8.9 6.1 17.6

,711.1 ,675.9 100.0 20.2 47.8 41,4 6,4 31.9 8.7 5.7 175

,940.5 ,847.7 100.0 20.5 48.8 42.3 6.5 30.7 8.4 5.2 17.0

,936.6 _59.4 100.0 20.2 49.0 42,4 6.6 30.8 8.1 5.1 17.6

607,7

F.akoloyment{in thousands) Agriculture (as% of employment) Manufacturing (as % of emp|oyme_t) Other (as % of employment) •

09,090 53.38 15.17 31.44

17,9g0 53.95 15.35 30,70

_,540 53.08 15.59 31.33

3730 51.17 15.77 33.06

rt,990 49.68 16.03 34_28

_9,470 48.59 16.18 35.23

_,.._00 47.80 15.89 36.31

0.80 16.03 16.83

1.11 14_80 17.59

1.00 13.47 17.95

0,85 12.61 16.79

122 11.08 14.48

0.98 10.51 13.36

0,76 10,68 13.31

0.77 11.37 12.14

TotalReserves minus Gold (in millions of dollars) Import Cover (Reserves in number of months of imports)

29,586 8.38

t3,674 10.44

_0,620 3.84

2,387 3.11

)'2,914 6,66

n5,377 8.22

r7,039 9.76

.2,762 12,56

GDP Growth Inflation Unemployment Rate Labor Productivity Growth I_te of Labor Produclivity

3.84 3.06 2.5 2,867 -10.10

9.19 3.54 2.3 3,087 7.69

14.24 6.34 2.3 3,486 12.92

13.49 14,6 2.6 3,9@7 12.09

12,66 24.2 2.8 4,,348 11.28

10.55 16.9 2.9 4704 9.33

9.54 8.3 3.0 5,139 8.11

8.80 2.8

37.96 25.83

38.22 27.91

38.32 31.46

41.51 37.62

42.23 35.78

41.87 34.17

40.84 33.64

41.15 33.78

14.36 18.47 L4.,v4 12.55

18.07 28.32 14.83 13.73

8.76 34.06 12.64 14.42

38.56 10.38 18.76 17.42

24.91 15.52 18,01 I,_.4F

17.93 19.52 18,11 15.77

20.91 3,73 19,90 14M_

Gov't Deficit (as % of GDP) Revenue (as % of GDP) Expenditure (as % of GDP)

Gross Domestic Say'rags(as %of GDP) Gross Fixed Capital Formation (as % of GDP) Export growth rate (%) I_t_por t _x_ycth rate (%) Export as % Of_ Import_ % ofGDP

19.20 -13.28 _ 11.06

¢_ c_

100.0 18.7 49.2

_._ ,,_ ('3

32.1 _" ,_ e_ _. _. _'_

7.8 --0.9b

Table I (...conh'nued)

Exchange Rate (average) % Change in Nominal Exchm'_ge Rate % Change in Real Exchange Rate Nominal Effective Exchange Rate Real Effeclive Exchange Rate

4.7832 27.04 23.98

Nominal Interest Rate Bank Rate

5.3234 112?.9 7.75 90.5.5 88.02

5_5146 3.59 -7_75 80.13 78.43

5.7620 4.49 -10.11 64.33 68.44

8.6157 49.53 2.5.33 58.24 72.83

8.3514 -3.07 -19.97 57.53 79.54

8.3142 -0.45 -8.75 59.96 85.53

8.2898 -0.29 -3.09 63.90 89.4

7.92

7.20

10.08

I0.08

10.44

9.00

8.55

Deposit Rate lamding Rate

8.64 9.36

756 8.64

7.56 8.64

10.98 10.98

10.98 12.06

7.47 10.08

5.67 8.64

Real Interest Rate Bank Rate

4.86

3.66

0.86

--4_'-2

-14.12

--6.46

0.70

5.75

Deposit Rate Lending Rate

5.58 6.30

4.02 5.10

1.22 130

-3.62 -3.62

-13.22 -13.22

-5.92 -4.84

-0_83 1.78

72,428 58,663 13,765

85,928 70,632 15,296

100,457 82,974 17,483

Tolal External Debt (inmillionsof US$) Long-term Short-term IIvIF

55,_1 60,259 45,515 49,479 9,317 10, 780 46e_J.........

Total External Debt (as 0/. of GDP) Long-term Short-term IMP Debt Service (in millions US$) Principal Repaymen_ on Long-lerm

Debt

Interest Payments Long-ter_ Short-term

i_bt Service (as % of expor_ Notes: Sources:

of go_ls

& services)

"Includes those employed in _slrucldon _As of Nov. 1998 Asian Development Bank (1998); Internat}onal

8.2779 -0,14 0.72

2.87 5.84

118,090 128,817 95,764 103,410 22,3Z5 25,407 -- ....

---

14.44 11.88 2.43 0.i2

15.07 12.38 2.70 0.00

15.44 12.51 2.93 0.00

14.35 11.80 2.55 0.00

18.57 15.17 3.20 0.00

16.60 13.46 3.14 0.00

15.44 12.39 3.05 0.00

6,502 3,319

7,831 4,123

8,618 5,213

10,168 6,729

11,135 6,343

15067 9,070

15,757 10,260

18,342 12,335

3,183 2,534 649

3,708 2,9,54 754

3,405 2,708 697

3,439 2,630 809

4ff92 3,844 948

5,997 4,657 1,340

5,497 4,685 812

6,007 6,007

11.33

11.88

10.93

11.71

9.34

10.23

9.18

8.85

_ _.

_, r._ Monetary

Fund.

The Mac roeconomy of China in the Late Nineties

•

• •

•

Significant development of basic industries (mainly through stat_owned enterprises in steel, textiles, etc.) which are important for such a large country as China. A high degree of provincial and local autonomy not only politically but also in economic planning and implementation. (It is said that China consciously encouraged regional sufficiency and relative autonomy due to the fear of being invaded by the erstwhile Soviet Union.) Successful redistributive policies that have reduced income disparities which might cause political instability and Strong historical ties with Hong Kong and the Southeast Asia, especially after the normalization relations with most countries after the meeting dent Richard Nixon and Mao Zedong. A strong state and government which provides well as a coherent, credible economic program.

Before 1978, China's

economic

dissent. overseas Chinese of of China's foreign in 1972 of US Presipolitical 3

growth was respectable

stability as

by low-income

Third World standards averaging 3.93 percent for the period 1971 to 1977. This, however, came in spurts and fluctuated wildly. The main reasons for this uneven and lower-than-present growth pattern is that the command economy and production targets set by the socialist state did not provide enough incentives to encourage production units to innovate and to improve production processes and product quality. Furth_more, most state-owned enterprises and communes were not free to channel their surplus towards the improvement and growth of their own production units. There was also a lack of healthy competition among production and distribution units that would have encouraged increases in productivity, efficiency and product quality. The relatively closed economy prevented further innovations and technological improvements that would have arisen from a healthy participation in foreign trade and directed exposure to foreign investments. It also limited the exposure of China's products to the world marl_et and prevented it from developing a dynamic export sector, which eventually became China's engine of growth in the 1980s and 1990s.

3. The author does not include here repressive policiesand undemocraticpractices.

China' s Economic Growth and the-_EAN

THE MARKET

REFORMS

The market reforms instituted in the late 1970s and 1980s changed the incentive structure and revolutionized financial and fiscal processes. The reforms involved a mix of policies designed to integrate China further into the global economy while at the same time strengthening its domestic b'ase and market. Some of the more important reforms are summarized as follows. Rural Reforms The earliest

reforms

shifted

the production

unit from thecommune

individual households. Under the new "t}ousehold responsibility contract system," land was leased to households for 15 to 25 years. While the state stipulated the crop to be produced, farmers could retain a sizeable portion of their harvest for sale in the market. Relative agricultural prices (vis-a-vis industrial goods) were raised as an added incentive. Table 2 shows that prices of farm products compared to rural industrial pr_ucts remained high during most of the reform years. The result was a surge in rural output, profits and savings giving rise to rural nonagricultural collective enterprises--the township and village enterprises (TVEs)--which were allowed to use the surplus generated by the rural sector for light industries. TVEs have been one of the most dynamic sectors in China. Foreign

Direct investments

Another early reform was the opening up of the country to foreign direct invesments via joint ventures with the state (1979) and the establishment of special economic zones (SEZs) in 1980. In 11986,foreign exchange swap centers were set up which basically removed Lhe government requirement that joint ventures be self-sufficient in generating foreign exchange. Thereafter administrative eign investors bottlenecks have poured and into interference the country, mere increasing also reduced. rapidlySince throughout then for the 1980s but mostimpressively throughou_ the 1990s. In 1992 alone, the volume of net foreign direct investments--US$7.2 billion--was greater than total inflows in the first 10 years of China's reform program. By 1997, net foreign direct investments brought in US$41.7 billion (see Table 3). China's abundantly cheap and docile as well as productive labor and its potentially gargantuan domestic market naturally attract foreign investors. The marked increases in the late 1980s and 1990s are due also to the increasing interest of overseas Chinese in investing in China. Cap!tal from Taiwan, Hong Kong and Southeast Asia have been flowing into South China in massive quantities.

Macroeconomy of China in the Late Nineties

351i

Price Ratio of Rural Farm Products to Rural Industrial Products (1978--100) ,;,,

,,, ;, :

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996

100.0 122.1 130.8 138.5 141.5 147.7 153.6 166.8 177.5 198.8 244.5 281.2 273.9 268.4 277.5 314.7 440.3 527.9 550.1

100.0 100.1 100.9 101.9 103.5 104.5 107.7 111.1 114.7 120.2 138.5 164.4 172.0 177.2 182.7 204.3 239.4 274.6 291.6

1.000 1.220 1.296 1.359 1.367 1.413 1.426 1.501 1.548 1.654 1.765 1.710 1.592 1.515 1.519 1.540 1.839 1.922 1.886 m

State Statistical

Bureau (1997).

Foreign Trade In 1977, the combined export and import sector already comprised a significant portion of the economy (close to 20 percent of GDP). The various encouraged the trade sector to grow even faster as decentralization of decisionmaking and the expansion of markets ensued. Official policies to enexports can be seen through such incentives as tax rebates, foreign exchange retention, and most especially, a strong depreciation of the Chinese (or renminbih - RMB) in 1981 to 1987, again in 1990, and most recently in (see Table 1). In addition, real output per employee (labor productivity) growing fast especially in the 1990s (Table 1). This enhances further the competitiveness of China's products. Between 1977 and 1992, the volume of merchandise exports ballooned from US$8.77 billion to US$84.9 bil1997, the figur e has reached US$182.7 billion (see Table 3).

Table 3. China: Balance of Payments

(In US$ Million) I. Cturent

Account, Net

A. Trade Balance Goods, Net Exports f.o.b. Imports Lo.b. Non4actor Services, Net

-2,475

2,104

5,674

4,240

2,030

-11,417

-7,034

300

-3,802

4,317

-2,751 18492 21243

1,735 22027 20292

4,737 4,249 21,125 16,876 488

2,475 1,990 20,707 18,717 485

-32 14 23,905 23,891 -46

-12,592 -13,123 25,108 38,231 531

-7,589 -9,140 25,756 34,896 1,551

291 -1,661 34,734 36,395 1,952

4,060 -5,315 41,054 46,369 1,255

4,927 -5,620 43,220 48,840 693

2,512 2,024 451

2,479 1,994 1,254

2,811 2,857 1,620

3,055 2_524 932

3,827 2,276 176

4,437 2,485 -215

4,858 3,603 -161

4,603 3,910 229

1,092 641

1,549 295

2,008 388

1,478 546

1,100 924

976 1,191

1,469 1,630

1,894 1,665

511 620 109

442 596 154

243 439 196

379 516 137

224 389 165

419 568 149

381 477 96

Receipts Paymen_ B. Factor Income, Net Receip_ Payments C. Transfers, Net Inflow Outflow IL Capital & Financial Aec'L, Net A_ Capital Account, n.i.e B. Financial Ac_0tmt, n.Le. _t Investment Abroad Dir. Invest. in Rep. EcorL, n.i.e. Portfolio Investment Assets Portfolio Inves'anent Liab., n.Le. Other Investments Assets Other Invesl_ments Liab., n.i.e. HI. Net Erro_ and Om/as/ons IV. Overall

Balance

570

575

486 672 186 -_ 338

-226

-1,003

8,971

5,944

6,001

7,133

3,723

338 44 430 20 41 790 721

-226 93 636 64 1 20 638 490

-1,003 134 1,258 1,721 83 625 136

8,971 629 1,659 -2,263 764 1,101 6,015

5,944 450 1,875 40 1,608 328 3_279

6,001 645 2,314 140 1,191 --82 3,199

7,133 850 3,194 340 1,216 781 4,694

3,723 780 3,393 320 140 229 1,519

293

128

-889

-957

115

6,305

4,142

138

2,374

-479

6 -2,440

-958 -2,048

-1,518 4,783

t_ r_

_. ff_ "_ _"

Tab_3 (...coat/au_) Â˘3

fin US$Million) L Curr_tA_mmt,

Net

A. Trade Balance

Goods,Net E,xporlsf.o.b. Imporls Lo.b. NorvfactorServices, Net Receipts Payments B.FactorIncome,Net Receipts Payments C. Transfers,Net

6,908

29,718

7,611

40,497

7,290

46,222

102,561 95,271 321 16,620 16,299 -1,038 5,737 6,775 3,35

182,670 136,448 -5,725 24,581 30,306 -15,923 3,174 19,097 5,144

Inflow

1,269

s,477

Outflow

934

333

lI. Capital and Financial Accoumt,Net

32,645

22,957

A. Capital Account, nie B. Financial Account, n.Le. Direct InvestmentAbroad Di_ Invest. in Rep. F.con.,r_Le. Portfolio Inveslanent Assets Portfolio Inves_a_a_ntLiab., rLi.e. Other Invesiments Assets Other Inveslanents Liab., rLi.e.

32,645 2,000 33,787 380 3,923 1,189 -1,496

-21 22,978 2,563 44,236 899 7,703 33,929 ' 8,430

HI. Net Ermm andOmissions

-9,100

IV.Overall Balance

30,453

C3 ;_ _' _" _' g"

-16,818 35,857 L_

Table 3 G.wnt/nued)

(As Percentage a_GDP) I.

-II,

Current Account, Net

1.96

1.38

0.66

-3.81

-2.40

0_09

-0.96

-0.99

K13

3.32

1.36

-I.94

1.26

0.23

0.87

324

A. Trade Balance Goods, Net

1.63 1.46

0.80 0.65

-0.01 0.00

-4.21 -4.38

-2.59 -3.11

0.09 -0.52

-1.03 -1.35

-1.I3 -1.29

Z79 2.39

2.90 Z19

1.07 1.11

-1.92 -1.78

1.39 1.33

1.68 2.54

Z10 2.34

4.41 5.04

Exports Lo.b. Imports f.o.b, Non-factor Services, Net Receipts Payment s B. FactorIncome, Net

7.28 5.82 0.17 0,87 0.70 0.16

6.73 6.09 0,16 0.81 0.65 0.41

7.74 Z74 -0,0i 0.91 0.93 0.52

8.39 12.77 0,18 1.02 0.84 0,31

8.78 11,89 0.53 1,30 0.78 0.06

I0.97 11,50 0.62 1.40 0.78 -0.07

10.39 11,74 0.32 1,23 0.91 -0.04

9,88 11.17 0.16 1.05 0.89 0.05

13,45 11.06 0.39 1,53 1.14 0.28

14,74 12.55 0.71 1.75 1.03 0.21

14_83 13.73 -9.04 1.97 2.01 0,05

12,64 14.42 -0.14 1.87 2.01 -0.21

18,76 17,42 0.06 3.04 2.98 -0.19

18,01 15,47 -0.86 2.69 3.55 -1.66

18.11 15.77 -0.24 2.47 2.71 -1.49

19.90 14.87 -0.62 2.68 3.30 -1.74

Receipts Payments C. Transfers, Net Inflow Outflow

0.38 0.22 0.17 0,23 0.06

0.50 0.I0 0.17 0.20 0.04

0.65 0,13 0,14 0,i9 0.05

0.49 0,18 0,08 0.15 0.07

0,37 0.31 0,13 0.18 "0.05

0.31 0.38 0.07 0,12 0.05

0,37 0.41 0,11 0.14 0.04

0,43 0.38 0.09 0,11 0.02

0,79 0.51 0.07 0.10 0.03

0.93 0.72 0.21 0.22 0.01

1.19 1,14 0.25 0.26 0.01

0.73 0.95 0.20 0.22 0,02

1.05 1.24 0,06 0.23 lkl7

0.73 2.39 0.20 0.26 0.06

0.88 2.37 0,26 0.28 0.03

0.35 2.08 0.56 0.60 0.0_

0.12

-0.07

-0,32

3,00

2.03

1.90

1.81

0.85

2.01

-0,05

3.92

5.97

5.44

4.79

2,50

0.12 0.02

-0.07 0.03

-0.32 0,04

3,00 0.21

2.03 0,15

1.90 0.20

1,81 0.22

0,85 0,18

0,85 0,22

2,01 0.23

-0,05 0.85

3.92 0,73

5.97 0.37

5.44 0.28

4,79 0.25

2.50 0.28

Dir. Invest. in Rep. Econ., n.i.e. Portfolio Investment Assets

0.15 0.01

0,21 0.21

0.41 0.56

0,55 -0.76

0.64 0,01

0.73 0.04

0.81 0.09

0.78 0,07

0.91 0.06

1.09 0.08

2.38 0,10

4.60 0,10

6.18 0,07

5,04 -0.01

4.82 0,08

4.82 0,10

Portfolio Investment Liab,, nA.e, Other Investments Assets

0,01 0.27

0,01 0.2I

0,03 0.20

0,26 0,37

055 0.11

0,38 -9.03

0.31 0.20

0,03 0.05

0.06

0,14 0.04

0.08 0.70

0,61 0.35

0.72 0,22

0.10 0,I5

0.28 0,13

0,84 3.70

Other Investments

0,25

0.16

0.04

2.01

L12

1.01

1.19

0.35

0.28

1.13

-0.87

-0,10

-0.27

0.72

0.I5

0,92

0.10

0.04

-0.29

0.00

-0.33

-0.48

-0.24

0.03

-0.84

-1.69

-1.75

-1.69

-1,66

-2.51

-1.86

-1,83

2.17

1.35

0.04

-0.82

-9.70

1,51

0.60

-0.11

3.15

3.64

-0.44

0.30

5.57

3.16

3.80

3.91

Capi_andFinartcialAcc't,

Net

A. CapitalAccx3unt, n.i.e B. FinancialAccount, n.i.e. Direct Investment Abroad

ll/,Net

Liab., n.i.e.

Errors and Omissions

IV. Overall Balance Source:

International

Monetary

Fund,

The Macroeconomy

Reforms

of China in the Late Nineties

in State-owned

Enterprises

(SOEs)

Starting in 1983, SOEs were no longer required to remit all of their profits to the national government. Instead they had to pay some form of income taxes. Other reforms included the sharing of profits with the SOE management, and a shift of supervisory power from the central ministries to the local industrial bureaus. In 1984, plan target_ were lowered and the SOEs were allowed to produce above the targets and sell their products in the market. In 1985 further decentralization of enterprise management was implemented alongside a two-tiered price system wherein target output levels for the state sector are paid lower-than-market (official) prices while above target production levels are sold in the market at market prices. A "contract responsibility" system in agriculture was also adopted in the SOE sector as the SOEs entered into three-year contracts with the state specifying investment targets, profit remittance levels, retention rates, etc. Around 1987 and 1988, the contracts increasingly emphasized and gave positive incentives to meeting financial targets (profits, equity ratios, etc.) as opposed to physical (output) targets. Agaia the strong incentives given to the SOEs brought about increases in investments and productivity growth in many SOEs. Productivity growth was achieved as the SOEs were exposed to competition from the nonstate sector and SOEs of other provinces and areas. It must also be pointed out that although most SOEs in the manufactur_ ing and industrial sector were retained by the state, most of the commercial and services companies were sold or leased to private owners. New private entrants to the commercial and services sectors were encouraged. In reality it is not the reduction in state factories but rather the growth of the nonstate sector, specifically township and village enterprises, that accounts for the structural shift in ownership of enterprises. Table 4 shows the shares in industrial output by ownership type of enterprise. Note that there is a shift of industrial production from the state sector to the nonstate sector. The impressive increases lie with the TVEs and individual and other enterprises (including joint ventures). But even as its share in output and employment declined drastically through the years (from producing 64.9 percent of industrial output in 1985 to 28.5 percent in 1996), the state-owned enterprise still produces more than a quarter of industrial output. Its importance is also highlighted if we consider the state-owned enterprises as one of the biggest employer of labor. Table 5 shows that state-owned enterprises and collectively owned enterprises in urban areas hire 20.7 percent of total employment in 1996. Township and village enterprises employ 19.6 percent of total employment in 1996. Thus state-owned enterprises and collectively owned enterprises still employ a very big portion of labor in the country.

China's Economic Growth and the ASEAN

Table 4. Shares of State and Nonstate Sectors in Industrial Output (In Percent) _i......, '_'. ........

,,_,, ,,

.'_

' .

."i'._/i'?'iii_',i

'I'._:i_i''.

State Sector

64.9

54.6

28.5

Nonstate Sector Collectives

35.2 32.1

45.4 35.6

71.5 39.4

township village joint urban

7.8 6.8 1.6 15.9

10.2 10.0 2.3 13.1

11.8 16.0 3.4 8.2

1.9 1.2

5.4 4.4

15.5 16.6

16.2

22.5

31.2

Individual Enterprises Others, incl. Joint ventures Township & Village Enterprises I

Source: StateStatisticalBureau (1997). The state has also maintained

strong control over the wholesaling

basic and agricultural products, retailing of essential goods, which are rationed and price controlled, and the operation of large department stores and commercial outlets. Simultaneous with reforms of SOE i is allowing of private firms and enterprises, producers, wholesalers and retailers to operate and set up their own businesses. Together with the TVEs and firms (many of which are SOEs) with foreign joint ventures, this provided healKhier competition in the dynamically growing market economy. It can be seen, from Table 4 that individual enterprises and other enterprises (including joint ventures) made up only 3.1 percent of output in 1985. In 1996, they provided 31.1 percent of industrial output. TVEs almost doubled its share ofl industrial in 1985 to 31.2 percent in 1996.

output from 16.2 percent

Financial Reforms The Chinese government still controls the entire banking sector. But to be consistent with the market and incentive reforms, it had to separate the functions of central banking and commercial banking. In 1984, the separation began with the People's Bank of China undertaking only central banking functions.while newly created state-owned commercial banks took over commercial banking

functions.

More financial

innovations

were implemented

with the setting cial institutions demand for the Enterprises that ers whose pay

China's Economic Growth and the ASEAN

up of two universal banks and the creation of nonbank finanin the local areas. The enterprise reforms saw a great surge of services of financial institutions, especially at the local level. now retained part of their surplus and invested more, workand benefits increased as enterprises' capacity to raise their

wage fund became larger, private households and enterprises whose profits and savings were surging fast--all needed financial institutions in which to lodge their funds. It is indeed this large explosion of financial savings that gave rise to the rapid increase in bank deposits and the phenomenon of financial deepening as money supply to GNP ratios rose rapidly due to growing bank deposits (see Tables 6 and 7). This financial deepening also tempered monetary pressures towards high inflation (one of the periodic macro problems of China) as significant increases in money supply were channeled more to financial savings rather than to high consumption. 4 Fiscal Reforms The fiscal processes also had to undergo major transformations. The government lost much of its revenue generating capacity when it allowed SOEs to retain a sizeable portion of their surplus. (This in effect transformed the revenue generation from SOEs into something akin to a corporate income tax.) Though this also reduced the state's investment expenditures for the SOEs, the decline in the profitability of SOEs has caused a revenue and fiscal squeeze on the national government especially as many SOEs started to incur deficits and losses, requiring subsidies and/or restructuring by the government. The central government has always relied on provincial taxation bureaus to coUect revenues

and taxes. Again,in

1985 and 1986, the responsibility

contract system was applied to the local governments as they were required to enter into a contract with the central governments on the sharing of revenues between them. In 1994, the central government introduced a national corporate and personal-income tax and a value_added tax, but it still depends to a large extent on the local governments for _ollection. Tables 8 and 9 show that with the decline in revenues from SOEs, th_ dependence of the government on indirect taxes (especially value-added ta_es) increased tremendously in the late 1980s and 1990s making it the biggest and most important source of revenue for the government.

4. One of the features of the impressive growth of China is very high savings rates, as will be discussed later.

Table 6, China: Structure of the Financial System, 1985-1996 o_

..........

1985

"lggO

1994

1995

1996

I985

I994

1995

1996

1905--90_

1990-94v

1995

1996

Total Assets Financial lnst, (TAFI) 1035.0 Central Bank 274,8

2831.3 717.6

6902,0 1758.8

8433,5 2062.4

10710,8 2646,7

100.0 26.5

100.0 25.3

100,0 25.5

100.0 24,5

100.0 24.7

22.3 21.2

25.0 25.1

22.2 17,3

27.0 28.3

_'_

Deposit Money Banks2/

680.1

1739.8

4115,2

5013.0

6190.4

65.7

61.4

59.6

59.4

57.8

20,7

24.0

21.8

23.5

State Banks

n.a.

3819.7

4581.3

5563.2

n.a.

55.3

54.3

51.9

n.a.

19.9

21.4

Urban Credit Cooperatives

n.a.

37,2

214.9

303.9

374.8

n.a,

1.3

3.1

3.6

3.5

86.1

55,0

41.5

23.3

Rural Credit Cooperatives Others Financial Inst_ _/

80.1 n.a.

218.5 118.2

505.3 307,8

679.1 375.1

870,7 628,2

7.7 n.a.

7.7 4.2

7.3 4,5

8.1 4.4

8.1 5.9

22.2 41.7

23.3 27.0

34.4 21.9

28,2 67,5

M1/GDP

35.4

37.8

46.2

43.9

44.8

M_GDP

57.2

79.2

100.6

104,3

111.1

115,5

152.6

147,6

144.2

156.1

of which:

Memorandmm

TAFUGDP

_" n.a,

n.a,

items :

Notes: 1/Average growth for the periods 1985-1990 and 1990-1994, except for urban credit cooperatives 2/Including Wholly State-owned Commercial Banks and Other Commercial Banks, 3/Including Finance Companies and Specific Deposit Institutions. Sources: People's Bank of China (1997); International Monetary Fund (1997b, 1998, 1999),

and others financial insts., average

1986-1990.

Table 7. China:

Monetary

Survey 1_

1990

1991

1992

1993

1994

1995

1996

1997

(In billions of Yuan) Assets Foreign Assets (Net) Domestic Credit Claims on Central Govt. (Net) Claims on Oth. Dom. Transactors Liabilities Money Quasi-Money Bonds Capital accounts Other Items (Net) (Percentage change; end of period) Rate of Growth Money Supply Reserve Money (M 0) Nazrow Money (M 1) Broad Money (M 2) Rate of Growth Bank Credit (As percent of GDP) Ratio Money to GDP Reserve Money (M 0) Narrow Money (Iv[ 1) Broad Money (M 2)

103.79 1674.62

145.58 2002.67

168.52 2449.92

222.32 3481.09

506.4 4310.37

636.98 5333.38

921.37 6641.09

1366.07 7950.28

42.07 1632.55

58.2 1944.47

101.05 2348.87

118.38 3362.71

133.26 4177.11

166.67 5166.71

218.04 6423.05

243.84 7706.44

700.95 767.24 -

898.78 961.11 -

1171.43 1261.30 -

1676.1t 1797.88 24.79

2153.99 2538,04 21.30

2559.73 3514.67 38.62

3066.26 4543.27 29.98

3834.33 5352.45 366.07

147.78 156.75

184.00 104.36

199.57 -13.87

316.64 -112.01

372.74 -269.30

391.62 -534.23

450.88 -527.93

467.86 -704.36

30.1 20.1 28.9 23.7

24.2 28.2 26.7 20.0

16.3 30.3 30.8 36.3

42.5 43.1 42.8 32.8

31.0 28.5 35.1 24.7

20.6 18.8 29.5 23.9

29.5 19_8 25.3 20.6

17.0 25.0 20.7 16.6

34.4 37.8 79.2

36.7 41.6 86.0

34.6 44.0 91.3

38.0 48.4 100.3

36.9 46.2 100.6

35.6 43.9 104.3

39.2 44.8 111.1

42.1 51.3 122.9

41.4 21.9

40.0 20.6

46.9 21.6

43.9 19.9

42.3 18.4

38.0 14.9

32.7 13.1

32.3 12.5

(Inpercent) Memo Items: Ratio Currency Outside DMBs to M 0 Ratio Currency to Deposits

_" Vrl

_" C_ _. _,

Note : 1/Beginning in 1993, the data also cover finance companies and several other banking institutions. Beginning in 1994, the Urban Credit Cooperative Bank and the Agricultural Development Bank are included in the data. Beginning in 1996, the State Development Bank of China and ExportImport Bank of China are included in the data. Sources: International Monetary Fund and Peregrine Research Institute.

Vrl _-

Tabte 8. China: Government Budget and Expenditure, 1980-1997 _/ (As Percentage of GDP)

Total Revenue Tax Revenue Taxes on Income and Profits Taxes on Goods and Services Nontax Revenue

29.1 28.4 17.4 10.2 0.8

28.5 27.8 16.4 10.3 0.7

26.7 25.8 14.2 10.5 0.8

26.9 25.9 13.2 9.6 1.0

25.6 24.5 11.7 9.5 1.1

25.5 24.4 8.2 10.7 1.1

24.0 22.0 7.2 10.5 1.9

21.5 19.4 6.0 9.4 2.1

18.8 17.3 5.1 8.8 1.5

Total Expenditure Current Expendi_re of which: Administration Subsidies 3/ Capital Expenditure

32.4 21.9

29.7 22.0

28.0 21.4

28.5 21.3

27.0 19,3

25.9 18.8

25.7 18.4

23.6 17.3

21.0 15.9

1.5 6.1 10.5

1.5 7.6 7.7

1.5 7.0 6.6

1.7 7.2 7.2

1.9 5.7 7.8

1.6 5.7 7.2

1.8 5.7 7.4

1,6 5.6 6.3

1,6 5.1 5.1

Balance

-3.9

-1.7

-1.9

-2.2

-1.9

-0,5

-1.8

-2.1

-2.2

1.7 2.0 0.5 1.5 -0.2

1.9 2.5 1.4 1.2 -0.7

2.2 2.4 1.5 1.0 -0.2

1.9 2.0 1.2 0.8 0.0

0.5 1.1 0,4 0.7 -0.7

1.8 1.3 1.3 0.0 0.5 0.7 -0.2

2.1 1.5 0.7 0.9 0.6 0.9 -0.3

2.2 1,5 1.5 0.0 0.8 0.9 -0.2

Financing Domestic (net) Banking System Other Foreign (net) 4/ Gross Foreign Borrowing Amortization

3.9 2.8 2.8 0.0 1.1 ...... ......

c_ o "_ _" _. __, _" _

Table 8 (...continued) _ 1989

1990

1991

1992

1993:

1994

1995

1996

Total Revenue Tax Revenue Taxes on Income and Profits Taxes on Goods and Services Nontax Revenue

19.3 17.8 4.7 9.4 1.5

19.1 I6.9 4.6 8.8 2.2

17.0 15.3 3.8 8.1 1.6

14.7 13.0 3.0 7.8 1.8

13.7 12.9 2.3 8.3 0.8

11.9 11.2 2.0 7.4 0.7

11.2 10.4 1.9 6.8 0.8

11.3 10.1 1.9 6.7 1.2

11.5 10.5 1.1 7.0 1.0

Total Expenditure Current Expenditure of which:

21.5 17.0

21.1 16.5

19.2 15.2

17.0 13.7

15.8 12.3

13.5 11.5

12.9 t0.7

12.8 10.7

13.0 11.0

1.7 5.8 4.5

1.8 5.2 4.6

1.6 4.1 4.0

1.6 2.9 3.4

1.5 2.0 3.5

1.6 1.5 2.0

1.5 1.2 2.2

1.5 1.2 2.1

1.5 1.1 2.0

-2.2

-2.0

-2.2

-2.3

-2.0

-1.6

-1.7

2.2 1.5 1.5 0.0 0.7 0.9

2.0 1.3 1.3 0.0 0.7 1.0

2.2 1.8 0.7 1.0 0.5 0.8

2.3 1.7 3.3 -1.6 0.6 0.8

2.0 1.2 -0.9 2.1 0.8 1.0

1.6 1.4 0.3 1.1 0.2 0.3

1.7 1.7 0.0 1.7 -0.1 0.0

-0.2

-0.3

-0.4

-0.2

-0.1

Administration Subsidies 3/ Capital Expenditure Balance Financing Domestic (net) Banking System Other Foreign (net) *j Gross Foreign Borrowing Amortization

-1.5 t .5 1.5 1.2 0.3 0.0 0.2 -0.2

. 1997 "a

-1.5

1.5 1.5 -

_" Â˘'3

_C_ I

Notes :

1/ These budgetary statistics represent a consolidation of the budgets of the central government, provinces, municipalities, and countieS. Inter-â&#x20AC;˘ governmental transfers are netted out. Extrabudgetary financial operations of the various levels of government are not included. zl Budget.

;:_

3/ Comprises price subsidies on daily living necessities and agricultural inputs, as well as subsidies to cover operating losses of state enterprises. 4/ Foreign borrowing by the Ministry of Finance. Source: International Monetary Fund (1997a); World Bank (1996).

;_ _

Table 9. China: The Structure of State Budget Revenue, 1985-1996

(as percentage of Total Revenue) TotalRevenue TaxRevenue Nontax Revenue

100.0 95.8 4.2

100.0 91.9 8.1

100.0 90.1 9.9

Tax Structure Tax Revenue Taxes on Income and Profits1/ of which: Enterprises Profit Tax Taxes on Goods and Services of which: Value Added Taxes2/ Others Taxes_/

100.0 91.9 8.1

100.0 92.4 7.6

100.0 88.4 11.6

100.0 90.3 9.7

100.0 88.0 12.0

100.0 94.0 6.0

100.0 93.8 6.2

100.0 92.6 7.4

100.0 89.6 10.4

(as percentage of Tax Revenue)

100.0 33.8

100.0 32.7

100.0 30.9

100.0 29.7

100.0 26.2

100.0 27.0

100.0 24.8

100.0 23.5

100.0 18.0

100.0 17.9

100.0 18.3

100.0 18.7

31.9 44.0

30.6 47.S

28.7 48.2

26.5 50.8

23.0 52.4

23.7 52.3

22.0 52.9

20.9 59.8

15.2 64.3

13,5 66.1

13.8 65.9

13.4 66.8

6.8 22.2

10.3 19.9

10.9 20.9

14.9 19.6

I4.3 21.4

12.7 20.7

12.2 22.3

20.4 16.8

24.2 17.7

44.0 15.9

42.7 15.8

42.8 14.5

Notes : 1/ Data on the yield of the personal income tax are not available prior to 1995; the yield is included under "other taxes". 2/ Excludes the yield from VATon imports. 2/ Includes customs duties. Soun:es: International Monetary Fund (1997a); World Bank (1996).

_'_ '_

_" _'

As the government increased it to develop financial instruments more pressing.

China's Economic Growth and the ASEAN

its deficits through the years, the need for to borrow domestically will become even

STRONG MACROFUNDAMENTALS THE PRE-CRISIS PERIOD

;OF CHINA:

The Chinese macroeconomy has surged in the 1980s and throughout the 1990s. There were periodic spurts of high inflation in 1988-1989 and 19931995, which required deflationary and demand-reducing policies. There was just one major slowdown in 1989-1990 as a result of aggregate demand reduction and political upheavals (the Tienanmen demonstrations and crackdown) and their economic repercussions (especially on foreign investments). The Chinese economy easily bounced back after the 1989-1990 political and economic difficulties to achieve in the 1990s the highest growth rates for any major country in the world. The growth in the 1990s was spurred by industry (double-digit) growth followed by services. Agricultural growth re-. mained respectable at more than 3 percent growth. GDP growth rate climbed to 12 percent to 15 percent in 1992 to 1994 and decelerated in 1995 to 1997 as a result of demand-reducing policies to tame the inflation in the 1993-1996 period. Growth rates were 10.5 percent, 9.5 percent and 8.8 percent, respectivelj6 in the 1995 to 1997 period. Gross domestic savings grew to more than 40 percent of GDP in the mid-1990s while gross investments grew to around 34 percent of GDP. The high accumulation achieved by the country no doubt contributed to the impressive growth rate of the economy. Export growth was between 15 percent to 20 percent in the early 1990s (1991 to 1993). But with the devaluation of the renminbih in 1994, export growth shot up to 35.6 percent in 1994 and remained high at 25 percent, 18 percent and 21 percent respectively for 1995, 1996 and 1997 (see Table 1). Because of high export growth during the 1990s, trade and current account balances were mostly positive (Table 3) and international reserves increased to more than 12 months equivalent of imports in 1997 (see Table 1). Foreign inflows consisted mainly of direct investments rather than portfolio investments and short-term debt. Thanks to capital controls and directed capital biased towards foreign joint venture capital and long-term loans. Table 10 shows that based on gross inflows of foreign direct investments, portfolio investments and other financial investmer/ts--as percentages of GDP---_hina had only relied on foreign direct investments for foreign capital inflows. In the 1990s, portfolio investment and/or other _vestment inflows increased for the East Asian countries that liberalized their capital accounts. Other investments

Table 10. Comparison

of Capital Inflows,

External

Debt and Import Cover

for Selected

East Asian Countries

FDI Inflows (as % of GDP) PRC 0.00 0.00 Korea 0.01 0.15

0.15 0,09

0.21 0,08

0.41 0.12

0.55 0,25

0.64 0+42

0.73 0.45

0.81 0.56

0+78 0.50

0.91 0.31

1.09 0,40

2.38 0,24

4.60 0.18

6.18 0.21

5.04 0.39

4+82 0.48

4.82 0.64

Ma lays ia Thailand Indonesia

3.81 0.59 0.00

5.06 0+84 0,14

4,97 0,52 0.24

4.19 0.87 0.34

2.35 0.96 0.25

2.23 0.42 0.35

1,76 0,61 0.32

1.34 0,70 0,51

2.07 1.79 0.65

4.40 2.46 0.67

5.45 2.85 0,96

8.31 2.05 1.16

8.89 1.90 1.28

7.80 1.44 1,27

5.99 0.95 1,19

4,78 1,23 2,t5

5.12 1.26 2.72

5.22 2.43 2,18

Philippines

43.33

0,48

0.04

0.32

0.03

0.04

0.43

0,92

0.25

1,32

1.20

0,43

2.28

2,48

1.99

0.18

1,47

Portfolio hwestment Inflou_ (as % of GDP) PRC 0.00 0,00 0.0l Korea 0,21 0.03 '43.02 Malaysia 43.04 4,52 2.14 Thailand 0+30 0.13 0.19 Indonesia 0,00 0.05 0.33

0.01 0,66 2.22 0,27 0,43

0.03 0,92 3.26 0.37 -0,01

0.26 1.84 6.22 2.30 43.04

0.55 43.31 0.11 43.07 0,33

0.38 -0.22 0.44 0.68 qJ.12

0,31 43,33 -1,29 0.86 -0.1t

0.03 0.00 -0.28 2.06 43.17

0.00 0.09 _.60 -0,04 -0.08

0.14 0.79 0.35 4).08 43,01

0.08 1.61 -1.92 0.83 43.06

0.61 3.17 -1.10 4.34 1.14

0.72 2.14 -2+27 1.72 2.19

0.10 3.04 43+50 2.43 2.03

0.28 4.37 43.27 1.94 2.20

0.84 2.78 43.25 3,12 -2.46

Philippines

0+00

0.02

0.00

0,06

0,04

0,06

0.13

0,69

43,11

0.28

0.29

1.65

1+41

3,53

6.12

0.72

Other ln_estment Inflows (as % of GDP) PRC 0.00 0+00 0.25 Korea 10.06 6,68 6.50

0.16 2.87

0+04 1+79

Z01 1.79

1+12 -2.04

1.01 -6.33

1.19 -1.13

0.35 -0.64

0.28 2.17

1.13 2.38

-0.87 1.60

-0.10 43.44

_.27 3.58

0.72 4.70

0+15 5+07

0,92 -1.88

-0.68 5.12 2.37

43.21 8.17 3.05

1.03 9.82 3.30

5.46 5.81 3.19

11.59 5.37 1.38

2.63 6.81 43.87

5.36 11.51 1.20

4.65 6.42 0.11

-1.15 -14.48 -1.15

1.20

3.56

5.00

5.55

4.52

5.56

4+10

7.60

5,28

0,02

0.01

Malaysia Thailand Indonesia

Z49 5,51 0,00

1.98 6.28 1.83

6.70 3.06 5.38

11.28 4,04 6,32

2+53 5,00 3,70

-2.76 1,86 1,73

1+91 43.49 4,56

-4.91 0.78 4.19

-3+43 3.18 1.96

Philippines

9,79

7.17

8.58

-1,83

2,15

1,01

0,02

43.02

-1.10

Net Other hwestments

(as % of GDP)

Korea

9.28

6.66

5.43

2.21

2.11

0,62

-2.67

-6.41

-1.93

-1.07

1,21

1.36

0,53

-1.82

1,64

1.63

2.29

-4.95

Malaysia Thailand Indonesia Taiwan

2.07 5.57 0.00 0.00

0.88 6+40 1+83 9,10

6,21 3,29 5,38 -1.76

6.40 4.31 6.32 -1.70

3.30 5.19 3.70 -4.52

-2.26 2.48 1.73 -5.44

2.12 43,15 4.56 8+75

-6.58 0,50 4.19 10.55

-6.55 2.74 1.96 -5.34

43.60 5.55 2.37 -3.94

q).69 8.36 3.05 -6.38

3,02 9.46 3.30 _),83

8,03 5.72 3.19 -2,95

10+t4 7.97 1.38 -1,81

3,33 7.52 43,87 -0.43

4.46 13.14 1.20 -2,79

4.71 4.98 0,11 -2.10

-2.16 -13+68 -1.15 1.27

Philippines PRC

8.59 0.00

5.17 0.00

9.53 q),02

-1.51 1_),05

2.47 43,16

1,01 t,64

0,02 1,01

43.02 1.04

-1.10 0.99

1,20 0,29

I 3.56 0,22

5.00 1.09

5.55 -1.57

4+52 43.45

5.56 43.49

4.10 0.57

I 9,69 0.02

5.79 -2.78

Table 10 (...a_t/nuaO

External debt (as China Korea Taiwan Malaysia Thailand Indonesia Philippines

% of GDP) 1.49 2.03

27,00 24,57 28,89 50.46

Long-Term Debt (as % of China 1,49 Korea Taiwan Malaysia 21.46 Thailand 17.45 Indonesia 25.06 Philippines 27.1.7

2,99

3.20

35.83 28.68 24.74 55,13

19.83 46.58 31.13 26.61 63.04

20.73 57,15 32.12 34.89 69.60

GDP) 1.72

1.87

1.76

29.33 20.42 21.18 28.70

14,78 40.44 22,82 22.78 32.54

14.63 47.11 23.87 29,46 41.24

0.82

1.33

5.05 6.14 8.31 3.83 30.49

6.11 10.05 8.25 5.43 28.36

Short-Term Debt (as % of GDP_ China 0.00 0.00 Korea Taiwan Malaysia 5.53 6.49 Thailand 7.12 8.26 Indonesia 3.83 3,56 Philippines 2K29 26.43 Import Cover

(Reserves

in number

of months

3.91 52.62 15.62 54.43 33,75 36.08 74.73

5,47 58.61 13.95 64.52 42.24 41.99 82.86

8.03 49.51 16,18 78,90 40.46 53.54 90.19

11,00 35.28 19,09 72.27 38.26 68,19 85.93

10,58 23.88 14,39 53.51 34.14 60.21 73.48

10.01 18.99 11.44 42,98 32.14 57.95 64.54

14,26 18.33 11.04 35.80 32.80 60.68 66.96

14.84 18.52 10.73 35.48 38.38 61.94 69.06

14,99 19,15 9,37 34.33 37.52 63.26 60.21

14.30 19.79 10.44 40,74 41,94 56.44 63.86

18.51 22,33 10.87 40.40 45.34 60.96 60.76

16.87 24.72 10.40 39,32 49.40 61.54 52.19

15.61 23.17 10,07 40,11 49.08 56.74 48.70

2,00 33.82 10.11 46.98 25.26 29.91 44.61

3.26 39.34 8.56 55.92 34.01 35,06 53.07

5.61 33.35 5.05 69.11 33.87 45,47 72,17

8.08 22.85 2.49 64.85 32.99 59,81 74,49

8.13 14.01. 1,79 4K92 26.36 52.63 63.28

8.27 10.45 1.29 36.98 23.68 50,09 55.25

11.74 9.35 1.29 31.34 23.08 50.95 56.97

12.18 9.98 1.45 31.17 25.67 50.77 58.17

12,14 10.96 1,23 28.09 24.30 50.28 50.29

11.75 11.43 1.57 29.91 23.92 45.05 54.60

15.29 11,78 2,53 31.87 25.15 49.96 51.84

13.68 11,80 2,89 30.99 24.99 48.70 45.11

12.53 11,96 3.18 28,95 28.76 42.57 39.19

i .81 18.80 5.50 7,46 8,50 637 30.12

2.10 19.28 5.40 8.60 8.23 6.93 29_79

2,06 16.15 11.13 9,79 6.59 8.08 18.02

2.56 12.43 16.60 7.42 5.27 8.38 11.44

2.20 9.86 12.60 4.60 7,78 7,58 10.20

1.54 8.54 10.16 6.00 8.46 7.86 9.29

2.40 8,98 9,75 4,45 9.72 9.73 9.99

2,65 8,54 9,28 4.31 12.72 11.17 10.89

2,85 8,19 8,15 6,24 13.21 12.98 9.92

2.54 8.35 8.87 10.83 18,02 11.38 9,26

3.22 10.55 8,35 8.54 20,19 11.00 8.92

3,19 12,92 7,51 8,33 24.4I 12.85 7.08

3.08 1I ,20 6,89 11.16 20.33 i4.17 9.51

of imports)

China Korea Malaysia Thailand Indonesia

1.63 4.98 2.24 3.91

1.32 4.14 2.33 3.37

8.07 1.44 3,53 2.44 2.13

9.61 t.13 3,40 2.10 2.97

8.72 1.21 3.29 2.50 4.51

4.00 1.30 5.05 3.13 5.00

K94 1.34 6.93 4.00 3.88

5.38 1.11 7.38 4.00 4.85

4.80 3.07 5.04 4.10 3.71

4.41 3.21 4.56 5.02 3,05

8,38 2.73 4.45 5.40

10.44 2.02 3.92 6.14 4.47

3.84 2.51 5.64 6.74 4.68

3.11 2.90 7.57 7.22 4.76

6,66 3,01 5.51 7.30 4.50

8,22 2.90 3,97 6.81 4.02

9,76 2,72 4,44 7.09 4.95

12,56 1.69 3,37 5.70 4.31

Philippines

4,42

3,12

1.39

1.20

1,19

1.44

4.11

1,72

" 1148

1.63

0.91

3.23

3,64

3.19

3.38

2,90

3.77

2.40

Sources:

Asian Development

Bank (1998); International

Monetary

Fund.

The Macroeconomy of China in the Late Nineties

took the form of short-term unhedged borrowings, which made them so vulnerable to contagion and illiquidity caused by credit cut-off. The same table shows that China's external debt to GDP ratio (15.6 percent in 1996) and the size of short-term debt (3.1 percent of GDP in 1996) are low in China compared to other East Asian countries hard-hit by the crisis. Lack of capital convertibility and liberalization together with the strong international foreign reserves position of China shielded the country from contagion and successful speculative attacks as a result of the East-Asian crisis. Table 10 shows that the import cover of China in 1997 (the year the Asian crisis erupted) was equivalent to almost 13 months of imports, much more than any other country in East Asia. No amount of speculative attack on China's currency would have succeeded. Fiscal deficits of China have been reduced from more than 2 percent of GDP in the early1990s to around 1.5 percent of GDP in 1996 (see Table 8). The seemingly healthy fiscal balance, however, hides structural fiscal problems Ix) be discussed later. China's inflation was reduced substantially from double-digit in 1993 to 1995, to 8.3 percent in 1996, to 2.8 percent in 1997. The inflation rate in 1998 appears to be negative from the preliminary data (Table 1). Without the East Asian crisis China would have achieved a soft landing in its latest fight against inflation.

EFFECTS

OFTHE

EAST ASIAN

CRISIS

The East Asian crisis came at a crucial time when some important changes in the Chinese economy were taking place: a. Domestic demand was starting to weaken as characterized by the slow growth of retail sales, build-up of inventories and deflationary pressures on prices in 1998. The slowing domestic demand may initially be due to the deflationary policies as a result of high inflation in the 1993-1995 period. But in 1998, the weak domestic demand may indicate some satiation in the traditional consumer durables (such as color televisions, refrigerators and washing machines) and the inadequacy of income to increase demand of more expensive and more protected durables such as automobiles and housing. The lack of a dynamic market on housing also contributes to inadequate supply in the sector while lack of mortgage and loanable funds reduces its affordability and accessibility. Oversupply of light manufactures and consumer products has caused a shift from what Chima experts call a sellers' market (during the period of high demand growth) to a buyers' market. This means that there will be more

China's Economic Growth and the ASEAN

intense (and destructive) competition among sellers and a bigger need for them to undertake product upgrading, technological and productivity improvements and innovative product expansion. TVEs have been particularly hard-hit by the shift away from light manufacturing consumer goods and durables. Large regional disparities and the inability of other areas in the hinterlands to develop at pace with the coastal areas has shut off a possible venue backward areas. b.

of domestic

demand

expansion

from the more

Significant and continuing reforms of the state-owned enterprises-including a tightening of SOEs' budget constraints--and strong competition from the nonstate sector had brought deficits and losses to many state-owned enterprises. This has serious implications on the fiscal position of the government and the financial status of state-owned commercial banks. These will be discussed in a later section. Another important implication is that for state-owned enterprises to be competitive, they will have to lay off some workers and reduce their obligations to provide housing, education and other social services to their workers. Simultaneously, there should be market-oriented changes in the areas of pensions, health care, housing and education. The uncertainties that these changes bring to urban workers and employees will further dampen domestic demand as they become more cautious in their spending to increase their savings to cope with possible losses in wage income and higher expenditures on social services.

Thus China is, more than ever before, dependent on its export sector and high GDP growth to stave off the slackening of domestic demand and, at the same time, allow laid-off workers to be absorbed in either the nonstate sector or the more productive SOEs. Without the strong export stimulus and continuing strong GDP growth, domestic demand will weaken furflier, stateowned enterprises will suffer higher losses and deficits, and more workers will be laid-off and unable to be absorbed t_y other sectors due to a weakening economy. SOE losses and deficits will translate into bigger fiscal and financial problems and jeopardized.

volatility.

Economic,

finanhial

and political

stability

will be

Table i shows that exports, after growing by around 20 percent in 1995 to 1997 grew only by 0.58 percent in 1998. Table 11 shows that the large slowdown in export growth is mainly due to a decline in the exports to Japan, Hong Kong, Korea and the ASEAN--all in financial and economic distress in 1998 and 1999. China had been vulnerable to the East Asian crisis inasmuch as I

China's

Economic

Growth

and the ASEAN

Table 11 (,,_continued)

tryt_

.........

China's Import and Export with the 15 Biggest Trading Partners As Percentage of Total Export]Import Japan U.S.A HongKong R.O.K Taiwan Germany Singapore U.K Netherlands Russia Italy France Australia Canada Malaysia Asia ASEAN North America Europe Latin America

19.1 16.6 24.2 4,5 2.1 3.8 2.4 1.9 2.2 1.1 1.4 1.2 1,1 1.0 0.9 61.8 3.7 17.6 15.5 2.1

20.4 17.7 21.8 5.0 1.9 3.9 2.5 1.1 2.3 2.1 1.3 0.9 1.2 0.9 0.9 60.4 3.4 18.6 15.8 2.1

17.4 17.9 24.0 5.0 1.9 3,6 2,4 1.1 2.4 2.1 1,3 1.1 1.2 1,0 0,0 59.6 6.6 18.9 15,9 2.5

16.2 213,7 Z1,1 B.4 2.1 4,0 2.1 2.5 1.5 2._ 1.0 1.3 1.4 1.2 0.9 55.4 5.9 21.8 18.2 2.9

22.0 12.2 6.5 7.8 11.2 6.1 2.6 1.5 0,6 2.9 2,4 2.0 2.0 2.0 1_6 59.1 4.5 14,2 21.1 2.2

21.0 11.6 5.6 9.0 11.7 5.3 2.6 3.7 0.7 1.4 1.6 1.6 2_3 1.6 1.6 60.1 4,9 13.3 19.9 2.6

20.4 11.4 4.9 10.5 11.5 4.3 3.1 2.9 0.8 1.4 2.3 1,8 1.7 1.9 0.0 62.1 8.7 13.3 18.1 2,6

20.1 12.1 4.7 10.7 11.9 5.0 3.0 1.4 2.3 0.6 2.6 1.9 1.6 1,6 1.9 62.1 9.0 13.7 18.8 2.1

28.3 163.9 367.9 -58.1 -130.4 3.1 -1.4 -20.6 33,2 18.3 -9.1 -5.8 -2.1 -8.3

14.9 210,2 321.0 -87.3 -127.6 3.6 -2.9 26,8 -3.8 43.3 -18.0 -3.5 3.0 -1,1 -10.7 111.3 -16.4 209.1 71.3 23.3

China's Import and Export with the 1_ Biggest Trading Partners Trade Balanee Japan U.S.A. HongKong R,O,K. Taiwan Germany Singapore U.K, Netherlands Russia Italy France Australia Canada Malaysia Asia ASEAN North America Europe Latin America

-5.4 86.0 273,9 -36.1 -116.9 -23.7 1.0 8.3 24.1 -21,3 -10.5 -8.1 -9.6 -11.5 -7.9 139.5 -4.7 74.5 -48,2 1.8

16.9 105,3 250.8 -49.7 -133.8 -14.8 1_5 --34.6 26.2 13.2 -3.3 -8.7 -14,0 -8.5 -8.7 78.0 -16,8 96.8 -37.9 -4.9

Source: China Ministry of Foreign Trade and Econon_ic Cooperation (http: //www, moftec.gov.cn/moftec/official/statistics data.html). i i

205.2 -3.0 155.6 32.2 8.4

The Macroeconomy of China in the Late Nineties

the majority of its exports go to Asian markets. Table 11 also shows that in 1996 (the year before the Asian crisis erupted), more than 60 percent of China's exports went to Asia, with 21.8 percent going to Hong Kong, 20.4 percent to Japan, 5 percent to Korea, 3.7 percent going to the ASEAN countries and 2.1 percent to Taiwan) In 1998, exports to Asia had been reduced to 53,4 percent of total exports, while exports shares to North America (especially the SA) and Europe had increased. The sharp deceleration in export growth in 1998 clearly was due to the sharp contraction of the East Asian export market and China's large exposure to this market. Table 12 shows that much of the deceleration in export growth in 1998 reflects a fall in primary commodities exports (with animal and vegetable oils, mineral fuels and lubricants and nonedible materials falling sharply) and slower growth in exports of manufactured export goods (including a fall in light and textile industrial goods). The slowdown in export growth was originally accompanied by significant cutbacks in imports. The deceleration of import growth started as early as 1997 when import growth was a measly 3.7 percent (while export growth was 21 percent). In 1998, there was import contraction of 1.54 percent that accompanied the export growth slowdown. The situation has changed in the first half of 1999 as initial reports show exports falling between four to five percent in the first half of 1999 and imports increasing by 15 to 16 percent during the same period. The drastic fall in China's trade surplus in 1999 will no doubt keep talks about a renminbih devaluation very much alive. Because of weak domestic and external demand, the government decided to embark on a strong pump-priming drive to stir up the Chinese economy in 1998 and 1999 hoping to keep economic growth from declining sharply. The pump-priming measures include: • Infrastructure building of roads, railways, telecommunications, irrigation, rural electricity networks and environmental protection. It is too early to tell whether these projects are being undertaken in more backward areas in order to reduce regional disparities. • Undertaking housing investments and projects in 50 sectors of the economy. Housing investments are targeted to comprise 15 percent of total fixed asset investments in the next three years. • Provide loans for housing and purchases of consumer durables, especially motor vehicles. •

A series of interest rate cuts as inflation There is, however, little room for further already

very near US interest

is at its historic trough. cuts as interest rates are

rates.

5. Hong Kong is, however, a transit point only for many of China's exports.

Table 12a. Value of China's

Exports by Category

Total

of Commodities

(In US$100

Million)

181.19

220.07

223.21

222.26

261.39

273.05

309.42

394.37

475.16

525.38

91.14 29.85 0.78 17.11 42.80

102.48 29.24 0.60 19.48 52.28

100.50 29.08 0.97 16.53 53.14

96.20 28,53 1.04 18.92 46.66

119.34 32.32 1.t0 24.21 60.27

138.28 38.03 1.05 26.53 71.32

112.72 44.48 1.19 29.08 36.83

132.31 47.81 1,75 36.50 45.44

144.06 58.90 2.35 42.57 39.50

150.78 61.45 3.14 42.12 43.21

0.60

0.88

0.78

1.05

1.44

1.35

1.14

0.81

0.74

0.86

Manufactured Goods Chemicals &ReIated Products

90.05 11.20

117.59 13.42

122.71 11.96

126.06 12.51

142.05 13.64

135.22 13.58

196.70 17.33

262.06 22.35

331.30 28,97

374.60 32.01

Light & Textile Industrial Machinery & Transport Equipment Miscellaneous Products

39.99 8.43 28.36

47.06 10.87 37.25

43.02 12.63 37.05

43.65 12.21 38.04

50.54 14.93 46.97

44.93 7.72 34.86

58.86 10.94 49.48

85.70 17.41 62.73

104.89 27.69 82.68

108.97 38.74 107.55

2.07

8.99

18.05

19.65

15.97

34.13

60.09

73,87

86.87

87.33

100.00

50.30 16.47 0.43 9.44

46.57 13.29 0.27 8.85

45.02 13.03 0.43 7.41

43.28 12.84 0.47 8.51

45.66 12.36 0.42 9.26

58.64 13,93 0.38 9.72

36.43 14.38 0.38 9.40

33.55 12,12 0.44 9.26

30.32 12.40 0.49 8.96

28.70 11,70 0.60 8.02

Mineral Fuels, Lubricants & Related Materials _l & Vegetable Oils, Fats & Wax

23,62 0.33

23,76 0.40

23.81 0.35

20.99 0.47

23.06 0155

26.12 0.49

11.90 0.37

11.52 0.21

8.31 0.16

8.22

Manufactured

Prmaary Goods Food & Live Animals Used Chiefly for Food Beverages & Tobacco Non-Edible Raw Materials Mineral Fuels, Lubricants & Related Materials Animal & Vegetable

Unclassified

Oils, Fats & Wax

Commodities

as % of total Total Primary Goods Food & Live Animals Used Chiefly Beverages & Tobacco Non-Edible Raw Materials

Goods

for Food

_[ _" C_

0.16

49.70

53.43

54.98

56.72

54.34

49.52

63.57

66.45

69.72

71.30

Cl_micals & Related Products Light & Textile Industrial

6.18 22.07

6.10 21.38

5.36 19.27

5.63 19.64

5.22 19.34

4.97 16.45

5.60 19.02

5.67 21.73

6.10 22.07

6.09 20.74

Machinery & Transport Equipment Miscellaneous Products Unclassified Commodities

4.65 15.65 1.14

4.94 16.93 4._

5.66 16.60 8109

5.49 17.12 8184

5.71 17.97 6.11

2.83 12.77 12.50

3.54 15.99 19.42

4.41 15.91 18.73

5.83 17.40 18.28

7.37 20.47 16.62

Table 12a (...continued)

o_ e_

Growth Rate Total Primary Goods Food & Live Animals Used Chiefly forFood Beverages & Tobacco Non-Edible Raw Materials

21.46

1.43

--0.43

17.61

4.46

13.32

27.45

20.49

10.57

12.44 -2.04 -23.08 13.85

-1.93 -0.55 61.67 -15.14

-4.28 -1.89 7.22 14.46

24.05 13.28 5.77 27.96

15.87 17.67 -4.55 9.58

-18.48 16.96 13.33 9.61

17.38 7.49 47.06 25.52

8.88 23.20 34.29 16.63

4.66 4.33 33.62 -1.06

-13.07

Mineral Fuels, Lubricants & Related Materials

22.15

1.64

29.17

18.33

-48.36

23.38

Animal & Vegetable Oils, Fats &Wax

46.67

-11.36

34.62

37.I4

_o.25

-15.56

-28.95

--8.64

16.22

Manufactured Goods Chemicals & Related Products

30.58 19.82

4.35 -10.88

2.73 4.60

1Z68 9.03

-4.81 -0.44

45.47 27.61

33.23 28.97

26.42 29.62

13.07 10.49

17.68 28.94 31.35 334.30

-8.58 16.19 -0.54 100.78

1.46 -3.33 2.67 8.86

15.78 22.28 23.48 -18.73

-11.10 -48.29 -25.78 113.71

31.00 41.71 41.94 76.06

45.60 59.14 26.78 22.93

22.39 59.05 31.80 17.60

3.89 39.91 30.08 0.53

Light & Textile Industrial Machinery & Transport Equipment Miscellaneous Products Undassified Commodities

-12.I9

â&#x20AC;˘9.39

'_n _.

Table 12a (...continued) .

. - .

1990

1991

â&#x20AC;˘

: 1992

1993

1994

1995

1996_

1997

/998

Total

620.91

718.43

849.40

917.44

1,210.06

1,487.80

1,510.66

1,827.00

1,837.60

Primary Goods Food & Live Animals Used Chiefly for Food Beverages & Tobacco Non-Edible Raw Materials Minerals Fuels, Lubricants & Related Materials Animal & Vegetable Oils, Fats & Wax

158.86 66.09 3.42 35.37 52.37 1.6I

161.45 72.26 5.29 _4.86 47.54 1.50

170.04 83.09 7.20 31.43 46.93 1.39

166.66 83.99 9.01 30.52 41.09 2.05

197.08 100.15 10.02 41.27 40.69 4.95

214.85 99.54 13.70 43.75 53.32 4.54

219.25 102.32 13.42 40.46 59.29 3.76

239.30 110.50 10.50 41.90 69.90 6.50

206.00 106.20 9.80 35.20 51.80 3.10

Manufactured Goods Chemicals & Related Products

462.05 37.30

.556.98 38.18

679.36 43.48

750.78 46.23

1,012.98 62.36

1,272.95 90.94

1,291.41 88.79

1,587.70 102.30

1,631.60 103.20

Light & Textile Industrial Machinery & Transport Equipment Miscellaneous Products . Unclassified Commodities

I25.76 55.88 126.86 116.25

144.56 71.49 166.20 136.55

161.35 132.19 342.34

163.92 152.82 387.81

232.18 218.95 499.37 0.12

322.40 314,07 545.48 0.06

285.11 353,13 564.26 0.12

344.10 437,00 704.30

323.80 502,30 702.20 0.10

100.00

vrj r_

Primary Goods Food & Live Animals Used Chiefly for Food Beverages & Tobacco Non-Edible Raw Materials Minerals Fuels, Lubricants & Related Materials Animal & Vegetable Oils, Fats & Wax

25.59 I0.64 0.55 5.70 8.43 0.26

22.47 10.06 0.74 4.85 6.62 0,21

20.02 9.78 0.85 3.70 5.53 0.16

18.17 9.15 0.98 3.33 4.48 0.22

16.29 8.28 0.83 3.41 3.36 0.41

14.44 6.69 0.92 2.94 3.58 0.31

14.51 6.77 0.89 2.68 3.92 0.25

13.10 6.05 0.57 2.29 3.83 0,36

11.21 5.78 0.53 1.92 2.82 0.17

_. C_

Manufactured Goods Chemicals & Related Products

74.41 6.01

77.53 5.31

79.98 5.12

81.83 5.04

83.71 5.15

85.56 6.11

85.49 5.88

86.90 5.60

88.79 5.62

Light & Textile Industrial Machinery & Transport Equipment Miscellaneous Products Unclassified Commodities

20.25 9.00 20.43 18.72

20.12 9.95 23.13 19.01

19.00 15.56 40.30 0.00

17.87 16.66 42.27 0.00

19.19 18.09 41.27 0.01

21.67 21.11 36.66 0.00

18.87 23.38 37.35 0.01

t8.83 23.92 38.55 0.00

17.62 27.33 38.21 0.01

as % of total Total

Table 12a (...continued)

• - . _->_--.....

-=_.t

_;_

5.]-]<_.

•

---

-.'-_

__.

=<-_:>-_ _<

..........

Growth Rate

Total

18.18

Primary Goods

15.71

18.23

8.01

22.95

1.54

20.94

0.58

5.36

1.63

5.32

18.25

9.02

2.05

9.14

-13.92

7.55

9.34

14.99

1.08

19.24

-0.61

2.79

7.99

-3.89

8.92

54.68

36.11

25.14

11.21

36.73

-2.04

-6.67

.16.03

-1.44

-9.84

-2.90

35.22

6.01

-7.52

21.20

-9.22

-1.28

12.44

-0.97

31.04

87.21

-6.83

-7.33

47.48

.41.46

-8.28

23.34

20.55

21.97

10.51

34.92

25.66

16.53

2.36

13.88

6.32

34.89

45.83

-2.36

15.22

0.88

15.41

14.95

11.61

1.59

41.64

38.86

-11.57

20.69

-5.90

Machinery & Transport Equipment Miscellaneous Products

44.24 17.95

27.93 31.01

84.91 105.98

15.6I 13.28

43.27 28.77

43.44 9.23

23.75 24.82

14.94 -0.30

Unclassified

33.12

17.46

Food & Live Animals Beverages

Used Chiefly for Food

&_Tobacco

Non-Edible

Raw Materials

Mineral Fuels, Lubricants Animal & Vegetable Manufactured Chemicals

Oils, Fats & Wax

Goods

& Related Products

Light & Textle

Source:

& Related Materials

Industrial

Commodities

China Ministry

of Foreign

Trade and Economic

Cooperation

-100.00

-1.99

31.90

-50.00

11.20 -17.18 1.45

12.44 3.44 100.00

-21.76 3.56

-15.99

17.90

-25.89

72.87

-52.31

22.94

2.77

-100.0

(htlp://www.moftec.gov.cn/moftec/offlcial/statistics_data.html).

r_ ko

Table 12b. Value of China's

Imports

by Category

Total Primary Goods Food & Live Animals Used Chieflyfor Food Beverages & Tobacco Non-Edible Raw Materials Mineral Fuels, Lubricants & Related Materials Animal & Vegetable Oils, Fats & Wax Manufactured Goods Chemicals & Related Products Light & Tex_le Industrial Machinery & Transport Equipment Miscellaneous Products Unclassified

Commodities

of Commodities

(In US$100

Million)

200.17

220.15

192.85

213.90

274.10

422.52

429.04

432.16

552.75

591.40

69.59 29.27 0.36 35.44 2.03

80.44 36.22 2.13 40.27 0.83

76.34 42.01 1.30 30.12 1.83

58.08 31.22 0.46 24.59 1.11

52.08 23.31 1.16 25.42 1.39

52.89 15.53 2.06 32.36 1.72

56.49 16.25 1.72 31.43 5.04

69.15 24.43 2.63 33.21 5.39

100.68 34.76 3.46 50.90 7.87

117.54 41.92 2.02 48.35 16.50

2.39

0.99

1.08

0.70

0.80

1.22

2.05

3.49

3.69

8.75

130.58 29.09 41.54 51.19 5.42

139.71 26.06 40.35 58.66 5.58

116.51 29.36 39.06 32.04 4.86

155.82 31.83 62.89 39.88 7.82

222.02 42.37 73.18 72.45 11.82

369.63 44.69 118.98 162.39 19.02

372.55 37.71 111.92 167.81 18.77

363.01 50.08 97.30 146.07 18.78

452.07 91.39 104.10 166.97 19.82

473.86 75.56 123.35 182.07 20.73

3.34

9.06

11.19

13.40

22.20

24.55

36.34

50.78

69.79

72.15

as%_ total Total Primary Goods

_" 100.00 34.77

100.00 36.54

100.00 39.59

100.00 27.15

100.00 19.00

100.00 12.52

100,00 13.17

100.00 16.00

100,00 18.21

100.00 19.87

Food & Live An/reals Used Chiefly for Food Beverages & Tobacco Non-Edible Raw Materials Mineral Fuels, Lubricants & Related Materials Animal & Vegetable Oils, Fats & Wax

14.62 0.18 17.70 1.01 1.19

16.45 0.97 18.29 0.38 0.45

21.78 0.67 15.62 0.95 0.56

14.60 0.22 11.50 0.52 0.33

8.50 0.42 9.27 0.51 0.29

3.68 0.49 7.66 0.41 0.29

3.79 0.40 7,33 1.17 0.48

5.65 0.61 7.68 1.25 0.81

6.29 0.63 9.21 1.42 0.67

7.09 0.34 8.18 2.79 1.48

Manufactured Goods Chemicals & Related Products Light & Textile Industrial

65.23 14.53 20.75

63.46 11.84 18.33

60.41 15.22 20.25

72.85 14.88 29.40

81.00 15.46 26.70

87.48 10.58 28.16

86.83 8.79 26.09

84.00 11.59 22.51

81.79 16.53 18.83

80.13 12.78 20.86

_" _" r_

Machinery & Transport Equipment Miscellaneous Products

25.57 2.7I

26.65 2.53

16.61 2.52

t8.64 3.66

26.43 4.31

38.43 4.50

39.11 4.37

33.80 4.35

30.21 3.59

30.79 3.51

r,_

1.67

4.12

5.80

6.26

8.10

5.81

8.47

11.75

12.63

12.20

Unclassified

Commodities

C'_

_. if-)

Table 12b (...continued)

•

Growth Rate Total

¢_

'9.98

-12.40

10.92

28.14

54.15

1.54

0.73

27.90

6.99

Primary Goods Food & Live Animals Used Chiefly forFood Beverages & Tobacco Non-Eddie Raw Materials Mineral Fuels, Lubricants & Related Materials

15.59 23.74 491.67 13.63 -59.11

-5.10 15.99 -38.97 -25.20 120.48

-23.92 -25.68 -64.62 -18.36 -39.34

-i0.33 -25.34 152.17 3.38 25.23

1.56 -33.38 77.59 27.50 23.74

6.81 4.64 -16.50 -2.87 193.02

22.41 50.34 52.91 5.66 6.94

45.60 42.28 31.56 53_27 46.01

16.75 20.60 -41.62 -5.01 109.66

'_ ;_ _" _t" _'

Animal & Vegetable Oils, Fats & Wax

-58.58

9.09

-35.19

14.29

52.50

68.03

70.24

5.73

137.13

_'_

Manufactured Goods Ct_mcals & Related Products

6.99 -10.42

-16.61 12.66

33.74 8.41

42.48 33.11

66.49 5.,1.8

-2.56 32.811

24.53 82.49

4.82 -17.32

Light & Textile Industrial Machinery & Transport Equipment Miscellaneous Products Unclassified Commodities

-2.86 14.59 2.95 171.26

-3.20 -45.38 -12.90 23.51

61.01 24.47 60.91 19.75

16.36 81.67 51.15 65.67

6.99 14.31 5.54 37.t4

18.49 9.04 4.59 3.38

62.59 124.14 60.91 I0.59

0.79 -15.62

-5.93 -13.06 3.34 ' -12.96 -1.31 0.05 48.02 39.74

Table 12b (.,.continued)

Total

637.91

805.85

1,039.59

1,156.14

1,320.84

1,388.38

1,423.60

1,401.70

Primary Goods Food & Live Animals Used Chiefly for Food Beverages & Tobacco Non-Edible Raw Materials

533.45 98,53 33.35 1.57 4_1.07

108.35 27.99 2.00 50.03

132.55 31.46 2.39 57.75

142.10 22.06 2.45 54.38

164.86 31.37 0.68 74.37

244.17 61.32 3.94 101.59

254.40 56.72 4.97 106.97

286.20 43.00 302.00 120.00

229.50 37.90 108.00 107.20

Mineral Fuels, Lubricants & Related Materials Animal & VegetabIe Oils, Fats & Wax

12.72 9,82

21.13 7,19

35.70 5,25

58.19 5.02

40.35 18.09

51.27 26.05

68.77 16.97

103.10 16.80

67.70 14.90

Manufactured Goods Chemicals & Related Products

434 92 66.48

529.57 92.77

673.30 111.57

897.49 97.04

991.28 121.30

1,076.67 172.99

1,133.98 181.06

1,137.40 193.00

1,172.10 201.70

Light & Textile Industrial Machinery & Trm_sport Equipment Miscellaneous Products Unclassified commodities

89.06 168.45 21.03 89.90

104.93 196.01 24.39 111.47

192.73 313.12 55.88

285.27 450.23 64.95

280.84 514.67 67.88

287.72 526.42 82.61 6.93

313.91 547,71 84.84 6.46

322.20 527,60 85.50 9.10

310.70 567,70 84.60 7.50

('b

100.00

rrl r_

18.47 6.25 0.29 7.70 2.38

16.99 4.39 0.31 7.84 3.31

I6.45 3.90 0.30 7.17 4.43

13.67 2.12 0.24 5.23 5.60

14.26 2.71 0.06 6.43 3.49

18.49 4.64 0.30 7.69 3.88

18.32 4.09 0.36 7.70 4.95

20.10 3.02 21.21 8.43 7.24

16.37 2.70 7.70 7.65 4.83

_. C)

1.84

1.13

0.65

0,48

1.56

1,97

1,22

1,18

1.06

Manufactured Goods Chemicals & Related Products

81.53 12.46

83.02 1454

83.55 13.85

86.33 9.33

85.74 10.49

81.51 13,10

81.68 13.04

79.90 13.56

83.62 14.39

Light & Textile Industrial Machinery & Transport Equipment Miscellaneous Products Unclassified Commodities

16.70 31.58 3.94 16.85

16.45 30,73 3.82 17.47

23.92 38.86 6.93 0.00

27.44 43.31 62_5 0.00

24.29 44,52 5.87 0.00

21.78 39.85 6.25 0.52

22.61 39.45 6.11 0.47

22.63 37.06 6.01 0.64

22.17 40.50 6.04 0.54

as % of total Total Primary Goods Food & Live Animals Used Chiefly for Food Beverages & Tobacco Non-Edible Raw Materials Mineral Fuels, Lubricants & Related Materials Animal & Vegetable

Oils, Fats & Wax

o_r

Table 12b (...continued)

Growth Rate

Â˘_

Total

-9.80

19.58

26.33

29.01

11.21

14.25

5.11

2.54

-1.54

Primary Goods

-16.17

9.97

22.34

7.20

16.02

48.11

4.19

12.50

-19.81

Food & Live Animals Used Chiefly for Food

-20.44

16.07

12.40

42.20

95.47

-7.50

-24.19

-11.86

Beverages & Tobacco Non-Edible Raw Materials

-22.28 -15.06

27.39 21.82

19.50 15.43

2.51 -5.84

.72.24 36.76

:79.41 36.60

26.14 5.30

12.18

-64.24 -10.67

Minerals Fuels, Lubricants & Related Materials

-22.91

66.12

63.00

-30.66

27.06

34.13

49.92

-34.34

12.23

26.78

-26.98

-4.38

'.60.36

44.00

-34.86

-1.00

-11.31

Animal & Vegetable Oils, Fats & Wax Manufactured Chemicals

Goods

& Related Products

Light & Textile Industrial

68.95

-29.88

-8.22

21.76

27.14

33.30

10.45

8.61

5.32

0.30

3.05

-12.02

39.55

20.27

-13.02

25.00

42.61

4.67

639

4.51

-27.80

17.82

83.67

48.02

-1.55

2.45

9.10

2.64

-3.57

Machinery & Transport Equipment Miscellaneous Products

-7.48 1.45

16.36 15.98

59.75 129.11

43.79 16.23

14.31 4.51

2.28 21.70

4.04 2.70

-3.67 0.78

7.60 -1.05

Unclassified

24.60

23.99

--6.78

40.87

Source:

Commodities

China Ministry

oi Foreign

Trade and Economic

Cooperation

-100.00

C3 s_ _"

-17.58

(http://www.moftec.gov.cn/moftec/official/statistics_data.html).

L_J

China's Economic Growth and the ASEAN

• •

Increases in money supply through loan expansion to the stateowned banks and reduction of the required reserve ratio. Financing the investment expansion by issuing treasury bonds. With excess capacity in the industrial sector, it is hoped that this will still result in a multiplier

increase in aggregate

demand.

The Chinese government targeted a_ 8 percent growth for 1998 and announced that theyhad achieved 7.8 percent. This will be the sixth consecutive year of growth that is lower than the previous year (starting from 14,2 percent growth in 1992 and down to 7.8 percent in 1998). In the first half of 199% growth reportedly slowed down slightly tO 7,6 percent, while the authorities have lower their GDP growth target to 7 percent. Even with the slowing down of the Chinese economy, the growth achieved is high especially in current East Asian (crisis) standards. What is more worrisome is the little room for maneuverability currently available for the Chinese authorities to continue sustaining the respectable growth. The problems faced by the Chinese authorities are: 1.

If investment projects are not efficiently and wisely done, this might lead to duplications, unnecessary wastage and inefficiencies which may lead to further SOE losses and loan defaults in the future. The economy might crash into a recession. With SOE losses threatening to ruin financial markets and the government's fiscal position, this crash may be very disastrous to the Chinese economy. The government's deteriorating fiscal position as a result of deteriorating SOE deficits and losses will necessarily curtail govern°ment's future capacity t° further pump-prime the economy without resorting to loans and credit subsidies. The use of quasi-fiscal measures and credit facilities, on the other ihand, may aggravate an already weak financial sector burdened w_th tremendously large bad debts. 'Animal spirit' has already been lseriously eroded with the slowdown in growth and exports with the deteriorating fiscal position and especially with the growing nonperforming loans of the stateowned banks, i I

It is, therefore, in China's interest that the East Asian and Japanese crises and recession would end as soon as possible so that exports can provide much needed stimulus to sustain grQwth while hard reforms are being undertaken. • On the domestic

front, proper

engines to medium- and long-run and efficiency in the state-owned vice obligations

to the private

reforms,

if properly

done, can provide

growth. Apart from increasing productivity industries, the transfer of SOEs' social ser-

sector will lead to the privatization I

and comi

The Macroeconomy

of China in the Late Nineties

mercialization of the housing sector. This, in turn, can give rise to a whole array of ancillary services and industries (carpentry, architecture, plumbing, house repairs and maintenance, furniture and appliances) that can absorb labor thrown off from failing SOEs. 6 The same can perhaps be said of the private and market-oriented health and education sectors. It must be pointed out that state participation and regulation in these sectors are still essential to ensure the meeting of standards of quality, equity and universality (with special emphasis on the availability of these social services three sectors (housing, health and education).

ON THE EXCHANGE

in backward

areas) in all the

RATE DILEMMA

The most controversial question with respect to China's role in the East Asian crisis is whether China should or will be forced to devalue its currency to save its exports and remain competitive with the other East Asian countries. Figure I shows the real exchange rate (nominal exchange rate less inflation rate) of various countries with 1990 as the base year. 7 Note that China originally had the most depreciated currency especially with its devaluation in 1994. It still had the most depreciated currency in 1996 on the eve of the crisis. But with the onset of the East Asian crisis in 1998, we find that on the average China's currency had appreciated (based on 1990 real exchange rate levels) with respect to the East Asian countries, except the Philippines. Many fear that this appreciation of China's currency to its neighbors may force China to devalue its currency. However, there are several reasons why this scenario may not happen in the near future. First, the slowdown in China's export so far is mainly due to the decline in the East Asian economies rather than China losing its exports to other East Asian countries. This can be seen in Table 11 where it is clear that exports to Asia decreased significantly but exports to North America and Europe grew substantially in 1998. This is verified by preliminary data showing exports of crisis-ridden East Asian economies performing poorly in 1998 despite significant depreciation in their currencies, s These all point to the fact that a renminbih devaluation is not yet of vital urgency. 6. Stiglitz (1998). 7. The graph will be very sensitive to the base year. If the base year were just slightly before 1990,China would have depreciated more since its currency devalued sharply in 1990.If the base year were 1986,Korea would have appreciated heavilysince its currencybecameincreasingly strong in 1987 to 1989.If the base year were 1994,China would have appreciatedmost since the graphwould not have capturedthe significant devaluation during that year. 8. Thisis due to creditconstraints that have affectedexport production in these countries amd the continuingslowdown of the world semiconductormarket.

China's Economic Growth and the ASEAN

Figure 1. Real Exchange Rate of Various East Asian Countries (1990=100), 1990-1998 250,00

200.00

n..

g c 150,00

_C 100,00-

1990

1991

.,,,x .....

50.00 1992

1993

19i4

1995

1996

1997

1998

---*-China

-ii-

Korea

.-,.--Malaysia

-_-Thailand I

--e- Indonesia

-4-

Philippines

Furthermore, a renminbih depreciation now will cause another round of destructive competitive devaluation in the East Asian economies. This will defeat the original purpose of the renminbilh devaluation. Furthermore, it will potentially ruin the recovery of the East Asian economies, which we have seen is vital to the recovery of China's exports. A significant renminbih devaluation may cause significant pressures for currency depreciation and further economic dislocation for Hong Kong, Korea, Taiwan and the ASEAN countries which together comprise more than 30 percent of China's exports. Furthermore, East Asia (especially Japan and Hong Kong) has a big trade deficit with China, and so its recovery would be important to sustain China's strong trade and current account position. It is also true that even if Chma's currency has appreciated in real terms from its 1990 level more than other East Asian countries, it has remained very competitive with its strong growth in laboriproductivity. Table i3 gives us the growth rate of labor productivity of Chin_ compared with other East Asian countries. It is clear that throughout the 1990s China's growth in labor productivity had outpaced all the other countrieS. The gap in the growth productivity would have even widened !in 1997 and 1998 when

in labor China's

growth and efficiency gains were far greater than the East Asian countries in crisis. Also in 1997 and 1998, China s inflatlon rates fell to near zero and even into negative territory while East Asian inflation rates soared to double-digit or high single digit _ates. All these again l_oint to the fact that despite some i

Table 13. Comparison

of Macro Indicators

GDP Growth Rate (at constant

Across East Asian Countries

prices)

Â˘_

China Korea Taiwan

4.48 6.72 6.16

8.25 7.30 3.55

10.44 11.78 8.45

14.56 10.14 10.60

16.21 6.23 4.96

8.86 11.55 11.64

11.57 11.52 12.74

11.27 11.27 7.84

4.06 6.38 8.23

Malaysia Thailand Indonesia

6.94 5.91 7.93

5.94 5.35 2.25

6.25 5.58 4.19

7.76 5.76 6.9_

-1.02 4.64 2.46

1.05 5.54 5.88

5.39 9.52 4.93

8.94 13.29 5.78

9.21 12.19 7.46

Philippines

3.41

3.63

1.87

-7.32

-7.31

3.41

4.31

6.76

6.13

Inflation

Rate

_. Â˘_

China

6.5

7.22

18.74

18.33

Malaysia Thailand Indonesia

21.28 16.39 9.74 12.77 12.30

7.11 3.01 5.75 5.18 9.33

3.53 1.40 3.66 3.76 11.87

2.32 -0.12 3.99 0.88 10.45

2.40 -0.12 0.33 2.48 4.80

2.73 0.69 0.77 1.81 5.73

3.04 0.46 0.22 2.49 9.35

7.13 1.37 2.60 3.82 8.05

5.74 4.39 2.74 5.36 6.42

Philippines

13.33

10.13

10.09

50.40

23.12

0.73

3.76

8.77

12.16

China Korea Taiwan

0.73 -6.61 1.08

1.96 -3.43 4.64

1.38 -1.84 8.43

0.66 -1.42 11.79

-3.81 -0.84 14.82

-2.40 4.34 21.57

0.09 7.38 17.65

-0.96 7.97 8.27

-0.99 2.41 7.65

Malaysia Thailand Indonesia

-9.87 -7.38 -0.62

-12.77 -2.74 -5.64

-11.56 -7.17 -7.42

-4.88 -5.05 -2.12

-1.92 -3.95 -2.20

-0.36 0.57 -4.89

8.15 -0.72 -2.76

5.38 -2.68 -1.57

0.83 -3.46 -1.09

Philippines

-5.88

-8.65

-8.34

-4.12

-0.12

3.19

-1.34

-1.03

-3.42

Korea Taiwan

Current Account

_f._ ,._._"

Balance

Table 13 (...continued)

Export

Growth

Rate (%)1t

PRC Korea Thailand

19.12 20.08 7.02

Malaysia Indonesia

-9.20

Philippines

-1.98 1t .14 -7.71

15.44 13.49 16.33

2.54 -15.42

14.37 -5.36

19.68 11.05

-7.69 -12.03

-1.14

- 12.25

N).32

7.71

- 14.13

4.60

PRC

-4.48

-16.83

10.91

27.64

60.02

Korea Malaysia Thailand

12.51 12.46 6.93

-3.40 7.70 -15.30

6.36 4.41 21.20

9.63 1.68 0.73

-3.32 -14.08 -9.15 -15.56 -15.80

Import growth

-4.09 1.01 _ -0.97

5.03 0.41 -3.80

2.58 28.25 24.71

34.86 36.36 31.73

18.20 28.99 36.09

5.28 2.95 25.68

30.92 I9.52

17.36 13.38

18.09 17.76

18.13

23.67

10. 56

-8.72

4.30

27.40

5.33

12.27 =10.58 0.29

29.89 15.82 42.83

24.93 28.61 48.56

17.86 31.79 27.41

_;_

-6-04 -1.31

4_98 33.56

10,37 21.11

17.92 27.70

_" _"

_. _'3

-t0.46 -21.15

rate (%)1/

In'on _os_ i,_ Philippines

2.83

7,_,._ -3.51

13.75 12.12 2.32

11.03 7.35 6.17

4.40 6.11 2.41

t 7.43 3,90 -1.17

26.58 7.95 0.64

17.57 1.31 -5.05

7.80 -6.68 -16.12

0.00 -11.08 -9.93

1.16 -8.20 -7.63

Malaysia Thailand Indonesia

5.84 6.56 0.77

1.36 5.41 4.69

-0.60 0.00 37.48

0.96 2.78 12.82

5.95 14.89 8.26

3.96 -3.17 15.49

-2.39 -2.19 28.16

3.94 -1.67 2.55

3.44 1.61 5.01

Philippines

5.18

8.10

30.13

50.27

11.43

9.56

0.89

2.56

3.04

% Change

in Nominal

China Korea Taiwan

Exchange

-0,72 -2.35

-_i -18.93

Rate

1/Export and import growth for 1998 for Indonesia, Statistics, April 1999.

Philippines

and Thailand

based on first three quarters as reported

in IlvIF's International

Financial c.o Vrj

Table 13 (...continued

".4

GDP Growth Rate (at constant prices) China Korea Taiwan Malaysia Thailand Indonesia Philippines Inflation

3.84 9.51 5.39 9.74 11.63 7.07 3.10

9.19 9.13 7.55 8.48 8.18 7.13 -0.58

14.24 5.06 6.76 7.80 8.08 6.46 0.33

13.49 5.75 6.32 8.35 8.71 6.50 2.13

12.66 8.58 6.54 9.30 8.90 7.54 4.39

10.55 8.94 6.03 9.36 8.66 8.22 ,_.76

9.54 7.06 5.67 8.60 6.40 7.98 5.68

8.80 5.51 6.81 7.70 -1.35 4.65 5.07

7.80 -5.80 4.80 -6.80 -8,00 -13.70 4.50

Rate

1st Q

2rid Q

8.30 4.60 4.30 -2.80 0.30 -10.30 1.20

6.90

1.30

Latest 3 mos.

China Korea Taiwan Malaysia Thailand Indonesia

3.06 8.58 4.11_ 2.67 5.93 7.76

3.54 9.30 3.63 4.40 5.70 9.40

6.34 6.22 4-50 4.69 4.07 7.59

14.6 4.82 -13_ 3.57 3.36 9.60

24.2 6.16 4.12 3.71 5.10 8.53

16.9 4.49 _ 5.28 5.77 9.43

8.3 4.96 2.99 3.56 5.85 8.03

2.8 4.45 0.90 2.66 5.61 6.71

-0.8 7.5 1.7 5.3 8.1 60.7

-2.2 0.6

(Apr) (Mar-May)

3.2 0.5 35.3

(Feb-Apr) (Mar-May) (Mar-May)

14.16

18.70

8.93

7.58

9.06

8.11

8.41

5.01

9.7

8.8

(Feb-Apr)

China Korea

3.13 -0.79

3.32 -2.83

1.36 -1.25

-1.94 0.30

1.26 -1.02

0.23 -1.86

0.87 -4.75

3.24 -1.95

Taiwan Malaysia

6.82 -2.03

6.94 -8.69

4.03 -3.72

3.16 -4.66

2.70 -6.23

2.10 -9.70

4.05 -4.63

2.72 -4.90

Thailand Indonesia Philippines

-8.50 -2.61 -6.08

-7.71 -3.32 -2.28

-5.66 -2.00 -1.89

-5.07 -1.33 -5.55

-5.59 -1.58 -4.60

-8.05 -3.18 -2.67

-7.94 -3.37 -4.77

-1.96 -2.28 -5.23

Philippines Current Account

2" _" t_rr_

Balance

r,_ rrl

Table 13 (...continued)

Export growth

rate (%)1/

r_r_

PRC Korea

19.20 2.79

14.36 13.86

18.07 6.63

8.76 ,7.31

35.56 16.75

24.91 30.25

17.93 3.72

20.91 4.97

0.58 -2.16

-6.4 -5.4

(Feb-Apr) (Jan-Mar)

Thailand Malaysia Indonesia

15.01 16.27 16.68

23.76 17.03 10.55

13.70 18.13 14.04

13.39 16.11 8.32

22.20 23.05 9.88

24.66 26.13 17.98

-1.87 7.13 5.76

4.12 1.30 12.17

-5.80 -6.94 -26.21

-2.2 3.7 -9.2

(Mar-May) (Feb-Apr) (Feb-Apr)

4.67

7.99

11.13

15.79

18.53

29.40

17.75

22.81

18.96

15.2

(Jan-Mar)

Philippines Import

growth

rate (%)1/

,_ f._

PRC Korea Thailand

-13.28 14.64 28.21

18.47 25.18 26.79

28.32 0.31 10.06

34.06 2.48 17.80

10.38 22.13 28.05

15.52 32.02 29.92

19.52 11.26 1.65

3.73 -3.79 1.30

-1.54 -35.45 -25.92

13.7 8.3 -8.2

Malaysia Indonesia

29.94 31.55

15.76 15.75

5.96 7.81

12.23 5.98

18.45 13.91

31.56 26.60

0.76 8.11

-13.77 4.48

-37.57 -50.48

-3.5 -14.4

(Mar-May) (Feb-Apr)

Philippines

17.15

-1.27

20.48

21.20

21.23

23.71

20.82

14.02

-16.35

-12.1

(Jan-Mar)

China Korea Taiwan

27.04 5.41 1.84

11.29 3.62 -0.29

3.59 6.45 -6.16

4.49 2.82 4.86

49.53 0.10 0.27

-3.07 -4.01 0.11

-0.45 4.30 3.67

-0.29 18.25 4.53

-0.13 47.39

Malaysia Thailand Indonesia

-0.14 -0.46 4.11

1.67 -0.27 5.83

-7.37 -0.46 4.08

1.05 -0.31 2.82

1.95 -0.67 3.53

-4.57 -0.93 4.06

0.46 1.72 4.17

11.82 23.76 24.21

39.5 70.37 244.18

Philippines

11.84

13.03

-7.16

6.30

-2.59

-2.66

1.95

12.42

% Change in Nominal Exchange

'-_

(Feb-Apr) (Jan-Mar) (Feb-Apr)

Rate

_i Export and import growth for 1998 for Indonesia,

Philippines

38.76

and Thailand based on first three quarters as reported

in IMF's International

Financial

_'_ _"

The Macroeconomy

of China in the Late Nineties

real appreciation of the renminbih vis-;_vis other East Asian currencies, China's continuing high productivity growth and low inflation during the East Asian crisis period would make its export products competitive with East Asian products. China should be more concerned with regaining the export markets of the fallen East Asian countries rather than competing with them. Since China is not yet a member of the World Trade Organization (WTO), it has the advantage of giving tax credits and credit subsidies to the export sector, which can be as effective (if not more so) as a currency devaluation. Macroeconomic and trade theory also dictates that economic fundamentals of China should allow for some appreciation of its currenc3a Table 13 shows the current account balance of China (as percentage of GDP) vis-a-vis other East Asian countries. Together with Taiwan, China had achieved current account balance or surpluses in the 1990s. 1997 and 1998 would also be periods of even higher current account surpluses for China due to the bigger slowdown in imports compared to exports? The good current account position is matched with strong international reserves which have grown to more than ten months worth of imports. The increase in foreign exchange reserves, unlike the East Asian economies hit by the crisis, is matched with increased capacity for earning foreign exchange. Capital inflows are mainly made up of foreign direct investments, which directly contribute either to export production or to import substitution, thus building up foreign exchange capabilities in the medium and long run. This contrasts sharply with the massive shortrun portfolio and short-term debt inflows to the East Asian countries (before the crisis) which led to an artificial appreciation of their currencies as their foreign exchange earning capabilities deteriorated. Finally, it is China's goal to become an economic and political leader in Asia and in the world. It will win China quite a few political points and goodwill if it postpones any depreciation of its currency until such time as when the East Asian economies have gotten over this crisis and are strongly participating in the world economy again. China had made it clear that it is only a massive depreciation of the yen that can force it to devalue its own currency. The yen has now stabilized below the 130 yen to a dollar level. China can concentrate on improving its productivity and continue its low inflation trend to keep competitiveness strong while restructuring and reforming its fiscal, financial and state sectors so as to further enhance long run productivity, efficiency and technological growth. In the meantime, it is to everybody's interest, especially China, to see the East Asian economies (particularly Japan and Hong Kong) back at their feet and again trading strongly with China. 9. Even if 1999 threatens to reduce substantially the trade surplus with negative growth in exports and growing imports, current account balances are still expected to be positive, though much reduced.

China's Economic Growth and the ASEAN

ON PROBLEMS

OF ATRANSITION

The Theoretical

Debate

ECONOMY

Before tackling problems of a transition economy, it is best to first discuss briefly the issues concerning the Chinese path to development. There is now a minor debate between two camps of China analysts. The first camp, called the "big bang" theory or the convergence school, is composed of economists such as Jeffrey Sachs, Michael Bruno, Gang Fan, Geng Xiao and Wing Thye Woo (1999). They espouse faster privatization and market liberalization and view government interventions and socialist principles as impeding long run growth and development of China. This school also defends the one-shot and blanket liberalization and privatization of the economy and the state sec tor as the best path for transition economies. It views the Chinese economic success as the typical East Asian success story of countries opening up their markets and trade sectors and employing cheap, surplus labor from agriculture to light manufacturing. The continuation of high growth in China, however, critically depends on the privatization of the state and collective sectors and in the liberalization of the product and factor markets in the econom)a The failure of some East European transition economies to progress into successful capitalist countries had more to do with the lack of rural and agricultural labor surplus and the complete dominance of the state sector in labor employment on the eve of the transition. The other school, called the gradualist or "experimental" school, is comprised of economists such as Peter Nolan, Barry Naughtorb Thomas Rawski and Gary Jefferson. Recently this group had been strengthened by the entry of Joseph Stiglitz, chief economist of the World Bank, to their ranks. This school contends that it was the gradual opening up of the economy by giving market and performance-based incentives (such as a percentage or share of profits in the "contracf responsibility systems") to market players and exposing them to domestic azad foreign competition that released the tremendous productive forces in China. This is more effective than "privatization in a noncompetitive envirdnment. "1째 "Rather than focusing on the privatization of existing enterprises,i [China] focused on the creation of new enterprises. ''11 The gradualist natu{e of China's opening up had to do with "maintaining and strengthening social organization during the transition and to create the institutional infrastructure that a market economy re-

10..Stiglitz 11. Stiglitz

(1998), p. 2_ (1998), p. 3.

The Macroeconomy of China in the Late Nineties

quires."_2 In particular, necessary legal and institutional mechanisms to implement and enforce bankruptcy, competition and contract laws are required. Transparency and standard accounting practices will have to be learned and made prevalent. It is within the framework of this second school where our earlier analysis of China's initial socialist reforms combining successfully with strong market reforms will be appreciated. Increasingly Painful Reforms of State-owned Enterprises The relative economic slowdown has emphasized the structural problems of China, particularly in the SOE, financial and fiscal sectors. In recent years, the state has slowly shifted to the position that failing SOEs will be allowed (or forced) to close shop and/or lay off workers as provision of social services are transferred to the private sector and national and local govern* merits. The transfer of social service obligations away from the SOEs will economically and financially benefit them as it will reduce a big portion of their expenditures. This will allow a better assessment of the viability and profitability of the SOEs. Politically, however, it means that SOEs will be less protected against bankruptcies and closures. At the same time, the state has initiated the tightening of SOEs' budget constraints which means less direct and credit subsidies as well as less directed policy (usually soft) loans and stricter punishment for SOEs going into arrears. It is estimated that 50 to 60 percent of SOEs are operating with losses. Profits have been steadily falling and have become negative in the first half of 1998.13It is also a fact that capacity utilization (the Chinese call this utilization rates) is very low for many firms and industries. Rolled steel industry has a utilization rate of 62 percent in 1995. The machine tool industry had a utilization rate of 46.2 percent for the same year. 14In June 1998, color televisions and refrigerators had utilization rates of 46.1 percent and 50.1 percent, respectively, while industries for air conditioning, washing machines and vacuum cleaners had rates of 30 to 40 percent. The telephone industry had a utilization rate of 28 percent) s The very low utilization rates and continuing losses are a reflection of the barriers to exit, bankruptcy and takeover of SOEs due to their overprotection and provision of social services to employees and a continuing competition from the nonstate sector. Gore (1999) claims that this is also a result of incen12. 13. 14. 15.

Stigli_z (1998), p. 2. Stiglitz (1998), Wu (1998), pp. 443-458. Song (1998).

China's Economic Growth and the ASEAN

tives for local bureaucrats to achieve high local growttl via overinvestments, duplication not only of firms and. industries but also of entire provincial economies in a system marked by a striking lack of regional specialization based on comparative advantages. No doubt these explanations are also tied in with the lack of labor and capital mobility, the inadequate supply and mortgage funds for housing (to support labor mobility), and the inadequate government investments in backward areas to achieve better regional equity. Nolan (1998) points out that this does not mean that all SOEs should be dismantled. In fact, when redundant labor are allowed to be shed, wages are allowed to move with market forces, and social service obligations are removed, many of them may become reasonably viable and profitable. He points to many SOEs in the upstream industries that are doing well and turning in reasonable profits. Critics may point out that these profits are due to the SOEs' monopoly status and overprotection. But Nolan has a point when he claims that upstream industries, key public utilities and other vital sectors that involve some economies of scale, externalities and leamin.g-by-doing--where correct government interventions can correct some market failures--may be economic areas where viable SOEs may be allowed to remain. Chaebols of Korea and zaibatsus of Japan are examples of large firms that have become economically and technologically strong through competition in the domestic and world market and through government help and guidance. In fact, Nolan (1998) points out that the government has indeed been privatizing or closing small and medium SOEs involved in trade and downstream production. It has hang on to firms in the upstream industries, public utilities and higher technology SOEs. China's transition economy; as Stiglitz (1998) points out, should put competition and correct market and performance-based incentives--not exclusive privatization--in the forefront of its reforms. Together with this is proper governance of the economy where corporate and financial governance and supervision are critical. The Shedding

of Labor,

Its Reabsolrption,

and Social

Insurance

Because of barriers to entry and _xit of labor, SOEs are plagued with red undant labor and wages that are way above rates commensurate with productivity and market rates. With the ongoing reforms, however, 12 million SOE workers had been laid off in 1997 comprising 10 percent of SOE employees and 7 percent of total urban employment26 Half of these workers were reabsorbed in the economy in 1997. In the first half of 1998, another 3 million workers were laid off. China's Ministry_ of Labor estimates that there are 22 16.

Meng

(1998).

The Macroeconomy

of China in the Late Nineties

million redundant

workers

in state and collective

enterprises

in the cities. 17

The ongoing reforms will no doubt displace more workers. The good news is that decades of slow reforms have reduced the state sector in terms of its share of output and its share of employment (see Tables 4 and 5). This should make additional reforms easier as the shedding of labor continues at a lesser pace. The bad news is that the size of labor in the state and collective sectors is still enormous. In 1996, the state-owned enterprises and urban collectives still employ slightly more than 20 percent of total employed persons, while township and village enterprises employ another 20 percent (see Table 5). Another bad news is that in the past much of the displaced labor was reabsorbed because of the high growth in the economy Between 1995 and 1997, SOE employees dropped by 3.6 million, while private sector employment increased by 12 million. 18 But starting 1998, the slowdown in domestic demand and domestic growth, as discussed previously, have affected adversely not only SOEs' performance but also TVEs' performance and profitability, and the nonstate sector's ability to absorb further displaced labor. Thus, the issue of China's external and domestic demand and growth potential becomes critical to the ongoing reforms. Of course, the picture is not that bleak. State reforms itself should create new sectors and new industries that will be able to generate dynamic labor employment. Housing is a very important sector that has two vital functions. One is its large contribution to labor mobility and well functioning labor market that is so important to efficiency and productivity of the country. The other is the multiplier effect on domestic demand and labor employment that we have discussed earlier as it in itself is a big stimulus for domestic demand and creates also a series of ancillary service sectors. Equally important in the set of state reforms are the provision for social services and the creation of a social insurance scheme as these obligations are being taken off the backs of the SOEs. Inasmuch as SOEs are still in a state of flux, widespread implementation of employment insurance schemes for private employees may be limited, though urgently needed. Schemes for unemployment and health insurance and pensions are critical but beyond the scope of this paper. The government will have to assume much of the duties of proriding basic education and health services for the general public while allowing the private sector to serve the higher income groups. This will require important revenue sources which will be discussed immediately.

17. Wu (1998). 18. Stiglitz (1998).

Problems

China's Economic Growth and the ASEAN

in the Fiscal Sector

With increasing losses and deficits in the state-owned enterprises and reforms that allow profitable SOEs to, etain part of their profits, the tax effort (tax revenue to GDP ratio) has fallen from 28.4 percent in 1980 to 10.5 percent in 1997 (see Table 8). This is one of the lowest in the world. Table 8 and 9 also show that taxes on income and profits are dominated by state-owned enterprises, thus accounting for the small share of direct taxes in total tax revenue and the large decline in tax revenues. Table 9 shows that in 1996, 18.7 percent of total tax revenue is made up of taxes on income, and profits, of which 13.4 percent of total tax revenue are from SOEs. Thus the major contribution to tax revenue are taxes on goods and services accounting for two-thirds of tax collection (value added taxes account for around 43 percent of total tax revenue in 1996). The above shows a big mismatch wherein the nonstate sector accounts for around 60 percent of GDP (if one includes urban collectives in the SOE category--see Table 4) while it contributes around 5 percent of total tax revenues. This makes the tax system very regressive. Thus improvements in tax schemes and collection efforts on the nonstate sector will have to be undertaken immediately. The Chinese nonstate:firms are charged 33 percent corporate income tax rate while foreign er_terprises are charged 15 percent corporate income tax rate. There is a prevalence of illegal tax avoidance from private and collective sectors as well as the foreign sector, which is hard to detect due to inadequate and underdevelOped accounting and audit systems. But with the state having to shoulder much of basic social services, there will be an urgent need to undertake important tax reforms especially on direct taxes. This will entail the adoption of proper accounting procedures and a universal self-reporting from all the enterprises of the state and nonstate sectors. Table 8 also shows that the government deficits in the mid-1990s hover around the 1.5 to 1.7 percent of GDP. This amount is grossly underestimated since it does not include debt payments which in 1995 would have increase government deficit to around 2.9 percent bf GDP. Furthermore, the estimated subsidies of GDP in 1996 in Table 8) is underestimated

to SOEs (amounting to 1.2 percent since there is quasi-fiscal subsi-

dies to SOEs in the form of policy loans from state-owned banks to failing or losing state-owned enterprises. Because qf the large levels of nonperforming and bad loans, government may have to absorb and convert these into capitalization of the troubled state-owned bahks. If we include this, government deficits will balloon to even higher rmmb_rs. In summary then, the Chinese government will have to increase its tax efforts, particularly on enterprises in the nOnstate sector (comprised of private, collective and foreign firms), in order to finance its growing expenditures. Ex-

The Macroeconomy

of China in the Late Nineties

penditures will expand due to the need for the state to take over the provision of basic social services from the SOEs plus the provision for social safety nets and social insurance. The commitment to tighten the budget constraints of SOEs--which will reduce state subsidies both fiscal and quasi-fiscal to SOEs-will reduce some of its expenditures. But in the short run this will not decrease the expected expenditures especially since the government is expected to Ix)rrow large amounts of money to capitalize a very troubled financial sector. Reforming

the Financial

System

Past policy loans and implicit quasi-fiscal subsidies has led to extremely high debt-to-equity ratios for SOEs and have led to China's four state-owned commercial banks to be saddled with nonperforming loans estimated to be 24 percent of total loans in 1997.19Conservative estimate_ put bad debts at 6 percent and overdue loans at 18 percent of total loans. The 6 percent bad debts 'amount to 400 billion yuan, more than the four banks' net assets amounting to 317 billion yuan. Furthermore, 30 percent of the gross assets of the banks are deposits essentially of SOEs. Thus, the state-owned commercial banks are technically insolvent. SOEs, producing less than 30 percent of the country's output in 1996, borrows nearly 80 percent of bank loans. Overinvestments and low utilization rates in SOEs and "asset bubbles" in the fastest growing provinces can be partially traced to this mismatch. On paper, the trouble of China's banks seem to exceed that experienced by Korea or Thailand on the eve of the Asian crisis. However, the solutions to China's problems may be easier to handle if the government does not unnecessarily lengthen and aggravate the existing problem and if the correct credit and commercial culture is put in place in the financial institutions. First of all, China's bad debts do not involve much foreign currency, except in the case of the two big investment firms in Guangdong province. There is no danger of illiquidity and credit stoppage due to foreign creditors' response to the crisis or to aggravation of bad loans due to currency depreciation. Second, the problem being faced by China now is a change in regimes. Past command-economy-oriented policies have made the state give direct financial money to SOEs for stipulated production and investments. This has resulted in the current state of bad and nonperforming loans. The change towards market and decentralized decisionmaking in financial transactions, as long as it is credible, will erase the moral hazard problem to financial bail out of the state-owned banks. In other words, as long as it is clear that there is

19. Huang and Yang (1998),pp. 1-9.

China' s Economic Growth and the ASEAN

change in regimes in the workings

of the state-owned

commercial

banks from

a state-dictated policy to commercial policies based on expected rates of returns and viability of projects, it will not cause any moral hazard problems (as in excessive lending and borrowing) out the bad loans out of the books

to bail-out the troubled banks by taking of the state-owned commercial banks. 2Â°

Another advantage is that both state-owned banks are owned by the state. Thus, it is easy and put it in the other pocket as long as the entity, the state. 21 Third, the undercapitalization of the

enterprises and the commercial to take money out of one pocket pockets are owned by the same state-owned

commercial

banks

will have to be resolved by the state infusing capital in these banks. It is fortunate that China has a low government debt level (around 15 percent of GDP) that it can still afford some room for domestic and foreign borrowing to infuse capital in the state-owned commercial banks. The solution, therefore, to China's financial sector woes is the transfer of nonperforming

loans out of the books of the state-owned

commercial

banks.

Moves toward this have been started inApril 1999 with the creation of Cinda Asset Management. This agency has been tasked to buy the nonperforming loans from China Construction Bank, one of the four state-owned banks. Cinda was able to acquire an initial funding of 10 billion renminbih (US$1.2 billion) from the Ministry of Finance to purchase the bad loans. Cinda can compel state-owned enterprises with bad loans to restructure, lay off workers and become more efficient in order to repay the bad loans. It also has the power to convert unpaid debt into equity meaning it can become partial owner of badly run SOEs. Many believe that the creation of Cinda will effect an improvement in the accounting, management and riskassessment practices of both state-owned commercial banks and enterprises. This could be the start of the adoption of basic commercial and market-based banking practices for loanitransactions to the corporate sector. These include: â&#x20AC;˘

Part of the recapitalization

of the commercial

state-owned

bank will

start once Cinda purchases the_bad loans from the China Construction Bank. The experience withlone state-owned commercial bank is illustrative of the gradualist and experimental style to market reforms the Chinese authorities are underta -king. There is also a practical reason. Capitalization of] all state-owned commercial banks may require

20. Stiglitz (1998). 2l. Stiglitz (1998).

substantial

amount

of financing

and may require

sub-

The Macroeconomy

of China in the Late Nineties

stantial domestic or foreign borrowing. It is best that government debt be increased slowly while banking and enterprise reforms are undertaken so as not to put undue pressure and stress on the state sector. â&#x20AC;˘

Work towards using commercial and traditional banking principles and practices to loan transactions in the banking sector. This requires the setting up of a credit culture which may actually flourish with the present need for massive funds for mortgages and loans for investments and consumer durables from the nonstate sector. This also requires the setting up of a more sophisticated accounting, auditing and risk assessment system, reasonably honest self-reporting of enterprises and banks, more transparency and the setting up of a whole financial infrastructure of prudential regulation, enactment and enforcement of banking, credit, and bankruptcy laws and regulations. This also entails a sure turning back on massive and widespread subsidies and policy loans to SOEs, a tightening of their budget constraints and less state dictates on the production and distribution of firms.

SUMMARY

AND CONCLUSION

The release of initially pent-up productive forces in the first two decades of China's market reforms have made it the fastest growing major country in the world. It seems, however, that the easy phase of growth might be ending. Structural changes in demand patterns, painful reforms in the state sector and a less friendly world environment may reduce China's growth to within 6 to 8 percent in 1999 to 2000. It has been shown how important and interrelated changes and reforms will have to be undertaken to effect: a) a more efficient and profitable state enterprise sector; b) an increased labor mobility and establishment of a dynamic housing sector; c) a strong government and private system of social services, social insurance and provision of safety nets; d) a more efficient and progressive taxation system; and, d) corporate and financial reforms to institutionalize market-based and performance-based incentives and competition in the corporate and financial sectors, All these changes will be easier if the macro environment allows for sufficient growth and external and domestic demand expansion. This is vital for political and economic stability, to allow reabsorption of displaced labor, and to prevent a possible domino-like collapse of state enterprises and financial institutions. A recession will make the reforms extremely difficult to imple-

ment and will exacerbate fiscal systems.

China's Economic Growth and the ASEAN

the vulnerabilities

of the financial,

enterprise

and

But if China is successful in its reforms and world trade picks up again, there may be another big spurt of growth as whole new industries related to housing and consumer durables to the economy. Enterprise and profitability in the medium and genuine economic development

may combine with exports to give a big boost financial reforms will increase efficiency and long term and China will be heading towards and dragonhood.

The Macroeconomy

of China in the Late Nineties

BIBLIOGRAPHY

Amsden, A. and Xiaoming Zhang. 1994. The Macroeconomy of China During Structural Reform: 1978-1994. Paper presented in Conference on Medium Term Development Strategy, Phase II, WIDER, Helsinki. Asian Development Bank (ADB). 1998. Key indicators of Developing Asian and Pacific Countries, vol. 24. China Ministry of Foreign Trade and Economic Cooperation. Available online at http: //www.moftec.gov.cn/moftec/official/statistics_data.html. Gore, L.L.P. 1999. The Communist Legacy in Post-Mao Economic Growth. The China Journal 41(January):25-54. Guo, Xin. 1998. Measures to Ensure an 8-Percent Economic Growth Rate. Beijing Review 41(39):8-12. Harrold, P. 1992. China's Reform Experience to Date. World Bank Discussion Paper No. 180 World Bank. Holland, L. 1999. Cleaning House: China Takes Aim at State Banks' Bad Debts. Far Eastern Economic Review. May 6:17-19. Huang, Y. and Y. Yang. 1998. China's Financial Fragility and Policy Responses. Asian Pacific Economic Literature 12(2):1-9. International Monetary Fund (IMF). Various issues. International Financial Statistics Yearbook. 1998 and February 1999. .1997a. People's Republic of China: Recent Economic Development. .1997b. People's Republic of China: Selected Issues. Lim, J. 1995. The Integration of China into the World Economy. In China's Economy and Asia, edited by M.T. Pascual. Philippine-China Development Resource Center (PDRC). Meng, X. 1998. Recent Development in China's Labour Market. China Update Conference Papers. National Centre for Development Studies. Nasution, A. 1998. The Recent Issues in Management of Macroeconomic Policies in the People's Republic of China. Asian Development Bank. Naughton, B. 1997. Fiscal and Banking Reform: The 1994 Fiscal Reform Revisited, pp. 251-276. In China Review. Hong Kong: Chinese University Press. Nolan, P. and Xiaoqiang Wang. 1999. Beyond Privatization: Institutional Innovation and Growth in China's Large State-Owned Enterprises. World Development 27(1):169-200. Peoples' Bank of China. 1997. Almanac of China's Finance and Banldng. Peregrine Research Institute. Various issues. Inside Asia; The MacroeconomicTravelGuide. Rawski, T. 1999. Reforming China's Economy: What Have We Learned? The China Journal 41(January):139-156. Song, Li-gang. 1998. New Sources of China's Economic Growth. China Update Conference Papers. National Centre for Development Studies. State Statistical Bureau. 1997. China Statistical Yearbook.China Statistical Publishirtg House.

China's

Stiglitz,

Economic

Growth

and the ASEAN

J. 1998. Second Generation Strategies for Reform for China. Address given at Beijing University, July 20, 1998. Wei, Shang-Jin. 1997. Gradualism vs Big Bang: Speed and Sustainability of Reforms. Canadian Journal of Economics 30(46). Woo, Wing Thye. 1999. The Real Reasons for China's Growth. The China Journal 41(January):115-137. World Bank. 1996. The Chinese Economy: Fighting Inflation, Deepening Reforms, vol.2. Wu, Renhong. 1998. China's Macroeconomy: Review and Perspective. Journal of Contemporary China 7(19):443-458.

Chapter Three

TheGreatDragonEffect: MainlandChinaandthe AsianSlowdown by Raul

V. Fabella*

ABSTRACT S paper studies the impacts of the emergence of a Great Dragon orl er countries. It first focuses on the labor-abundant Great Dragon ainland China) and then on the capital-abundant Great Dragon pan). This was done in both the static Heckscher-Ohlin-Samuelson (H-O-S) framework and the dynamic East Asian model framework.

INTRODUCTION East Asia has experienced the emergence in its midst of two economic Great Dragons in the last 30 years. The first one was Japan, which attained gigantic proportions in the 1970s and 1980s, and exerted a tremendous positive pull on the rest of East Asia. South Korea and Taiwan became export powerhouses, churning out goods with heavy Japanese import content. Itwas not an exaggeration that the South Koreans downplayed their trade surplus with the US as "disguised Japanese trade surplus." In the second half of the 1980s, Japanese direct foreign investments (DFIs) transformed Malaysia, Thailand and Indonesia into export machines and, eventually, DFI miracles. * Dean, School of Economics, University of the Philippines, Diliman.

China 's Economic Growth and the ASEAN

The second Great Dragon experience came with the entry of Mainland China into the world export market in the late 1980s and early 1990s. The impression was unmistakable and scary. The other East Asia promptly lost its thriving sports shoe industry, textile and_arments industry, toys industry, and its knick-knacks. Christmas tree mapufacturers in Thailand were uprooted with dispatch. The C and D markets of the world became flooded with cheap "Made in China" products. The _ledgling tradeable sector in the ASEAN, used to sending shivers down the spines of others, now itself faced the raw end of comparative advantage. cannot be more pronounced.

Th6 contrast with Japan's positive

pull

This paper will first explore the theory behind the Great Dragon effect. A three-country model will first generate Comparative static explanations for the phenomenon now being observed. Tl_en, a dynamic model of East Asia will convey the story in terms of growth. :

EMERGENCE

OF.A DRAGON:

A STATIC THREE-COUNTRY The Labor-Abundant

MODEL

Dragon

Initial Conditions Consider a three-country, two-good, two-factor trading universe. tors are immobile. The first country, A (for East Asia), is labor-abundant

Facand

the second, W, is capital-abundant. X is the labor-intensive and homogeneous commodity, and Y is the capital-intensive, homogeneous commodity. By the Heckscher-Ohlin-Samuelson proposition, if only A and W trade, A exports X to and imports Y from W. Dragon in Hibernation Country pre-trade

D initially operates

in autarky. Let D be initially identical

A, so that its initial autarkic

the autarkic

price ratio of A. Both are less than the autarkic

pA = pD < pw. NOW, let the labor endowment paribus. It is known that: I pO" = pxD,_ pyD' = [_LD/(SD + 8S)] 1ÂŁ

1. Woodland (1982).

to the

price Iratio pD = (px/py)D = pA = (px/py)a, price ratio of W pW:

Lr, of D expand

rapidly

ceteris

(i)

The Great Dragon Effect

where (*) indicates rate of growth, 6D is the elasticity .of substitution around the isoquant, 5s the elasticity of transformation around the production frontier, (SD+ 6s) > 0 and I _,1> 0, if X is more labor-intensive than Y (_ being the matrix of industry shares). Thus, the autarkic pO falls and the fall is larger when the growth in labor LD is larger. Thus, the before-trade post-L growth price ratios are pD < pA <pW AS long as D is autarkic, exports of X to W will all come from A. However, the citizens (labor) of D are now poorer than A's because each works with less capital and, thus, lower marginal productivity, i.e., (w/r) ° < (w/r) A. Export Shares

Let s be A's share of X export market (W's imports a function of pA and pD if D opens its door, i.e., s = s (op A,opt'),

s_ = (0s/Op A) < 0, o = 1 s2 = (0s/0p °) > 0, o = 1

of X). Assume

s to be

(ii)

where the autarky operator o = 1 if the country trades, and o = 0 if the country does not trade. We also make the assumption that s(0, op °) = 0 and s(op a, 0) = 1. Thus, initially, s -- 1 and (l-s) = 0, since D does not trade. And, finally, s = 0.5 if pA _ pD In this case, there is no way to differentiate between exports of X from either A orD. A Dragon Emerges: Homogeneous

X and Y Case

From a position of autarky, D now suddenly throws its doors open to trade. From (ii), o = 1 and s(op A, opD), and pA > pp. Since X and Y are homogeneous commodities, and transport cost is either identical or insignificant, s falls from one to zero, and D's export share in the W market (l-s) = 1. A, in effect, becomes autarkic. It loses all its export market for X in W but cannot begin to sell to D (since X is cheaper in D). It wants to import Y but has no hard currency to pay for it apart from borrowing. Nor can it sell the capital-intertsire Y to D having become relatively more capital-abundant than D since D can get the same Y cheaper from W. Claim 1: (Forced Autarky): A reverts to forced autarky when X and Y are homogeneous goods and a previously • autarkic but more labor-abundant (than A) country D opens its doors to trade. A's welfare falls.

China's Economic Growth and the ASEAN

The result of the emerging (as it were from the cocoon) dragon is a drastically reduced welfare for A. This corr_plete displacement represents the worst possible outcome. The situation of forced autarky remains until the growth and capital accumulation in D eventually equalize factor endowment ratios. X as a Spectrum of Goods i

Let X be a set of goods rather than a homogeneous

commodity. Each Xi._ X

has a capital-labor ratio strictly less than ttlat of homogeneous Y: lq < kv, 짜i. So, initially, A still exports X to W since A is lab0r-abundant and imports Y from W. Let D be more labor-abundant than A but autarkic initially. When D opens up to trade, A is relatively more capital-abundant, and by H-O-S, it will export those Xi's which exhibits the lowest lq's, k_'s < ki* to A and W (producing these cheaper) and will import X_'s exhibiting higher kl > k*. A will lose the W market for X such that kl < ki*. In addition, A will start to trade with D, importing X,.with lq < ki* and exporting Xi with kL> k_*.Both A and D will still import Y from W. Intra-X trade occurs between A and W. The welfare effect here is ambiguous. A is forced to upgrade (concentrate on the capital-intensive segment of X)I,relegating the rest to D. This, more or less, egation steady higher

reflects the "flying geese pattern" of consecutive adaptation and relof labor-intensive products. There will be adjustment costs but the state average k in A is higher and steady state per capita income is (characterization of the tradeable sector as a continuum in the Solow-

Swan framework).

2 South Korea and Taiwan are in this position.

Claim 2: Let X be a set of tradeables. Let Xi _ X and lq be its capital-labor ratio, but lq < ky, 짜_. If D opens its door to trade, A can either retain its exports of X_ to W and start exporting these to D as long hs lq > k*; or lose its export of Xi to W if lq.< k*, and W bggins to import these from D. This pattern cally and A surges will be discussed

also mirrors ahead

what happens

With the expansion

later in connection

when A and D start out identiof its capital

with _he capital-abundant

endowment

This

dragon.

With Mobile Capital If capital is mobile between A and [), the entry of a labor-abundant D will shift comparative advantage for labor .intensive X to D from A. But now, i

2. Findlay

(1996).

The Great Dragon Effect

capital from A can and will move to D, since capital is now more productive in D because it works with more L. Thus, the capital endowment of A can fall, reducing

its grip on the more capital-intensive

_.'s. The following

is intuiti_e:

Claim 3: (Negative Pull): Let capital (but not labor) become costlessly mobile between A and D when labor-abundant D opens up. Then, with k^ > k D(where k ^ and kw are weighted aggregate [K/L] in A and D, respectively), (w/r) a > (w/r) Dand capital moves from A to D, raises the threshold k* of A's comparative advantage in X and reduces the potential trade between A and D. It also reduces A's export of X to W. This reduces the relative capital abundance advantage the subset of X that it can hold on to. This leads to reduced

of A and reduces trade between A

and D, and A and W. This mimics the "Mundell effect" of capital mobility. The negative pull on A can even be more pronounced. Claim 4: Let capital (but not labor) be costlessly mobile between A and D. H enough capital moves to D to equalize factor endowment ratios between A and D, then A becomes H-O-S-identical to D and exactly as poor. With equal poverty, both A and D export X and import Y from W. A suffers "absolute immiserization." This is especially true when considerable capital in A is controlled by multinational corporations (MNCs) with their global reach and facility of relocation. The impact is greater if (a) the capital accumulation in A is heavily dependent on mobile capital, DFI; and (b) the capital-intensive segment of X with _ > 1_* is very sparse or underdeveloped. These are the real source of distress in A due to the emergence of China. Not only are A export shares being contested in W but there is considerable loss of capital (i.e., closure of factories). Thailand, Malaysia, Indonesiaand thePhilippines arein thissituation. Role of Absolute

Ricardian

Advantage

and Scale Economies

While the discussion has so far employed comparative advantage, there are absolute advantage issues as well. Assume D to be initially identical to A and initially autarkic. Let K and L in D rise at the same rate. Now, D has absolute advantage in both goods but no comparative advantage since KD= KKAand LD= _, K A, _ > 1. No trade wiU occur by H-O-S if production technology is identical.

China's Economic Growth and the ASEAN

Suppose, however, there is a "Hick's neutral Arrow-type scale economies," i.e., H = H(K), in the production of X. Then, pD falls below pa (even if (w/r) D= (w/r) A,since the (w/r) - p locus shifts, and D will begin to push A out of W market. Claim 5: Let there be an Arrow "!earning-by-doing" in the Hick's neutral parameters of X, i.e., Hi(K), Hi'(K ) > 0, for each Xi e X. Let D be X-neutral larger than A, i.e., K D= _,K^ and LD= _. KA, _. > 1. Then, (i) D's opening up will force A into autarky, if Ht(K ) is uniform across i; or, (ii) if HI(K) is non-uniform, D's opening will result in a Ricardian comparative advantage between A and D where D concentrates in those X where Hi(K) is largest and A will take up the residual. The reason for Claim 50) is that D is more p_oductive than A across all Xt's due to uniform Arrow scale economies induced by higher capital endowment. D's labor is richer than A's, i.e., H(K)r_V[PL = w r_> w A = H(K)AMPL, since KD> KA, but X_'s are still cheaper to produce in D, since capital is more productive. Thus, D will export X to W. A has nowhere to export X. D has an absolute Ricardian advantage in X over A. Again, "immiserization" of A results. A retains some Xin the case of non-uniform scale economies. With capital mobile in the trading world, this scale economies effect accelerates. Since H(K)r_VIPKv = r D > r A = H(K)AMPK A, capital will flow into D from A and W. This raises KDand, thus, H(K) Dfurther. Therefore, Claim 6: If capital mobility "learning-by-doing"

is alloWed on top of the Arrow based On K and D being _-neutral

larger than A, capital flows _nto D fromA, and W wors! ens the plight of A. I The results here point to the overall d0wnward pull on relatively laborabundant A with the opening up of an absolutely labor-abundant D in a threecountry model. D is the poorer country reduce exports. Adding capital mobility tive impact. Some mitigation, however, ing more advanced, less labor-intensive The Great

Dragon

an d A is either forced to autarky or between A and D worsens the negaexists for those A subregions producX_'s in the heterogeneous X case.

Effect

An open Mainland China is the real counterpart of the emerging abundant dragon. The first thing observers noticed after its opening I

laborin the

The Great Dragon Effect

1990s is the very low labor cost, the relatively good infrastructure, the absence of fractious labor disputes, and the huge potential market which can suppc_rt scale economies. East Asia promptly lost first its garment, then its toy industry, and then its sports and sports-shoe industry to factories located in Mainland China and financed by, heretofore unheard of, levels of DFIs. Although cost of labor in Shanghai is now comparable to other East Asia, the Chinese hinterlands still shelter workers in the hundred millions who are ready to move when circumstances allow. This forms a huge pool of labor that casts a warning shadow on all labor-intensive production in the other East Asia. The Capital-Abundant

Dragon

This section presents the case of a three-country trade where the emergence of the third country D flows from a rapid rise of its capital e_dowment. Initial Conditions Let A and D be initially identical, labor-abundant and trading with W. X and Y are the goods, with X being heterogeneous, labor-intensive, on average, and Y being capital-intensive. No factor-intenSity reversal is allowed. Let HO-S assumptions hold. Then, for all practical purposes, A and D are subregions of the same country. Their share in exports of X to W will be half-and-half. The autarkic price ratios are pa = pD < pW.Trade between A and D does not exist. D Emerges Suppose D forges ahead due to a rapid growth of its effective capital stock (due to either higher savings rate or higher innovation, or human capital growth). Then, (w/r) Drises as r falls and pD rises above pA, and the autarkic situation is presented: pA < pD < pW.In the heterogeneous X case, D will begin to specialize in its trade with W in those X__ X, such that lq > k* and relegate X with lq < k* to A. Furthermore, A and D will begin to trade: A exporting to D the more labor-intensive X, and importing from D the less labor-intensive X. The welfare effect of this on A is ambiguous. A's consumers are accessing less labor-intensive X cheaper from D. (D's rise in capital means that this segment of X becomes cheaper). But A is also giving up this segment of its exports to W in return for its exports of lower segment to D. The dislocation can be painful.

China's Economic Growth and the ASEAN

Capital Mobility If capital is mobile between A and D, capital (which has become cheaper in D with a rise in K) will now move to A where it is scarcer and fetches a higher price. In other words, A receives DFI from D. Thus, A shares in the growing capital-abundance of D resulting in the growth falls as well. The capital inflow mitigates the dislocation abundant positive.

X. The welfare

effect on A with capital

of its own (w/r) Aas r in A of the less labor-

mobility

is unambiguously

Claim 7- (Positive Pull): If X is heterogeneous and capital is mobile between the rapidly capital accumulating D and the labor-abundant A, A's real wage will grow with D's real wage. The First Great Dragon:

Japan

The capital-accumulating dragon D refers to Japan and its positive pull on East Asia in the 1970s and 1980s. Japan's DFI virtually made economic miracles to Thailand, Malaysia and Indonesia. This was the first Great Dragon Effect.

EAST ASIAN

GROWTH

WITH A DRAGON

The previous section dealt with the trade pattern and some welfare impact of the entry or emergence of a Great: Dragon in a comparative static framework. This section will attempt a dynamic characterization of the impact of a dragon General

on the growth

Equilibrium

of a smaller neighbor.

Structure

With I_xogenous

Interest

Rate

The purpose

of this section is to demonstrate

how the drive to accumu-

late capital induces a tight credit policy in _policy environment mated that of the East Asian newly indLtstrialized countries model does not attempt to encompass all th_ compelling features the heuristic account but is shown to be c_nsistent with most i model's internal eralization.

consistency

breaks down

With Mundell-Fleming

that approxi(NICs). The described in of them. The capital

lib-

A model of a small semi-open econor_y with two sectors is constructed: the tradeable sector T, and the nontradeable sector N. T includes manufactur-

The Great Dragon Effect

ing. N includes prominently quasi-tradeables such as infrastructure, intermediation industries (financial, distribution, informal), unemployment, and real estate. Each sector uses labor and capital and all factors are accounted for. The economy is labor-abundant and T is more capital-intensive than N. An altonative useful characterization of N views the sector as consisting of two segments of differing

capital intensity,

with N's capital-labor

ratio being

the

weighted average of the two segments" capital-labor ratios. The capital-intensive segment, i.e., real estate and banking, is more capital-intensive than T; also, the labor-intensive segment is more labor-intensive than T. No factor reversal is allowed. Finally, the production technology is constant returns to scale. Let k = (KT/I_,r), h = (KN/LN), f(k) the average output in T, g(h), the average output in N, p = Q/P, where Q is the price of N and P is the price of T, the first order conditions for P maximum are:

f '(k)= r

(1)

f(k) - f '(k)k = w

(2)

pg'(h) = Xr, X > 1 pig(h) - g'(h)h] = w

(3) (4)

where w in the wage rate and Xr are the interest rate in T and N, respectivaly. Assume that (1)-(4) characterize a locally stable equilibrium. Note that P is inclusive of tariff on imports of T. The four equations can be solved for four unknowns k, h, p and w. This leaves r to be exogenously determined. Note that p, k, h, and w are functions of r. Since r is exogenous, (1)-(4) is consist_t with two different interest rates. Thus, there is a consistent model of an economy where credit policy is a potentially important lowing results can be derived

policy ldandle. The fob

from (1) to (4): 3

(i)

Since T is more K-intensive than N, a rise in r reduces p, i.e., p'(r) < 0, the Stolper-Samuelson relation. (ii) A rise in p raises N and reduces T for given factor endowments in a full employment setting. (iii) k'(r) < 0, h'(r) < 0, [k'(r) - h'(r)] < 0 and w'(r) < 0, the factor price frontier slope.

In this case, a rise in r has two effects: the "allocative

efficiency effect" medi-

ated by a change in (w/r) and the "revenue effect" mediated by a change in the commodity price ratio, p. These can conflict. For example, a rise in r causes

3. Obsfeldtand Rogoff (1996).

China's Economic Growth and the ASEAN

a substitution

effect away from capital in both T and N (k'(r) < 0, h'(r) < 0) but

as p fails, it raises the demand for capital in T and lowers it further in N (by full employment). Assume the following: The revenue effect of a rise in r exceeds its "allocative efficiency effect" on factor demand. This means that from LT(w(r), r, p(r)), results in (dI.,r/dr) > 0 since p'(r) < 0 and (dLN/dr) < 0 for the same reason. The results given by (i) to (iii) are equilibrium results, i.e., one expects them after the economy has settled into a new equilibrium. These are, in this sense, long-term outcomes. Growth

Rates

From the Rybczynski plicity): (i) (ii)

Proposition,

for L* = 0 (which is adopted

T*= [(Lr/K) [(k(r)- h(r)]]-lK * N* = [(L_/K) [(k(r)- h(r)]]-l[-K*].

for sim(5)

Let H(r) = [.]-1 in equation 5(i) and G(r) = [.:]-1in equation 5(ii). Clearly, H(r) < G(r) if T is more K-intensive. It is easy to Show that H(r) > i and G(r) > 1 in equation 5(ii). Given LT (w(r),r,P(r)), the result is presented H'(r) = 0H/0r as: {(OLT/OW)W'(r) + (0LT/Or) + (OLT/0p)p'(r)}H

- (k'(r)-h'(r)(k-h)-_H

> 0,

since (al_,r/0p) < 0, (0I,r/OW) < 0, (aL_/or) > 0, making the expression in brackets {.} > 0 and, furthermore, (k- h) > ) and [k' - h'] < 0. By the same token, G'(r) < 0. Thus, L* = 0: (i) (ii)

T* -- H(r)K*, H' > 0 N* = G(r)(-K*), G' > 0.

Note that N* is an average

tendency.

(6)

N* < 0 means

that the bulk of N (the

labor-intensive segment) is shrinking but the capital-intensive segment may be growing. Finally, in units of tradeables, aggregate income growth is: Y* _-_,T*+ (N* + p*) (1--1)

(7)

where 7 is the share of tradeables in Y. Note that we omitted technical progress (TFP [total factor productivity]) in (7) for convenience only and not as obeisance to Young-Krugrnan. Aggregate income growth is the weighted sum of tradeable output growth and the growth of nontradeable output (in units of tradeables). The problem is that these two ohtputs react differently to relevant policy shocks.

The Great Dragon Effect

Let Pw be the world price of T, E the nominal exchange tariff rate. If P = EPw (1 + t), i.e., small country, then, p* = Q* - (t*/(l+t))

- Pw* - E*.

rate, and t the

(8)

since p is a negative function of r, p* is a negative function of r*, and Q* is a negative function of r*. A fall in r (r*<0) raises Q* and, thus, precipitates an asset-price movement in favor of N. Likewise, trade liberalization (t* < 0) o_ an absolute currency appreciation (E* < 0) will raise p*. Any other pressu_ that pushes Q* up will raise p* (e.g., inflow of foreign money into the demand side of the N market). Since asset price imbalances have turned up as an important feature in the East As.ian currency crisis, it is important to peek into what can trigger them in a semi-open small economy. From (8), currency appreciation, trade liberalization and yen, rinminbi and deutschmark depreciations in the face of a dollar-pegged E all contribute to growing asset price imbalance (p* > 0) in favor of N. All these were present in the early 1990s in East Asia. But the mo_t important single contributor is the easing up of credit leading toa rapid rise in Q* which reached bubble proportions. Explosive growth of domestic credit _o accommodate capital inflows is a common element in the crisis. The consequent rise in p, in turn, impacted crucially on the allocation of resources between T and N, especially where asset price bubbles in N dominated the landscape. We do not model asset price bubbles here since our model is am equilibrium model. Finally, since the real exchange rate RER = (Epw/p D)where pu = prQI-T _f= (T/Y), and pw is P째's world counterpart, then, RER = [VW/Pw(l+t)lpr-_.

(9)

Thus, a rise in p leads to currency appreciation. Physical

Capital

Accumulation

The fledgling East Asian economy is assumed, for analytical convenience, to possess no capital goods industry of significance and, thus, physi_l capital has to be wholly imported. This can be relaxed by assuming a fixed fraction of capital growth due to domestic capital. Exports X finance impol_ts M with the help of the change in foreign exchange reserves/kR (a proxy for all exogenous capital flows, e.g., aid, state borrowing, etc.), DH, and MundellFleming flows (MF}. These three factors are capital account items, i.e., M = _R + X + DFI + hMF. Consumer imports I, and producer imports IKconstitute to_

China's Economic Growth and the ASEAN

imports M. Let I K= eM, 0 < e < 0, and e is a negative function of RER. Now, AK = Ix - 6K or K* = (Ix/K) - 6, where 5 is the constant depreciation rate. Thus, K* = (eM/K) - 5, and, K* = [e(AR + X + DFI + hMF)/K]

- 6.

(10)

This is the impact of X on capital growth mediated by capital import share e. This influence, however, erodes as the capit_l stock K grows strengthening the domestic currency. The impact of AR on K* _isidentical. Thus, foreign borrowing, foreign aid, and other exogenous capit_l inflows have the same effect on capital accumulation. The impact of MF on capital accumulation is mediated by a function h(p) of the domestic terms of trade. In view of the debate between Rodrik (1995) of the investment-led school and the export-led school of East Asian growth, equation sents the Japanese reconciliation school. Equation (10) is formally

(10) represtated as:

Claim 8: Maximizing exports X maximizes capital accumulation Thus, no contradiction

need' arise, but this concordance

gines of growth, if exploited, equation 6, this concentrates away from N*.

between

K*.

the two en-

results in a particular pattern of development. By the focus of growth almost exclusively onT* and

Exports Export X is defined

as a Cobb-Douglas

surplus T-C where C is tradeable port W. That is:

function of (a) tradeable

consumption,

and

goods

(b) share s in world ex-

X = (T - C) _ (sW) 1-_ which, in growth

rate, gives:

X* = a(T-C)* + (1-a)(s* + W*).

(11)

Thus, export growth X* depends on growth of tradeables surplus (TC)*, the growth of export share s*, and world export growth W*. Note that a may be the "smallness and distortion indeX" (a = 1 means "small economy and no distortion economy", i.e., it exports _11its surplus; a = 0 means that X = sW and every increment in X is attained by increased share in world export (policy-driven).

The Great Dragon Effect

Growth of domestic tradeables consumption the real wage in terms of T (w/P), C* = C(w/P, RER),

Cw > 0, CR < 0

(T-C)* = T*[T/(T-C)]

Since the domestic price of T

+ t)].

(13)

- C*(C/(T-C)).

(T-C)* = H(K*, (w/P),

function of

(12)

where Cw -- [_C/a(w/P)], and CR= [aC/a(RER)]. is P = EPw(l+t), (w/P) becomes (w/P) = [w/EPw(1

C* is a positive

and a negative function of the PER:

Since T* is a function of K*, finally:

RER).

(14)

The growth in world share s* is a negative function of relative real wage and o_ relative real exchange rate and a positive function of Total Factor Productivity (TFP). s* = s*(_(W/P)/(Wc/Pc),

(RER/RERc),

TFP)

(15)

where subscript "c" refers to China. These are now used to analyze the dynamic Great Dragon effect.

THE GREAT Labor-Abundant

DRAGON

EFFECT:

DYNAMICS

Dragon

Equation 10 shows the sources of capital accumulation in East Asia over the past half-century. In the 1950s and early 1960s, it was exogenous flows, DR â&#x20AC;˘consisting of foreign aid, military assistance, state borrowing and, in the caae of Taiwan, overseas Chinese capital. In the late 1960s and early 1970s, it shifted to exports X and, with the advent of export processing zones, also direct foreign investment. In the late 1970s, state borrowing came back with vengeance in the wake of recycled petrodollars. In the late 1980s, it was onae again DFIs, mostly Japanese, that underpinned the ASEAN miracle. In the 1990s, with DFI being strongly contested by China and other LDCs, the capital account was opened further to allow Mundell-Fleming (MF) type flows, largely short-term capital. The impact of China's entry into the world economic stage impacted oil K* via (a) export levels X, and Co)the level of DFIs. With China's capital COlt-

Chma's Economic Growth and the ASEAN

trois mitigating its claim on MFs which, in the early 1990s, experienced unprecedentedgrowth, became the darling as source of financing capital growth. As in equation 10, the effect of MF on capital accumulation is mediated by a function of h(p) which negatively responds (and crucially) to the domestic terms of trade p. With p on the rise, h(p) falls and marginalizes MF's impact on capital accumulation. China's entry meant a smaller ASEAN share of DFIs as China quickly cornered a sizeable chunk. As long as world DFI was growing rapidly, as it did in the early 1990s, even a smaller share remained an important stimulus for growth. When world MF flow slowed down, as it did in the late 1990s, this translated materially into lowered growth in the ASEAN. The second effect of China's entry is via export growth X* given by equation 11. Export growth depends first on the growth of world trade W* over which the region has no control. Secondly, it depends on the growth of the region's share s* (equation 15) which depends (i) negatively on relative real wage [(w/p)/(wJpc) ] mediated by the share of labor-intensive exports in total exports "e"--the higher is the real wage (w/p) in the ASEAN relative to China (wJp0 and the higher c, the slower,is s* and so is the ASEAN's export growth; (ii) negatively on relative real exchange rates (RER/KE_) as proxy for relative cost of other ira.mobile factors-a-the higher is the cost of doing business the slower is share growth s* and, thus,!export growth; (iii) on the positive side--the faster is Total Factor Productivity (TFP) which proxies for technological upgrade, the faster is share growth and, thus, X*. Finally, X* depends on (T-C)* which represents the growth of tradeable surplus. This, in turn, depends on the growth of T(T*) and on the growth of tradeable consumption C*. T* depends on K* while C* rises with the real wage (income effect for normal goods) and falls with RER, the relative price of tradeables (a high RER means a shift of consumption from tradeables to nontradeables, the substitution effect).! Thus, (T-C)* is related to the economy's savings rate. Acting on these two crucial factors_ China could not but eventually hamstring the ASEAN growth, especially with export slowdown in 1996-1997.

The Capital-Abundant

Dragon

The impact on the ASEAN of the capital-abundant dragon in the guise of Japan in the 1980s is the opposite of Cl_ina's: (i) Increased Japanese DFIs meant higher K* for the ASEAN. Since these went almost exclusively to Thailand, Malaysia and indonesia in the 1980s, these economies became DFI miracles

overnight.

(ii) The increased

DFIs also stimulated

rapid export

The Great Dragon Effect

growth X* since s* grew with Japanese DFI-related exports as well as with substantial DFI-stimulated TFP. (iii) As X rose, so did K* and is a positive feedback X* via T*. It was a veritable Why the Asian The Asian

"virtuous

cycle" of growth.

Convulsion? Crisis in 1997-1998

was partly a response

to the challenge

posed by China and other LDCs on the Asian niches. Equations 10, 11, and 14 show how crucial the real exchange rate (RER) is in the process. With rising real wages and strengthening currencies, the squeeze was.tightening. The response came in the form of the currency crisis with massive devaluations as part of the package. This "prolongs" the adjustment period for the Great Dragon intrusion. 4

CONCLUSION This paper studies the multitude of possible impacts upon an open economy or region of the opening up of a great dragon economy. The latt_ has one of two factor-endowment-orders of magnitude greater than the former. This paper situates Hechscher-Ohlin framework.

the analysis in a two-factor, three-country The first dragon is more abundant in labor (to

mimic Mainland China) and the second is more abundant in capital (to mimic Japan). The two factors are labor and capital, the two goods are X and Y and the three economies are A (for East Asia), D (for the great dragon Mainland China) and W (for the rest of the world). The first part, with immobile factor=, tackled the case of homogeneous X and Y. This is the most pessimistic case. A which exports X to W is forced to give up all its export share to D and since this is a barter economy, imports are forced to zero and A is forced into autark'y (Claim 1). A's welfare falls to autarkic levels. If X is a spectrum of goods of a range of capital-labor ratios, the opening up of the more labor-abundant D creates a three-country model with A being the country of intermediate endowment. The two commodities, in effect, splits into three with the split in X occurring at some intermediate capit_llabor ratio. A retains its exports of the more capital-intensive X but this is now exported to both D and W (Claim 2). Thus, A loses export breath but gaims export destination. The welfare impact of A is ambiguous, since trade creatiort (new exports to D) conflicts with trade constriction (reduction of exports to W). The welfare impact on D and W is unambiguously favorable. 4. For a lengthy discussion, see Fabella(1998).

100

Chi_a's Economic Growth and the ASEAN

Then, capital mobility is introduced. The resulting movement of capital from A to D, consequent to lower wage-rental ratio in D (Mundell effect), reduces the segment of X to which A holds On to and reduces the potential trade between A and D and between A and W (Claim 3). Capital mobility between A and D alone will tend to lower welfare in A when D opens up. When this effect is without bounds (completely cosfless), movement of capital from A to D will render A and D H-O-S-identical! This mc_ans that if A is richer due to higher capital-labor ratio initially, A experiences I"immiserization" (Claim 4). Ricardian absolute advantage may also be at work at the same time. An Arrow "learning-by-doing" is introducecf based on capital stock and the fact that D has larger endowment of K and L. If this scale economies is uniform across the spectrum of X, A's exports to W will all be bounced by D's exports. A is forced into autarky (Claim 5). If the scale economies is uneven across the spectrum of X, then even as D has absolute advantage in all of X, a "Ricardian comparative advantage" develops in X between A and D. D specializes in those X where the scale economies is most pronounced and A picks up the residual. The addition of capital mobility between A and D worsens the outlook. Note that because capital is absolutely more productive in D due to scale economies, it will attract more from abroad (A and W). This process exacerbates the scale-economies imbalance and leaves A farther behind (Claim 6). When the Great Dragon is capital-abundan t , these effects are reversed and a positive tyuU is experienced by A (Claim 7). The Great Dragon here refers to Japan which throughout the 1970s, 1980s, and early 1990s pulled East Asia along in its way to closing the gaps between itself and OECD. The third section again spelled-out Ithe dynamics of the process using the H-O-S framework and specifically the IRybzcynski growth equations. The structure of the East Asian model is spelled-out which was specialized to maximized capital accumulation via exports. The role of the relative real exchange rate and the relative real wage and the growth of DFI are emphasized. These are where Mainland China put pressure on the rest of Asia. Its low relative real wage, higher relative exchange r_te, and capture of a large share of DFI all contributed to the squeeze that it l_laced on other Asian countries, especially the ASEAN. ] Mainland China is the Great Drago# of the 1990s and into early in the next century, and its impact will be largelJ_ negative for those countries with comparable endowments.

The Great Dragon Effect

101

BIBLIOGRAPHY

Fabella, R. 1998. The East Asian Model and the Currency Crisis: Credit Policy ar_i Mundell-Fleming Flows. Manchester School. To be published. Findlay, R. 1996. Growth and Development in Trade Models. In Handbook oJ;Internmtional Economics, edited by R.W. Jones and P. Kenen. Amsterdam, North Holland. Jones, R.W. and J.P. Neary. 1984. The Positive Theory of International Trade. In Handbookof International Economics, edited by R.W. Jones and P. Kenen. Amsterdam, North Holland. Obsfeldt, M. and K. Rogoff. 1996. Foundations of International Macroeconomics. Cambridge, Mass.: MIT Press. Rodrik, D. 1996. Institutions and Economic Performance in East and Southeast Asia. Paper presented at the IEA Conference, December 16-19, Tokyo, Japan. Woodland, A.D. 1982. International Trade and Resource Allocation. Amsterdam, North Holland. World Bank. 1993. The East Asian Miracle: Economic Growth and Public Policy. Washington D.C.: The World Bank.

Chapter Four

China'sChangingTradePatterns: Implications for ASEAN-China Trade by Ellen H. Palanca*

ABSTRACT _su

economic reform in China and the economic prosperity that relted have brought about tremendous growth and pattern changes in ,_ its external trade. In the last couple of decades, merchandise trade between China and all the ASEAN-5 countries, which started at relatively low levels, has grown at impressive rates. This is so despite the increasing similarity in the exports of China and the ASEAN-5 countries except Singapore. Bilateral trade between China and the ASEAN-5 countries reflects intra-industry division of labor as well as trade of niche products.

INTRODUCTION Since China opened up its economy in late 1978, its external trade volume has grown at phenomenal rates. It has also diversified its trading partners from 173 countries in the late 1980s to 22Oat present. 1 In the face of such developments, China has continuously fostered strong economic trade relations with the ASEAN-5 countries, namely, the Philippines, Singapore, Indonesia, Thailand, and Malaysia. China attaches great importance to the ASEAN _, * Professor of Economics and Director, Chinese Studies Program, Ateneo de Manila University: 1. Hou (1998), p.16.

104

Chi_a's Economic Growth and the ASEAN

due to its political

and economic

signifidance.

Such attached

importance

magnified with the formation of the ASE/qN Free Trade Area (AFTA) and also in the context of the Asia-Pacific Economi_ Cooperation (APEC). The ASEAN countries, on the other hand, have increasingly recognized China not just as an emerging political force, but also as a huge growing market for their exports. This paper analyzes the changing trade patterns of China and explores how the ASEAN countries can continue to promote trade with China as trade patterns and the socioeconomic conditions in China are changing very rapidly. Specifically, the objectives of this study are: 1. to identify changes in China's domestic

economy

and society that

have contributed to the changes in its trade patterns and commodity structure; to analyze the growth and volume of merchandise trade between China and the ASEAN-5 as a whole, as well as China's bilateral trade with each of the ASEAN-5 countries; to study changes in the commodity trade structure between China and each of the ASEAN-5 countries and to compare their revealed comparative advantage profiles; and to identify trade opportunities between China and each of the ASEAN-5 countries. I

The opening up of China and the economic reform it undertook have had a tremendous impact on China's foreign trade. In the domestic front, trade has been affected not only by the direct irlterventions clone through institutional reforms and changes in the trade structures. Increasingly, much of the changes in China's trade pattern are due to_the consequences of development on society and the economy. Trade and rural reforms, development plans and strategy, demographic and household income changes, all contribute, directly or indirectly, to China's structure of import demand and export products. These economic and structural development factors, as well as their societal and economic consequences, have strong implications on China's trade with the ASEAN countries and with the rest of the world. In general, the ASEAN countries and China have similar resource endowments and economic development strategy. Following trade theories, this means that China and the ASEAN countries are competitive in the international market, thus, trade opportunities b_tween them are limited. Despite these limitations, trade between them, which started at relatively low levels when China first opened up, has grown steadily at impressive rates. The dynamic structural changes actually provide the ASEAN countries. Direct investment

nlches for trade between China and in iChina by the ASEAN countries,

China's Changing Trade Patterns

105

which is increasing rapidly in the last few years, has also given these investing countries trade opportunities. Changing trade patterns can best be analyzed by looking at the changing comparative advantage profile over time. Responding to market-oriented reforms, China has gradually shifted its export and import structure to conform to its comparative advantage. Areas of trade with China for the ASEAN-5 countries can be explored by looking at their changing comparative advantage profiles and comparing them with China's. The time period under study is from 1980, when the effects of economic reforms started to be felt, to 1996, the latest year data are available. China and the ASEAN countries,

all relying on an export-oriented

eco-

nomic system, also compete with each other for their shares in the world market and in attracting foreign investment. This study, however, does not look at China's and the ASEAN's trade with other countries and so does not study their competition

THE ASIAN

for export markets.

MIRACLE

Following the globalization trend and the remarkable success of the newly industrialized economies in East Asia (both Northeast and Southeast), the last two decades saw the emergence of the Chinese and several ASEAN economies. After the economic success of Japan in the 1950s and 1960s, four economies, namely, Taiwan, Korea, Singapore, and Hong Kong, turned from backward conditions to become newly industrialized economies (NIEs) in the 1970s and 1980s. 2 Malaysia and Thailand followed suit by adopting the same growth strategy of open-trade industrialization. China took a similar course of development when it embarked on its economic reform program in 1978. Although these countries have not reached the NIE status, they experienced very rapid economic growth in the last few decades prior to the Asian crisis. The Philippines, whose level of industrialization was comparable to Malaysia and Thailand during the early 1980s, proceeded on the same track when i_s political and economic conditions stabilized in the early 1990s. Although it_ economy had experienced high growth since the 1970s, Indonesia started to open up its trade only recently. Economic growth for China and most of the ASEAN countries has been impressive and stable, as can be seen in Table I where the average annual growth rate of their GDP in the last few decades are presented. Except for the

2. Woronoff(1992).

106

Chin!'s Economic Growth and the ASEAN

Philippines,

the average

growth

rates

o4 these

countries

have

been

much

higher than the world average. Following the economic model taken by the NIEs, China and the ASEAN countries adopted the export-oriented growth strategy. These emerging economies also, benefited from the growth of the NIEs. A synergy of economic growth activities in the Southeast Asian region has resulted from the economic growth of !he NIEs. Part of this synergy is the spiUover effects of the industrial restructuring of these economies. China and the ASEAN countries (except for Singapore) are behind the NIEs in the formation of "flying geese" pattern, the model illustrating the relay effect of development. While the emerging economies are now exporting labor-intensive manufactured products, the NIEs have molted on to capital- and then technology-intensive sectors. Japan, the leader ai_nong the "flying geese," now focuses on more technologically advanced sectors. Table 1. Average Annual Growth Rate of GDP: China and ASEAN-5, 1970-1996 (In Percent)

China

5.5

10.2

12.3

Philippines Singapore Indonesia

6.0 8.3 7.2

1.0 6.6 6.1

2.9 8.7 7.7

Malaysia Thailand

7.9 7.1

5.2 7.6

8.7 8.3

3.1

2.2

World

_ I

â&#x20AC;˘ No entry. Source: World Bank. i In the last couple

of decades,

China and the ASEAN-5

countries

have

all been outward-looking market economies, focusing on exports as their engine of growth. The countries all rank high among world economies in their exports of goods and commercial _ervices, both in absolute values and in relative value China

terms,

i.e., as a percentage

ranks eleventh,

much higher

of their GDP levels (Table 2). By _han any of the ASEAN countries. !

I 3. More recent data show that for 1997,China 'occupiesthe 10th position in terms of export and total trade values among the world economies (Beiji_gReview,30 March-5 April 1998,p. 13).If we include the export of Hong Kong,which has beerl among the top ten,China's export would rank among the h!gh top places.

China_ Changing Trade Patterns

107

Table 2. Export of Goods and Commercial Services: China and ASEAN-5, 1995 Value ,'(inUSSbiIlion)

',0relative,,towodd} ,,i,:i:/i!i: ,:,

{t'elatlvetewodd)

China

167.18

23.96

Philippines Singapore Indonesia

26.75 147.56 44.96

35 13 28

36.08 173.34 25.42

16 1 31

65.18 71.14

23 21

92.28 43.24

4 10

Malaysia Thailand

Source: International Institute for Management Development (1997).

The ranking of China in export as a percentage not be as high as those of the ASEAN countries nal market.

of gross domestic product canbecause of China's large inter-

Table 3a shows the trade volume of China, the ASEAN-5,

and the world

for the period 1980-1996 (selected years) while Table 3b shows the average growth rate of external trade for selected periods. Total trade volume of China and the ASEAN-5 as a bloc grew at an average annual rate of 13.53 percent and 11.01 percent respectively during the 1980-1996 period, an average much higher than the 6.64 percent of the world. It is interesting to note the following observations regarding the growth rates of the ASEAN countries. First, although the ASEAN countries adopted the export-oriented outward-looking approach to economic growth much earlier than China, their trade growth rates were lower than that of China during the first half of the period. (Growth rates of Thailand and Singapore were quite high although still lower than that of China, which had a relatively low base to start with.) Second, trade growth accelerated significantly for China and all the ASEAN-5 countries from 1988 to 1996. Finally, the ASEAN's trade growth was more rapid in the second half of the period, surpassing that of China for both export and import. These observations suggest that the rapid growth in China's foreign trade did not impede the growth of trade activities in the region. Instead, it seemed to have a stimulative effect on them, promoting economic development in the region. During this period, China and Thailand experienced the highest growth rate in total trade and export volumes. Although the growth in imports was lower than that for exports for both countries, imports also increased at exceptionally high rates. It was highest for Thailand and third for China. Malaysia, with the fastest growth rate in trade during the 1988-1996 period, is third in rank for its total trade volume and second in rank for its import volume

108

China's

Table 3a. Trade Volume:

China, ASEAN-5

Economic

and World,

Growth

and the ASEAN

1980, 1988 and 1996

(In $US Million)

China Total Exports

18139

47663

151197

Total Imports

19941

55278

138944

38080

102941

290141

Total Exports

66535

102780

329290

Total Imports Trade Volume

63124.9 129659.9

102670.2 205450.2

360295 689585

Total Exports

5788

7034

20417

Total Imports Trade Volume

8295.3 14083.3

8720.8 15754.8

34122 54539

Total Exports

19377

39318

125024

Total Imports Trade Volume

24003 43380

43864 83182

131338 256362

Total Exports

21909

19376

49814

Total Imports Trade Volume

10834 32743

13249 32625

42929 92743

Total Exports

12960

21096

78246

Total Imports Trade Volume

10779 23789

16551 37647

78422 156668

Total Exports

6501

15956

55789

Total Imports

92_3.6

20285.4

73484

157_4.6 I

36241.4

129273

Trade Volume ASEAN-5

Philippines

Singapore

Indonesia

Malaysia

Thailand

Trade Volume World

(in US$ billion)

Total Exports

,18B3

2763

5290

Total Imports* Trade Volume

19_8 38_11

2771 5534

5367 10657

*. Total_world exports plus freight and insuranceiapproximate Sources: International Monetary Fruld; World g_nk,

total world imports.

China's Changing Trade Patterns

109

Table 3b. Trade Volume: Average Growth Rate, China, ASEAN-5 and World, 1980-1996 (In Percent) _-__....

China Total Exports Total Imports Trade Volume

12.84 13.59 13.24

15.52 12.21 13.83

14.17 12.90 13.53

Total Exports Total Imports Trade Volume

5.59 6.27 5.92

15.67 16.99 16.34

10.51 11.50 11.01

Philippines Total Exports Total Imports Trade Volume

2.47 0.63 1.41

14.25 18.59 16.79

8.20 9.24 8.83

Singapore Total Exports Total Imports Trade Volume

9.25 7.83 8.48

15.56 14.69 15.11

12.36 11.21 11.74

Total Exports Total Imports Trade Volume

-1.52 2.55 -0.05

12.53 15.83 13.95

5.27 ; ..,a 8.99 6.72

Malaysia Total Exports Total Imports Trade Volume Thailand

6.28 5.51 5.93

17.80 21.47 19.51

11.89 13.21 12.52

Total Exports Total Imports Trade Volume

11.88 10.37 11.01

16.94 17.46 17.23

14.38 13.86 14.08

4.91 4.64 4.77

8.46 8.61 8.54

6,67 6.61 6.64

ASEAN

Indonesia

World Total Exports Total Imports Trade Volume

Sources: International MonetaryFund;World Bank.

110

Chint_'s Economic Growth and the ASEAN

among these countries for the entire period.

Singapore,

being one of the NIEs

and, therefore; had become a full-fledged industrialized country in the 1980s, continues to experience high growth rate in trade, the sustaining force of its economic growth. The Philippines was able to really pursue this open-trade turbulence

course of development in the 1980s. Indonesia

only in the 1990s because of its political also started to open up its trade only re-

cently. Rapid growth in trade started in 1992 for the Philippines for Indonesia.

and in 1994

CHINA'S

TRADE

TRENDS

AND PAl-FERNS

Trade Dependence

From an almost autarkic economy

b_fore 1978, China has become very

dependent on the world economy for markets as well as for inputs, products, and technology. Trade dependence has grown significantly since then (Table 4). The export dependence ratio (ratio of total exports to nominal GDP) of Chinese economy increased from 9 percent in 1980 to more than 20 percent in the 1990sj As mentioned, China's dependence ratio cannot be as large as those of the ASEAN countries due to its large internal market The increase in import dependence ratio, i.e., import as a percentage of GDP, is also dramatic-from 10 to 17 percent during the period. Table 3a shows that from a level of US$18B in 1980, China's export volume reached US$151 billion in 1996. On the other hand, imports rose from US$20B in 1980 to US$139 billion in 1996. Due to the favorable trade balance accumulated over the years as well as the large capital inflows from direct foreign investment, China's foreign reserves reached a level of US$140 billion in 1997. With respect to its major trading partners, China has focused essentially on the developed countries-the United States, Japan, and European Union. In the 1980s and the 1990s, trade with the_ United States increased most rapidly. Exports to the US grew at an annual rate of 23 percent during the period 1980-1996. In the last few years, China's trade with the Latin American and African countries rose rapidly as China intensified its effort to diversify its trading

partners, s i

4. Export dependence ratio was only around2 durihg the 1960sand 1970s. 5. Hou (1998),p. 16.

Table 4. Exports

and Imports

Dependence

Ratio: China and ASEAN-5,

1980-1996

(In Percent)

A. Exports Dependence Ratio

China Philippines Singapore Indonesia

8.97

1Z20

10.84

9,76

9.76

9.05

10.62

14.73

15.46

15.16

17.28

18.72

20.31

21.07

22.38

21,33

17.66

15.85

13.32

14.71

16.78

14.99

15.98

17.05

18.56

18.20

19.32

18.40

20.40

20.74

23"59 24_47

18.31

165.56 151.22 136.25 125.41 128.37 128.88 126.75 141.85 I59.15 1.53.36 144.62 139.56 128.28 128.81 139.25 141.31 130.32 28,07 24,11 23.54 24.82 25.03 21.33 20.15 2Z58 21.96 21,88 22.46 22.74 24,42 23.30 22.82 22.93 21.90

Malaysia

53.09

47,19

44,78

46.80

48.90

49.36

49.76

56.64

60.81

66.28

68.73

72.91

70.66

74,94

83.04

86.78

77.30

Thailand

20.12

20.17

18.99

15,91

17.73

18.30

20,58

23.15

25.95

27.82

26.97

28.91

29.20

29,43

31.55

33_80

30.05

B. Imports Dependence Ratio

China Philippines Singapore

9.87

11.20

9.35

9.37

10.35

14.07

14_68 16.18

18.00

17.06

14.80

16.62

19.27

23.88

21.39

18.51

16.82

25.54

23.79

22.14

24.00

20.47

17.76

18.06

23.02

26.26

29.32

28.20

29,06

34.55

35.15

38.20

38,07

21.54

204.81 198.74 184.72 162.22 152.87 148.66 143.64 161.13 177.78 170.52 166.80 156.82 145.86 148.31 147.69 148.76 130.96

Indonesia

13.84

14.38

17.84

19,20

15.89

11.81

13.39

17.03

14.87

16.16

t9,05

20.21

19.62

17.93

18.23

20.66

19.32

Malaysia

44.10

46.39

46.28

43.81

41.54

39.42

38.94

40.19

47.84

59.41

68.50

77.80

69.27

72.71

84.20

91.14

73.26

Thailar_d

28.47

28.58

23.37

25.72

24.88

2K75

21.28

25.72

32.92

35.71

39.00

38.27

36.57

36.98

38.07

42.37

38.90

Source: National Asia Pacific Economic and Scientific Database (NAPES).

_:_

_Â˘_

112

Changing

China's Economic Growth and the ASEAN

Patterns

China's trade commodity composition has transformed dramatically since the beginning of the reform in the late 1970s. Table 5 presents the commodity structure of China's exports fror_ 1980 to 1993. Export of primary products declined from a share of 50 percent of total exports in 1980 to just 18 percent in 1993 while export of manufactured goods rose from 50 to 82 percent. During this period, labor-intensive _xports continued to increase as the manufacturing

sector took advantage

of Lhe low-wage

comparative

advan-

tage. The share of labor intensive exports lin total exports grew at a phenomenal pace since reforms took place. 6 This trend is expected to continue for several more decades. Although the wage rates in the coastal areas are likely to rise, labor in the inland is still cheap. Therefore, foreign and domestic investments are moving further inland. : Table 6, which presents the composition of China's imports from 1980 to i993, shows that since 1985 the distribution between primary products and manufactured products in total imports is, more or less, the same as for exports. In recent years, China demonstrated tural demand7

import dependence

for its agricul-

Domestic production in China has replaced part of its labor-intensive imports. 8 In the composition of import commodities, from 1978 to 1993, the Share of agricultural and mineral-intensive this period, labor-intensive imports, which

commodities declined. During initially increased in share, had

declined in more recent years. Only capital-intensive imports rose very rapidly. In 1993, they occupied 72 percent of total imports and 82 percent of manufactured imports. 9 Import priorities essentially consist of technical and capital resources that can be directed to key sectors such as energy, transportation, and communication; and inputs, technology, and equipment for increasing production in the export sector. DOMESTIC

FACTORS

AFFECTING

CHINA'S

EXTERNAL

TRADE

China's trade expansion and changing commodity structure can be attributed to several factors, most of which!are related to its economic reform. Market-oriented economic reform has influenced the system toward trade based on comparative

6. 7. 8. 9.

Song (1996). Anderson (1990a). Song (1996). Song (1996).

advantage.

Rural r_form and direct foreign investment

Table 5. Commodil T Strucbxre of China's

Merchandise

Exports,

1980-1993

(In Percent)

_-Â˘")

o_ Primary products

50.3

50.5

36.4

33,5

30.3

28.7

25.6

22.5

20.0

18.2

Foodstuffs

16.5

13.9

14.4

12.1

12.4

11.7

10.6

10.1

9.8

9.2

0.4

0.5

0.6

0.5

0.7

0.8

1.0

9.4

9.7

9.4

9.3

8.9

8.0

5.7

4.8

3.7

3.3

23.6

26.1

11.9

11.5

8.3

8.2

8.4

6.6

5.5

4.5

0.3

0.5

0.4

0.2

0.1

0.2

0.3

0.2

49.7 6.2

49.5 5.0

63.6 5.6

66.5 5.7

69.7 6.1

71.3 6.1

74.4 6.0

77.5 5.3

80.0 5.1

81.8 5.0

22.1

16.4

19.0

21.7

22.1

20.8

20.3

20.1

19.0

17.9

11.9

13.7

14.7

13.6

13.3

11.3

10.8

9.1

8.4

4.7 15.7

2.8 12.8

3.5 16.0

4.4 15.9

5.8 17.4

7.4 20.5

9.0 20.4

10.0 23.1

15.6 40.3

16.7 42.3

7.5

9.5

10.3

11.7

li.0

12.5

19.9

20.0

12.5

19.4

18.7

18.3

16.6

18.7

19.0

Beverages

and tobacco

Nonfood items Mineral fuels Animal and vegetable oils and fats

Manufactured Chemicals

products

Products classified

by material

of which: Textiles Machinery and equipment Miscellaneous manufactures of which: clothing Products not elsewhere classified

1.1

Notes: The symbol - means not available, whereas ** means no longer applicable. Pollowing a new commodity reclassification exercise in 1992, "products not elsewhere classified" in China's new customs statistics have been subsequently included in differenl categories under "primary l_Od_lÂ˘._" and "mamifactured products." Source: Ho (1995).

_o "_

Table 6. Commodity

Structure

of China's

Merchandise

Imports,

1980-1993

(In Percent)

1980

1985

1986

198'J

1988

1989

1990

199t

1992

1993

ISrimary products

34,8

12.5

13,1

I6.0

18,2

t9,9

18,5

17.0

16.4

13,7

Foodstuffs

14.6

3.7

3.8

5.6

6.3

7.1

6.3

4.4

3.9

2.1

0.2

0.5

0.4

0.6

0.3

0.2

17.8

7.7

7.3

7.7

9.2

8.2

7.7

7.8

7.2

5.2

Mineral fuels

1.0

0.4

1.2

1.4

2.8

2.4

3.3

4.4

5.6

Animal and vegetable oils and fats

1,2

0.3

0.5

0.8

0.7

1.5

1.8

1.1

0.6

0.5

65.2

87.5

86.9

84.0

81.8

80.1

81.5

83.0

83.6

86.3

14.5

10.6

8.8

11.6

16.5

12.8

12.5

14.5

13.9

9.3

20.8

28.2

26.1

22.5

18.8

20.9

16.7

16.4

23.8

â&#x20AC;˘27.5

25.6

38.4

39.1

33.8

30.2

30.8

31.6

30.7

38.9

43.3

2.7

4.5

4.4

4.3

3.6

3.5

3.9

6.9

6.2

1.7

5.8

8.5

11.8

12.6

12.2

16.9

17.5

Beverages and tobacco Nonfood

Manufactured

items

products

Chemicals Products

classified by material

Machinery and equipment Miscellaneous Products

manufac_res

not elsewhere

classified

Note: ** means no longer applicable. Other notes are the same as those in Table 5. Source: Ho (1995),

China's Changing Trade Patterns

115

promote export-oriented industrialization. Machinery and technology, as well as goods necessary to export manufactures, dominate imports. However, as economic prosperity continues and per capita income increases, demand for consumer goods imports has been on the rise. Rural Reform/Enterprise

Empowerment

Many rural areas in China were the first beneficiaries of its economic reform. Rural reform in China took on a comprehensive development program incorporating the agriculture, industry, and commerce sectors. The reform resulted in the growth of township and village enterprises (TVEs), which are established either by the local governments in the countryside or the peasant themselves. These rural enterprises were allowed to buy and sell their inputs and outputs in free markets after fulfilling a minimal plan obligation to the state. The result was better economic performance of these firms compared

to the existing state-owned enterprises. Rural reform was essentially in the form of industrialization. In 1991, 74 percent of rural enterprises' output value focused on the industrial sector oriented to exports. The ratio was 84 percent for the non-state owned ones (TVEs). 1째 In 1991, export earnings of the TVEs were reported to contribute to 16 percent of the total, increasing from a measly share of just 5 percent in 1985, with value increasing from US$1.3 billion in 1985 to US$11.2 billion in 1991 (see Table 7). Another report put the share (for 1991) at 25 percent and still another put the value at US$13 billion, n The abundance of labor in the countryside attracts investment of both local and foreign capital. Development over time also shows that the structure of rural enterprise exports has shifted towards capital-intensive production from natural resource- and labor-intensive ones (Table 8). Since economic reform started in 1978, private enterprises both in the rural and urban areas, have been allowed and encouraged. Rural and economic reforms in general have empowered them and given them more autonomy. Managers of state-owned businesses now assume more responsibility for the profits and losses of their enterprises. Outward orientation of business firms resulted as enterprises became free to engage in export and import activities based on profitability in the international market.

10. Findlay et al. (1992). 11. Findlay et al. (1992).

116

China's Economic Growth and the ASEAN

Table 7. Rural Enterprise Share of National Exports: China, 1985-1991

1985 1986 1987 1988 1989

27350 30940 39440 47520 52540

1325 2635 4290 7912 9839

5.0 9.0 11.0 17.0 19.0

1990 1991

62060 71910

9640 11173

16.0 16.0

Note;

Rural enterprise exports exchange rates, Source: Findlay et al. (1992).

Trade System

in US$ are Â˘onverte_

from renminbih

by China's

official

Reform

As pari 6f the economic reform in China, market liberalization policies were adopted for its foreign trade system. China's exports and imports, initially centrally managed, gradually conformed to the country's comparative advantage. Further liberalization of the foreign trade system was implemented in 1994. The government relaxed the import plan, freeing more foreign exchange for nonmandatory imports. The local governments and exporting enterprises were given the privilege of retaining a share of the foreign exchange earned and, based on their export earnings, could purchase foreign exchange from the central bank. In 1991, mandatory expdrt plan and export subsidies were abolished. This increased the competitionlamong the foreign trade corporations in buying products and, therefore, cr6ated more attractive prices for exporters. Reforms in 1994 eliminated mandatory import planning and reduced quotas and licensing requirements. Tariff Irates for a few products were reI duced and nontariff barriers were loweredI. With a gradualistic approach in the r_form of its external sector, adopting trade reform measure, and the institutional changes necessary to implement them, China has managed to expanCt its external trade and change its composition without creating serious macroeconomic imbalances. It is expected that further trade liberalization will continue to lead to dynamic changes in its comparative advantage.

Table 8. Structure

of Rural Enterprise

Exports: China, Selected Years

Natural Resource

Intensive

Labor Intensive

Capital Intensive

Total * Yuans in million. Source: Findlay et al. (1992).

1163

11.7

2037

12.6

3059

10.2

4072

11.0

4900

10.1

8052

80.9

12549

77.5

24103

80.7

29214

78.7

38500

79.4

733

7.4

1609

9.9

2709

9.1

3858

10.4

5100

10.5

37144

]100.00

48500

9948

99.99

16195

99.99

29871

100.00

118

Direct

China's Economic Growth and the ASEAN

Foreign

Investment

(DFI)

Direct foreign investment increased in leaps and bounds in the last two decades. During the period 1979-1997, China accumulated DFIs in the amount of US$223 billion, la The increase was most rapid in the early 1990s when the annual growth rate was over 100 percent. Direct foreign investments make up most of China's large capital inflows. For fhe period 1993-1997, over 70 percent of the capital inflows were DFIs. I Most of direct foreign investments iin China are in the export sector (Table 9). From very negligible levels in th_ 1980s, the contribution of DFI enterprises to China's exports reached 40.7 pdrcent in 1996. These foreign investments have expanded exports through importing advanced technology and â&#x20AC;˘ . L .... equipment from abroad and conducting coproduction with inland enterprises. In the special economic zones where direct foreign investments are concentrated in, priority is given to export-oriented enterprisesâ&#x20AC;˘ In Shenzhen, one of China's first special economic zones, exports of electrical products, textile products, and other light industries account for 83.9 percent of its total export value. 13 Such export-oriented foreign capital investments not only diversify the local economy; they also reform the trade structure at the same time. They also provide better access to the outside world, particularly by linking firms in China to the export and marketing networks abroad. DFI was found to be a highly significant determinant of exports, both at the provincial and national level, in a study on the impact of DFI on promoting trade in China's provinces and China's bilateral trade with its trade partners in the world. 14 Industrial

Infrastructure

When China opened its foreign trade, it already had in place the infrastructure for extensive manufacturing. It adopted early on (in the 1950s) policies of industrialization which focused on heavy industries. This can probably explain why China's share of manufactured products in total exports was relatively higher than most of the ASEAN countries when it started to liberalize trade. Table 10 shows the share of manufactured products in total exports for 1965, 1980, 1990, and 1995 for China and th d ASEAN-5. The share of manufactured products

in total exports

is higher

fOr China than most of the ASEAN

countries during this period (except for Singapore in 1980 and 1990 and Thailand which performed equally with China in 1990). The existence of an indus12. Wu (1998). 13. Gao and Long (1996). 14. Chen (1997).

China's

Changing

Trade Patterns

Table 9. Direct Foreign

1985

119

Investment

Exports

of China, 1985-1996

320

1.1

1986

480

50.0

1.6

1987

1200

150.0

3.0

1988

2460

105.0

5.2

1989

4920

100.0

8.3

1990

7800

58.5

12.5

1991

12100

55.1

16.8

1992

17400

43.8

20.4

1993

25240

45.1

27.5

1994

34713

37.5

28.7

1995 1996

46876 61506

35.0 31.2

31.5 40.7 J_

Source: State Statistical Bureau (1998). Table 10. Share of Manufactured Products Selected Years (In Percent)

China

in Total Exports: China and ASEAN-5,

65.0

48.0

64.0

81.0

Philippines

5.0

37.0

52.0

56.0

Singapore Indonesia

35.0 2.0

50.0 2.0

73.0 36.0

77.0 74.0

6.0 3.0

19.0 28.0

44.0 64.0

78.0 60.0

Malaysia Thailand

Note: Manufactured exports are those of SITC Sections 5 to 8, excluding SITC 68 (non-ferrous metals). This definition excludes export of the food processing, beverages and a number of resource-p_cessing industries. Sources: World Bank (1966). International Institute for Management Development (1997).

trial infrastructure

explains

why China,

although

and adopting the export-led growth strategy countries, has been able to contribute a large supplied

by the developing

countries.

it started

later in opening

compared to most of the ASEAN share of the manufactured goods

120

reform,

China's Economic Growth and the ASEAN

Consistent with its modernization program that is an essential part of its China continues to place great emphasis in building up its infrastruc-

ture and technological capability. Hence, the import of advanced technologies to upgrade its technological level and develo p its communication and information industries is given high priority. Promotion of manufactured exports has been a strong mechanism for technological upgrading, therefore, a source of rapid productivity growth in the high performing economies of East Asia, including China. With its present technological state, China has been able to export low-level technologies based on its domestic practical situation. Is Large Population China's and investors.

and Change

in Cohsumption

Pattern

large population has alway_ been an attraction for exporters The increase in the ability t o purchase of the people in recent

years has accelerated China's import potentials. The lives of the Chinese people have improved tremendously since Deng Xiao Ping decided in 1978 that China Should open up its economy to the outside and undertook the necessary economic reform. Table 11 shows the striking improvement in the income and consumption of the Chinese people. 16 This increase in standard of living, together with the changing age distribution and educational status of households, has caused the household consumption pattern to change rapidly. Table 12 shows the average consumption pattern in households in China for 1997 and the changes from 1996. Changes are significant even in just a year% time. Percentage-wise, expenditures on household appliances and services, health care, transportation and communications, entertainment, education and culture have increased, taking over the share of more basic necessities such as food and clothing. Expectedly, the demand for imports of quality and luxury goods as well as the demand for services will increase with such development. Aside from the growing

standard

of living, China's

import demand

for

consumer goods has also been affected by Ithe changing demographic structure as well as the rapid urbanization pace. !Because of the strict implementation of the one-child policy in the last c6uple of decades and the longer lifespan brought about by better living conditions, China's population is aging quickly. Many of the children

born du_ing this period

are now heads

15. Long (1998). 16. The higher per capita consumption over per capita income observed in Table 11,particularly for the urban population, means that consumption is partly provided through government subsidies. The difference between per capita c_gnsumptionand per capita income, plus saving from income, can be inferred as representing tl_emagnitude of such subsidies and other government social welfare expenditures.

China' s Changing

Trade Patterns

Table 11. Standard

I21

of Living in China, 1978 and 1998 _:_ i',

Annual per capita income (in yuan) Rural Urban Average

annual

employee

salary (in yuan)

Annual per capita consumption All Farmers Non-farm Average

residents

living space per person

1978

133.6

2,090.1

316.0

5,160.1

615.0

6,470.0

184.0

2,936.0

138.0

1,930.0

405.0

6,040.0

(in sq.rn.)

Countryside Cities

8.1 3.6

22.4 8.8

(per 100 households) Public buses in towns and cities

11.6

(per 10,000 people) Color TV sets in urban areas

3.3

(per 100 households) TV sets in rural areas

100.5

(per 100 households)

92.4

Motorcycles

owned

1998

in towns and cities

8.6

Source: Hou (1998).

Table 12.

Household

Consumption

Pattern

Food

in China,

1997

43.7

-2.9

11.7

-3.1

10.0 4.6

2.4 0.8

5.3 13.6

0.9 1.4

Housing

5.4

0.4

Other

5.7

0.2

Clothing Household appliances Health care Transportation Entertainment,

and services

and communications education and culture

goods and services

Total

100.0 iJ'

Source: Hou (1998).

122

China% Economic Growth and the ASEAN

households. Called the "little emperors," these spoiled children have developed higher consumption standard and more fastidious tastes. With such developments, the demand for personal services, geriatric goods, household appliances and quality food items is expected to rise. CHINA'S

TRADE

Trade between

PATTERN

WITH ASEAN-5

China and the Southeast

Asian region started

at low lev-

els when China first opened up in the late 1970s. This is due partly to the lack of complementarity in their exports, and partly to the low level of political relations between China and most of the countries in the region in the 1960s and 1970s. However, in the last few decades, the Southeast Asian region as a whole has been an important trading partner of China. In 1996, trade with the ASEAN-5 constituted 6 percent of China's total trade. On the other hand, the ASEAN countries, wanting to reduce their trade dependence on the developed countries, have increasingly been exploring China as an alternative market. 17 Trade with China, particularly export, increased significantly. Hence, despite the seemingly similar resource endowment between China and the ASEAN, trade between them has been quite vigorous. It seems that by putting importance in engaging each other economically, the ASEAN-5 countries have been able to sustain the growth in their respective bilateral trade with China by exploring diversity in their similar resource endowment and exploiting differences in their developmental needs. ASEAN-China

Trade

This section examines the total exports to China of the ASEAN-5 bloc and China's exports to the bloc. (See Tables _3 and 14.) The trend of the export and import values for the 17-year period uhder consideration is depicted in Figure la. Figure lb shows how ASEAN-5's _xports fare as a percentage of the bloc's total exports and also as a percentage of China's total imports while Figure lc shows the trend of China's export_ as a percentage of ASEAN's imports and as a percentage of China's total e_ports. (Data on China's export to the ASEAN are considered their imports fro m China.) From the value trends, it is noted thatl the growth of both ASEAN's exports to China and China's exports to the ASEAN is generally in a hyperbolic fashion. Initially, in the 1980s, China's export s to the ASEAN-5 as a whole were more than their exports to China. In 1993 and] 1994, however, ASEAN's exports

17. Zhao (1997)r

124

China's Economic Growth and the ASEAN

Table 14. China's Export to ASEAN-5: Annual Values and Annual Growth Rates, 1980-1996 ..............._'_"_................ _"_ .....'.::li_i_'l_/t_i_'_' _ _'''' .v

', _', i,_,'_ .... _'_'_'_'_i ':%,

_!,_ _ ' ' '

_' '_, _','_,_',', ' ',/l/l_'_i_,_ :_. ';1',,, _ ',,:',",_9'

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996

_ _' _" '_l_ _:'_i'b_ '_ _'

,' i'_,,:',_ '''_' 'i' _,',,",Y',;' "__'1',,

1196 1386 1279 1140 1979 2803 1879 2312 2789 2898 3846 4124 4250 4673 6368 9001 8829

15.89 -7.72 -10.87 73.60 41.64 -32.96 23.04 20.63 3.91 32.71 7.23 3.06 9.95 36.27 41.35 -1.91

_'_

_..:' ................... _,_'_'_ _"I,i'' ,

,_:_ .','._.

_,_"'" _ _,.... ,, f', ,"_,,,"' ',,, ,

6.59 6.45 5.85 5.15 7.97 10.26 5.99 5.86 5.85 5.60 6.12 5.73 4.97 5.10 5.27 6.05 5.84

1.89 1.96 1.72 1.50 2.70 4.41 3.05 2.95 2.72 2.31 2.43 2.30 2.17 2.08 2.35 2.61 2.45

Source: International Monetary Fund. export to China grew at much higher ratesi than its total export. The average annual growth rate for the ASEAN-5 range8 from a low of 13.2 percent for the Philippines to a high of 41.6 percent for In_lonesia. Together, .these countries supply about 7 percent of China's import demand in 1996, which is a signifb cant increase from the 2 to 3 percent shar_ in the early 1980s. From 1980 to 1996, total export of the ASEAN-5 10.5 percent while their export percent per year.

countrie_ to China

grew at an annual grew by about i

average

an average

rate of of 17.8

As a share in its total export, China'_ export to the ASEAN countries hovered around 6 percent during the period 1980-1996 (except for 1985), with a very slight decline in the trend (Table 14). On the other hand, there was a more substantial increase in the share o_ ASEAN-5's export to China in ASEAN-5's total export (Table 13). The shhre was less than I percent for the

China's

Changing

Figure

la.

Trade

ASEAN-5's

Patterns

Export

125

to China

and

China's

Export

to ASEAN-5,

1980-1996 12000

10000

8000

6000

4000

2000

'1980

I I

Figure

lb.

1981

1982

1983

1984

1985

1986

1987

1985

-e-- ASEAN-5's Exportto China

ASEAN-5's

Export

to China:

ASEAN-5's

Export

and

1989

Values

as Percentage

1_90

1991

1_2

I_3

I_34

1995

1_3_

China'sExpa. to ASEAN-5

as Percentage of China's

of Import,

1980-1996

7.00 6.00 2_ 5.00 UJ 8.00 1 O 4.00 LU 3.00 n

:,.oo

J_.__-_

_-'_'_-"_*-"-" __

1.00 0.00

% of China'sImports --e- ASEAN-5 ASEAN-5 Exportsto Exportsto Chinaas Chinaas % ofASEAN Exports

] !

126

China's Economic Growth and the ASEAN

Figure lc.

China's Export to ASEAI',-5: Values as Percentage of China's Export and as Percentage of ASEAN-5's Import, 1980-1996

12.00

I-

g tw 6.00 U LU (2.

1o.oo8.oo 4.00

=____._..-

_'_--._%

_..

.....

2.00 .-__/ 0.00 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996

-i-

China's Exports to ASEAN-5 as % of China's Exports China's Exports to ASEAN-5 as % of ASEAN-5 imports

most part of 1980 to 1985, but reached almost 3 percent in the mid-1990s. 1996, imports from the ASEAN-5 countries accounted for 6.9 percent

By of

China's total import while imports from China constituted 2.5 percent of total ASEAN-5's imports. For the individual countries (Tables 17a to 17e), while the share of import from China to total country's import ill 1980 for most is less than 1 percent; in 1996, this percentage ranges from a high of over 4.2 for Indonesia to a low of 1_6 for the Philippines, It can be seen that trade between China and the ASEAN-5 started at a low base but has increased steadily and impressively. The ASEAN-5 bloc has found China a growing market for its export. Following Japan, the United States, Hong Kong and Europe, the ASEAN_-5 bloc is the fifth largest trading partner of China, although trailing by a large gap. In terms of growth rate of total trade with China, from 1980 to 1996, tile ASEAN-5 is ahead of these top trading partners. 1 Trade Trend with Individual

Countries

The ASEAN-5 coLmtries are far from ihomogenous in their patterns of trade with China. The bilateral trade of each country with China depends on the country's level of economic development, trade policies, resource endowment relative to China's, as well as its dip!lomatic and economic ties with

128

China's Economic Growth and the ASEAN

Table 16. ASEAN-5's Export to China: Average Growth Rate, 1980-1988, 1988-1996 and 1980-1996 (In Percent)

ASEAN-5's export to China ASEAN-5's total export China's total import

18.21 5.59 13.$9

17.43 15.67 12.21

17.82 10.51 12.90

Philippines Export to China

,I 5.10

21.96

13.22

Total export

i 2.47

14.25

8.20

Singapore Export to China

18.49

13.96

16.20

Total export

i 9.25

15.$6

12.36

!80.12" !-1.52

19.75 12.$3

41.56 5.27

Malaysia Export to China

8.44

20.80

14.46

Total export

6.28

17.80

11.89

18.28 11.88

18.67 16.94

18.47 14.38

Indonesia Export to China Total export

Thailand Export to China Total export i

The period covered is from 1981 to 1996. Source: international Monetary Fund. i

very high trade volume during this period. Nevertheless, its trade with China grew at a faster rate compared with its trad_ with the rest of the world. Due to Singapore's large total trade _olume, the share of its trade volume with China, even though substantial, in the country's total is small. During the period 1980-1995, export to China c_nstitutes between 1 and 3 percent of Singapore's total export while import from China as a share of its total import is slightly higher. Although small, for! the most part of the period, these shares are highest for Singapore among th_ ASEAN countries. In more recent years, however, Indonesia and Thailand surpassed Singapore in the share of export to China in total country export. The share of import from China in total country import was higher in Indonesia in recent years and in the Philippines and Thailand in the early 1980s.

Table 17a. Philippines'

Bilateral

Trade with China, 1980-1996

1980

0,78

6.49

258

3.11

21.57

1981

1.36

14.47

255

3.01

18.40

1982

105

2.09

13.53

236

2.86

18.45

1983 1984

22 60

0.45 1.12

3.83 9.10

143 223

1.79 3.47

12.54 11.27

1985

1.76

8.71

314

5.75

11.20

1986

101

2.10

8.08

157

2.91

8.36

1987

1.54

4.80

245

3.43

10.60 9.61

1988

0.95

2.54

268

3.07

1989

0.64

1.76

239

2.14

8.25

1990

0.76

2.40

205

1.57

5.33

1991

128

1.45

4.06

253

1.98

6.13

1992

114

1.16

3.02

209

1.35

4.92

1993

167

1.48

3.37

281

1.50

6.01

1994

164

1.22

2.51

476

2.11

7.47

1995

216

1.25

2.56

1030

3.63

11.44

1996

328

1.61

3.43

1015

2.97

11.50

Values are China's exports to lhe Philippines. Source: Intemationa! Monetary l_und.

Table 17b. Singapore's

Bilateral Trade with China, 1980-1996

1980

307

1.58

44.30

421

1.75

35.20

1981

179

0.85

33.21

658

2.39

47.47

1982

240

1. I5

30.93

648

2.30

50.66

1983

213

0.98

37.04

567

2.01

49.74

1984

243

1.01

36.87

1239

4.32

62.61

1985

333

1.46

35.81

2063

7.85

73.60

1986

57i

2.54

45.68

1217

4.77

64.77

1987 1988

737 1193

2.57 3203

40.16 45.16

1323 1464

4.06 3.34

57.22 52.49

1989

1199

2.68

42.22

1642

3.31

56.66

1990

799

1.51

30.93

2016

3.31

52.42

1991 1992

858 1113

1.45 1.75

27.23 29.44

2014 2031

3.04 2.81

48.84 47.79

1993 1994

1905 2098

2.57 2.I8

38.45 32.06

2245 2563

2.63 2.50

48.04 40.25

t995

2759

2.33

32.67

3500

2.81

38.88

1996

3394

2.7i

35.53

3753

2.86

42.51

Values are China's exports to Singapore. Source: International Monetary Fund.

r.__

Table 17c. Indonesia's

Bilateral

Trade with China, 1980-1996

1980

0.19

1.76

1981 1982

8 14

0.03 0.06

1.48 1.80

54 46

0.41 0.27

3.90 3.60

1983 1984

27 8

0.13 0.04

4.70 1.21

49 70

0.30 0.50

4.30 3.54

1985

1986

I39

0.05

9.03

124

1.21

4.42

0.94

11 .I 2

143

1.33

1987

7.61

343

2.00

18.69

188

1.46

8.13

1988

492

2.54

18.62

236

1.78

8.46

1989 1990

534 834

2.43 3.25

18.80 32.29

208 401

1.27 1.84

7.18 10.43

1991

1191

4.08

37.80

481

1.86

11.66

1992

1396

4.11

36.92

471

1.69

11.08

1993

1249

3.39

25.21

693

2.45

14.83

1994

1419

3.71

21.68

1052

3.29

16.52

1995

1866

4.31

22.10

1438

3.51

15.98

1996

2081

4.18

21.78

1428

3.33

16.17

Values are China's exports to Indonesia. no data.

b..,l

Table 17d.

Malaysia's

Bilateral Trade with China,

1980-1996

b.a

1980

217

1.67

31.31

184

1.71

15.38

I981

0.75

16.33

191

1.65

13.78

1982

110

0.91

14.18

181

1.46

14.15

1983

206

1.46

35.83

186

1.40

16.32

1984

165

1.00

25.04

196

1.39

9.90

1985

161

1.04

17.31

186

1.51

6.64

1986

163

1.17

13.04

203

1.88

10.80

1987 1988

279 415

1.56 1.97

I5.20 15.71

255 309

2.01 1.87

11.03 11.08

1989

481

1.92

16.94

332

1.48

11.46

1990 1991

619 639

2.10 1.86

23.96 20.28

370 528

1.26 1.44

9.62 12.80

1992 1993 1994

772 1204 1933

1.90 2.55 3.29

20.42 24.30 29.54

645 704 1118

1.62 1.54 t.88

15.18 15.07 17.56

1995

1962

2.65

23.23

1281

1.65

14.23

1996

1882

2.41

19.70

1374

1.75

15.56

"Values are Chma's expor_ to Malaysia. Source: International Monetary _und.

__3 _"

Table 17e. Thailand's

Bilateral

Trade with China, 1980-1996

3 EXPORTS Year

Values

% of Total

(In US$ million)

Exports

IMPORTS '

% of ASEAN's

Values"

% of Total

Exports to China

(In US$ million)

Imports

4" 03 % of China's Exports

to ASEAN

1980

124

1.9t

17.89

312

3.39

26.09

1981 1982

I86 307

2,65 4.42

34,51 39.56

228 168

2.29 1.97

16,45 13.14

1983 1984

107 183

1.74 2.47

18.61 27, 77

195 251

1.90 2.41

17.11 12.68

I985

271

3.81

29.14

116

1.26

4.14

1986

276

3.11

22.08

159

1.73

8.46

1987

388

3.36

21.14

301

2.31

13,02

1988

475

2,98

17,98

512

2.52

18.36

1989

576

Z88

20.28

477

1.85

16.46

1990

269

1.17

10.41

854

2.56

22.20

1991

335

1.16

10,63

848

2.26

20,56

1992

386

1A9

10,21

894

2.20

21,04

1993

430

1,16

8.68

750

1.62

16.05

1994

930

2.02

14.21

1159

2.13

18.20

1995

1642

2.90

19.44

1752

2.37

19,46

1996

1868

3.35

19.55

1259

1.71

14.26

o._ _._"

,_ oa

Values are China's expor{s to Thailand, Source: International Monetary Fund.

Â˘.oo

134

China's Economic Growth and the ASEAN

Figure 2a. ASEAN-5's Exports to China: Values, 1980-1996 4000 3500 3000 2500

2000 1500 1000 5OO

1980 1981 1982 1983

1984 1985 1986 1987 198_ 1989 1990 1991 1992 1993 1994 1995 1996 /

•--0- Philippines

--.B- Singapo_

IndOnesia

Malaysia

Thailand

Figure 2b. ASEAN-5's Exports to China: Values as Percentage of Total Country Exports, 1980-1996 5.00 4.50

4,00

u_ 3.50, 3,00,

U ._= 2,00 O I-

1.50

1.00

0.50 0.00

__.--a,-..___,

/ ,/

I i

1980 1981 1982 1983 1984 1985 1986 1987 1988 1_89 1990 1991 1992 1993 1994 1995 1996 /

Philippines

--a- Singapore

"_-

Indon_esia

Malaysia

Thailan¢l

I I

"".

China's Changing Trade Patterns

135

Figure 2c. ASEAN-5's Exports to China: Values as Percentage of Total ASEAN Exports to China, 1980-1996 50,00

40.00

35,00 0 30,00

_545,o0 20_00 i

25,00 15.00

" 5.00

0.00 :

1900 1981 1982 1983 1084 1985 1986 1987 1988 1980 1990 1991 1992 1993 1994 1995 1996

Philippines

Singapore

--_

Indonesia

--_

Malaysia

-4-

Thailand

Figure 3a. China's Exports to ASEAN-5 Countries: Values, 1980-1996 4000 1

3000 -_

_ 2500] 1 _2_,

1500 ' 1000:

5OO 0 1980 1981 1982 1983 1984 1985 1988 1987 1955 1989 1990 1991 1992 lgg3 1994 1995 1996 Singapore I

Philippines

Indonesia

Malaysia

.4- Thailand

China's Economic Growth and the ASEAN

136

Figure 3b. China's Exports to ASEAN-5 Countries: Values as Percentage of Country Imports,

1980-1996

9.00 8,00 0 o..

7.00

__ 6,00 5.00 :} 0 0 4.00

o _

1.00 0.00

....

I .

1980 1981 1982 1983 1984 1965 1986 1987 191_61989 1990 1991 1992 1993 1994 1995 1996 i /

I -4--Philippines

Figure 3c. China's

--m.- Singapore

Indbnesia

Exports to ASEAN-5

Values a s Percentage 1980-1996

.-w.- Malaysia

Thailand

Countries:

of China's

Exports

to ASEAN-5

Countries,

60.00

Fz o

70.00

._ <

60.00 50,00

40.00

30.00

2o.oo.I 0.00 _ [ ..... _ . . _ ..... 1980 1981 1982 1983 1984 1985 1986 1987 1988|1989 1990 1991 1992 1993 1994 1995 1996

-'_

Philippines

,4-Singapore

Indonesia

[

-w-- Malaysia

ThailanclJ

Table 18, Balance of Trade: Chifta and ASEAN-5,

I980-1996

(In US$ million)

China Export toASEAN Import fromASEAN Balance of Trade

1196 693 503

1386 539 847

1279 1140 1979 776 575 659 503 565 1320

2803 1879 930 1250 1873 629

2312 1835 477

2789 2898 2642 2840 147 58

3846 2583 1263

4124 3151 973

4250 3781 469

4673 4955 -282

6368 6544 -176

9001 8445 556

8829 9553 -724

Philippines Export to China Import from China Balance of Trade

45 258 -213

78 255 -177

105 22 60 236 143 223 -131 -121 -163

81 314 -233

101 157 -56

88 245 -157

67 50 268 239 -201 -189

62 205 -143

128 253 -I25

114 209 -95

167 281 -114

164 476 -312

216 1030 -814

328 1015 -687

Singapore Export to China Import from China BalanceofTrade

307 421 -114

179 658 -479

240 213 648 567 -408 -354

243 333 571 1239 2063 1217 -996 -1730 -646

737 1323 -586

1193 1199 799 858 1464 1642 2016 2014 -271 -443 -1217 -1156

1113 1905 2031 2245 -918 -340

2098 2563 -465

2759 3500 -741

3394 3753 -359

Indonesia Export to China Import from China Balance of Trade

a_ 21

Malaysia Export to China Import from China Balance of Trade Thailand

217 184 33

Export to China Import from China Balance of Trade

t24 312 -188

g _ 54 -46

14 46 -32

27 49 -22

8 70 42

84 124 -40

139 143 -4

343 188 155

492 236 256

534 208 326

834 401 433

1191 481 710

1396 471 925

1249 693 556

1419 1052 367

1866 1438 428

2081 1428 653

88 191 -103

110 181 -71

206 186 20

165 196 -31

161 186 -25

163 203 -40

279 255 24

415 309 106

481 332 149

619 370 249

639 528 111

772 645 127

1204 704 500

1933 1118 815

1962 1281 681

1882 1374 508

186 228 -42

307 168 139

107 195 -88

183 251 --68

271 116 155

276 159 117

388 301 87

475 512 -37

576 477 99

269 854 -585

335 848 -513

386 894 -508

430 750 -320

930 1159 -229

1642 1752 -110

1868 1259 609

_ _

';_

a no data, Source: Intemalional

2_ Monetary Fund.

China's Changing Trade Patterns

ence trade

deficit

139

with the ASEAN-5

due to the substantial

countries

since 1993 (except

increase in import over export

for 1995)

in its trade with Indone-

sia and Malaysia. From 1980 up to 1996, China's trade balance with the Philippines and Singapore had consistently been in China's favor. In the case of Thailand, trade balance with China over the past one-anda-half decades was less consistent. The volatility of trade balance between countries can perhaps be explained by the export similarity index between them. Table 19 shows the similarity indices for China's exports with each of the ASEAN-5 countries. The degree of export similarity is highest between Thailand and China. Despite such similarity over the entire 17-year period, trade between the two countries was not sluggish, and in fact became more active in the latter part of the period. The high degree of export similarity, however, seems to make trade between them less predictable and consistent. The similarity trade indices with China for the other four countries are at relatively lower levels. It is perhaps due to the fact that these countries have greater degrees of complementarity with China that there was more consistency in the direction of their trade balance, whether positive or negative. Table 19. Export Similarity Indices: China and ASEAN-5, 1987, 1990 and 1995 ":__

_; ....... _!C I_ _'__'_' _r_' :i _'.1_1,;,_. _ _..

_"i_.i:Y'!!_ '_'':!_'_

_:'

Philippines Singapore Indonesia

0.66 0.59 0.58

0.58 0.56 0.60

0.54 0.50 0.65

Malaysia Thailand

0.51 0.73

0.56 a

0.51 0.72

a The similarity index for China and Thailand for 1987could not be computed due to insufficient data. Source:United Nations. BILATERAL China's

TRADE

COMMODITY

trade with the ASEAN-5

STRUCTURE (except Singapore)

has evolved

from

trade of primary products such as food and crude materials to manufactured goods and machines and equipment from 1980 to 1996 reflecting the structural development of all six countries. In the case of Singapore, which also exports to China primary products (rubber and petroleum), most of its major exports since 1980 have been machines and equipment. Basic manufactures and chemicals necessary for industrial activities have also dominated China's

140

China's Economic Growth and the ASEAN

bilateral trade with the ASEAN-5 countries all through the period. Tables 20a to 20e present the top trade items (based on three-digit classification) of the trade between the ASEAN-5 countries and China for 1980, 1988 and 1996. The Philippines Mineral fuels in the form of crude petroleum, petroleum products, and coal dominated the Philippines' imports from China in the last couple of decades. Aside from mineral fuels and other primary products, other imports from China were chemicals and machines in 1980, basic manufactures in 1988, and machines and basic manufactures in 1996. In 1996, among the mineral fuels items, only crude petroleum was in the list of top ten China's exports to the Philippines list. Instead, mineral fuelsl in the form of natural gas constituted part of the Philippines' top exports tO China in 1996. Among the Philippines' top exports to China, vegetable oil was continuously among the top 10 for all three years, iHowever, from the top position in 1980, it descended to the third in 1988 and the sixth in 1996. Food items, crude materials, and basic manufactures featured prominently in the Philippines' exports to China throughout the period. Fresh fruits and nuts have climbed up in position from 10 to 4 to 2. Other food i_ems such as sugar and honey and meat and fish items are no longer in the 1996 list. Also disappearing from the list are crude materials which in 1980 included base metal ore concentrates, silver and platinum, and crude vegetable materials. No crude materials except for nonferrous base metal ore concentrates made it to the list in 1996. In 1988, chemicals, in the form of fertilizers and plastic materials, and basic manufactures, like veneer plywood and structural parts, were important exports by the Philippines to China. In recent years, due perhaps to its expanding industrial activities, China's demand for petroleum products and other primary raw materials has been on the in4rease. In 1996, the Philippines exported to China mineral fuels (gas and petroleum products), an item that ranked first in our imports from China two decades ago. In 1996, machines and equipment as an item were both impozted and exported in 1996. Imports from China were non-electrical machines and telecommunication equipment while items exported to China were office and electrical machines. Singapore Singapore, being more developed than China but lacking in natural resources, traded mostly machines and equipment for China's primary exports in the last couple of decades. In 1980, China exported essentially food products, crude materials, petroleum products, and basic materials. In 1988, China

Table 20b. Singapore-China

Rank.

Trade Community

198o

332 656 653 652 221 055 292 051 054 512

1980, 1988 and 1996

-- 1_8_

: China's

1 2 3 4 5 6 7 8 9 10

Structure,

Top 10 Export Commodities

Petrolm Prods Textl Etc Prods Nes Woven Textl Noncot Cotton Fabrics Woven Oil Seeds Nuts Krnls VegEtc Prsvd Prepd Crude Veg Matrls Nes Fruit Frsh Nuts Frsh Dry Veg Etc Frsh Smply Prsvd Organic Chemicals Singapore's

33I 332 081 653 652 283 682 221 651 656

_t,O

â&#x20AC;˘

1_6

to Singapore

Crude Petrolm Etc Petrolm Prods Animal Feed Stuff Woven Textl Noncot Cotton Fabrics Woven Nonfer Base Mtl Ore Conc Copper Oil Seeds Nuts Kernls Textl Yarn and Thread Textl Ere Prods Nes

Top 10 Export Co_

714 122 724 729 722 841 653 891 897 652

Office Mach TobaccoMfrs Telecom Eqpt Elec Mach Nes Elec Pwr Mach Switch Cloth Not Fur Woven Textl Noncot Sound Recorders Gold Silver Jewelry Cotton Fabrics Woven

to China

1 2 " 3 4 5 6 7 8 9

231 735 931 724 718 561 631 673 729

Rubber Crude. Synth Ships Boats Specl Transacts Telecom Eqpt Mach for Spcl Indust Fertlzrs Manufact Veneers Plywood Etc Iron Steel Shapes Elec Mach Nes

332 422 581 231 724 719 729 512 732

Petrolm Prods Fixed Veg Oil Nonsoft Plastic Matrls Etc R_bber Crude Synth Telecom Eqpt Mach Nes Nonelec Elec Mach Nes Organic Chemicals Road Motor Veh

332 714 729 719 581 722 724 718 891

Petrolm Prods Office Mach Elec Mach Nes Mach Nes Nortelec Plastic Matrls Etc Elec Pwr Mach Switch Telecom Eqpt Mach for Spcl Indust Sound Recorders

733

Road Veh Nonmtr

421

Fixed Veg Oils Soft

599

Chemcls

Source: NAPES Database.

Nes

_" -,

Table 20c. Indonesia-china

Trade Commodity

Structure,1980,

1988 and 1996

China's Top 10 Export Commodities

to Indonesia

1 2 3 4 5 6 7 8 9

061 512 651 717 641 514 . 581 711 698

Sugar Honey Organic Chemicals Texfl Yarn and Thread Textl Leather Mach Paper Paperbrd Othr Inorganic Chemls Plastic Matrls Etc Power Mach Nonelec Metal Manufact Nes

221 263 081 321 512 671 717 061 674

Oil Seeds Nuts Kernls Cotton Animal Feed Stuff Coal Coke Briq Organic Chemicals Pig Iron Etc Textl Leather Mach Sugar Honey Irn Stl Univ Plate Sheet

331 719 514 724 672 711 512 121 733

Crude Petrolm Etc Mach Nes Nonelec Othr Inorganic Chemls Telecom Eqpt Iron Stl Primary Forms Power Mach Nonelec Organic Chemicals Tobacco Unmfd Road Veh Nonmtr

899

Other Manufact Goods

264

Jute

054

Veg Etc Frsh Smply Prsvd

lndonesia's

Top 10 Export Commodities

to China

1 2 3 4 5 6 7 8

631 292 561 231 732 674 243 331

Veneers Plywood Etc Crude Veg Matrls Nes Fertlzrs Manufact Rubber Crude Synth Road Motor Veh Irn Stl Univ Plate Sheet Wood Shaped Crude Petrolm Etc

331 631 641 251 422 231 651 581

Crude Petrolm Etc Veneers Plywood Etc Paper Paperbrd Pulp Waste Paper Fixed Veg Oil Nonsoft Rubber Crude Synth Text] Yarn and Thread Plastic Matr|s Etc

9 10

283 051

Nonfer Base Mtl Ore Conc Fruit Frsh Nuts Frsh Dry

243 653

Wood Shaped Woven Textl Noncot

Source: NAPES Database. _a

Table 2f)d. Malaysia-China Rank

Trade Commodity 1980

Structure,

1980, 1988 and 1996

1988

China's Top 10 Export Commodities 1 2 3 4 5 6 7 8 9 10

292 054 013 641 042 081 051 652 075 653

Crude Veg Matrls Nes Veg Etc Frsh Smply Prsvd Meat Tinned Nes or Prepd Paper Paperbrd Rice Animal Feed Stuff Fruit Frsh Nuts Frsh Dry Cotton Fabrics Woven Spices Woven Texfl Noncot ___

1 2

231 242

Rubber Crude Wood Rough

3 4 5 6

422 266 684 332

7 8 9 10

243 262 729 653

Malaysia's

to Malaysia

Oil Seeds Nuts Kernls Animal Feed Stuff Coal Coke Briq Maize Unmill Cotton Fabrics Woven Paper Paperbrd Woven TextI Noncot Medici E_c Prods Nonfer Base Mtl Ore Conc Othr Inorganic Chemls

722 891 719 729 661 514 724 673 652 715

Elec Pwr Mach Switch Sound Recorders Mach Nes Nonelec Elec Mach Nes Cement Etc BldgProd Othr Inorganic Chemls Telecom Eqpt Iron SteelShapes Cotton Fabrics Woven Metal Work Mace

422 631

Fixed Veg Oil Nonsoft Veneers Plywood Etc

Top 10 E_pnrt Co _m_modi_.ies to China 231 242

Rubber Crude Wood Rough

Fixed Veg Oil Nonsoft Synth Regen Fibre Aluminium Petrolm Prods

422 631 732 652

Fixed Veg Oil Nonsoft Veneers Plywood Etc Road Motor Veh Cotton Fabrics Woven

729 231 651 581

Elec Mach Nes Rubber Crude Synth Textl Yarn and Thread Plastic Matrls Etc

Wood Shaped WoolAnimal Hair Elec Mach Nes Woven Textl Noncot

331 243 072 719

Crude Petrolm Etc Wood Shaped Cocoa Mach Nes Nonelec

719 714 242 653

Mach Office Wood Woven

Source: NAPES Database,

Synth

221 081 321 044 652 641 653 541 283 514

1996

Synth

Nes Nonelec Mace Rough Texfl Noncot

_-. _,_ Z

Table 20e. Thailand-China

Trade Commodity

Structure,

1980, 1988 and 1996

China's Top 10 Export Commodities

to Thailand

1 2

331 332

Crude Petrolm Petro[mProds

Etc

081 674

Animal Feed Stuff [rn Stl Univ Plate Sheet

719 653

Mach Nes Nonelec WovenTextl Noncot

3 4

061 717

Sugar Honey Textl Leather Mach

651 282

Textl Yarn and Thread Iron Steel Scrap

672 673

IronStl Primary Forms Iron Steel Shapes

5 6 7 8 9 10

512 264 292 581 719 651

Organic Chemicals Jute Crude Veg Matrls Nes Plastic Matr]s Etc Mach Nes Nonelec Textl Yarn and Thread

263 719 671 332 211 653

Cotton Mach Nes Nonelec Pig Iron Etc Petrolm Prods Hides Skins Undrsd Woven Textl Noncot

671 512 724 722 729 513

Pig Iron Etc Organic Chemicals Telecom Eqpt Elec Pwr Mach Switch Elec Mach Nes Inorg Elemnts Oxides Etc

Thailand's

Top 10 Export Commodities

to China

1 2 3

678 231 044

Iron Stl Tubes Pipes Etc Rubber Crude Synth Maize Unmill

061 231 042

Sugar Honey Rubber Crude Synth Rice

231 042 714

Rubber Crude Synth Rice Office Mach

4 5 6 7 8 9 10

061 054 651 121 042 611 691

Sugar Honey Veg Etc Frsh Simply Prsvd TextlYarn and Thread Tobacco Unrnfd Rice Leathr Struct Parts Nes

655 732 631 719 581 081 121

SpecTextl Etc Prod Road Motor Veh Veneers Plywood Etc Mach Nes Nonelec Plastic Matrls Etc Animal Feed Stuff Tobacco Unmfd

061 581 512 651 266 719 729

Sugar Honey Plastic Matrls Etc Organic Chemicals Textl Yarn and Thread Synth Regen Fibre Mach Nes Nonelec Elec Mach Nes

Source: NAPES Database.

146

Chi_a's Economic Growth and the ASEAN

and Singapore traded petroleum products. Other items which dominated the top 10 list were basic manufactures for China's exports to Singapore and vegetable oils, chemicals, and machines for Singapore's exports to China. Food products declined in prominence in China's exports to Singapore. By 1996, as in the trade between the Philippines and China, machines and equipment dominated the exports and imports of Singapore to and from China. In addi_ tion, other miscellaneous manufactured goods were exchanged between the two countries in 1996. Thailand In 1980, China's exports to Thailandiconsisted essentially of mineral fuels, machines, chemicals, and crude materials. In return, Thailand exported to China basic manufactures such as iron steel tubes and pipes, leather, and structural parts; as well as agricultural products like maize and rice, sugar, tobacco, and fresh and preserved vegetables. In 1988, China's exports consisted of more basic manufactures as well _s crude materials while Thailand's exports to China consisted of mostly agricultural food products and basic manufactures. In 1996, dominating Chin_'s exports to Thailand were machines and basic manufactures. Thailand, Cn the other hand, continued to export rice, sugar, crude materials, and chemicals to China, even as export of machines and equipment also took importance. As has been mentioned, Thailand and China have very similar export profile in world trade. However, their bilateral trade some diversity could be found within thei_ similarities.

structure

shows

that

Indonesia As noted earlier, trade between Indohesia and China did not start officially until 1985. There is no information dn Indonesia's exports to China in 1980 in the National Asia Pacific Econolnic and Scientific (NAPES) database. In 1980, top exports to Indonesia consisted, of basic and other manufactures, machines, and chemicals. In 1988 and 1996_ mineral fuels in crude petroleum and coal, coke, and briquette were exchanged between China and Indonesia. Other exchanges between the two countries were mostly in crude materials, basic manufactures and machines in 1988. However, in 1996, China exported more of machines and transport vehicles in_exchange for basic manufactures such as plywood, paper products, and textile yarn and crude materials such as rubber and paper pulp. This reveals that, aside from the fact that the two countries have similar resources, China's industrial structure is more advanced compared

to Indonesia's.

China's Changing Trade Patterns

147

Malaysia Malaysia's trade with China progressed from trade of crude materials and food items in 1980 to basic manufactures and crude materials in 1988, and then to machines

and basic manufactures

in 1996. Despite this general devel-

opment, rubber and vegetable oil dominated its exports to China in all these years. In 1980, exchanges between them were mostly primary products. China exported rice, fruits, vegetables, animal feed stuff, and spices to Malaysia while Malaysia exported rubber, wood, synthetic fiber, and wool to China. In addition, some basic manufactures were exchanged--paper products and woven cotton fabrics from China and aluminum and woven non-cotton textile from Malaysia. In 1988, food items from China declined there were more basic manufactures and chemicals traded sic manufactures tween Malaysia

COMPARATIVE Concept

in share. Instead, for Malaysia's ba-

and machines. Trade in machines and transport vehicles beand China increased in importance over the years.

ADVANTAGE

and Measure

Based

on the principle

of dynamic

comparative

advantage,

it is ex-

pected that international division of labor constantly changes in response to changes in the demand and supply factors of the commodities traded. Hence, a country's comparative advantage profile can change as a result of changes resource and factor endowments, technology, cost of production, and consumption. Following this principle, in the last few decades, East Asian NIEs have gone through different stages of exports---from mainly resource-intensive to labor-intensive and on to capital-intensive products. Indeed the phenomenon of "flying geese" pattern is due to changes in comparative advantage of developing countries. To measure comparative advantage, this study adopts Balassa's concept of revealed comparative advantage (RCA). A country's revealed comparative advantage in the trade of a product is measured by the product's share in the country's exports relative to its share in world trade. 18 It should be noted that such a measure is based on post-trade data, which means that the RCA indices are affected by distortions due to policies. 19 18. RCA -- (X./Xw) / , (X/Xw) where X.] is country i's exports of commodity j, X,.) is world's P ,I I. , export of commodity ], Xt ts total exports of country _,and X is total exports of the world. 19. Ariff (1994).

148

China's Economic Growth and the ASEAN

Factor Intensity The revealed comparative advantage for broad commodity groups based on factor intensities of China and tile ASEAN-5 countries are shown in Table 21. China, the Philippines, and Singapore have declined sharply in their exports of agricultural-intensive commodities relative to the world's total. China, the Philippines, Indonesia, and Thailand have high and increasing revealed comparative advantage in labor-ihtensive products. High RCAs for capital-intensive commodities are seen fo_ Singapore, Malaysia, and the Philippines. By 1996, only Indonesia has corr_parative advmatage in the production of mineral-intensive goods. It can also be inferred from Table 21 that China and the ASEAN-5 countries are following a similar growth strategy. Over time, although in varying degrees, comparative advantage in agricultural exports for China and most of its Southeast Asian neighbors has been decreasing while comparative advan= rage in labor-intensive exports has been ii_creasing. These countries have all focused on promoting labor-intensive manJJfactured exports, making industrialization the engine of their growth. The result is that these countries have become more similar in their export profile. This has been confirmed in our analysis of the commodity structure of bilateral trade between China and the ASEAN-5 countries. The commodities topping the exports of these bilateral exchanges are converging towards manufactured products. With focus on industrialization, these countries are movingl away from agricultural production to manufacturing activities. Most countries have developed comparative advantage in the export of machines and basic manufactures. Another confirmation of this similar export profile phenomenon is the increase in the degree of correlation of these countries' revealed comparative advantage indices. Table 22 shows that, based on the RCAs of the three-digit classification categories for 1987, 1990, a_td 1995, the rank correlation coefficients creased

between China's and over the years. Except

the ASEAN-5's RCAs have generally for Singapore, which is scarce in labor,

inthe

1995 correlation of the comparative advantage indices for all the other ASEAN countries with China is found to!be positive and significant. For all the ASEAN countries, the degree of correlation of their exports with China's has increased over time, except for the decline in 1990 for the Philippines and Singapore. Trade

Niches

Despite the growing similarity in t_:ade profile of the ASEAN-5 and China, bilateral trade between China and these ASEAN countries, as has been

Table 21. Revealed Comparative

Advantage:

By FactorIntensity

Groups,

China and ASEAN-5,

Selected

L"_

Agriculture-intensive Cavital-intensive

23.1 0.3

16.8 0.4

12.5 0.5

0.9 0.6

Labor-intensive

25.2

33.5

31.6

0.3

0.9

0.8

Minerals-intensive

33.5 0.0

28.9 0.1

17.2 0.3

1.0 10.5

36.0

0.1

12.7

14.4

16.8

0.6

t2.3

0.7

0.4

Indonesia

Agriculture-intensive Capital-intensive Labor-intensive Minerals-intensive

Years

_ "_

.........

20.9 0.38

12.6 0.86

0.72

0.9

13.5

Mataysia

0.92

_- .........

0.62 11.I

0.37 13.1

0.65

0.4

12.4

0.75

Thailand

1970

1980

1990

1996

1970

1980

1990

1996

1970

1980

1985

1996

24.8

14.2

2t .1

21,4

29.2

30.6

20.1

13.5

35.1

20.5

0.11 13.4

0.32 18.7

30.7

24.1

0.01 0.02 23.8

0,02 0.08 24.7

0.07 0.08 16.2

0.32 0.36 11.4

0.73 0.79 13.4

10.6 0.74

0.02 0.14

0.23 12.6

0.29 17

0.88 13,6

0.75

0.89

0,54

0.41

0.32

Source: NAPES Database.

150

Chinla's Economic Growth and the ASEAN

Table 22. Spearman Correlation Coefficients Between China's Revealed Comparative Advantage Indices and Those of ASEAN-5, 1987, 1990, 1995 ,

China 1987 Philippines Singapore Indonesia

0.17" 0.05 0.19"

Malaysia Thailand

0.03 0.33**

China 1990

China 1995

0.09 -0.06 0.26**

0.27"* 0.12 0.38**

0.08 0.41"*

0.20"* 0.45**

L * Statistically_significant at 0,05 level. ** Statistically significant at 0.01 level. Source: NAPES Database.

discussed earlier, has grown rather impressively over the last couple of decades. The growth has, in fact, been more significant for Thailand and Indonesia, whose export profiles are most similar to that of China. Growth is, in particular, most spectacular for Thailand's exports to China, which grew at 18.5 percent for the period 1980-1996 and, in the 1990s, grew at an average of 38.1 percent per year from US$269 million in 1990 to US$1868 million in 1996 (see Table 17e). Much of the increase was for the 1993-1996 period when the value grew from US$ 430 million to US$1868 million--at a growth rate of 63.2 per cent. It is evident here that even in situations where resource endowment and industrial structure are similar, trade opportunities do exist and specialization can take place. Identifying and concentrating on the trade niches and opportunities are needed to sustain trade activities. A comparison of the RCA indices of China and the ASEAN-5 countries based on the three-digit classifications shows the general categories for trade between them. Based on the 1995 list, the following are commodities China has comparative advantage over all the ASEAN-5 countries. 0 1

Food and Live Animals Dried Fruits Beverage and Tobacco

Nonalcoholic beverages Crude Materials Oil seed nuts kernels Silk Wool

Fertilizers (crude) Other crude minerals Crude animal matter

which

China's Changing Trade Patterns

151

Mineral Fuels, etc.

Electric energy Chemicals Related Products Inorganic

chemicals

Inorganic synthetic Basic Manufactures

Radioactive dyes

Explosives

materials pyrotech

products

Fur skins Cotton fabrics

Pig iron, etc. Lead

Other textile products Floor covering, tapestry, etc. Cement, building products Pottery Iron and steel

Wire products Tools and cutlery Base metal household eqpt. Other metal manufactures

Machine Transport and Eqpt. Electric power machine switch Domestic electrical eqpt Miscellaneous Mfd Goods

Railway vehicles Nonmotorized road vehicles

Plumbing, heat, light eqpt. Travel goods, handbags Clothes and fur products

Articles of plastics Office supplies Toys, sporting goods, etc.

Footwear

Gold, silverware,

jewelry

The categories of commodities in the above list are those in which China's comparative advantage index is higher in value than that of any of the ASEAN-5 countries. Indeed, China has many products the world can buy. For trade possibilities specific to a bilateral trade (between China and one of the ASEAN-5), this study identifies as export niches those categories where the RCAs of the country is greater than one and is significantly higher than China's. It identifies as import niches, aside from those listed above, tho6e categories where the RCAs of China is greater than one and much higher that of the country. These are summarized below.

Philippines

Fresh fruits

Live animals

and dried or fresh nuts Shellfish and fish (fresh an_t tinned) Preserved fruits Sugar and honey

Meat (tinned) Eggs Vegetables (fresh and preserved) Tea

than

152

Philippines

Chin_'s

Economic

Growth

and the ASEAN

Animal feed stuff Tobacco (unmanufactured) Fuel wood charcoal*

Spices Tobacco manufactures Natura] abrasives

Vegetable fiber

Coal, coke briquettes

(excl. Cottc)n jute)*

Leather (mfd)

Iron ore concentrate Nonferrous

Textile yam and thread Textile fabrics

base metal ore cone. Nonferrous metal scrap

Zinc Tin

Silver, platinum

ores

Electric power

Fixed vegetable

oil nonsoft

Footwear

Processed

animal/

vegetable

oil

Copper

machine switch

]

Articles of plastics

Gold, silverware,

jewelry

Office machines Electrical distribution

I machinesi

Electrical machines Telecom equipment Furniture Developed

cinema film I

Singapore

Cocoa Spices

Live animals Meat (tinned)

Margarine,

shortening

Fish and shellfish

Tobacco (manufactured) Rubber

Dried and preserved fruits Fresh and preserved vegetables

Waste textile products Natural abrasives

Tea Oil seeds, nut kernels

Refined petroleum Processed animal/

Fuel wood, charcoal Silk

vegetable

oil, etc.

Wool

Silver, platinum

Jute

Office machines

Vegetable fiber, excl cotton/jute

TV receivers

Crude vegetable

Teleeom equipment Electrical machinery

materials

Leather manufactures . Wood manufactures

Photo cinema supplies Sound recorders

Woven textile noncotton Furniture

Printed

Garments

matters

and clothing items

China's

Changing

Trade Patterns

153

Singapore

Articles of plastics Gold and silver jewelry Zoo animals,

Indonesia

pets

Fish and shell fish

Live animals

Sugar preparations Coffee Cocoa

Meat, tinned Vegetables, fresh & preserved Tobacco manufactures

Spices

Vegetable fibers

Crude rubber Fuel wood, charcoal Wood

Lime, cement building Leather manufactures Zinc

Pulp waste paper

Telecom eqpt parts,

Synthetic fiber & fabric

TV receivers

Stone, sand, grave

Watches, clocks

Non-ferrous

Gold & silver jewelry

base metal ore conc.

products

Articles of plastics

Coal, coke briquette Petroleum, crude and refined Gas Fixed vegetable oil nonsoft Processed animal & vegetable Soaps Fertilizers,

oil

manufactured

Veneers, plywood, etc. Wood manufactures Paper Glassware Tin Furniture

Malaysia

Cocoa Margarine,

Meat, tinned shortening

Crude rubber Wood Uranium, Gas

Vegetables, fresh & preserved Tea

thorium

Fixed vegetable

Fish and shellfish

ore conc.

oils nonsoft

Spices Tobacco manufactures Vegetable fibers, incl jute

154

Chinf(s

Processed

animal

& vegetable Materials

Economic

Natural

Growth

abrasives

oil

Leather manufactures

of rubber

Textile yarn & thread

Veneers, plywood,

etc.

Woven textile & fabric

Non-metal mineral manufactures

Textile products Zinc

Tin

Garments

Automatic

and the ASEAN

data processing

and clothing

Watches and clocks

ADP machine parts

Gold & silver jewelry

and accessories TV receivers

Zoo animals,

pets

Radio receivers Sound recorders,

phonographs

Telecom equipment Electrical machines

parts

Aircraft, etc. i

Thailand

Shellfish and fish Rice Non-wheat

Live animals Tea

meal flour

Spices

Fruits and vegetables

Tobacco manufactures

Sugar and honey

Fuel wood, charcoals

Coffee Crude rubber

Vegetable fibers, excl cotn & jute Natural abrasives

Synthetic

fibers

Stone, sand, gravel Pigment Leather

Crude vegetable

Zinc

paints, etc.

Tin Electrical distribution

& leather manufactures

Electrical machines

Rubber articles

Zoo animals,

Pearls and precious stones Office machines Automatic data processing TV receivers Electrical distribution equipment Electrical machines

materials

Plastics Gold & silver jewelry [

pets

mach

China's Changing Trade Patterns

155

To some extent, complementarity in primary products continues to exist between the ASEAN-5 countries and China. The geographical conditions and natural environment are not similar for all countries. China's demand for imports of agricultural products is also increasing as it focuses on industrialization, which has extended to the rural areas. Food and industrial raw materials now constitute

a substantial

-ported agricultural energy is expected China's

production More trade items in the fourcategories which, be beneficial trade

part of China's

imports.

This dependence

on ira-

and other primary products such as minerals and noncoal to rise in the future as manufacturing takes center stage in structure. possibilities can perhaps be identified by examining the and five-digit classifications. Disaggregated items under as a whole, do not reveal trade opportunitie s may actually niches. Moreover, as China and the ASEAN countries fol-

low the same growth strategy and converge to a similar industrial structure, intra-industry trade possibilities and specialization are the order of the time. Changes

in China's

Revealed

Comparative

Advantage

As the trade structure of an economy matures, the range of its RCA indices narrows. Data on China's RCAs over time show that this is true for its export commodities. This means more diversification of exports, which has come about as a result of industrialization. (This is also true for the ASEAN-5 countries.) The impact of China's market-orientod reforms on the trade sector is very evident. With trade liberalization policies and institutional changes, the demand for economic efficiency has gradually moved its trade pattern towards conforming to its resource structure. Increasingly, exports and imports are responses to price signals in both the domestic and international markets. China now produces for its exports those products in which it has higher comparative advantage. This has been found in a study which compares the domestic resource productivity and the net export performance ratio of China's exports, a째 The study shows that China's trade commodity structure is closely correlated with its international comparative advantage and that this correlation has improved over the last couple of decades. 2_ Changes in trade structure over time are due to the adjustment ports and imports to the changing comparative advantage try faces. In the case of China, the dynamic transformation

of ex-

situation the counin its competitive

20. Domestic resource productivity (DRP)is the amount of foreign exchange earned fora dollar of domesticresources employed while net export performance ratio (NEPR)is the contribution of a country's net exports of a commodity to total world exports of that commodity, compared with the country's contribution to world trade. 21. Zhang (1996)as cited in East Asia Analytical Unit (EAAU)(1997).

156

China's Economic Growth and the ASEAN

advantage profile has been due to the development in its economic structure as well as the trade liberalization approach undertaken by China and most of its trading partners. Over the last couple of decades, China experienced sharp decline in the revealed comparative advantage indices for agricultural and mineral-intensive products while those for labor-intensive products have increased significantly. There has also been a slight increase in the comparative advantage for capital-intensive products, n

BILATERAL

TRADE

AND DIRECT

INVESTMENTS

IN CHINA

This paper has discussed how direct foreign investments have contributed to China's exports. Direct investmentlin China is mostly in the manufacturing sector. The investing countries can expect more export to China for the operations of their companies. Natural res0urces, machinery, equipment, and other supplies are usually from the investing countries. Table 23 shows the direct investment values of the five ASEAN coun.tries in China for 1993 and 1996. Singapore invested the most in both years. Malaysia and Thailand are next in rank while the Philippines and Indonesia invested the least. Table 2K ASEAN-5's Investments in China: 1993 and 1996 (In US$ Million).

" '.%", '. v ",' ' '!" .' "' '' ,./._,i..".' "

'. " '? '%_ ... _'_

Philippines

122,

178

Singapore Indonesia

492[ 66i

2247 94

2739 160

Malaysia

911

460

551

Thailand

234[

328

562

Source: StateStatisticalBureau(1998). -

I ! I

A simple exercise based on the five ASEAN countries is done to test the correlation between a country's direct investment in China and its export level for the period 1993 to 1996. It found strong correlation between investment in China and export to China. The Pearson

coefficient

and Spearman

rank corre-

lation coefficient are 0.902 and 0.900 respeciively. It seems that the relatively high investment of Thailand in China in the [1990s can, to some extent, explain 22. Song (]996).

158

China's Economic Growth and the ASEAN

SUMMARY

AND CONCLUSIONS

China's external trade volume and structure have changed tremendously since China opened up and undertook economic reform in 1978. These changes are due to the reforms which liberalize trade and give more autonomy to the enterprises. The rapid flov_ of direct foreign investments also contributes significantly to China's export boom. The ensuing economic prosperity and change in industrial structure have had impact on import demands and will continue to do so. China's

open-door

policy has stimulated

merchandise

trade

between

China and all the ASEAN-5 countries. These countries registered very rapid growth in their trade with China as well as With the rest of the world in the last couple of decades. However, exports to China for each of the ASEAN-5 countries have grown faster than the country's fotal exports. Complementarity exists only between China and Singapore, due to the difference in their level of economic development and the difference in factor availability, particularly labor. China's export profile is highly similar to Thailand's and Indonesia's. It is also similar to those of the Philippines and Malaysia, although to a lesser extent. Despite

the similarity,

China's

bilate}al

trade with Thailand

and Indo-

nesia has increased most rapidly among the ASEAN-5 since 1980. Trade between China and these ASEAN countries is based not just on complementarity of broad product categories intensity but also on complementarities within sification of export items through intra-industry cation of niche products can provide bilateral respect, mutual coordination and joint research to help promote trade efficiency and expansion.

classified according to factor categories of products. Diverdivision of labor and identifitrade opportunities. In this to identify niches are needed

The trade structure of China and courltries in the Southeast Asian region is changing rapidly. The share of manufactured goods within total exports has grown substantially for these industrializing countries. They have all utilized their low-cost labor comparative advantag_ in manufactured exports. Moreover, in manufacturing, complementarities have been exploited in intra-industry or horizontal division of labor between China and the ASEAN countries. mid-1990s, different classifications of machines, transport, and equipment major items being traded between China a_d all of the ASEAN countries, cept Indonesia. This concentration of exports in the same sector for China most of the ASEAN countries has not stunted trade between them. Instead, kind of trade was accompanied This study

also presents

the form of direct investment

by higher

trade volume

some evidence stimulates

and growth

that economic

an_I promotes

In are exand this

rate.

cooperation

in trade.

China's Changing Trade Patterns

159

As mentioned at the beginning of this paper, this study does not look at the competition for the world market between China and some of the ASEAN countries. Such competition is expectedly more keen among countries with similar resource endowment and production structure. The conclusion from this study on trade between similar countries can be extended to cover thehr competition for markets. The cooperation between China and the ASEAN countries in their trade with each other, which is based on horizontal division of labor, can also apply to their trade with other countries.

160

China' s Economic Growth and the A S EAN

BIBLIOGRAPHY

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China's

Changing

Trade Patterns

163

APPENDIX

Revealed

Comparative

Advantage

(Using the 3-Digit Standard Legend:

Indices

International

of China and the ASEAN-5, Trade Classification

CH=China; PH=Philippines; SI-Singapore; MA=Malaysia; and TH=Thailand

1995.

[SITC])

IN=Indonesia;

001

Live Animals

1.52

0.00

0.02

0.18

1.12

0.06

011

Met Frsh Chilld Fmzn

0.83

0.00

0.03

0.09

0.03

0.89

012

Meat Dried Saltd Smokd

0.26

0.00

0.02

0.01

0.07

0.02

013 022 023

Meat Tinned Nes or Prepd Milk Cream Butter

1.84 0,06 0.00

0.03 0.00 0.00

0.07 0,25 0.13

0.05 0.05 0.130

0.09 0,29 0.01

2.00 0.20 0,130

024

Cheese Curd

0.00

0.01

0,01

0.(30

0.130

0.00

025

Eggs

1.13

0.07

0,99

0.83

1.87

0.63

031 032 041 042

Fish Fresh Simply Presvd Fish Etc Tinned Prepared Wheat Etc Unmill Rice

1.66 2.85 0.08 0.08

2.49 5.45 0.00 0.04

0.55 0,19 0,00 0.01

4.13 1.16 0.00 0.00

0.35 0.83 0.00 0.01

6,06 15.20 0.00 25.13

043 044

Barley Unmill Maize Unmill

0.130 0.04

0.00 0.03

0,130 0,03

0.00 0.11

0.00 0.01

0.00 0.17

045 046

Cereals Nes Unmill Wheat Etc Meat or Flour

0.85 0.73

0.00 0.00

0.00 0,48

0.01 0.00

0.01 0.62

0.28 0.22

047

Meal Flour Nonwheat

0.47

0.03

0.10

0.89

0.23

10.50

048

Cereal Etc Preps

0.44

0.38

0,50

0.29

0.82

0.71

051 052

Fruit Frsh Nuts Frsh Dry Dried Fruit

0.46 1.68

6.54 0.11

0,24 0,34

0.29 0.17

0.24 0.02

0.43 0.67

053

Fruit Prsvd Prepd

1.15

5.85

0.30

0.59

0.24

3.97

054

Veg Etc Frsh Smply Prsvd

1.85

0.45

0,18

0.49

0.11

1.94

055 061

Veg Etc Prsvd Prepd Sugar Honey

5,54 0.65

0.30 1.53

0,25 0,05

0.77 0.26

0.22 0.22

3.41 7.40

062 071

Sugar Preps Nonchoc Coffee

0.29 0.02

0.70 0.21

0,23 0,72

1.16 4.07

0.51 0.07

0.87 1.01

072

Cocoa

0.21

0.97

1,38

6.21

2.87

0.18

073

Choc and Prods

0.04

0,28

0.10

0.19

0.03

074

Tea Mate

4.49

0.00

0,47

4.70

0.04

Spices Animal Feedstuff

3.36 0.55

0.08 1.15

4,97 0,16

14.09 0.73 ,,,

1.58 0.41

0,54 0.98

075 m081

164

Chtna's Economic Growth and the ASEAN

091 099 111 112 121

Marg Shoring Food PrepsNes Nonalc BevrgsNes AlcBevrgs TobaccoUnmfd

0.02 0.47 1.68 0.17 0.64

0.10 0.49 0.16 0.12 1.49

1.26 0.49 0.80 0.78 0.06

0.35 0,07 0.18 0.00 130

3.52 0.32 0.46 0.14 0.(30

0.01 1.35 1.38 0.05 0.96

122 211 212 221

Tobac_ Mfrs Hides SkinsUndrsd Fur SkinsUndrsd Oil Seeds Nuts Kemls

1.70 0.28 0.10 133

0.39 0.01 0.00 0.33

2.38 0.11 0,00 0.14

0.78 0.00 0.00 0.09

0.26 0.02 0.(30 0.05

0.01 0.05 0.00 0.07

231 Rubber Crude Synth 241 Fuel Wood Charcoal

0.11 1.24

0.79 6.14

2.10 0.82

15.49 7.82

7.85 1,39

15.64 0,50

242 Wood Rough 243 Wood Shaped 244 Cork Raw and Waste

0.15 0.29 0.22

0.04 0.45 0.00

0.07 0.25 0.01

0.00 1.28 0.03

5.89 4.58 0.00

0.01 0.29 0.01

0.03 24.89 1.26 0.15

0.32 0.07 0.00 0.01

0.10 1.08 0.00 0.08

1.95 0.01 0.01 0.18

0,03 0.09 0.54 0.07

0.24 0.81 0.64 0.05

1.21 1.13 0.14 0.16 1.12 0.97

0.11 14.14 0.18 0.64 0.03 0.85

0.03 0.04 0.05 1.87 0.03 0.15

0.11 0.14 1.08 0.02 026 2.44

0.35 0.03 0.40 0.70 0.13 0.63

1.34 0.23 1.92 0.05 0.00 2.39

274 Sulphur Etc 275 NatAbrasivs 276 Other Crude Minrls

0.05 1.22 3.57

0.00 0.06 0.52

0.22 2.01 0.11

0.00 0.81 0.33

0.00 0.01 0.12

0.01 0.43 0.41

281 IronOre Conc

0.00

5.43

0.00

282 IronSteelScrap 283 Nonfer BaseMtl Ore Conc

0.07 0.18

0.22 4.17

0.34 0.06

0.12 12.64

0.07 0.35

0.58 0.06

284 285 286 291

Nonfer Metal Scrap Silver Platinum Ores Uranium ThoriumOre Conc Crude Animal MatterNes

0.19 0.00 0.22 6.10

1.39 6.74

0.05 0.01 0.22

0.44 0.07 3.54 0.10

0.24 0.19

0_4

0.8.5 0.01 0.77 0.15

292 321 331 332 341

Crude VegMatrls Nes Coal Coke Briq CrudePetrolm Etc Petrolm Prods GasNat Manufact

1.44 2.39 039 0.35 0.01

1.65 0.00 0.02 0.33 0.82

0.53 0.01 0.(30 3.51 0.17

0.46 4.83 2.93 1.50 12.16

0.13 0.01 0.94 0.70 2.77

0;54 0.00 0.00 0.23 0.37

251 261 262 263

Pulp WastePaper Silk WoolAnimal Hair Cotton

264 265 266 267 271 273

Jute Veg Fibre ExclCoin Jute SynthRegen Fibre WasteTextlFabric_ FertlzrsCrude StoneSand Gravel

0.68

China's Changing Trade Patterns

165

Lll k51 [21 _.2 131

AnimalOils ElecEnergy Fats Fixed Veg Oils Soft Fixed Veg OffNonsol_ Procesd Anml Veg Oil E_c

0.00 1.69 058 0.96 0.09

,02 0.04 .01 i n 31 .88 57 _84 ,68

).05 ).00 3.06 3.64 7.65

.01 .66 .10 ,.00

0n.0_ _00 11 22

512 513 514 515 521

OrganicChemicals InorgElemnts Oxides EL Other InorganicChem_ RadactveE_cMatrl Coal PetroleumEtc Chems

0.68 1.74 2.83 1.47 0.24

.13 .09 _.17 L00 L23

,88 .24 32 .02 .07

0.48 036 0.13 0.00 0.01

130 t.10 }.05 ).00 ).01

.19 2.0 .15 .00 L05

531 532 533 541 551 553

Synth Dye Nat Indgo lakes Dyes Nes TanningProds Pigments Paints Etc MediclEtcProds F__mtlOil Perfume E_ PerfumeCosmeli_Etc

1.60 0.37 0.43 0.72 0.74 0.24

L02 _.06 ).09 ).05 ).12 }139

L61 _,40 _$4 )34 ).73 )27

031 0.74 0.06 0.06 0.71 0.25

).02 )JYl ).45 )/T/ :).02 C).18

139 L46 28 ).15 )31 )34

554 Soaps Cleaning EL _ 561 Fertlz_ Manufact

035 0.24

)2.,3 :).42

}51 ).00

1.00 1.65

D$3 0.44

}.41 ).02

571 581 599 611 612 613 621

3.64 0.24 0.43 0.80 2.86 2.43 0.35

_.48 D.14 0.26 0.20 0A4 0.00 0/B

).16 ).63 3.74 _.24 {).07 0.01 035

0.05 031 0.17 033 1.11 0.07 0.46

0.11 034 0.74 0.20 0.11 0.00 2.15

).01 )39 339 1.64 3.16 0.04 0_

629 RubberArticles Nes 631 VeneersPlywood E_ 632 Wood Manufact Nes

0.63 0.49 2.00

0.20 0.21 2.01

037 034 0.25

0.69 24.22 636

037 656 1.05

1.(]( 0._ 1.6_

633 Cork Manufact

0.10

0.02

0.00

0.01

0.08

0.(I

641 642 651 652 653 654

0.16 0_0 2.17 5.69 2.78 1.75

0.05 034 032 0.08 0.19 030

02.0 0.40 035 035 0.64 0-39

1.09 0.73 2.76 1.75 2.46 1_28

0.17 0.51 1.(B 0.45 031 0.13

0.1t 0.7t 1._ 1.I', 1.1" 1.Â˘

655 Spec TextlEtcProd 656 TextlEtcProds Nes

0.79 7.02

039 1.49

02.3 0.21

0.60 133

0.12 0.19

0.7 13

657 FloorCovr TapestryEtc

2.60

0.23

0.13

031

0.10

661 Cement EtcBld_ Prod

2.81

034

027

026

0.18

ExplsvsPyrotech IMx:l PlasticMatrls Etc Chemds Nes l_eaiixr l.e.athrEtcManufact FurSkins TanDrsd Matrlsof Rubber

Paper Paperbrd Artclsof Paper Etc TextlYarnand Thread Cotton FabricsWoven WovenTextlNoncot LaceRibbonsTulleEtc

166

Chi_a's

Economic

Growth and the ASEAN

662 663

Clay Reffac Bldg Prd Oth Nonmet Mineral Mfs

0.45 0.51

0.03 0.29

0.15 0.17

0.15 0.28

0.44 1.19

0,41 0,52

664

Glass

0.88

0.4,5

0,62

0.60

0.50

0,85

665

Glassware

0.79

0.30

0.60

1.16

0.37

0,42

666 667

Pottery Pearl Prec Semi-P Stone

6.39 0.42

3.42 0.15

0.11 0.15

1.39 0,03

0.84 0.17

2,84 2,61

671

Pig Iron Etc

5.66

0.71

0.05

0.82

0.84

0.02

672

Iron Stl Primary Forms

1.83

0.00

0.06

0.55

0.02

0,18

673 674

Iron Steel Shapes Im Sfl Univ Plate Sheet

0.44 0.45

0.01 0.05

0.33 0.23

0.16 0.14

0.16 0.12

0,25 0,09

675 676 677

Iron Steel Hoop Strip Railwy Rails Etc Im Stl Im Sfl Wire Exfl W Rod

...... 0.77 0.88

0.04 0.02

0.22 0.17

0.00 0.13

0.05 0,68

0,01 038

678

Iron Sfl Tubes Pipes Etc

0.60

0.14

0.44

0.12

0.37

0.94

679 681

Im Stl Castings Unworkd Silver Platinum Etc

Z58 0.07

, 0.09 0.08

0.41 1.26

0.06 0.16

0.34 0.14

0.19 0.01

682 683

Copper Nickel

0.38 0.13

3.79 10.03

0.97 0.30

0.25 0.00

0.67 0.01

0.11 0.03

684

Aluminium

0,32

, 0.01

0.29

0.84

0.22

0.05

685

Lead

3.28

10.14

0.55

0.48

0.57

0.03

686

Zinc

1.64

0.01

2.64

0.03

0,07

0.12

687

Tin

5.35

0.05

5.88

17.52

10.44

0.96

688 689

Uranium Thorium Alloys Nonfer Base Metals Ere

0.61 3.27

! 0.02

0.00 0.19

0.00 0.08

0.01 0.01

0.05 0_E3

691

Struct Parts Nes

0.90

10.14

0.37

0.62

0.60

0.80

692

MetalTanks

0.42

0.05

0.36

0.86

0.55

0.87

693

Wire Prods Nonelec

1.36

0.01

0.33

0.11

0.66

0.38

694

Steel Copp Nails Etc

1.31

10.23

0.54

0.22

0.75

0.41

695 696

Tools Cutlery

1.53 3.61

10.14 i0.26

0.66 0.55

0.04 139

0.12 0.13

0.16 1.28

697 698 711

Base Mtl HHold Eqpt Metal Manufact Nes Power Mach Nonelec

2.99 1.26 0.13

i0.96 I !0.33 !0.16

0.19 0.58 0.27

1.93 0.18 0.03

0.30 0.57 0.12

1.68 0.53 0.10

712 714

Agric Mach Office Mach

0.17 0.63

0.03 2.13

0.05 5.29

0.01 0.24

0.02 2.11

0.03 2.12

715

MetalWork Mach

0.38

0.04

0.52

0.01

0.13

0.28

717

Textl Leather Mach

0.53

0.06

0.34

0,03

0.09

0.14

718 719

Mach for Spcl Indust Mach Nes Nonelec

0.17 0.27

0.09 0.08

0.67 0.73

0.25 0.07

0.19 0.48

0.09 0.60

Boxes Etc

China's Changing Trade Patterns

167

722 ElecPwr Mach SwiWh 723 Elec Distrib Mach

1.25 0.65

0.73 5,40

1.72 0.76

0.23 0.28

1.32 0.85

1.53 1.64

724 Telecom Eqpt 725 Domest ElecEclpt 726 ElecMedd)(ray Eqpt 729 ElecMach Nes

1.48 2.41 0,11 0.45

2.01 02.6 0.01 4.19

2.56 0.77 0.20 3.14

0.66 0.11 0.03 0.21

3.88 0.54 0.03 3.33

1.20 1.90 0.02 1.15

731 732 733 734

RailwayVeh RoadMotor Veh Road VehNonmtr Aircraft

4.14 0,05 1.94 0.07

0.01 0.09 0.29 0.02

0.02 0.08 1.03 0.23

056 0.03 1230 0.03

0.41 0.04 0.62 1.25

0.78 0.08 1,37 0.71

735 812 821

Ships Boats Plumb Heat Lght Eqpt Furniture

0.81 2.25 1.28

038 0.84 1.86

0.76 0.33 0.20

O.27 0.23 2.07

0.63 02-6 1.35

0.18 0.79 1.45

831 841 842 851

TravelGoods Hbags Cloth Not Fur Fur EtcClothes Prod Foot Wear

8,58 5.05 6.49 6.08

3.79 3.96 0.05 1,76

0.23 0.39 0.02 0.15

0.89 2.40 0.01 6.35

0,26 0.97 0.22 0.21

3.57 2.71 0.34 535

861 Instr Apparat 862 Photo Cinema Supplies 863 Devel Cinema Film 864 WaWhesCk_ks 891 Sound Recorders 892 PrintedMatter 893 PlasticNes

0.75 0.15 0.42 3.47 1.45 0.23 1.85

1.02 0.01 5.07 3.96 0,57 0,09 0.62

0.87 1.29 0.03 1.87 335 1.00 0,56

0.18 0.02 0.03 0-34 1,54 0.03 0.42

0.58 0.06 0.02 0,89 4,56 0.21 0,62

0.63 0.03 0.11 2.14 1.80 0.63 3.14

894 895 896

6.27 1,57 0.23

1,97 0,13 0,05

0.62 1.02 0.07

1.21 057 0.02

0,94 0,83 0.01

2.10 0.81 0.39

897 Gold SilverJewelry 899 Other Manufact Goods

2.48 5.08

0,43 3.20

1.47 0.39

1.94 0.80

1,70 0,25

4,34 152

911 Mail Not Clss by Kind

....

931 Specl Transacts 941 Zoo Animals Pets 951 War FirearmsAmmun

0.11 2,57 0.06

0.27 234 0.06

0.78 0,30 0.08

0.03 1.19 0.01

0,43 0.25 0.05

0.30 0.79 0.08

961 Coin Nongold Noncur

0.02

0.00

0.26

0.03

0.01

0.00

ToysSportingGoods Etc OfficeSuppliesNes WorksArtEtc

Source: NAPESDatabase.

Chapter Five

Direct ForeigninvestmentFlows Toand FromChina by Rosatina

P. Tan*

ABSTRACT

e study traces the growth of direct foreign investme_nt (DFI) inflows China, and its distribution by sector, receiving regions and source untries. It also looks into the trends and patterns of Chinese outward irect investments. Direct investment flows into China are shown to be significantly affected by China's GDP growth rate, wage rate and exchange rate as well as the world's GDP growth rate. Policy factors play a catalytic role. China's overseas direct investment, likewise, appear to be influenced by home country (e.g., Chinese government policies, Chinese competitive advantage) and host country (e.g., market considerations, cost and price factors, and receiving countries' policies) variables. The study has also shown that the massive flows of inward DFIs have significantly contributed to China's capital forma* tion and export performance. Furthermore, the improved shares of China as well as the ASEAN-4 countries (the Philippines, Thailand, Malaysia and Indonesia) in the global supply of DFIs do not indicate a crowding-out effect. Twoway DFI flows between China and ASEAN countries, particularly Thailand and Malaysia, have become increasingly important since the early 1990s.

INTRODUCTION The Equity Joint Venture Law was enacted in 1979 to address two constraints to China's pursuit of economic growth. China's very low income base * Assistant Professor, Department Ateneo de Manila University.

of Economics

and Director,

Japanese

Studies

Program, *

170

China's Economic Growth and the ASEAN

could not generate the amount of domestic savings that would be adequate to fuel a growth trend that would improve Ithe living standards of the people. Second, having limited its economic cont_ _ct with the outside world for more than 30 years, China barely had the foreig: 1 exchange necessary for the importation of capital goods and other produ:tion inputs. Direct foreign investments offer a single solution to this twi:_ problem. Through direct foreign investments, foreign savings are channel_ _t into China to bridge the domestic investment-savings gap. The inflow of di :ect foreign capital likewise generates the supply of foreign exchange to fins rice acquisition of imported capital goods and materials. Direct foreign investments were pursued over other forms of capital inflows such as foreign b6rrowing for two reasons. First, the entry of foreign firms into China was expected to result in the importation of new technology in both management and production as well as the introduction of new products. Second, by encouraging specifically foreign investments in export-oriented undertakings, continuous inflows of foreign exchange could be assured. The study looks at the structure, determinants and impact of direct foreign investment flows to and from China since the start of its "open-door" policy. The first section traces the growth _f direct foreign investment inflows in China, and its distribution by sector, rec4iving regions and source countries, and the type of arrangement. The sectionlalso discusses the trends and patterns of Chinese outward direct investmer_ts. The next section looks at the determinants and motivations for direct foreign investments. Indicators for the share of China in the global supply of investments are presented and factors contributing to this share are identified. Iv_otivations for Chinese outward investments are likewise discussed. Section_ III analyzes the effects of inward investments in China on its exports, capital accumulation, employment and income growth. The last section summarizes the findings of the study and discusses the implications of these investment flows on the ASEAN-4 countries-the Philippines, Thailand, Malaysia land Indonesia.

TRENDS AND PATTERNS OF DIRI_CT FLOWS TO AND FROM CHINA Inward

Direct

Foreign

FOREIGN

INVESTMENT

Investments

General Trends The Equity Joint Venture Law was enacted in 1979 to address two coni straints to China's pursuit of economic growth. China's very low income base

Direct Foreign Investment

Flows To and From China

171

could not generate the amount of domestic savings that would be adequate to fuel a growth trend that would improve the living standards of the people. Second, having limited its economic contact with the outside world for more than 30 years, China barely had the foreign exchange necessary for the importation of capital goods and other production inputs. Direct foreign investments offer a single solution to this twin problem. Through direct foreign investments, foreign savings are channeled into China to bridge the domestic investment-savings gap. The inflow of direct foreign capital likewise generates the supply of foreign exchange to finance acquisition of imported capital goods and materials. Direct foreign investments were pursued over other forms of capital inflows such as foreign borrowing for two reasons. First, the entry of foreign firms into China was expected to result in the importation of new technology in both management and production as well as the introduction of new products. Second, by encouraging specifically foreign investments in export-oriented undertakings, continuous inflows of foreign exchange could be assured. With the 1979 Joint Venture Law, the doors of China were opened

to for-

eign investors after more than three decades of isolation. To create an environment conducive to foreign business operations, five Special Economic Zone., (SEZs) were developed. The first four, located in Shenzhen, Zhuhai, Shantou and Xiamen, were proclaimed in 1980. The fifth, and the largest, was established in Hainan in 1987. To facilitate export and import activities, 14 coastal port cities were opened. Moreover, coastal Economic Development Zones (EDZs) as well as inland development areas were established. From 1979 to 1996, a total of 283,254 contracts were approved. During this period, substantial amounts of foreign capital flowed into China despite the rather volatile rate at which they entered the country. On the basis of contracts, the approved amount of direct foreign investments reached a total of US$469 billion. Pledged investment amounts were rather moderate during the first five years of implementation of the Joint Venture Law. Most of these involved Hong Kong investors and were concentrated in the SEZs. Investors from othe_r countries were initially reluctant to penetrate the Chinese economy due to tl_ uncertainties with regard to the business climate. There were no rules to clearly delineate the parameters within which foreign and private businesses could operate. And even if the rules already existed, there was insufficient information about them. This lack of transparency in the private business legal framework necessitated prolonged and protracted negotiations between the Chinese and foreign partners on every small detail of the agreemen_ which discouraged many potential foreign investors. Recognizing the problem, Chinese authorities formulated a series of Joint Venture Regulations in 1983 and 1984. Guidelines on land use fees and

172

other business

Chi_za's Economic Growth and the ASEAN

charges,

for instance,

were established

for the first time. As the

new rules reduced business uncertainties, large transnational corporations such as Peugeot and Volkswagen heade_ to China which triggered a bandwagon effect among American and Western firms as well as investors from capital-rich Asian countries. Hence, from only 470 in 1983, the number of joint venture contracts quadrupled to 1,856 in ly84. Entry of foreign capital in terms of the contract amount accelerated in 19_4 and 1985 during which pledged amounts grew remarkably by 53 percent _nd 124 percent, respectively. The upward trend in pledged direct investments in terms of both number and value of contracts was abruptly teversed in 1986. In 1984-1985, foreign businesses were in a rush to become part of the investment boom in China and as a consequence, failed to giv_ adequate attention to details of the joint venture negotiations. Inevitably, problems soon emerged and frustration and disappointment grew as expectation_ were not met. As news of difficulties and conflicts in the joint venture negotiations spread quickly, the enthusiasm of other prospective foreign investo:'s dwindled. Growing corruption in government and loss of macroeconomic cot trol aggravated the pessimism. Thus, p!edged investments in 1986 were reduced o even less than half of the 1985 level. The Chinese hosts, however, were n _t slow to act on the problem. Determined to accommodate more foreign-own ed enterprises, the Chinese authorities approved, in October 1986, 22 3rovisions to encourage foreign investments. These included tax privile _;es, preferential land use fees and other incentives. Decision-making with respect to smaller joint ventures was decentralized thereby reducing red tape. More importantly, a solution to China's inconvertible currency was presented by allowing joint ventures to exchange foreign currency at negotiated irates. 1 Further, the Law on Wholly Foreign-Owned Ventures, which signaled Iofficial approval of 100 percent foreign entities, was passed. The offshoot of _11these reforms was a renewed and more firmly anchored foreign investment expansion in China. In 1987 and 1988, approved direct investments grewby 31 and 43 percent, respectively. The growth slowed in 1989 and 1990 due ito the political upheaval caused by the outbreak of the students' pro-democr_. ,ovement in Beijing in the summer of 1989 which culminated in the Tian_mmen Square incident of June 1989. Because of the Chinese government s violent suppression of the movement, a number of Western countries imposed economic sanctions on China in 1989.

1. China's inconvertible currency was a major prlDblemfor joint ventures in the mid-1980s, especially those producing for the domestic marke_and, hence, not earning foreign exchange. Sourcingof foreign exchange for the purchase of imported goods and repatriation of profits was difficult. The issue occupied center stage with the _lispute between American Motors and the Chinese authorities with regard to BeijingJeep. "

Direct Foreign Investment

Flows To and From China

173

With the lifting of economic sanctions by France in 1990, the economic and, to some extent, the political environment in China gradually normalized. Between 1990 and 1993, China recorded uninterrupted and significant growth in pledged investments. From only US$6.6 billion in 1990, pledged investments surged to US$111.7 billion in 1993. The unprecedented investment boom in the early 1990s can be attributed to several factors. First, regulations concerning foreign investors had been sufficiently codified by the start of the 1990s. Second, liberalization of the foreign exchange and financial markets continued, albeit gradually, and in 1994, the dual-currency system was abolished. sectoral restrictions on foreign direct investments were also loosened.

Third, Previ-

ously restricted sectors, namely, finance, retail and construction, were opened up. Huge foreign capital went into the real estate boom of 1992-1993. These years also witnessed retail outlets.

the opening of branches

of foreign banks, fashion and food

In addition to the abovementioned internal developments, external factors contributed to the surge of foreign investments into China in 1991-1993. Hong Kong investors were jo_ed by large waves of investments from Taiwan and South Korea as political constraints in dealing with China were substantially their other these

reduced in these two countries. Taiwanese were finally permitted by government to transact business with the Mainland. South Korea, on the hand, established diplomatic links with China. Economic conditions in two countries were highly favorable for outward investment flows. With

continuing surpluses in Taiwan's current account, foreign exchange reserves accumulated. This excess supplyof foreign exchange and capital easily found their way into China immediately after political restrictions were eased. The economic motivation that governed the behavior of the Taiwanese and South Korean investors were the same as that of the Hong Kong investors. Their objective was to utilize China's big pool of low-cost labor and combine it with their production and marketing expertise to realize profits. FlOws from other Asian countries likewise fuelled the investment boom in China in the 1990s. Excess supplies of foreign exchange in Japan arising from huge trade surpluses and the appreciation of the Yen were recycled into direct investment outflows from the second half of the 1980s. Prior to the 1990s, however, much of this Japanese capital was going to Southeast Asian countries. It was only in the early 1990s that Japan became cognizant of the potential of China. The investment boom in the early 1990s was followed by an intense overheating of the Chinese economy. This necessitated stabilization efforts which were accordingly initiated in mid-1993 but prematurely relaxed later that year after some initial success. The consequent resurgence of inflation prompted the Chinese authorities to resume and intensify efforts to achieve macroeconomic

stability.

This explains

the drop in pledged

foreign

invest-\

Direct Foreign Investment

Flows To and From China

175

Table 1. Direct Foreign Investments in China

1979-1982 1983

922 470

6,010 1,732

1,166 636

19.4 36.7

1984 1985 1986 1987 1988

1,856 3,073 1,498 2,233 5,945

2,651 5,932 2,834 3,709 5,297

53.1 123.8 -52.2 30.9 42.8

1,258 1,661 1,874 2,314 3,194

97.8 32.0 12.8 23.5 38.0

47.5 28.0 66.1 62.4 60.3

1989 1990 1991 1992 1993 1994 1995 1996

5,779 7,273 12,978 48,764 83,347 47,549 37,011 24,556

5,600 6,596 11,977 58,124 111,736 82,680 91,282 73,276

5.7 17.8 81.6 385.3 92.2 -26.0 10.4 -19.7

3,392 3,487 4,366 11,007 27,515 33,767 37,521 41,726

6.2 2.8 25.2 152.1 150.0 22.7 11.1 11.2

60.6 52.9 36.5 18.9 24.6 40.8 41.1 56.9

Source: State Statistical Bureau.

ber of contracts,

in terms

of investment

amount

it accounted

for a significant

percent, implying higher capitalization in this sector. The share of Industry was reduced substantially but remained the highin 1993. its share fell slightly below 50 percent in terms of value of investments. A substantial part of its previous share was taken away by Real Estate, Public Utilities and Services which accounted for almost 40 percent of the amount of investments. This figure reflected the boom in hotel, infrastructure and housing complex development in China during this period. Corresponding to this was the increased share of Construction in terms of both number and amount of contracts. Also notable was the improved share of Commerce, Food Services, Material Supply and Marketing. The slow-down in investments in real estate and infrastructure

devel-

opment led to the much-reduced share of the sector, as well as that of the related sector Construction in 1996. This is partly due to the government'_ straightforward

efforts to discourage

and limit them to redirect foreign capital

176

Table 2. Direct Foreign

China's

Investments

Economic

Growth

in China by Sector (Contract

and the ASEAN

Amount)

....... ...,_.f_ _ ...._._.... ........... _.,.?.. _.._ _.. :%'.'7

Agriculka-e, Forestry, Animal Husbandry, Fishery & Water Conservancy Industry

310

198

ll,741

1,228

812

1,139

11,620

8_93

_6,365

50,737

18,280

50,486

Construction

122

_,062

3,544

387

2,001

Transportation, Post &Telecommunica_on Services

852

1,382

196

1,599

5,051

1,655

2,346

I i

Commerce, Food Services, Material Supply & Marketing

240

'190

_,238

Real Estate, Public Utilities & Services

374

1,336

1_1,551

42,557

1,961

12,850

Other Sectors

235

263

3,993

4,441

1,265

2,854

12,910

10,797

82,802

108,940

24,556

73,275

2.4

1.8

2.1

1.1

3.3

1.6

90.0

79.6

68.1

46.6

74.4

68.9

Construction

0.5

1.1

3.7

3.3

1.6

2.7

Transportation, Post &Telecommunication Services

0.5

0.9

1.0

1.3

0.8

2.2

Commerce, Food

1.9

1.8

6.3

4.6

6.7

3.2

Real Estate, Public Utilities & Services

2.9

12.4

14.0

39.1

8.0

17.5

Other Sectors

1.8

2.4

4.8

4.1

5.2

3.9

100.0

Total Share in Percent Agriculture, Forestry, Animal Husbandry, Fishery & Water Conservancy Industry

Services, Material Supply & Marketing

Total

Source: State Statistical Bureau (1996).

Direct Foreign Investment

Flows To and From China

177

to export-oriented manufacturing concerns. These shares were regained by Industry. Though still lower than in 1991, the share of Industry climbed to two-thirds of total direct foreign investments in 1996. Not much change can be observed in the shares of Agriculture and Forestry and Transportation and Telecommunications. Table 3 shows the extent of foreign participation in terms of registered capital in the different sectors. About 61 percent of total registered capital of all enterprises with foreign capital in 1993 was contributed by the foreign partner. The last column of the table indicates that the ratios for the individual sectors do not deviate substantially from the over-all average. Foreign participation was highest for Real Estate, Public Utilities and Services where foreign equity was around 69 percent of registered capital. The lowest ratio of 57 percent was posted by Industry. As mentioned earlier, Industry was dominated by overseas Chinese investors who had more connections in the Mainland and who were more open to greater Chinese

Table 3. Capitalization

participation.

of Registei-ed Enterprises with Foreign Capital by Sector, 1993

Agriculture, Forestry, Animal Husbandry, Fishery & Water Conservancy

3,813

2,462

64.57

147,476

84,026

56.98

57.14

Construction

4,902

3,284

66.99

Transportation, Post & Telecommunication Services

4,628

2,826

61.06

MaterialSupply & Marketing

12,157

7,496

61.66

Real Estate, Public Utilities &Services

67,015

46,431

69.28

5,605

3,637

64.89

245,631

150,182

61.14

Industry Geological Survey & Exploration

Commerce, Food Services,

Other Sectors Total Source:SiamStalisacal Bureau (1998).

128

China's Economic Growth and the ASEAN

Geographical

Distribution

There has not been a significant

rec_lstnbution

of foreign

direct invest-

ments between the open coastal cities and the interior regions over the years. in 1983, 178 out of 188 joint ventures, equivalent to 98 percent of the total amount of investments, were located in l_eijing and the open coastal areas. One hundred three (103) of these, or about half in terms of the investment amount, were in the four special economic zones (SEZs), namely, Shenzhen, Zhuhai and Shantou in Guangdong, and Xiamen in Fujian. Shenzhen alone cornered 87 of these enterprises with foreign capital or about a fourth of the total value of direct foreign capital inflow in that year. The inland regions, on the other hand, only had 10 of these join_ ventures, accounting for a mere 2 percent of total foreign investments. 2 / By 1987, the share of the inland re_ions had improved to 14 percent T while the share of Beijing and the coastal regions was reduced to 86 percent (Table 4). Since 1987, however, thel share of Beijing and the coastal areas remained almost unchanged to glve way for more foreign investments in the interior regions. In 1996, 8_ percent of total foreign capital was still being directed toward Beijing' Iand the open coastal cities and provinces, l A change in the distribution, however, was taking place within the coastal regions. In the 1980s, foreign direk:t investors were heavily concentrated in the four original SEZs, three of Which including Shenzhen, the big_ gest, were in Guangd0ng. Nearly half of realized direct foreign investments in the 1980s went to Guangdong. Though the province's share had been greatly reduced in the 1990s, it had remained to be the recipient of the biggest slice of the DFI pie in China. Guandong's lead position was due largely _o the performance of the two 5EZs, Shenzhen and Zh_ lhai. Initially, the surge of foreign investments in these two SEZs came from overseas Chinese in Hong Kong. These involved small investments in labor- intensive manufactured goods for exports. Heavy investments in infrastruct' local officials and the workforce towards

1re as well as positive attitude of 9FI in Shenzhen and Zhuhai also

attracted larger joint ventures in less labor-intensive industries and transnational companies from Japan, the ! Jnited States and European countries. These were the types of investments t]1at initially would only go to either Beijing, China's capital and first industrial base, or to Shanghai, a coastal city second to Beijing as an international and i_ dustrial center. The third SEZ in Guangdong, Shant0u, was less successful as it was not as strategically located as Shenzhen and Zhhhai. The success of Shenzhen and 2. Long (1984),p. 339.

Direct Foreign

Table 4.

Investment

FlowsTo

Direct and Other Foreign by Province/City

and From China

Investments

179

in China

of Destination

(Utilized Amount)

,,,

m:i. .,

.,.) J

Value in US$ Millions Beijing Coastal

106 1,436

279 2,873

667 22,093

1,553 33,797

Tianjin Shanghai

133 214

37 174

524 3,160

2,153 3,941

Liaoning Hebei

91 10

257 44

1,279 397

1,738 830

Shandong

186

1,874

2,634

Jiangsu

134

2,844

5,210

Fujian

320

2,867

4,085

737 -

1,582 103

7,556 707

11,754 789

885

663

241

284

4,582

6,530

1,783

3,436

27,342

41,880

5.9 80.5

8.1 83.6

2.4 80.8

3.7 80.7

Guangdong Hainan Guangxi Interior Region Total Share in Percent

Beijing Coastal Tianjin

7.5

1.1

1.9

5.1

Shanghai

12.0

5.1

11.6

9.4

Liaoning Hebei

5.1 0.6

7.5 1.3

4.7 1.5

4.1 2.0

Shandong

3.6

5.4

6.9

6.3

Jiangsu

4.8

3.9

10.4

12.4

Fujian

3.1

9.3

10.5

9.8

Guangdong Hainan

41.3 -

46.0 3.0

27.6 2.6

28.1 1.9

Guangxi Interior

2.5 13.5

1.0 8.3

2.2 16.8

1.6 15.6

100.0

Total

Source: State Statistical Bureau.

Direct Foreign Investment

Flows To and From China

181

ince was the light-industrial heartland of China. There were two joint venture contracts approved in 1981, one in 1982 and another in 1983 but only two became operational before the end of 1983. The foreign investment boom of 1984-1985 brought more foreign entrepreneurs to Jiangsu. The number of joint ventures in operation, however, remained low at 30 by the end of 1986. It was in 1987-1988 that foreign investors' attention started to be diverted to Jiangsu from Guangdong, so that by the end of 1988 over 175 joint ventures were operational, s This was the offshoot of the provincial authorities' November 1986 investment incentive package that went beyond the national provisions and was more generous than the packages offered by other provinces. In terms of the amount of realized DFI, the surge came after 1990. Starting from just 4 percent of the realized amount of foreign investments in China in 1990, Jiangsu's share increased to 12 percent in 1996. Shanghai was the location for pioneer joint ventures. In 1987, Shanghai was next to Guangdong as site for DFI. It is the consular, business and commercial center of China and, thus, has a large international community. The early DFIs in the province were large service-sector projects such as hotels and apartment complexes. Being a leading industrial city, Shanghai got the first large high-profile industrial DFIs such as the Schindler, Bell, Pilkington and Volkswagen projects. Shanghai was also able to attract a good portion of the export-oriented, relatively smaller-scale joint venture projects with Hong Kong entrepreneurs. This enabled the province to retain its importance as DFI hosts until the 1990s. In 1996, Shanghai still accounted for a substantial onetenth of total DFI in China despite the sprouting of other coastal locations. This could be attributed to a number of factors. One is the existence of port facilities in the city. Another is the creation of three Export Development Zones (EDZ) and the introduction of new foreign investment incentives better ' than those provided by national legislation in 1986. This second factor paved the way for the entry of the SEZ-type, small- to medium-scale joint ventures into Shanghai from the late 1980s. A third reason is the wage factor. In 1985, Shanghai's wage index of 153.7 was just half of Shenzhen's. 6 Furthermore, Shanghai has a long tradition of entrepreneurship with close connections with overseas Chinese in Hong Kong as several of the city's businessmen fled to Hong Kong when the Communists took over the Chinese government. Beijing, the capital city of China and an industrial, commercial and international city like Shanghai, is another site for the pioneer and larger joint ventures. The distinctive feature of DFI in this city is the high concentration of service industries; the most prominent of which are the large hotel projects 5. Pomfret(1991),p. 92. 6. Li and Spinanger (1988).

182

China's Economic Growth and the ASEAN

such as the Great Wall Hotel. 7 It failed to attract

the non-service,

export-ori-

ented joint ventures and, hence, by 1996,: its share to total DFI had been reduced to 4 percent. Partly to blame for th_s was the heavy bureaucracy in the capital city. Source Countries

The biggest source of foreign inveslments in China is Hong Kong. By the end of 1983, 128 out of a total of 198 jfint venture projects in China were undertaken by Hong Kong investors, s Th_se were mostly small manufacturing entities capitalized at less than US$1 rpillion. Hence, in value terms, they amounted to only US$47 million or 23 percent of the US$207 million total foreign investments in China. From 1984 to t_e first half of the 1990s, Hong Kong accounted for more than half or the amount I of direct and other foreign investment flows to China. The 1984q985 foreign investment boom in China was helped by the rapid growth of small joint _entures which were mostly located in Guangdong, the province adjacent tO Hong Kong. These were mostly Hong Kong firms transferring their expdrt activities into China in reaction to higher wages and land rents in Hong Kong and to the appreciation of the US dollar with which the Hong Kong dollar was pegged. These investment flows from Hong Kong continued and, together with capital from Taiwan and South Korea, brought about the 6nprecedented investment boom in China in the early 1990s. Hence, throughout the ten-year period 1987-1996, realized Hong Kong investments increased more than ten times from US$1.8 billion to US$20.9 billion (see Table 5). 9 Hong Kong investments are typically small to medium-scale manufacturing ventures engaged in labor-intensiv_ export activities. The Hong Kong partner brings in the design and, in most cases, the materials. They take charge of quality control and export marketing. This arrangement involves minor capital requirements but quick retti ms. The SEZs in Guangdong, particularly Shenzhen, are the favorite sites. In 1993, Guangdong captured 40 percent of the DFI contract amount from H )ng Kong (Table 6). Fujian got 11 percent followed by Shanghai's 6 percent. Hong Kong investors had 82 percent of their capital placed in the coastal _%ions in 1993, higher than the national average of 81 percent.

7. Pomfret (1991),p. 85. 8. Long (1984),p. 3399. Note, however, that inward DFI from Hong Kong may be overestimated as capital of Chinese origin is reportedly recycled and disguised a_ DFI to take advantage of special tax and incentives to foreign investors. A World Bank estimate put recycled capital ofChinese origin or disguised DFI to be around 25 percent of gr_

Direct Foreign

Investment

Flows To and From China

Table 5. Direct and Other Foreign Country

Investments

of Origin (Utilized

183

in China by Region/

Amount)

Valuc in US$ Millions

Hong Kong & Macao Taiwan

1,809 -

2,118 -

18,032 3,139

20,852 3,482

Japan

267

520

1,361

3,692

Korea

381

1,504

United States

271

461

2,068

5,051

Europe Southeast Asia Indonesia

124 37 -

182 65 1

794 1,005 66

3,013 3,185 94 460

Malaysia

Philippines

122

22 11

53 8

492 234

2,247 328

139

409

991

1,356

2,647

3,755

27,771

42,135

Hong Kong & Macao Taiwan

68.3 -

56.4 -

64.9 11.3

49.5 8.3

Japan Korea

10.1 -

13.8 -

4.9 1.4

8.8 3.6

United States

10.2

12.3

7.4

12.0

4.7

4.8

2.9

7.2

Indonesia

0.0

0.2

Malaysia

0.0

0.3

1.1

Philippines

0.2

0.1

0.4

0.1

Singapore Thailand

0.8 0.4

1.4 0.2

1.8 0.8

5.3 0.8

5.3

10.9

3.6

3.2

100,0

100.0

100,0

Singapore Thailand Others Total Share in Percent

Europe Southeast

Others Total

Asia

Source: State Statistical Bureau (1988, 1998).

Direct Foreign Investment

Flows To and From China

185

Economic relations between China and Taiwan were not officially allowed until the late 1980s. Prior to the official permission, only informal and indirect transactions were carried out via a third economy, usually Hong Kong. Both China and Taiwan changed its stance toward each other in the 1980s. China shifted from one of a hardline military liberation policy to a peaceful unification policy. It was thought that the prospect of economic gains and economic dependence would draw Taiwanese to the idea of unification. The business climate was made more favorable to Taiwanese investors with special privileges granted to them. In Taiwan, democratization and the removal o_ martial law had led to the gradual easing up of restrictions on economic relations with China. And in 1987, Taiwanese were officially allowed to visit China. Importations from China have been admitted since 1989 and export and investment flows to China have been officially recognized since 1990. With the change in the political climate between China and Taiwan, economic forces were able to determine the course of relations between the two. Within the economy

of Taiwan,

three

major push factors

for direct

invest-

ments abroad appeared. First was the sharp appreciation of the N.T. dollar versus the US dollar in the second half of the 1980s as a result of the huge trade surplus. In 1986, Taiwan's trade surplus had climbed to almost 20 percent of GDP. As a consequence, the N.T. dollar-US dollar exchange rate fell from 40 in 1985 to 26 in 1989. Second was the rapidly increasing wage rate. This was both the direct effect of the 1983 Labor Law and the offshoot of the expansion of the Taiwanese economy, specifically of the service sector, in the second half of the 1980s. Third was the increase in land prices in Taiwan. Not only did it force new investors to go abroad but the sale of land at high prices enabled old firms and landlords to have the funds for foreign investments. 1째 China, on the other hand, had abundant supply of labor at low wages as well as low land prices and rent to offer. All these economic considerations, together with locational advantages and historical and cultural ties, led to the surge of Taiwanese investments into China. In 1993, Taiwan was already the second largest source of foreign investments in China, accounting for more than 11 percent of the total. Most Taiwanese investors in China are into manufacturing. Between 1990 and 1992, 73 percent of approved Taiwanese investments went to the manufacturing sector while only 14 percent went to finance, insurance and real estate industries. Within the manufacturing sector, the majority of Taiwanese investments are concentrated in the traditional export industries of Taiwan such as electrical and electronic machinery and appliances, food, metal products,

plastic products,

10. Chen and Kan (1997),

wearing

apparel

and miscellaneous

prod-

186

China's Economic Growth and the ASEAN

ucts. n Proximity to Taiwan makes Fujian and Jiangsu the location of choice for Taiwanese investors. The Fujian dialect is also very similar to Taiwan's and many Taiwanese are of Fujian origin, Taiwanese investments, however, are more geographically spread than Hong Kong's which was heavily concentrated in the province of Guangdong. In 1993, approved Taiwanese investments in Jiangsu and Fujian were 18 and,16 percent, respectively (Table 6). Next were Guangdong with 12 percent and Shandong, 10 percent. Taiwanese investments in the interior regions were also relatively more significant. In 1993, the interiors regions' share in Taiwanese investments was 18 percent, higher than the ratios for the other major investors, Hong Kong, Japan and the United States. Japanese investors were seen as rather slow in taking part in the investment boom in China. The first joint ventures with Japan were established in 1980 (Hitachi's color television factory in Fujian and Otsuka's medical products firm in Tianjin). During the first five years of the opening of China, only 13 of the 198 joint ventures, or a mere 7 percent, were of Japanese origin. R In value terms, cumulative investments from japan by the end of 1983 amounted to only US$18 million, or 5 percent of th_ total, thus, making the Japanese investment project smaller than the averag4 project size for all investors. Japanese investments graduaUy increased fromithe latter part of 1983 as both Chinese and Japanese governments undertook measures to make the business climate in China more conducive to Japanese investors. Examples of these measures include the 1983 tax treaty be_veen Japan and China to avoid double taxation and the enactment of laws on brands and patents. Hence, for the year 1987, actual Japanese investments amounted to US$267 million which was about 10 percent of the total. The scenario in Japan in the 1980s was similar to those of Taiwan and Hong Kong--the

strengthening

of the yen_huge

surpluses

in the current

ac-

count, and the high costs of labor and lan_. These factors, together with the growing protectionist sentiments against Japan-produced goods in the West, drove the Japanese firms out of Japan and into low-cost bases for export production of the Asian countries._I Initially, in the late 1980s, much of the Japanese capital was going to South ._ast Asia, particularly, Thailand, Malaysia and Indonesia. It was only in the 1990s that Japanese firms started to have strong interest in investing in China. In 1990, actual Japanese investments in China amounted to just halt a billion US dollars. In 1996, the amount had reached US$3.7 billion. Unlike 7aiwanese and Hong Kong invest-

I1. Chen and Kan (1997). 12. Long (1984). 13. Palanca-Tan (1999).

Direct Foreign Investment

Flows To and From China

187

ments which were concentrated in China, the excess funds in Japan were distributed among several Asian countries. 14A number of reasons could be cited for Japanese firms' rather delayed and moderate entry into China. The sociopolitical uncertainties surrounding the business environment in China deterred many of the prospective Japanese investors in the 1980s. Despite the _promulgation of the reform and "open-door" policy and the Joint Venture Law, regulations concerning foreign investors' operations were vague. There were numerous bureaucratic problems. There was the question on political stability as manifested by the June 1989 Tiananmen Square incident. Social infrastructure in electricity, transportation were deficient. Further, Japanese investors

and communication systems wanted to see first that sound

macroeconomic management takes root in China. The development gap between China and Japan is also much wider compared to the gap betwe_m China and Taiwan or Hong Kong. Hence, there is much lesser vertical production complementarity between China and Japan. Japanese investments are dispersed among several coastal provinces. Shanghai is the biggest recipient in terms of the number of contracts, followed by Beijing. These locations have the industrial and commercial base, the infrastructure and a large international community necessary and important to non-ethnic Chinese investors like the Japanese. Liaoning, with its heavy industries base, captured about 13 percent of the approved amount of Japanese DFI in 1993 (Table 6). Substantial Japanese investments are also directed to Jiangsu, Guangdong and Shandong. Majority of Japanese firms are engaged in electric/electronic machinery and textile production. These two sectors, together, made up about 60 percent of the aggregate number of Japanese-invested firms as of 1994. is The Americans and the Europeans were earlier than the Japanese to respond to the call for investments by China. These western investors were responsible for the large joint venture projects that accounted for the lion's share of the total amount of foreign investments during the first five years of the "open-door" policy. Hence, although the United States investors (21 cases) and the European investors (16 cases) represented only about one-fifth of the cumulative number of projects by the end of 1983, they contributed almost

14. China's share in Japan's DFI in Asia had increased significantly in the 1990s. In Japan's fiscal year (FY) 1991, the share of China was I0 percent; Indonesia, 20; Malaysia, 15; Thailand, 14; and Hong Kong, 16. In FY 1993, China's share rose to 24 percent but the shares of the other Asian countries remained substantial: Hong Kong; 19; Malaysia, 12; Singapore, 10; Indonesia, 10; and Thailand, 9. In the early 1990s, as the economy and the political situation in the Philippines stabilized, the country was also able to attract some Japanese direct investments (about 3 percent). 15. Kinoshita (1997).

188

Chin_'s Economic Growth and the ASEAN

half of the investment

amount.

Actual

investments

from both the United

States and Europe continued to expand in the 1980s and the 1990s. In 1996, the United States was second only to Hong Kong, providing 12 percent of actual DFI. Europe's 7 percent share was not far below Taiwan's 8 percent. United States' and European investments, like Japan's, are more into capital-intensive activities (e.g., pharmaceuticals, chem Lcals,automobiles, telecommunications

and

industrial

and commercial

e( uipment

and

machinery),

hence,

requiring greater capitalization. 16 They a re less oriented toward the export market and, therefore, have less incentive to locate in the SEZ areas. Among

the five Southeast

Asian nat ions, the Philippines

and Thailand

were the first to invest in China. By the eiLd of 1983, there were already five joint venture projects with Philippine parb Lers in China, infusing some US$42 million. Thailand had one with a measly _.mount of US$0.27 million. Investments from Southeast Asia continued to a(celerate in the 1990s, with the bulk being contributed by Singapore. Singapore's share in DFIs to China grew continuously from only 1 percent in 1987 to more than 5 percent in 1996. Malaysia's involvement became more acti_'e relative to the three other Southeast Asian countries

towards

the middle part of the last decade.

Type of Arrangement I

Direct foreign investments in Chin_ can be classified into three major types: equity joint ventures, contractual joint ventures, and wholly foreignowned enterprises. An equity joint venture is a limited company jointly funded through equity by Chinese and foreigninvestors. The investing parties share profits or losses in proportion to their respective equity shares. The contractual joint venture, also referred to as "cOoperative venture," allows for the Chinese partners to contribute resources such as land, labor, local equipment and facilities instead of financial equity. The foreign partners, in addition to funds, may contribute technology, major flew equipment and materials. The contributions as well as the operation and management responsibilities of the Chinese and foreign partners are stated in] the contract. In a contractual joint venture, profits and losses are divided according to a ratio also stated in the contract. A wholly foreign-owned enterprise is a company with no Chinese equity participation. It can either be a brar_ch of a foreign company or an en-

16. Seven large joint ventures with the United States and European partners during the 19791983 were located outside the SEZs and were capitalized at over US$10 million each. These included Schindler Elevators, Pilkington Glass, a Swedish pharmaceutical company, a Belgian subsidiary of Bell Telephone, BeijingJeep and two hbtel projects. (From Pomfret 1991.) i

Direct Foreign Investment

Flows To and From China

189

tirely new and independent enterprise formed by a foreign company or a group of individuals who are non-Chinese citizens. The foreign owners am fully responsible for profits and losses. 17 The type of arrangement by which direct foreign investments entered China had significantly changed over the years. Until 1983, contractual joint ventures had dominated, accounting for about:82 percent of investments in terms of the number of contracts and 88 percent in terms of the contract amount (see Table 7). The foreign partners in these contractual joint ventures were mostly of Hong Kong origin who wanted to take advantage of low wages and low land prices in China. These Hong Kong investors were mo_e familiar with the culture and practices of their fellow Chinese in the mainland and were more open to enter into detailed negotiations with them. On the part of the Chinese partners, a contractual joint venture arrangement appeared Im be a better and more feasible option initially since it would not require cash outlay from them. Equity joint ventures accounted for about 14 percent of the number of contacts and 6 percent of the amount during 1979-1983 while the corresponding shares of wholly foreign-owned enterprises were 4 and 7 percent. Equity joint ventures became increasingly important from 1985 and was the assumed form for the majority of direct foreign investments in China in the 1990s. The number and value of wholly-foreign owned investments likewise rose from 1987 and by 1996, about a third of direct foreign investments in terms of both number and value were of this type. The share of contractual joint ventures, on the other hand, shrank to 12 percent of the number and 20 percent of the value of foreign investments. Two reasons are cited for the increased use of the 100 percent foreign-equity type of investments. 1_ First is the inclination of Taiwanese investors, an important source of foreign capital in the 1990s, to control their own companies rather than cooperate with partners. Second, wholly foreign-owned arrangements involve less costs and time as long and tedious negotiations about financial capital, technology and management contributions joint ventures are avoided.

of the partners

in contractual

and equity

17.A fourth type, joint development venture, is specified in DFI accounts in China. Joint development ventures are simply joint venture projects in oil exploration. Chinese and foreign partners do not share profits but oil resources. Oil output of the venture is divided among the partners in accordance to the contract. Since joint development venture is just a minor categocy in terms of the number and value of contracts and investment of this type are made only in some years, some reports, including this paper, combine this category with contractual jol_t ventures. 18.Nyaw (1997).

190

China's

Table 7. Direct Foreign Investments

Economic

Growth

in China by Arrangement • _"ii'_ I' ', 'T "

and the ASEAN

Type

• _

No. of Contracts

'_'

I [

Joint Ventures Contractual Joint Ventut_b Wholly ForeignOwned

188 1,085

14.2 81.8

4,056 1,316

56.1 18.2 i

53,488 10,789

64.6 13.0

12,628 2,866

51.4 11.7

4.0

1,856

_5.7

18,525

22.4

9,062

36.9

82,802

100.0

24,556

100.0

Enterprises

Total

1,326

100.0

7,228

100.0

Contract Amount I i

i Joint Ventures Contractual Joint Ventures

340

5.5

2,628

5,370

87.6

1,258

420

6.9

2,442

6,130

100.0

6,328

Wholly ForeignOwned

50.0

31,876

435

23.3

14,590

19.9

38.6

29,134

26.7

26,810

36.6

100.0

108,941

100.0

73,276

100.0

Enterpld_ses Total

Utilized Amount

Joint Ventures

1,876

5 _.9

14,966

57.4

20,754

49.7

Contractual Joint Ventures

663

2,}.5

4,905

18.8

8,365

20.0

Wholly ForeignOwned

703

2i.7 I

6,219

23.8

12,606

30.2

E_t_rp_

! L

To_ Notes: "b Cumulative

3242I _

I26'_ 100.041,_ 100.0

•

co_.._. lo_tv_

_ae C_pe_e.r_e!op_t (_o_

wi_fo_ _

offshore oil development) and Cooperative OperationsOo_ntproduction with foreign countries). Sou_: Ministryof ForeignEconomicRelationsand Tradel. [

Direct Foreign Investment

Outward

Direct

Flows To and From China

Foreign

191

Investments

China's outward direct investments were much less significant than the inflows. The ratio of outward to inward DFI being only 0.7 percent in terms of number of contracts and 0.5 percent in terms of amount of investments. For every 1,000 investors in China, there is only one Chinese investor abroad and for every US$1,000 foreign investments in China, there is only US$1 of Chinese investment in other countries. Nevertheless, Chinese capital has flowed into other countries since it started its "open door" policy. From 1979 to 1985, investing overseas could be undertaken only by state-owned import and export corporations under the umbrella of the Ministry of Foreign Economic Relations and Trade (MOFERT), and provincial and municipal international economic and technological cooperation enterprises regulated by the Commission for Foreign Economic Relations and Trade. Within this seven-year period, Chinese capital went into 185 non-trading enterprises overseas (Table 8). Chinese investments summed to US$154 millirm which was roughly 62 percent of total investment amount in the contracts. Most of these investments were in the form of joint venture and were located in developing countries. Few of the Chinese overseas enterprises were concerned with manufacturing activities. They were mainly in catering, engineering, finance and insurance, and consultancy. 19 In 1985, a directive that expanded the scope of enterprises eligible for overseas investments was issued by MOFERT. With the new directive, all enterprises, both public and private, can apply for permission to establish subsidiaries in other countries if they possess sufficient capital and technical and operational know-how, and if a suitable foreign partner can be found. The 1985 directive resulted in enhanced Chinese investments overseas so that by the end of 1990, there were a total of 801 Chinese-invested

enter-

prises in the world, involving about US$1.2 billion of Chinese capital. This meant an additional 616 enterprises in 1986-1990, more than 3 times the number in 1979-1985. In terms of dollar value, the additional amount of Chinese investments of US$1.1 billion was almost 7 times the 1979-1985 value. Chinese capital accounted for about 50 percent of the total amount of investments. It was during the period 1986-1990 that Chinese investors started to engage in manufacturing activities. The industries into which Chinese capital flowed became diversified, including metallurgy and minerals, petro-chemicals and chemicals, electronic and light industry, tlansportation, finance, insurance, medicine, and tourism. It was also during this period that the rise of big Chinese transnational corporations such as China National Metals and Minerals 19. Tseng and Mak (1996),pp. 145-146.

192

China's Economic Growth and the ASEAN

Table 8. Approved Overseas Investments of China

Number of Enterprises Total Investments (US$ M) Chinese Investments

185 249

Value (US$ M) % of Total Investments

616 2,146

1,184 2,122

1,985 4,517

154

1,055

943

2,152

61.8

49.2

44.4

47.6

Source: M/nistryofForeignEconomicRelationsand Trade.

Import and Export Corporation and China National Chemical Import and Export Corporation was witnessed, z째 i In the 1990s, the Chinese governmen_ encouraged instead of just allowing outward direct foreign investments. Top ranking national and local officials publicly expressed the ;need forChinese businesses to explore international markets and expand operations overseas to further strengthen themselves and to avoid discriminatory measures imposed by the host government, as well. The Chinese government sponsored and organized seminars and workshops on business opportunities abroad, on how to establish overseas subsidiaries, and on ways and means of improving overseas business operations. As a result, Chinese companies continued to expand outwardly with additional 1,184 overseas subsidiaries established between 1991 and 1996. Chinese capital infused in these overseas business undertakings was US$943 million, representing 44 percer(t of the total investments. The biggest recipient of Chinese overSeas investments in terms of number of enterprises is the United States. Up Io 1996, the United States had attracted 238 Chinese investors, representing _2 percent of the total number. The large share of the European bloc was due mainly to Russia, which until 1996 had hosted 227 Chinese-investedenterprise_, just a few firms less than that of the United States. Hong Kong and Macao combined ranked third with a total of 191 Chinese-invested entities by 1996. _f the five Southeast Asian countries, Thailand had attracted the most nurn_er, 134, of Chinese investments, accounting

for a substantial

42 percent of tlle total for the region. The Philip-

pines compared very poorly with Thailand,[ with the least number in the region, only 29, of Chinese-invested ventures. In terms of the value of Chinese investments, Canada, though hosting only 77 Chinese enterprises, ranked first ! 20. Tsengand Mak (1996),pp. 145-46.

Direct Foreign Investment

Flows To and From China

193

with US$371 million of Chinese capital or 17 percent of the total. A close second and third were the United States and Australia accounting for 16 and 15 percent, respectively, of the total value of Chinese overseas investments. It can be inferred from the data that Chinese enterprises in Canada and Australia were much bigger than those of the other countries. Russia, on the other hand, had the smaller Chinese-invested projects as its value share of 4 percent was way below its share of 11 percent in terms of number of enterprises. The Chinese investors in Southeast Asia likewise appeared to be relatively smaller. The most important Southeast Asian recipient, Thailand, accounted for 3 percent (half of the region's share) of the total value of Chinese investments while the Philippine share was a measly half of a percent point. The last column of Table 9 gives the proportion of Chinese capital i_ total investment by country of destination. First in this criterion was the United States where the Chinese investors contributed almost threefourths of total capital on the average. Chinese participation in European and Canadian ventures was approximately 50 percent. Chinese investors, on the other hand, were the minority in joint ventures in all of the 5 Southeast Asian countries, infusing only about a third of the total capital. Remarkably, the Chinese stake in the big venture projects in Australia was just 26 percent, the lowest in the least.

FACTORS AFFECTING DIRECT FOREIGN INVESTMENT

FLOWS

Determinants

for DFI

of and Motivations

There exist a number of excellent theoretical and empirical analyses on the factors that affect the size, distribution and structure of DFI flows between countries. The different factors discussed in these studies can be grouped into the determining factors (host*country perspective) and the motivating factocs (home-country perspective). The home-country variables, the economic conditions and policy factors in the source countries, determine the potential supply of DFI. The characteristics of and the business environment in alternative host countries, on the other hand, determine ply of direct foreign capital.

the direction

of the available

sup-

Host-Country Variables

factors

Host-country variables relevant to investment

include macroeconomic and microeconomic decisions, policy formulations that directly or

194

China's Economic Growth and the ASEAN

Table 9. Approved Overseas Investments of China by Country/Region of Destination, 1979-1996

Ratio_lG)

,,, Hong Kong & Macao

191

9.6

Japan United States

82 238

4.1 12.0

Europe Southeast Asia

395 321

Indonesia Malaysia Philippines Singapore

!257

11.9

58.4

15 1352

0.7 16,4

34.9 74.3

19.9 16.2

1157 I 1134

7.3 6.2

46.7 34.3

1.7

0.8

37.5

64 29 61

3.2 1.5 3.1

125 110 i15 i

1.2 0.5 0.7

43,1 35.7 28.3

15.1 3.1

32.4 26,4

17.2 25.1

53.0 60.0

100.0

47.6

Thailand Australia

134

4.6 6.8

Canada Others

77 590

3.9 29.7

36625 I

1371 541 t

Total

1,985

100.0

2_152

Source:MinistryofForeignEconomicRelationsand Trade.

indirectly alter the incentive-disincentive factors, and risk factors. Macroeconomic

Factors

The Accelerator

scheme for DFI, investment

support

Principle

of Investments /

derives

that the increase

capital stock is directly proportional to expected output. Expected output is approximated by the size of the market. Gross Domestic Product (GDP), in turn, can be used as an indicator of the sizel_f the market. In accordance with this basic investment formulation, most studies on DFI postulate a positive relationship between DFI and output growlh in the host-country. A qualification, however, must be made. The size of t_e market and its potential growth are likely to influence only those DFIs that are geared towards production of goods and services for the domestic markett Access to a large domestic market is important only to import-substituting DFI.

Direct Foreign Investment

Flows To and From China

195

For DFIs that aim to produce for the world market, the relevant macroeconomic variable is the exchange rate. The real exchange rate, defined as the price in real terms of the foreign currency the host-country uses for its international transactions, affects the international competitiveness of producers in the host countries. An increase in the real exchange rate implies a real depreciation of the host-country's

currency

while a decline

implies a real apprecia-

tion. The concepts of overvalued and undervalued situations in which the real exchange rate is considered

currencies refer to to be "too high" and

"too low," respectively, in relation to the "correct" or "equilibrium" level. An overvaluation/ undervaluation of the host-country's currency makes goods and services produced in the host country more/less expensive than goods and services produced elsewhere. If the exchange rate does not equalize production costs among different countries, there is a potential disincentive/incentive for DFI to flow into the country with an overvalued/undervalued currency. Microeconomic Factors The decision to invest is a microeconomic

concern.

The single most im-

portant consideration in any firm's decision to invest is the prospect for higher profits. Profit maximization, given a target output level, is tantamount to cost minimization. Assuming that a market, whether domestic or external, is guaranteed, profitability will just depend on the cost functions. Most DFIs, eithe_ domestic market-oriented or export-oriented, are driven away from their home countries by rising production costs, important components of which are labor and raw material costs. Differences in wages and raw material prices reflecting relative factor endowments direction of DFI.

among prospective

hosts influence the

Policy Factors These refer to all government actions that directly or indirectly alter the incentive structure for DFI. Fiscal incentives such as preferential tax rates and investment allowances and subsidies are offered to encourage DFIs. Lower tax rates or outright tax exemptions improve after tax profits. Investment allowances and subsidies, on the other hand, lowers the effective cost of capital build-up to the firm. Other government actions or policies, though unintended, can influence the size, direction and structure of DFI flows. The host country's trade policy policy tracts. from

can provide profit opportunities for foreign investors. The type of trade that a country pursues indicates the type of DFI that the country atA protectionist trade policy, for instance, shelters domestic production international competition, hence, encourages the establishment of ira-

196

China's Economic Growth and the ASEAN

port-substituting DFIs. Accordingly, domestic market-oriented DFIs may be concentrated in highly protected sectors. Policies that facilitate export activities, on the other hand, will attract more _xport-oriented DFIs. The exchange rate policy of the host !_ountry is also an important consideration for DFIs. As discussed earlier, a pplicy that supports an undervalued exchange rate can lead to more DFI inflows. Liberalization of the foreign exextenchange market may be necessary to attratt DFIs as they engage more sively in international transactions such aslmportations and profit and income remittances. Investment Support Factors Investment support factors pertain t o the availability of infrastructure as well as suppliers and service industries, ;ufficient networks of roads, ports, airports, telecommunication facilities, and energy and material suppliers are required for DFIs' operations in the host cot ntxy to be profitable. A country with poor infrastructure may have difficulties in c _pturing a significant amount of DFI. Risk Factors Foreign investors measure risks in the host country. Political instability is ass_ confiscation or damage to property, threat,, roeconomic management or the regulator_

erms of the political conditions in ciated with production disruption, to personnel, and changes in macenvironment.

Home-Country Variables Macroeconomic

Factors

The macroeconomic income, the exchange

variables

that _ffect outward

investments

include

rate and the balance ih the current account. High income

growth rates result in high savings rate wh}ch implies more investment funds. A surplus in the current account is another form of savings which is generated by the economy from external 0:ade transactions. Trade surpluses do not onlygenerate funds for investment _pending, foreign exchange for outward investments, ! Microeconomic

they also make available

Factors

Excess funds

or external

surpluses

_lone do not result !

in outward

in-

vestments. Firms undertaking investments abroad must be internationally competitive. Outward investments requir_ some special firm-specific competitive advantage to overcome the intrinsic cost disadvantages of overseas operations. This competitive advantage r_ay be in production management, marketing, access to world markets, etc.

technology,

Direct Foreign Investment

Flows To and From China

197

Policy

Factors Outward investments may also be policy-induced. Deregulation of the foreign exchange and financial markets in the home country facilitates the movement of capital and can encourage outward investments. Fiscal policies such as heavy taxation of profits and business activities as well as export taxes may also encourage firms to locate elsewhere to escape the burden of taxation in the home country. Recently, environmental regulations in the developed nations have also been very prohibitive. Abatement costs for compliance with environmental standards may augment costs to such extent that production in the home country becomes less competitive. Demonstration Effects Demonstration effects such as the bandwagon effect operate among the smaller foreign investors which are often more risk-averse and whose infotmarion about the prospective host country is limited. The relative attractiveness of prospective host countries as sites for DFI is indicated by the actual choices made by earlier and bigger investors. Expectations also tend to be sel_fulfilling as the massive inflows of DFI result in increased economic activities. Other Factors Specific factors such as historical circumstances, cultural familiarity and geographical proximity may be important considerations for the smaller foreign investors. For these small country investors, transactional and infcÂ˘mation-cost factors are significant determinants of the direction of DFI. China's China's

Inward

Investments

Share in the Global Supply of DFI

How has the emergence of China as a host for direct foreign investments affected foreign capital inflows in the ASEAN countries, specifically, the Philippines, Thailand, Malaysia and Indonesia? Have the massive flows of i_ward investments in China drained the supply of foreign capital in the four ASEAN countries? Though China began to open its doors to foreign investors in 1979, it was not until the 1990s that big waves of foreign capital arrived at its shores. From 1991 to 1996, in a span of merely five years, inward direct investments in the country grew ten-fold. Remarkably, DFI flows into China posted str ,_g growth rates despite volatility in the global supply of investments during lhe same period. The contraction in the world stock of DFI in 1991, 1992 and 1996 appeared to have adversely affected to a greater extent the industrial co_m-

198

China's Economic Growth and the ASEAN

tries. Like China, the developing countries as a whole enjoyed consistently increasing inward DFI, although the average annual growth rate for the entire group of 26 percent was much lower than China's 61 percent. A different picture emerges when one looks at the four/_SEAN countries individually. With the exception of Indonesia, all experiencdd a volatile pattern of investment inflows as in the global case, recording neghtive growth rates in three of the six years. Table 10 reveals contrasting scenaribs on DFI developments for China and the three ASEAN countries, the Philit_pines, Thailand and Malaysia. The investment boom in China during the period was clearly not paralleled by similar developments in the three ASEANIcountries. The very favorable trend of inward investments in China was likewise reflected in terms of shares to global DFI. In 1990, only 1.5 percent of the global supply of foreign capital went to China. By 1996, China's share had significantly increased to 12 percent. This could have explained to a large extent the increase in the share of developing countries in global DFI from 14 percent to 39 percent during the period. The shares oF Indonesia and Malaysia likewise posted improvements from 1990 to 1996 While that of the Philippines was barely maintained and Thailand's was reduced slightly. Therefore, it can be said that the much improved share of Chin_ did not eat on the shares of its four ASEAN neighbors, nor on the share of the _leveloping countries as a group. If crowding-out had indeed taken place, it ha_t been at the expense of the industrial countries whose share dipped by aboll_ 10 percentage points from 1990 to 1996, The greater magnitude of the incre_ e in China's share relative to the magnitude of the drop in the industrial Countries' share and the positive growth in the global supply of DFI may be1 indicative of new stocks of DFI generated by Chinas "open-door" policy. In,teed, in the early 1990s, export surpluses in the newly industrialized countrie_ of Asia, particularly Taiwan and Hong Kong, were recycled into additional _upplies of global DFI specifically directed towards China. The trade-intensity framework can also be employed in the analysis of DFI flows. _1 Interests and preference of invbsting countries in particular host countries may be indicated by the investxI ent-intensity index. The index is defined as the ratio of the share of the sou1 ce country in total inward DFI of the recipient country to the share of the sou_ ce country in the global supply of investments. Since the objective is to comp are source countries' investments in China and the four ASEAN countries, thl total supply of DFI in China and the four ASEAN countries is used as the de lominator of the formula, instead of the global supply of DFI. q

21. This was first done by Pangetsu (1980,1987).

Direct Foreign Investment

Flows To and From China

199

Table 10. Inward Direct Foreign Investments

Growth Rates (%) China

25.2

155.5

146.6

22.8

6.1

12.1

61.4

Philippines Thailand

2.6 -1.8

-58.1 4.9

443.0 -14.6

28.5 -24.3

-7.1 51.4

-35.0 13.0

62.3 4.8

Malaysia Indonesia

71.4 35.6

29.6 19.9

-3.4 12.8

-13.3 5.2

_4.8 106.2

22.9 42.5

17.1 3Z0

Developing Countries

23.6

19.0

47.2

23.8

6.5

33.6

25.6

Industrial Coun_es

-32.4

4.3

15.9

2.6

44.6

1,1

6.0

World

-17.4

-0.5

17.7

16.0

27.5

-0.7

7.1

Shares to Global DFI (%1 China

1.5

2.3

5.8

12.2

12.9

10.7

12.1

8.2

Philippines Thailand

0.2 1.0

0.3 1.0

0.1 1.1

0.5 0.8

0.6 0.5

0,4 0.6

0.3 0.7

0.3 0.8

Malaysia Indonesia

1.0 0.5

2.1 0.8

2.7 0.9

2.2 0.9

1.7 0,8

1.2 1,3

1.5 1.9

1.8 1.0

Developing Countries

14.4

21.6

25.8

32.3

34.5

28.8

38.8

28.0

industrial Countries

72.6

595

62,3

61.4

54.3

61.6

62.7

62.1

100.0

World

Source:UNCTC,Worldlnvestrtwat Report,variousissue. Table 11 presents estimates of intensity indices of investments int_ China and into the ASEAN-4 from two source countries, the United States and Japan, and three source regions, the Asian Newly Industrialized Countries (NIEs)-----consisting of South Korea, Taiwan, Hong Kong and Singapore, the European Union (EU), and the ASEAN-4. The intensity index of investments in China from the Asian NIEs was greater than 100 for all the yeats sampled indicating stronger interests and attention accorded to China relative to the ASEAN-4 by this economic bloc in general. The intensity index of Unites States investments in China, on the other hand, exceeded 100 in 1986 and 1990 but fell below 100 in 1994-1996,

implying

diminished

American interests

200

China's Economic Growth and the ASEAN

Table 11. Intensity Index of Investment in China and the ASEAN-4

_ ,Â° ....

In China By United States Japan Asian NIES European Unioa ASEAN-4

i 122

184

51 165

55 1144

62 127

52 186

42 146

73 62

48 85

58 50

! 42 [10 I i 88

112

110

104

Japan Asian NIES

143 43

1107 ! 94

136 75

129 48

148 62

European Union

124

i108

132

134

ASEAN4

133

[113

101

109

141

In the ASEAN-4 By United States

Source:NAPES Database.

China in the mid-1990s. The calculated intensity indices of investments from Japan, the EU and ASEAN-4 reveal stron get interests of these countries/regions in the ASEAN--4 bloc relative to Chh m. In Table 12, the intensity indices of investments from each of the Asian NIEs are shown. The ASEAN-4 bloc is likewise segregated both as source countries and recipient countries. This is done to determine individual countries' interests in China as well as in each cc,tmtry of the ASEAN-4. In the mid1990s, investors from the United StatÂ˘_ and Japan manifested greater preference for Thailand and Malaysia. The aigh intensity index of investments from the Asian NIEs in China in the mid 19 _0s was largely due to Hong Kong. Singapore appeared to be more interested _ Thailand, Malaysia and Indonesia. Remarkably, the intensity index of inv ._stments from the Philippines was high for China but very low for its fellow ASEAN countries. Indonesia displayed equally strong interests in China anq I the ASEAN--4 economies. Among the ASEAN nations, Malaysia appeared to be the least motivated to invest in China in 1994 and in 1996, Thailand showed ithe least interest to invest in China. The Investment Climate Income Growth The Chinese economy has eontinuously expanded since its adoption of market-oriented policies and its "open-door" policy. With the explosive

Direct Foreign Investment

Flows To and From China

201

Table 12. Intensity Index of Investment in China and ASEAN-4 Countries

1994 United States

340

163

112

Japan Asian NIEs Korea Taiwan

62 127 54 91

44 46 16 104

37 37 13 73

56 79 91 !30

66 87 197 95

136 75 143 108

Hong Kong Singapore European Union ASEAN-4

154 63 ...... 98

32 46

9 _74

20 _69

67 127

50 134

445

101

Philippines Thailand

159 159

546

42 -

4 23

58 11

45 45

Malaysia indonesia

49 207

564 5

96 0

146 -

148 0

1996 United States

243

195

104

Japan Asian NIEs Korea Taiwan

42 146 81 109

28 74 28 9

225 94 166 274

129 80 94 59

122 44 102 23

148 62 116 93

Hong Kong Singapore European Union ASEAN-4

206 54 58 50

121 30 156 157

5 143 145 19

0 282 45 7

15 106 149 224

13 138 134 141

Philippines Thailand

204 37

45 1

15 257

15 152

Malaysia Indonesia

53 102

30 263

28 121

127

222 -

139 98

Source:NAPESDatabase.

growth world's

of its domestic economy in the 1990s, China has emerged to be the fastest growing market which multinationals can not afford to ignore. Table 13 shows real GDP growth rate for China, the ASEAN-4 countries and the world. Throughout the period 1981-1996, only China posted doubledigit growth rates that averaged 11 percent per year, more than thrice the worldwide average. Thailand, Indonesia and Malaysia likewise performed

202

China's Economic Growth and the ASEAN

Table 13. Real GDP Growth Rate (In Percent) ,,

,,,

',,,,, _,'

,,,I_),',

1981-1990(Ave) 1991 1992 1993 1994 1995 1996

10.3 9.2 14.2 13.5 12.6 10.5 9.6

1.0 ---0.6 0.3 2.1 4.4 4.8 55

1991-1996 (Ave)

11.6

2.8

)

1 7.9 8.5 8.1 8.3 8.9 8.7 6.7

5.2 8.7 8.0 9.0 9.1 1.1 8.8

5.8 8.9 7.2 7.3 7.5 8.2 7.8

3.1 1.8 2.8 2.7 4.1 3.7 4.1

8.2

7.5

7.8

3.2

Source:ADB (1997,1998). quite impressively better than the global average but still a little way below China's record. The Philippines, on the other hand, was at the tail end, with a growth performance below the world average. Labor Costs An important factor that explains !the influx of export-oriented DFI in China, particularly from overseas Chinese, in the 1980s is its abundant supply of low-cost labor (see Table 14). Wages per employee for the manufacturing sector in China were only a fraction (one,fourth) of ASEAN wages from 1980 to 1986. Wages in the Philippines were lower than the ASEAN average but still significantly higher--about thrice the Chinese wages. Indonesian wages were about double Chinese wages. Remarkably, Malaysian and Thai wages exceeded the Over-all average for the ASEAN during the period. To factor in differences in labor productivity among the countries, one can look at labor cost per unit of good ]produced (wages divided by valueadded). Though the gap between China and the ASEAN countries narrowed in terms of unit labor cost, China's average of 0.15 for 1980-1986 was still much lower--only about half of the ASEAN unit labor cost average. Policy

Factors Investment

Incentives. Foreign investments

are allowed

into China to ac-

quire the financial capital, foreign exchange and technology necessary for the country's pursuit of economic development. Hence, policies are particularly undertaken to lure foreign investors. Th4 approach adopted involves: (1) the provision of incentives, largely administrative and fiscal to foreign investors and (2) the gradual liberalization of the t_ade and exchange regimes. i

Direct Foreign Investment

Flows To and From China

203

Table 14. Average Wages and Unit Labor Costs in the Manufacturing Sector

Averag e Wages (US$) 1980 1981 1982

548 479 434

1,127 1,241 1,301

2,230

2,078 2,200 2,501

743 897 1,066

1,487 1,680 1,947

1983 1984 1985 1986

462 438 384 377

1,349 1,180 1,258 1,285

2,302 1,729

2,794 3,020 3,084 2,957

905 879 921 877

1,959 2,121 1,861 1,774

Ave.

446

1,249

2,107

2,662

898

1,833

Unit Labor Cost (US$) 1980 1981 1982 1983 1984 1985 1986

0.15 0.15 0.15 0.16 0.15 0.15 0.16

0.22 0.25 0.33 0.21 0.20 0.23 0.21

0.20 0.22 0,21

0.28 0.31 0.32 0.30 0.29 0.30 0.30

0.21 0.21 0_25 0.27 0.24 0.24 0.23

0.25 0.27 0.27 0.29 0.25 0.29 0.25

Ave.

0.15

0.24

0.21

0.30

0.24

0.27

Source: NAPES Database.

Considering the gigantic size and specific conditions of the Chinese economy, the introduction of incentives has been phased by region, starting with the coastal provinces and then pushing forward into the inland regions. This is done through the setting up of special zones within which a generous package of incentives is offered to make the economic and political environ, ment conducive to foreign investments. The first step was the establishment in 1980 of the four Special Economic Zones, Shenzhen, Zhuhai and Shantou in Guandong, and Xiamen in Fujian. z2 This was followed by the designation of 14 cities as open coastal cities and the establishment of 11 Economic and Tech-

22. Southern China was chosen as the starting point because of its long history of external contact and the existence of a transportationnetwork that extends to both the international marketsand the inland regions.

204

China's Economic Growth and the ASEAN

nological Development Zones (ETDZs) in 1984 and 1985. Also, in 1985, the Yangtze River Delta, Pearl River Delta and Xia-Zhang-Quan triangle region ffl south Fujian were designated as Coastal Economic Open Areas. In 1988, another SEZ was established in Hainan. Thereafter, a number of riverside and inland capital opened.

cities

and

border

economic

cooperative

areas

have

been

Special administrative measures _o facilitate the entry of foreign capital are implemented in these special zones. Government officials of the zones are given larger and flexible economic nlanagement power, project approval power and some legislative power. Special foreign investment centers exist to extend assistance to foreign investors. A generous package of fiscal incentives is offered in the special zones. In the taxation of profits, foreign enterprises enjoy a number of concessions. First, tax rates for foreign firms' profits are lower. Second, â&#x20AC;˘they are exempted from income tax payment for two years, in the case of productive enterprises and one year for service enterprises, z_Alter the exemption period, productive enterprises are entitled to a 50 percent reduction of the tax rate for three years while the service enterprises get the 50 percent reduction for two years. For technology-advanced enterprises, the rate reduction period may be extended for another three years. In the case of enierprises exporting at least 70 percent of their production, the tax rate impose_t after tl_e period of exemption and [ reduction is only 10 percent. Furthermore, profit remittances are not taxed. Foreign firms aJ:e likewise exemptl from many trade and indirect taxes. Imports of machine and equipment, spate parts and raw materials by foreign enterprises are exempted from custom d_ties and the consolidated industrial and commercial tax. _ Foreign firms also do not pay export duties and indirect taxes for their exports. Domestically-sDurced materials 2s used by foreign firms for their export products are also not levied value-added taxes. Special economic zones are treated as separate _ustom areas and foreign enterprises in the zones are exempt from import licensing. Though the tax reforms initiated in 1994 have aimed at equalizing

the

tax burden and creating a level playing field for all domestic enterprises and eventually, foreign enterprises, the tax concessions given to foreign firms have remained attractive. The new enterprise] income tax of the 1994 reform, for

[ ! US$10 million and registered an operation period of more than ten years to be eligible fdr the income tax exemption and rate reduc23.

Productive

enterprises

must

have

invested

at ieast

tion.For service enterprises, amount of investments and operation period must be at least US$5 million and ten years, respectively. 24. The consolidated industrial the Tax Reform of 1994. 25.

Exceptions

are crude

and

oil, petroleum

commercial and

a few

t_x /

has

been

_tate-designated

classified items.

under

the

new

VAT in

Direct Foreign Investment

Flows To and From China

205

instance, did not affect the foreign-funded enterprises. The tax reforms of 1994 subjected the foreign-funded enterprises to new indirect taxes. However, before they could even be fully implemented in 1998, new regulations on exemptions were announced. Moreover, by the beginning of 1998, China started extending very favorable terms to direct foreign investors in the central and western parts. The inland regions appear to be ready to offer foreign investors preferential measures that are equivalent or better than those in the coastal zones. Table 15 is a checklist of incentives offered to foreign investors in China and the ASEAN-4 countries. The incentive package of the Chinese government appears to be comparable and, in some respect, better than those of the ASEAN--4. Specifically, China scores better in regard to basic rights and guarantees to investors, tax and tariff concessions and assistance extended to foreign investors. Trade and Foreign Exchange Policies Trade and foreign exchange policies in China have been shaped to a great extent by the need to address DFI concerns and problems. From a fully centrally planned trade structure in 1949-1978, the foreign trade regime in China evolved towards decentralization and greater openness with the 1979 Equity Joint Venture Law allowing joint ventures to export and import directly on their own account. As discussed earlier, a system of duty exemptions and concessions for DFI exports and imports have been provided to make the business environment more attractive to foreign investors. The reform of China's policy of currency inconvertibility was rather delayed. It came only after foreign investors expressed frustration and disappointment as they encountered difficulties in obtaining foreign exchange for their importation, salary and profit repatriation. Realizing the adverse impact of this foreign exchange regime on the entry of foreign capital, the Chinese authorities established in 1986 a dual exchange system. They instituted an official rate that was adjusted periodically and a market-determined rate set in the Foreign Exchange Adjustment Centers (also referred to as the swap markets). Under the dual exchange system, which was in effect until the end of 1993, foreign enterprises were allowed to retain all their foreign exchange earnings and to engage in the purchase and sale of foreign exchange in the swap markets. Domestic enterprises and Foreign Trade Corporations were required to surrender their export receipts at the official exchange rate but received retention quotas in proportion to their exports. The retention quotas, which entitled the owner to purchase foreign exchange at the official rate, could be traded in the swap market. This scheme provided additional supplies of foreign exchange

at market rates to foreign investors.

The exchange

206

China's

Table 15. Comparative

Investment

Economic

Growth

and the ASEAN

Incentives

{ .....

,_':

Basic fights and guarantees

i"'

T'_

.....

, -G_/,_;:!:_,<

to investors

I Guarantee against expropriation

Guarantee against losses due to: I) nationalization

2) damage caused, by war

3) inconvertibility

....

of currency

Remittance of foreign exchange earnings and payments Repatriation of capita]

,/ /

,/ / ,/

,I ,/

/ 4+

1 1

Protection schem_s and priofifie_ given to in'restore and aliens

I Employment

of aliens

1) in,port competition

2) government

Â˘'

Patent protection

Preference in the granting of government

loar_

Protection against unjust competition

3) local competition Real-estate Exemptions

ownership

by alien investors

from taxes and Tariff duties

i i

Capital

gains tax

Corporate

income

tax

Taxes on imported

capital goods

Taxes on imported

raw materials

Taxes on royalties Withholding

tax on interest

foreign loans

(tax credit)

Other 'taxes and fees

on .z

Direct Foreign

Investment

Flows To and From China

207

i_< .%'/!. Deductions

from taxable

Accelerated

depreciation

Carry forward during

Corporate

income

allowance

the relief period

Carry forward

1) organization

expenses

2) pre-operating

expenses

profits allowance

Tax credits (direct Investment

,/"

....

of loss

Export allowances/deductions Deduction of

Reinvested Investment

of capital allowance

reduction

from Corporate

tax credits

income taxes) -

,/ ,/

,,/

¢'

¢"

foreign investors Assistance to investors

¢' ,f

¢" _

Joint venture brokerage Technical assistance

J ,/

,/ -

,/ ,/"

,/ ,/

Processing of application and other requirements

Tax credit on domestic Other tax credits

capital

Extension

availw

of incentive

equipment

ent period

Special incentives To multinational

companies

To exporters To offsk:Jre banking Other laws granting

units benefits

Note: CH=China; PH=Philippines; Source: The SGV Group (1987).

TH=Thailand; MA=Malaysia; IN=Indonesia.

Direct Foreign Investment

Flows To and From China

209

Table 16. Regression Results: Factors Affecting DFI Flows in China i_::',,'?_:'

',/_:;

Constant

-290.82

-293.93

CGDP

*(-2.07) 6.01

(1.91) 7.01

*(2.07) 1.30 (0.42) 54.81

*(2.25) -0.11 (-0.03) 52.71

**(10.84) 24.44

**(9.86) 22.42

*(2.16) -30.95

(1.82) -166.32

DUM R2

-246.63 0.98

(-0.41) 0.97

**34.92

**34.27

CGDP(-1) WGDP XR

(-1.50)

_ ;,_' ,,, , ,/_

(-0.25)

Notes: Number of observations = 13,t-statistics in parentheses * Significant at the 10%level of confidence ** Significant at the 1% level of confidence Though this motive has diminished in importance with the new policy of full convertibility of the renminbih, Chinese firms have continued to use their subsidiaries to avoid the long application procedure for remittance of foreign currency out of China as well as other administrative controls regarding use of foreign currency. There also exist microeconomic, firm- and industry-level, push factors. China has competitive advantage in certain production technologies such as that of the defense industry. A specific example of this push factor at work is the case of Northern Industry, a conglomerate under the Ministry of Defense. An army tank assembly plant in Malaysia was set up by Northern Industry. It has also diversified into civilian industries, applying the same technology in its metal-processing plant in Singapore. 27 Host-country variables influencing China's outward DFI include market, profit variables

(cost and price), and policy factors. Market

reasons are of

27. Examplescited in this section are taken fromthe survey on the motives of China's outward DFI in Tseng and Mak (1996),pp. 152-157.

210

China's Economic Growth and the ASEAN

various forms and degrees. One is to improve shares in the foreign markets. A number of Chinese manufacturing firms establish marketing and distributing firms in their export markets to have better control of distribution chamlels for their goods so as to increase their market shares. China Southern Glass Co. utilized this marketing strategy in the United States and Australia. A second market-oriented pull factor is penetration of a regional market. A pharmaceutical conglomerate in Shenzhen chose to locate in Thailand because it was eyeing the triangle region of Thailand-Cambodia-Burma for its market. The promotion of exports of capital equipment from China is another market-related factor. A fish processing firm was set up in Africa _vith Chinese capital with the secondary objective of exporting fishing vessels from China. In the case of China's outward DFI, cost savings arise mainly from raw materials and transportation, not labor, cost components. Though China is a country abundant in natural resources, it is deficient in certain natural materi_ als such as rubber and timber. Hence, Chinese firms locate in countries where their essential raw materials in short supply in China can be sourced most easily and cheaply. A Chinese cosmetic factory, for instance, is in Thailand because of its abundant supply of the essential oil used in cosmetic production. Another Chinese firm, a furniture factory, is also in Thailand because of its rich timber resources. A third example for this resource factor is the Chinese-invested fish processing plant in Alaska. For distant foreign markets such as the United States and/or for certain bulky goods (relative to the price), transportation cost becomes a major component of cost and this becomes an incentive for investing in the export market. The bottling plant in the United States owned by a Chinese beverage factory falls under this category. This is also the case for the health drink plant put up in Thailand by a Chinese pharmaceutical firm. The second profit variable, price_ is something specific to China's present position in the world market. Some Chinese businesses establish subsidiaries abroad because their products command higher prices when manufactured elsewhere. This is the reason cite d by a Chinese thermos factory and a Chinese battery manufacturer for locatil_g in Hong Kong. The policy factor is significant for tnany Chinese investors in African and North American countries which off 0r generous packages of tax incentives. Chinese capital also goes into countries with discriminative trade policies. To avoid the high import tax on rubber shoes in Malaysia, for instance, a joint venture rubber shoe factory was set tip in Malaysia. In Mauritius, a Chinese investor acquired a garment factory t_ circumvent the quota restrictions of the United States for China's garment egports. 2_ I 28. The United States impose no export quot_ restri_ti_ns fl)r Mauritius-made garments. i

Direct Foreign Investment

DFI Flows Between Philippine Investments

Flows To and From China

211

China and the Philippines in China

Among the ASEAN-4, the Philippines was the first to take note of the potential of China. One of the earliest investors from the Philippines was San Miguel, one of the four set up before 1988, whose target was the large domestic market of China. As with other ASEAN countries, a significant portion of Philippine investors in China are ethnic Chinese. The economic and peace and order conditions in the Philippines appear to encourage these Chinese-Filipino investments in the Mainland. Chinese-Filipino began to invest in China during the economic crisis years of the mid-1980s following the Aquino assassination of 1983. The period coincided with the rapid liberalization of the Chinese economy which offered prospects for higher returns on investments. In the early 1990s, the series of kidnappings in the Philippines that victimized a large number of ethnic Chinese pushed many of the Chinese-Filipinos into bringin s their capital, as well as their children, to China. An international school was even set up by Filipinos in Xiamen to cater to the educational needs of ChineseFilipino children sent there for security reasons. 29The peace and order problem was coupled by the acute power shortage that plagued the Philippines at about the same time. These conditions explain to a large extent the peaking of Filipino investments in China in 1993. China's growing economy and policy variables such as the generous foreign investment incentives and the development of the Xiamen SEZ in Fujian have served as the pull factors for Chinese-Filipino investments. Chinese-Filipinos have invested in manufacturing, real estate development, hotels, department stores and banking in anticipation of huge short- and long-term profits. Most of the Chinese-Filipinos still have relatives in Fujian. The Chinese-Filipinos capitalize on transactional costs advantages arising from cultural familiarity and kinship ties, referred to as "homeland mentality" by some political economy experts in the Philippines. The most successful of the Chinese-Filipino investors are those with big capital such as Tan, Sy, Ty and Gokongwei. The small- and medium-sized investments are reportedly not earning much or just surviving because of fierce competition. 'They remain to be in China, though, because of their relatives there. Chinese-Filipino investors, both small and big, claim that one of the reasons for their investments in the Mainland is for them to be of some help to their "homeland. "3째.

29. Chong-Carino(1994). 30. B.Lim, this voi., pp. 271-301_

212

Chtna_ Economic Growth and the ASEAN

Chinese Investments in the Philippines In the late 1980s and the early 1990s, China started to generate excess funds that could be channeled into overseas investments. Its government began to be liberal and, to a certain extent, supportive of such external undertakings. This is also the period during which the Philippine economy was stagnating while those of Thailand and Malaysia were on the upswing. Accordingly, Chinese capital surged into the direction of Thailand and Malaysia but only trickled to the Philippines. From 1979 to 1996, China's statistics recorded only 29 counts of approved investments to the Philippines. The Philippine Board of Investments (BOI) records, likewise, reveals very limited investments from China, with figures not significantly different from zero until 1988. From 1990 up to the end of 1993, BOI listed only 6 approved Chinesefunded investments, all of which except 'for one--the New Philippine-China Group Development Corporation, were 'small-sized investments amounting to less than US$500,000. The unstable political and economic environment in the Philippines during the period scared foreign investors away, including the Chinese. Investments from China began to pick-up in 1994 as the Philippine economy showed signs of recovery and stability. In this year, two large-scale Chinese-funded investments were approved by the BOI. Both were power generation projects, reflecting the needs of the Philippine market at that time and the comparative advantage China has (relative to the Philippines). It was also in 1994 that government-initiated business delegations from China visited the Philippines. In January of that year, a business mission led by Deng Xiaoping's son-in-law explored investment opportunities in the Philippines in the areas of finance, construction materials and real estate. That was followed by a visit of China's Minister of Foreign T_ade and Economic Cooperation and other top ranking economic officials in October. Exploratory business missions continued to arrive in the Philippines in the succeeding years. There were expressed interests in the areas of port development, cement production and appliance manufacturing. 31

31. Baltazar (1995),p. 19.

Direct Foreign Investment

EFFECTS Export

OF DIRECT

Flows To and From China

FOREIGN

INVESTMENTS

213

IN CHINA

Expansion

The Product Cycle Model provides a dynamic framework for the link between trade and foreign investments. In the initial stage of the cycle, the product, developed and produced in a developed country, is exported to a less developed economy. As the product becomes standardized and its markets in the less developed country expand, the product is produced in the less developed country through DFI for local sale. Over time, cost advantages in the less developed country result in the closure of capacity for the product in the developed country (which moves on to new products) and the product is exported from the less developed country to the developed country) 2 In line with the Product Cycle Theory, Kojima argues the tradeorientedness of Japanese outward foreign investments. He argues that direct foreign investments that result in the orderly transfer of industries from countries losing comparative advantage to those countries which still possess advantage in such industries are trade-creating and welfare-enhancing for both investing and host countries. 3a In the case where DFIs in export-oriented production are particularly encouraged, the simple production theory explains the positive correlation between direct foreign investments and exports. The introduction of superior production technologies through DFI works towards increasing the competitiveness of the host country's exports in the world market. Export-oriented foreign investments are particularly encouraged in China to ensure the continuous supply of foreign exchange necessary to sustain economic growth. Has China been successful in directing investments to export-oriented industries? The following table reveals the impressive expansion in China's exports. From 1984 to 1996, total export receipts of China increased almost six-fold from only US$26 billion to US$151 billion, growing at an average rate of 16 percent per year. Exports of foreign-invested enterprises grew at a much faster rate of 74 percent per year on the average so that by 1996, exports of foreign-invested enterprises was more than 500 times the 1984 level. The rapid growth of DFI exports was remarkably sustained until 1996 despite the abrupt deceleration in over-all export performance during the year. Consequently, the share of foreign-invested enterprises in China's exports rose continuously from less than 1 percent in 1985 to a substantial 41 percent in 1996---nearing half of China's export receipts. 32. Vernon (1966). 33. Kojima (1985),pp. 1-35.

214

China's Economic Growth and the ASEAN

Table 17. Exports of Foreign Invested Enterprises in China Year ,

US$ Millions

Â°

%) XÂ˘O_

''"

11.3 5.5

I ]115 1320 1480 /

178.3 50.0

0.4 1.1 1.6

40,147

30.8

_,200

150.0

3.0

47,308 59,277 62,400 72,024 85,294 91,782 121,010 148,780 151,060

17.8 25.3 5.3 15.4 18.4 7.6 31.8 22.9 1.5

_,460 _,920 _,800 1_,100 17,400 25,240 34,713 46,876 61,506

105.0 100.0 58.5 55.1 43.8 45.1 37.5 35.0 31.2

5.2 8.3 12.5 16.8 20.4 27.5 28.7 31.5 40.7

1984 1985 1986

26,140 29,091 30,683

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Ave.

16.1

74.1

15.2 "

Source:State StatisticalBureau.

A regression

run of total exports

versus

the amount

of inward

invest-

ments in China reveals a Significantly high correlation coefficient of 90 percent. The result also indicates a significant positive effect of foreign investment inflows on exports---every US$1 of DFI infl6w generates US$2.55 of exports: Regression Results: Dependent Jqariable = EXports

constant

DFI R-squared F

41,689 .64

7.41

_.55 ! I ! lI i

9.44 0.8998 89.7847

Direct Foreign Investment

Capital

Flows To and From China

215

Formation

Direct capital inflows, as a source of investment funding, have the potential to increase income via the supply and demand sides. On the supply side, DFIs imply expansion of capital stock and, hence, an increase in the productive capacity of the economy. DFIs are also often associated with technology transfer in both production and management, which results in more efficient use of productive resources. The expansion in demand for capital goods coming from foreign investors may not be substantial as a significant portion of their capital requirement may be imported. DFI, however, may lead to the development of supplier industries (backward linkages) and may likewise stimulate increases in other expenditure items (forward linkages) such as consumption (through its employment-generation effect) and exports (for export-oriented DFI). The supply-side effect of foreign investments may be the dominating factor in income growth relative to the demand effect. DFIs are tantamount to capital formation and, hence, expansion in the productive capacity of the economy. A spectacular build-up of capital has taken place in China since it opened its doors to foreign investors. Gross capital formation expanded 13 times from only RMB200 billion (1983) to RMB2.7 trillion (1996), an average annual growth rate of 23 percent. DFIs substantial contribution to this capital build-up is clearly reflected in the increase in the ratio of DFI to GCP (fifth column of Table 18). From a negligible share of 0.3 percent during the early years of the "open-door" policy, the share of foreign investors in capital formation in China continuously increased to 15 percent in 1994. DFIs' share in China's capital expenditures remained substantial despite the slow-down in the inward flow of foreign investments in the mid-1990s. Employment The effect of foreign investments on the over-all employment picture in China can only be minimal as they account for less than 1 percent of total employment and just about 2 percent of urban employment. Nonetheless, direct foreign investors have made important contributions to job creation in China. With the investment boom of the early 1990s, employment in foreignfunded enterprises increased by 30 percent in 1993 and another 41 percent in 1994. The impressive record continued until 1995 during which DFI employ* ment grew by 26 percent. By 1996, there were a total of 5.4 million jobs generated by foreign-funded enterprises, more than double the jobs in 1992 of 2.2 million. Consequently, the share of FFEs to total Chinese employment rose from 0.3 percent in 1992 to 0.8 percent in 1996 while their share to urban employment increased from 1.3 to 2.7 percent.

216

China's Economic Growth and the ASEAN

Table 18. Contribution of DFI to China's Gross Capital Formation

cRate

:D JcCF

1979-1982 1983 1984 1985

2 1 3 5

640 200] 247! 339'

23.5 37.2

0.3 0.6 1.2 1.4

1986 1987

6 9

3851 4321

13.6 12.2

1.7 2.0

1988 1989 1990 1991 1992

12 13 17 23 61

5491 609' 6441 752_ 9641

27.1 10.9 5.7 16.8 28.2

2.2 2.1 2.6 3.1 6.3

1993

159

1,500'

55.6

10.6

1994 1995 1996

291 313 347

1,9261 2,388 2,687

28.4 24.0 12.5

15.1 13.1 12.9

22.8

5.0

Ave. Source: State StatisticalBureau (1998).

The expansion of employment associated with DFIs becomes more significant if put in the context of contracting employment in state-owned enterprises (SOEs) and urban collectives. Indeed, foreign enterprises have helped absorb redundant labor displaced with the gradual rationalization of SOEs and urban collectives whose share to over4all employment figures had accordingly dropped. Table 19 further reveals that workers of FFEs are better paid than those of SOEs and urban collectives.! Generally, wages in FFEs are twice those of urban collectives and 50 percent more of SOEs. Regional wages given in Table 20 likewise indicate wage gaps between FFEs and non-FFEs. In the SEZ r_gions and the coastal cities where most DFIs are located (85 percent), wages are above the over-all average. Shanghai, Beijing and Guangdong with three of the five SEZs offer the highest wages in China. Wages in the interior reg!ons, which account for just 15 percent of DFIs, are 10 to 30 percent lower than the over-all average.

Direct

Foreign Investment

Table 19. Employment

Flows To and From China

217

and Average Wages in China

' â&#x20AC;˘_ â&#x20AC;˘ ,r_....

Employment

, _'_

(10,000 persons)

Total Rural Urban State-owned Urban collective Foreign-funded Hong Kong, Macao, Taiwan Others Average

_ !' "i' _' _ _ ' ._,,

65,554 48,313 17,241 10,889 3,621 221

66,373 48,784 17,589 10,920 3,393 288

67,199 48,786 18,413 11,214 3,285 406

67,947 48,854 19,093 11,261 3,147 513

68,850 49,035 19,815 11,244 3,016 540

83 138

155 133

211 195

272 241

265 275

2,711 2,878 2,109

3,371 3,532 2,592

4,538 4,797 3,245

5,500 5,625 3,931

6,210 6,280 4,302

4,740 4,347

5,147 5,315

6,376 6,533

7,484 8,058

8,334 9,383

Wage (Yuan)

Urban State-owned Urban collective Foreign-funded Hong Kong, Macao, Taiwan Others Employment

(Share to Total, %)

Total Rural Urban State-owned Urban collective Foreign-funded (Share to Urban, %) (Growth Rate, %)

100.0 73.7 26.3 16.6 5.5

100.0 73.5 26.5 16.5 5.1

100.0 72.6 27.4 16.7 4.9

100.0 71.9 28.1 16.6 4.6

100.0 71.2 28.8 16.3 4.4

100.0 72.6 27.4 16.5 4.9

0.3 1.3

0.4 1.6 30.3

0.6 2.2 41.0

0.8 2.7 26.4

0.8 2.7 5.3

0.6 2.1 25.7

Average Wage (Proportion

of Urban Wage, %)

Urban State-owned Urban Collective

100.0 106.2 77.8

100.0 104.8 76.9

100.0 105.7 71.5

100.0 102.3 71.5

100.0 101.1 69.3

100.0 104.0 73.4

Foreigrf-funded Hong Kong, Macao, Taiwan Others

174.8 160.3

152.7 157.7

140.5 144.0

136.1 146.5

134.2 151.1

147.7' 151.9

Source: State Statistical Bureau(1998),

218

China's

Table 20. Average

Economic

Growth

and the ASEAN

Wages in China by Region, 1996

Total

6,210

Special Economic

Zones Region

100.0

7,096

114.3

Guangdong

9,127

147.0

Fujian Hainan

6,684 5,476

107.6 88.2

Beijing and Coastal

6,691

107.7

Beijing

Regions

9,579

154.3

Tianjin

7,643

123.1

Shanghai

10,663

171.7

Liaoning Hebei

5,269 5,286

84.8 85.1

Shangdong

5,809

93,5

Jiangsu

6,603

106.3

Guangxi Jilin

5,397 5,370

86.9 86.5

Heilongjiang

4,564

73.5

Zhejiang Interior Regions Shanxi

7,413 5,084 5,183

119.4 81.9 83.5

Inner Mongolia Anhui

4,716 5,175

75.9 53.3

Jiangxi Henan

4,852 4,924

78.1 79.3

Hubei

5,099

82,1

Hunan

5,100

82,1

Sichuan

5,156

83.0

Guizhou

4,917

79.2

Yunnan

6,231

100.3

Tibet

1,087

17.5

Shaanxi

4,882

78.6

Gansu

5,882

94.7

Qinghai

6,513

104.9

Ningxia

5,635

90.7

5,987

96.4

Xinjiang

Source: State.Statistical Bureau (i998), !

Direct Foreign Investment

Flows To and From China

219

Income Growth The two decades of the 1980s and the 1990s witnessed the rapid growth of the Chinese economy that stemmed from the country's "open-door" policy. From 1978 to 1996, real GDP grew by 444 percent. On a per capita basis, real GDP in 1996 rose to more than four times the 1978 level. Industry, the sector housing much of the DFIs (about 70 percent), led this growth, expanding by 674 percent during the period. Construction, which was opened to DFIs in 1991 and which made a major contribution to the unprecedented investment of the early 1990s, grew by 548 percent. Primary industries comprised about 25 percent of China's GDP but received only 2 percent of DFIs. The primary sector grew by only 146 percent during the period. Table 21 gives the yearly growth rates of GDP and DFI. High GDP growth rates are accompanied by high DFI growth rates. The years during which China's GDP grew at double-digit rates coincide with years of massive DFI inflows, 1984-1985, 1987-1988 and 1992-1994. The first big waves of foreign investors arrived in Ch_a after laws and guidelines governing DFIs were formulated in 1983 and 1984. The entry of large multinationals from Europe and the United States triggered a bandwagon effect in 1984 and 1985. The

Table 21. DFI (Utilized Amount) and GDP Growth Rates (In Percent)

1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996

97.8 32.0 12.8 23.5 38.0 6.2 2.8 25.2 152.1 150.0 22.7 11.1 11.2

14.6 13.5 8.3 11.6 11.3 4.1 3.8 9.2 14.2 13.5 12.6 10.5 9.6

Sources: StateStatisticalBureau;Ministryof Foreign EconomicRelationsand Trade.

220

China's Economic Growth and the ASEAN

second wave came in 1987 and 1988 as generous incentives were offered to foreign investors for the first time. The third investment boom, unparalleled by the first two, led to three consecutive y_ars of very high growth. Increase in direct foreign investment inflows were sustained, albeit to a lesser degree, after 1994. Remarkably, GDP growth, though also lower, remained impressive. Data on per capita GDP by regicm are likewise reflective of the role played by DFI in China's economic growth. Per capita GDP in Shanghai, second only to Guangdong as recipient of DFi, was almost four times the national average. Beijing and Tianjin, a coastal city, recorded per capita GDP in 1996 more than double the over-aU average. Guangdong's and Fujian's, home to the first four SEZs, were about 50 percent higher. In general, coastal regions posted per capita GDP above the national average while those of the interior regions fall short of the average, i To further establish the extent of me contribution of direct foreign investments to China's growth, a model that Ispecifies output growth (CGDP) as a function of the production inputs: the _rowth rate of labor (L), the investment rate (GCF/Y)and technology (repreSented by the constant term) is formulated. To isolate the effect of direct foreign investments, capital formation (GCF/Y) is segregated into domestic savir_gs (S/Y) and foreign inflows (DFI/ Y). The results of the regression runs are g_ven in Table 23. The first estimated equation shows the significant positive eff4cts of labor growth and capital formation on China's GDP growth. The magnitude of the coefficients reflects the relatively stronger impact of capital formation on China's growth. For every 1 percent point increase in the investment rate, China's GDP growth rate increased by 2.4 percent points on the average during the period considered. The second equation, which separates the effect of direct foreign investments, reveals that much of the growth impact of Icapital formation was contributed by direct foreign investments. The coefficient of domestic savings rate in the second equation, although positive, is statistically insignificant. The coefficient of DFI/Y, on the other hand, is highly significant and strongly positive (slightly higher than the coefficient of the rate of capital formation). A value for the correlation coefficient of around 0.50 is expected as the model has not been specified to capture all the factors that laffect GDP growth. Demand variables, for instance, are not entered into the model. It may be necessary to note here that DFI, also shown to be greatly contributing to exports, is expected to have indirect

income effects via the export

_temand effect.

Direct Foreign Investment

Flows To and From China

221

Table 22. Per Capita GDP by Region, 1996

Total

5,634

100.0

Special Economic Zones Region Guangdong Fujian Hainan

7,716 9,513 8,136 5,500

137.0 168.8 144.4 97.6

9,370 15,004 12,270 22,275

166.3 266.3 217.8 395.4

Lia0ning Hebei

7,730 5,345

137.2 94.9

Shangdong

6,834

121.3

Jiangsu Guangxi Jilin

8,447 4,081 5,163

149.9 72.4 91.6

6,468 9,455 3,783 4,220

114.8 167.8 67.1 74.9

Inner Mongolia Anhui

4,259 3,881

75.6 68.9

Jiangxi Henan Hubei Hunan Sichuan Guizhou Yunnan Tibet Shaanxi Gansu

3,715 4,032 5,122 4,130 3,763 2,093 3,715 2,732 3,313 2,901

65.9 71.6 90.9 73.3 66.8 37.1 65.9 48.5 58.8 51.5

Qinghai

3,748

66.5

Ningxia Xinjiang

3,731 5,i67

66.2 91.7

Beijing and Coastal Regions Beijing Tianjin Shanghai

Heilongjiang Zhejiang Interior Regions Shanxi

Source:State StatisticalBureau(1998).

222

China's Economic Growth and the ASEAN

Table 23. Regression Results: Effect of Inward DFI on China's GDP Growth ..... '.' '_ Constant

-31.70_

L GCF/Y

_._._ _._ .. _ ,rtu_ 2 ,'i!,ill

,..

-22.82

**(-2.27) 0.96

(1.43) 1.30

**(2.88) 2.41

**(2.87)

**(2.88) S/Y

0.66

(1.55) DFI/Y

2.79

R2 F

0.48: **'5.151 I Notes:Number of observations = 14, t-statistics in p_rentheses *Significantat the 10%level of confidence I **Significantat the 5%level of confidence i ***Significantat the 1% level of confidence

**(3.11) 0.54 **3.90

SUMMARY AND CONCLUSIONS The objectives

of Chinese

authorities

in opening

the country's

door to.

foreign investors were many-fold. Taking off from a very low income base in 1979, domestic savings were not sufficient to fuel growth. Nor were its reserves of foreign exchange adequate to finance imports of capital goods and production inputs necessary to increase productivity and expand output. Foreign investors were also expected to introduce new management and production technologies that would make China internationally competitive. Further, the promotion of foreign investments, particularly in export-oriented sectors, was aimed at ensuring, not just a One-time, but a continuing flow of foreign exchange into the country. Has China been successful in achieving these objectives? I Since the enactment of the Equity Jot nt Venture law in 1979, big waves of foreign investments have arrived in Chh m. From 1979 to the end of 1996, a total of US$175 trillion capital had actually been invested in China by foreign entities. This figure was just less than hal of the total pledged amount of US$469 trillion. The rate of growth of DFI 'as extremely impressive--an e'_nual average of 57 percent in terms of contr, lct amount and 45 percent in ter: of utilized amount. By 1996, inflows of di :ect foreign investments were times of 1983's level.

Direct Foreign Investment

A number

Flows To and From China

of internal

and external

factors contributed

223

to this remark-

able record. Opportunities offered by China's potentially expansive market was an important drawing force for direct foreign investments. The market size factor represented by the rate of growth of the Chinese economy was shown to have a statistically significant positive effect on inward DFI in China. China's abundant supply of low-cost labor was a pull factor for the early small- to medium-scale export-oriented overseas Chinese investors. _ The regression analysis further revealed that the devaluation of the renminbih had a significant positive effect on DFI. The favorable influence of economicrelated variables in China was greatly enhanced by policy variables. Policy played a catalytic role in attracting foreign investors to China. The package of incentives offered to foreign investors in special zones matched, and even surpassed, those offered by competing economies such as the ASEAN-4. Chinese authorities manifested much sensitivity to the needs of foreign investors. Liberalization of trade and foreign exchange policies in China had evolved largely in response to and in accordance with the concerns of DFI. By the start of the 1990s, the world had been convinced of China's commitment to its "open-door" policy and to the establishment of a politically and economically conducive business environment. Hence, the unprecedented investment boom of the early 1990s. External factors were likewise at play in the investment boom in China. Economic conditions in the source countries dictated the available supply of funds for outward investments. As a general indicator of this factor, world GDP growth rate was included as one explanatory variable in the DFI equation. The relationship turned out to be strongly positive. A sizeable proportion of investments in China came from Hong Kong, Taiwan and South Korea. The accumulation of trade surpluses in these countries in the late 1980s up to the early 1990s made available the foreign exchange that was recycled into DFI outflows to China. These capital movements were facilitated by improved political relations of these primary source countries with China. A host of other non-economic and non-policy factors explained foreign investments in China. Historical, cultural and geographical affinity made the transaction costs of business in the Mainland lower for overseas Chinese. This was a relevant motivational factor for investments from Hong Kong and Taiwan which accounted for 60 to 70 percent of DFIs in China as well as for the ethnic Chinese investors ments from the ASEAN.

which

comprised

a significant

portion

of invest-

34. The regression analysis of the second section yields a negative relationship between the wage rate and DFI, as hypothesized.

224

Chit_a's Economic Growth and the ASEAN

Direct foreign investments flowed massively into China, as hoped. Had DFI delivered as expected? The impressive export performance of China, an annual growth rate of 17 percent, was ccmtributed largely by foreign investors, whose export receipts grew by 74 ipercent per year. In 1996, foreignfunded enterprises produced nearly halflof total Chinese exports, a big leap from their share of less than I percent in 1985. A spectacular buildup of capital had also taken place in China since the foreign investors arrived. Gross capital formation expanded at a rate of 23 percen_ per year. About 13 percent of these capital expenditures were undertaken bg foreign funded enterprises in the 1990s, a sharp improvement from their n_gligible share of 0.3 percent during the early years of the "open-door" policy.I It was also shown statistically that capital formation, particularly by DFIs, l_ad a significant positive effect on GDP growth of China, which posted double-digit rates in most of the "opendoor" years. These growth records werel translated into 5.4 million higher paid jobs in enterprises With tinuing and

FFEs, which made up for contracting employment in state-owned and urban collectives. its initial success, Chinese authorities appear to be bent on conexpanding the scope of the "bpen-door" policy. Though the tax

reforms initiated in 1994 have aimed at equalizing the tax burden for all domestic and eventually foreign enterprises,! policies towards foreign investors have remained very favorable. Chinese authorities have even come up with new positive measures for direct foreign investments since 1998 such as value-added tax exemptions, further simplification of DFI screening and approval procedures, and guarantee better protective measures for DFI interests. 3s On several occasions, top ranking officials have publicly declared government's intention to further improve the environment for foreign investments and to invite aggressively DFI.; Furthermore, Chinese authorities have already started to attract foreign invedtors to the inland regions. The central and western regions of China are now offering DFI incentives that are equivalent and sometimes better than those in the coastal regions. Though China too has been hurt by the Asian economic crisis, its toll has been much less. The drying up of funds in China's DFI source countries, mostly Asian, have resulted in the decline in DFI[ in terms of contract number and amount since 1996. Actual DFI inflows, on the other hand, have started to slowdown since 1995 but did not decrease in a_solute terms until last year, 1998, thanks to the fresh and large-scale investments made by European and American transnational companies. Accordingly 1 income growth in China has remained solid, a decent 7.8 percent in 1998, despite the deceleration since 1995.

35. Tateishi (1998).

Direct Foreign Investment

Flows To and From China

225

What are the implications of these developments in China on the ASEAN-4 countries? Has the emergence of China as a host for direct foreign investments affected foreign capital flows in the ASEAN-4? There are no indications that DFIs in China have crowded-out DFIs in the ASEAN-4. The much improved share of China in the global supply of DFI has not been accompanied by reductions in the shares of the ASEAN-4, nor of all developing countries as a group but of the industrial countries. The greater magnitude of the increase in China's share relative to the magnitude of the drop in the industrial countries' share and the positive change in the global supply of DFI are indicative of new stocks of DFI generated by China's "open-door" policy. Moreover, China's opening has presented new opportunities for the ASEAN4. Two-way DFI flows between China and the two ASEAN countries, Thailand and Malaysia, became important in the early 1990s during which all three economies were on an expansionary trend. Remarkably, complementation in several respects, namely, material endowment, labor skills, technology, and market needs, have been found. Thai firms have gone to China to escape the rapidly increasing cost of labor and land in Thailand as well as to penetrate the enormous Chinese market. Chinese firms, on the other hand, have gone to Thailand for sourcing of certain raw materials and getting access to a regional market. Similar examples of active and profitable cooperation between China and Malaysia could be cited. Examples of flows between China and the Philippines may not be as numerous. Despite the fact that the Philippines was the earliest among the ASEAN-4 to invest in China, a positive trend was not established due to the several crises the Philippines went through from 1983 up to the early 1990s. As the Philippines stepped onto the path recovery in the mid-1990s and as it has continued to manifest greater resiliency to the Asian crisis as China, talks of economic cooperation have been initiated. Government-supported business delegations have been sent between the two countries to explore opportunities. Certainly, complementation similar to those with Thailand and Malaysia exists.

226

China's

Economic

Growth

and the ASEAN

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Lan-

ChapterSix

ThePolitical Economyof China'sRelationswith SoutheastAsia by Aileen

S.P. Baviera*

ABSTRACT Cina

has always looked at Southeast Asia as art integral part of its curity environment. I!,values the ASEAN for the role it may play in e realization of China s desired vision of a multipolar order. South st Asian countries, on the other hand, appear prepared to accept China's legitimate interests in the region but fear that China's ambitions to become an Asia-Pacific military power could be at the expense of its smaller and weaker neighbors. Moreover, tensions over bilateral issues are also expected to periodically emerge as part of the normal state of relations. Meanwhile, Sino-Southeast Asian economic relations are currently important, but not vital from each side's perspective. Neither China nor the ASEAN has a unified economic policy towards the other. Economic relations towards the ASEAN, from China's perspective, depend on bilateral economic complementarities as well as common political and strategic interests, rather than expectation of purely economic gain.

INTRODUCTION This study is part of a team project looking at the significance of China's rise as an Asia-Pacific economic power for the Philippines and Southeast Asia. * Associate Professor, Asian Center, University of the Philippines, Diliman, and Executive D_rector, Philippine-China Development Resource Center.

230

China's Econumic Growth and the ASEAN

Specifically, this paper examines the strategic context 9f contqmporary ChinaASEAN relations by understanding the fui_damental political-security interests on both sides that influence relations and which may impact on economic relations. It hopes to: (1) identify China's strategic interests in its relations with Southeast Asia and vice-versa; (2) explore the role and importance of political-security overall relations from China's perspective;

factors in the

(3) look at the ways in which political-security considerations have influenced Chinese economic policy towards Southeast especially in the 1980s-1990s; and, (4) identify

opportunities

and challenges

and

submit

may Asia,

recommenda-

tions on how Southeast Asia, including the Philippines, cessfully respond to the growing influence of China.

may suc-

From a preliminary review of literature, one could see that most of the work that has been done on Sino-Southeast Asian relations has focused on either the political-security

dimension

or ,on the economic

dimension

alone.

Very few references attempt to treat bothaspects evenly; even fewer manage to explain how each impacts on the other or to point out if there are any patterns of correlations or causalities between them. 1 Among the works that do take a more interdisciplinary approach to China-Southeast Asia relatiolls, Paul Chan's 1987 article entitled "Policies, Mechanisms and Institutions Affecting ASEAN-China Economic Relations" contrasts the ASEAN and Chinese approaches in economic relations with each other. 2 Chart notes the absence of a collective ASEAN posture in economic relations with China, and insinuates that g_vernments in the ASEAN up until the 1980s may have deliberately kept the matter a low priority and discouraged private sector contacts. In general, the ASEAN was observed to have used economic diplomacy vis-h-vis Chin& only for the enhancement of their "overall economic security and long-term economic growth" rather than aim-

1. As a matter of fact, this may be said not only of Sino-Southeast Asian relations but also of the study of international relations in _eneral. The disÂ˘iplinal divide between political scientists and economists has been prono,,nced with few scholars able to satisfactorily explain why, for instance, at the political-security realm relations between states can sometimes seem so testy, even while economic interdependence grows. This dichotomy of politics and economics in the study of foreign relations is reflected by a dichoto_a_yin +be crafting and implementation of foreign poh._'yin the real world by defense and security specialists on the one hand, and eeonomic diplomacy specialists on the other hand. 'rhe, situation sometimes leads to different sets of policy-makers working at cross purposes, to the detriment of national interest _-,_ :_ .... well be, of international peace and stability. 2. Chia and Cheng (1992).

The Political Economy vf China's Relations

231

ing them at geopolitical objectives, h, contrast, Chan says that "[L]ike other major powers, China's foreign econondc and trade policy are instruments foÂ˘ increasing national power as mach as they are an extension of the latter." Understanding Chinc3e behavior, he sa._s, requires knowing the importance of their domestic context and the Chir._se 1_ng-term vision of their position in the international ar'_na. The ASEAN, ol, the other hand, has no such long-term perception of its strategic role in history. Frances Lai agrees that relations have to be understood from the domestic contexts as well as from the regional and global angle. One domestic factor is the handling of the ethnic Chinese issue. Pushpa Thambipillai should not overlook the relationship between the internal attitude ticular state towards its ethnic Chinese citizens and its perceptions

says one of a parof China.

The cases in point were Thailand and the Philippines, two ASEAN countries that then had the most well integrated ethnic Chinese communities and the least problematic tieswith Beijing. As for regional factors, the common interest of China and the ASEAN in opposing Vietnam's 1979 occupation of Kampuchea led to stronger political cooperation and healthy economic ties iln the 1980s, despite the hostility of the 1960s. 3 John Wong describes China-ASEAN ties from 1949 to the 1970s as dominated by ideological and political elements due to China's revolutionary proS* elytizing and the ASEAN perceptions of a China threat. He emphasized the need for a political-economy approach in studying relations. 4 This was because economic relations between a market economy and China's socialist economy at the time was most susceptible to political intervention, and the state in China was heavily involved in foreign operations of the socialist economy. From the Chinese perspective, as written by Cheng Bifan and Zhang Nansheng in their article "Institutional Factors in China-ASEAN Economic Relations, ''_ it was the dominant political and economic influence of the United States over the ASEAN through the 1950s and 1960s that prevented better Sino-ASEAN economic relations. Relations, however, improved by the early 1970s, and by 1985, Malaysia's Prime Minister Mahathir Mohamad declared during a visit to Beijing that "while politics dominated the first decade of Sino-Malaysian relations, economics should dominate the next decade. "6 In contrast, Jusuf Wanandi of Indonesia says "China will always be seen as posing a threat to Southeast Asia, in view of her size and past experiences _n which China considered Southeast Asia as within her sphere of influence. _'7 3. 4. 5. 6. 7.

Chia and Cheng (1992). Chiaand Cheng (1992). Chia and Cheng (1992). Chia and Cheng (1992). Wanandi (1992).

232

China's Economic Growth and the ASEAN

He describes the ASEAN as having an instinctive reluctance to see rapid increases in the scale of China's economic influence in the region. Indeed, the ASEAN was initially apprehensive of China's economic modernization efforts. Richard Grant notes ASEAN concerns that a strong and prosperous China would dominate the region economically and wield extraordinary political and military influence. 8 Since these papers were prepared, China has become even stronger economically, even more influential politically, and quite open about her ambitions for greater military power. The ASEAN, on the other hand, has grown in numbers, greatly improved its collective economic to the July financial melt-down), and considerably

standing enhanced

(especially prior its international

status as one of the prime movers of regional confidence-building and economic cooperation through the ASEAN Regional Forum and the Asia Pacific Economic Cooperation Forum. This study will examine relations between China and Southeast Asia at two levels. First will be the regional

context.

The focus here shall be China's

evolving attitude towards the ASEAN as a collective organization. Chinese attitudes towards ASEAN have changed especially in response to regional strategic developments such as the end ofl the Cold War, the emergence of the United States as the world's sole superpower, increasing regionalism and multilateralism in the Asia Pacific, Taiwan's aggressive diplomacy in Southeast Asia, and the ASEAN's own expansion in influence. The China-ASEAN relations described here refer mainly to relations conducted at the multilateral level, especially as they existed before the ASEAN began expanding in 1995 to eventually include Vietnam, Laos, Cambodia and Myanmar. The second approach will be at the bilateral level, where we look not only at the patterns of China's trade and investment with selected countries, but also at some significant domestic and international political events affect_ ing the strategic context of bilateral relations. The countries to be studied are Indonesia, Thailand, Association. 9

Malaysia

and Singapore,

all founding

members

of the

8. Grant (1993). 9. So far, most studies on China-ASEAN _lations_ especially on economic aspects, deal with China's pattern of relations with the so-calledASEAN-5, the four already mentioned as well as the Philippines who were the original founding meVabers.Future studies on the subjectshould also look at China's relations with new ASEAN me]tubers(Vietnam, Myanmar and Cambodia) as important in themselves and as having an effeÂ˘l on China's relations with Southeast Asia. Vietnam, among all of Southeast Asia, may be considered China's traditional foe. It alone has fought wars against China both on land as well as i_ the maritime arena. Myanmar,on the other hand, appears to have an increasing strategic dependence on China, causing concern among some of its neighbors. As for Cambodia, China considered it vital to her own security against Vietnam in the 1970sand 1980s,but now appears content that Hanoi has relinquished much of its influence and control over Phnom Penh.

The Political Economy of China's Relations

CHINA-ASEAN

POLITICAL-SECURITY

China has always

looked at Southeast

233

RELATIONS Asia as an integral

part of its se-

curity environment. However, in its overall Asia policy, the role of and importance attached to Southeast Asia have varied over time and through changes in China's strategic circumstances. At present, compared to Northeast Asia, where the Korean Peninsula conflict threatens to explode into a situation that might bring China into loggerheads with the United States and Japan, or compared to South Asia where China's long-standing rivalry ship with Pakistan, Southeast stable environment

with India had drawn it into strategic partnerAsia presents to China a relatively docile and

This was not always So. At the peak of the Cold War, when American containment policy against Chinese communism in the 1950s and 1960s found sympathy among states of Southeast Asia then fighting internal communist insurgencies, relations between China and the latter were hostile except for Beijing's short-lived alliance with Sukarno. Relations were strained due to China's support for communist guerillas in Malaya, Thailand, Indonesia and the Philippines. In Indonesia and Malaysia, these underground parties were predominantly composed of ethnic Chinese, aggravating already long-standing socio-cultural tensions between Chinese minorities and the Malay majorities and magnifying the ethnic relations issue as a problem in Sino-ASEAN relations. The founding of the ASEAN in 1968 was treated antagonistically by China. The Association was described in the official magazine Peking Review as "an out and out counter-revolutionary alliance rigged up to oppose China, communism and the people, another instrument fashioned by United States' imperialism, and Soviet revisionism for pursuing neo-colonist ends in Southeast Asia.'1째 During the Sino-Soviet conflict in the 1970s, Southeast Asia--particularly Indochina--became an arena for strategic competition between the two communist giants. Pro-Soviet Vietnam's hostile actions against China were seen as directed towards aiding Soviet encirclement of China, which China countered by developing alliances with Pol Pot's Cambodia and Thailand, both fearful of Vietnam's hegemonic goals in Indochina. Vietnamese occupation of Cambodia in 1979 brought China and the ASEAN closer together in a campaign supported by the United States and Japan to put an end to Vietnam's control of Indochina. ASEAN-China collaboration in effecting the withdrawal of Vietnamese troops from Cambodia, which lasted from the late 1970s to early 1990s, was a very successful 10.McDougal (1997),p. 221.

case Of political

cooperation.

234

China's Economi _ Growth and the ASEAN

By then, China began to appreciate the strategic value of Southeast Asia, most especially of a unified ASEAN, as a potential ally ha the emerging bala_tce of power in Asia. Among China's greatest concerns ha 'he post-Cold War period is the new role being played by the United States as the world's sole superpower. Not only is it the world's largest _:conomy, it is also a state possessing state-of-the-art military technology which, in China's calculus, may be in the future be directed against it. The way to counter the preponderance of the United States' power, China appeared to argue, wa_ to create and strengthen a multipolar world order. China sees the ASEAN as potentially evolving into one "pole" in its vision of a multi-polar world order. The ASEAN's fundamental objective of keeping Southeast Asia a peaceful and neutral region free from dominance by any regional or out_ide power is something which, China says, it shares, n But following Vietnam's withdrawal from Cambodia, the possibility loomed that Southeast Asia's deep-rooted suspicions of China would re-surface and lead the former into hostile alliances with other powers against China. After all, China and several Southeast Asian countries were locked in conflict over territorial sovereignty and maritime jurisdiction disputes. On the other hand, from Southeast Asia's perspective, there is fear that growing nationalism in China might cause it to trY to dominate its smaller neighbors. The worst manifestation of nationalism thus far is China's ambitions to become an Asia-Pacific military power. China has, among other actions, been expanding naval activities in the South China Sea. This appears to be done both in pursuit of its sovereignty claim over islands and waters of the entire area, and also presumably to develop capacity to counter US-Japan military strategy against China. Under these circumstances of uncertain security ties, both China and the ASF.AN opted to speed up and intensify the nature of political and security cooperation between them. Chinese Premier Li Peng, in a visit to Bangkok in 1989, proposed four principles for Sino-ASEAN relations. These were: (1) peaceful coexistence despite differences in social and political systems, (2) anti-hegemonism, i.e., China will not seek to be a hegemonist pc_wer nor will it interfere in the domestic affairs of the ASEAN countries, (3): further development of economic relations, and (4) continuing support of regional cooperation and initiatives from the ASEAN. 12 Since then, ASEAN relations.

there have

11. Hao and Huan (1989),p. 221. 12. Hao and Huan (1989),p. 221.

been

several

significant

milestones

in China-

The Political Economy of China's Relations

In 1991, China was invited by the ASEAN

235

to become

a "consultative

partner" of the Association. In 1994, it became a member of the ASEAN Regional Forum, which is an ASEAN-initiated regional security dialogue mechanism, the only one involving all the major powers of the Asia-Pacific. In 1995, China and the ASEAN established a separate political consultative forum

at vice-foreign

minister's

level to discuss

political-security

issues

affecting the region and their relations. This annual meeting has progressed quickly in terms of the depth and candidness of the discussions, placing on its agenda such sensitive issues as the South China Sea disputes. in 1996, China became a full dialogue partner of the ASEAN, a status earlier reserved for ASEAN's closest non-communist allies such as the United States, Japan, the European Union, Canada and Australia. Then in 1997, the China-ASEAN Joint Cooperation Committee (AJCC) was set up. The AJCC coordinates all cooperation between China and the ASEAN at the working group level. It is run by a Joint Management Committee, co-chaired by the ASEAN Secretary General and the Chinese ambassador in Jakarta. 13 An ASEAN-China Cooperation Fund was established under this committee) 4 The first ASEAN-China Informal summit was held in Kuala Lumpur in 1997, where Jiang Zemin said that the goal of China and ASEAN must be to "become permanent good neighbors, good partners and good friends." Today, there are several important regional issues that require politicalsecurity cooperation between China and the ASEAN. Perceptions

of a "China

Threat ''15

By virtue of its proximity and size, not to mention its growing economic power, political influence and military reach, China may naturally be deemed a threat, or at least a potential threat, by smaller and weaker states living in its shadow. Among the ASEAN states, there are differences in the degree with which they perceive China to be a threat, and perhaps even some differences _n the approaches they are inclined to take in order to neutralize any such threat as may be perceived. Among the founding states, Indonesia and Malaysia have historically been most suspicious of China, while Thailand has been the closest to Beijing in terms of convergence of strategic interests. Next to Thailand,

13. In their 1997 meeting, the committee agreed to promote personnel exchange, hold a workshop on economic and trade cooperation, and conduct other informal exchanges. 14. Reside (1988), p. 3. 15. This section draws from an earlier paper entitled "China as a Rising Power" presented by the author in December 1997 at a Philippine APEC Study Center Network conference in Quezon City.

236

China's Economic Growth and the ASEAN

Singapore and the Philippines in the past appear to have been least concerned with the prospect of China's flexing of muscles. In the case of the Philippines, however, this was true only until the Chinese occupation of Mischief Reef in its claimed area of the Spratlys in 1995, which raised great alarm in Manila. The ASEAN consensus on the need to bring China into the securityoriented ASEAN Regional Forum, however, appears to indicate their common concern over China's future security role in the region, as well as agreement on the need to engage, rather than contain, China. There is a lot that needs to be done to reduce lingering--even growing--suspicions of China. The call by other countries for China to increase its m_litary transparency and undertake measures to built trust and confidence must be addressed. In this respect, the reciprocal visits of naval vessels between China and the ASEAN are a good development. China sent its naval fleets tO visit Thailand, Malaysia and the Philippines in 1997, while receiving visits from Thai and Singaporean ships. In 1995, it also sent ships to attend the 50 th anniversary of Indonesian independence. 16The growth of military diplomacy appears to be a strong indication of China's desire to place political relations with the ASEAN at the forefront of its regional diplomacy. Increasing ASEAN-China economic interdependence is also seen by both sides as a means of enhancing mutual trust and enlarging eaeh side's stake in the stability and prosperity of the other. In this context, trade and investment linkages, as well as increased two-way flows in goods, capital and peoples have also contributed to improving political-security relations. The South China Sea Problem The South China Sea disputes refer ,to conflicting territorial and maritime jurisdiction claims by China, Taiwan, Vietnam, the Philippines, Malaysia and Brunei over rocks, islands, reefs, waters and resources of this ocean that connects China with Southeast Asia. At stake is not only sovereignty but access to living resources (fisheries and aquatic plants and animals) and nonliving resources (oil and other hydrocarbon deposits) in the ocean's water column and seabed. Moreover, whoever has control of the South China Sea obtains considerable

strategic

influence

o_er the Straits of Malacca

and other

crucial navigational chokepoints upon which the freedom of trade and military movements depend. In addition to this, the United Nations Convention on the Law of the Sea (UNCLOS), which entered into force in 1994, gives coastal states certain rights and jurisdictions over extended maritime zones based on their sovereignty 16. Hassan (1988),p.3.

The Political Economy of China's Relations

over land. This includes zone. It is believed

a maximum

that UNCLOS

among Southeast Asia and China South China Sea. _7

200-nautical

237

miles of exclusive

has unintentionally for control

driven

of islands

economic

up competition

and waters

in the

In Singapore on 13 August 1990, Premier Li Peng announced that "China is ready to join efforts with Southeast Asian countries to develop the Spratly islands while putting aside for the time being the question of sovereignty." 18The problem is that China's interpretation of such a policy seems to imply that other countries would have to recognize Chinese sovereignty before joint development could take place. There have been instances of armed exchanges among various claimants in the Spratlys area, the most serious being between China in 1988. Near provocation and tensions flare-up every now and ing not just close encounters of military personnel but incidents intrusions into exclusion zones and near occupied areas, as well

and Vietnam then, involvarising from as apprehen-

sions of fishermen for illegal entry or illegal fishing practices. While there have been talks held at the bilateral level among pairs of claimant states, particularly China-Vietnam, China-Malaysia, China-Philippines and Vietnam-Philippines, none of these talks appear to have gained ground on resolving sovereignty issues. Neither is there published evidence that the parties have engaged in truly substantive dialogue that directly addresses the sensitive issues of resource use; this, despite paying lip service to the desirability of joint development29 There appears to be a fear of negotiating with China on the part of the ASEAN claimants because of China's presumed leverage which may include a superior navy, political clout in the international community, or even economic bargaining chips. The ASEAN is instead exploring the possibility of multilateral negotiations with China for a regional code of conduct that would define norms of behavior for claimant states in the South China Sea. Moreover, since 1990, the Indonesian Foreign Ministry has been conducting an annual meeting of claimants and other littoral states on "Managinlg Potential Conflicts in the South China Sea." The workshop series has identified possible non-sensitive areas for cooperation that the littoral states may pursue as a way of building mutual confidence, such as marine scientific research or cooperation against pollution of the seas. To date, however, the participating governments are unable to arrive at any consensus in favor of actual implementation of the cooperation proposals.

17. Baviera (1999). 18. McDougall (1997). 19. Baviera and Batongbacal (1999).

238

China's Economic Growth and the ASEAN

Cooperation in Building for East Asia

a New Regional

Security

Order

The H0ng Kong Wen Wei Po interpreted Li Peng's 1997 diplomatic offensive in Singapore and Malaysia as "an important step on the part of China to promote a new multipolar international political and economic order" and as "an important act in a series of diplomatic plays by China ...,,2o During his visit, Li Peng had stressed the need to cooperate with the ASEAN towards "good neighborly and _riendly relations geared to the 21 s' century." He proposed the following as the basis for relations between the two sides: that the two sides respect each other and treat each other as equals; that they strengthen their dialogue and intensify consultations; that they seek common development based on mutual benefit; that they support each other and expand cooperation to safeguard and enhance the shared rights and interests of developing countries; and that--bearing in mind the larger picture--they seek common ground while putting aside! differences. Li Peng also underscored that there was an accelerating trend toward multi-polarization, again indicating China's support for a stronger ASEAN that could help balance the influence of other major powers in the region and in the world. It is generally believed in China that an expanded AS1R.ANwill strongly abide by the principle of a balance of powers in the region, rather than turn into a military alliance directed against China. Li Peng likewise stressed that economic factors had gained importance and were even underpinning the development of inter-state relations31 The message was that the ASEAN and China should pay greater attention to the huge potentials for economic cooperation between them, rather than focus on political differences and gaps in security perceptions. The next section explores if there is indeed a direction emphasizing and maximizing economic relations. =

TRENDS

IN CHINA-SOUTHEAST

ASIA ECONOMIC

RELATIONS

In general,

the state of Sino-Southeast

Asian

economic

relations

is not

too impressive. It has been argued that the fundamentally competitive rather than complementary structures of the economies of the two sides have prevented more significant growth in trade and investments from taking place, with the possible exception of China-Singapore ties. 20. Han (1997), p. A3. 21. Custodio (1988), p.19.

The Political Economy of China's Relations

The economies

239

of the two sides differ markedly

in several aspects, most

notably in size and economic system. It has also been noted that the ASEAN economies have a higher dependence on trade than does China, partly attributable to the huge size of China's economy. Despite much larger volumes of trade, China's trade/GDP ratio was 37 percent in 1991. This compares with 47 percent for Indonesia and the Philippines and 148 percent for Malaysia, although it is not clear how this itself can be an obstacle to trade between the two sides? 2 Other scholars

have pointed

out, however,

that as both sides experience

high rates of growth they have also become more differentiated in terms comparative advantages--therefore more complementary--and at the same time, more interdependent with the global market. The expanded ASEAN just before the July 1997 financial crash was projected to have about two-thirds of Japan's economic strength, with its gross national product of US$1.6 trillion. This was deemed to have opened up future opportunities for mutually beneficial exchanges with China's own huge economy. The record moreover shows that from 1980 to 1996, there was indeed respectable growth in trade and economic relations between China and the ASEAN as a whole. This stemmed mainly from the growth and expansion of their respective economies, spurring increased imports and increased outward investments as the case may be. However, the degree of integration and interdependence between the two sides (China and the ASEAN-5) did not appear to significantly increase. Their mutual trade remained a low percentage of each side's total trade. The same was true for investments, ironically for the reason that their respective trade and investment relations with other partners also increased significantly. Moreover, not all of the ASEAN-5 enjoyed the same degree of growth in economic ties with China. The most progressive economies of Singapore and the then emerging Asian dragons achieved as the Philippines trailed far behind.

a great boost, while laggards such

Trade Patterns Trade volumes

increased

significantly

from 1988 to the present, particu-

larly for Singapore and Indonesia, and much of it was due to increases in China's imports from the ASEAN rather than the other way around (see Fig. la). In terms of percentage of total trade of either China or the ASEAN-5, however, these volumes are very small if compared to the conceivable trade

22. Zhang and Ow (1996),pp. 156.

240

China's

Figure

la.

China's

Trade with Southeast

Economic

Asia, 1988-1996

Growth

and the ASEAN

(In US$ Million)

6000

7000

5000 6000

4000

3000

Â°

......

2000

1,69

[

q, Indonesia â&#x20AC;˘

potential, their

1,90

given

the

advantages

I,,I

I,,2

Malaysia &

Burma

(pre-financial

of proximity

1,93

I,,4

V" PhilippinesM

crisis)

and even

1,96

$ingapore.--l--Thailand_V-_tnaml i

robustness ethnic

I,,5

of their

Chinese

economies

linkages.

and

The share

mutual trade in total trade volumes of each side as of 1993 was only 5-6 percent in China's case and 2-3 percent for the ASEAN countries (see Fig.lb). :3 Both in terms of volume and as a percentage of China's total trade, China's

trade

with

Southeast

Asia

as of 1996, from

Singapore, followed at a distance by Indonesia, trailing far behind are the Philippines, Vietnam On country's est rates

the

other

hand,

total

trade

(see Fig. 2a and contrast

looking

in 1996 for the ASEAN-5

land,

Malaysia

and

after

Singapore

and Thailand

tions

were

established,

the Philippines.

at trade were

highest

with

China

as a share

Indonesia,

In 1988, Indonesia

it has consistently

are with:

with Fig. 2b), the highest

as follows:

but beginning

to lowest

Malaysia, and Thailand, and Burma.

had

in 1990, the year ranked

first

among

Singapore, ranked

then of the to lowThai-

only third

diplomatic

rela-

the ASEAN-5.

23. Grant (1993). 24. If we include Vietnam and Laos, we find that! their trade dependency on China is even slightly higher (nearly 6 percent as of 1995); Burma,: on the other hand, beginning only in 1991 has had 20-25 percent of its trade with China, much of it clearly explained by strategic considerations between the two sides.

The Political

Figure

lb.

Economy

China's

of China's

Trade

with

as Percentage

Relations

Southeast

of China's

241

Asia

Total

Trade,

1989-1996

o 0.

1.5 1 0.5 0 1989

1990

1991

1992

1993

1994

1995

1996

,IL I

Indonesia â&#x20AC;˘

Figure

2a.

Malaysia

Burma v

ASEAN-5's

Trade

Total

(1988-1998)

Trade,

with

Philippines --- Singapore c Thailand

China

as Percentage

V'_tnam

of the Country's

2.5

....

0.5 0 1988

1989

---4-- Indonesia

1990

--B--

1991

Malaysia --0--

1992

1993

Philippines _

1994

1995

Singapore

1996

Thailand 1 J

242

China's Economic Growth and the ASEAN

Figure 2b. Vietnam's, Laos' and Burma's Trade with China as Percentage of the Country's Total Trade, 1988-1998 3O

....

el 10

0 1988

1989

1990

1991

1992

1993

1994

1995

Vietnam Burma

Chinese Exports

, ,&

Laos

to the ASEAN

In terms of China's exports to the ASF.AN-5 (see Fig. 3 and Table 1), the highest to lowest in terms of percentage of China's total exports (using average of 1980-1995) are with: Singapore (3.26), Thailand (0.98), Malaysia (0.77), Philippines (0.68) and Indonesia (0.49). Altogether the ASEAN-5 received only an average of 6.16 percent of China's dotal exports from 1980 to 1995. In 1996, the total was even less at 5.83 percent i Other than 1985, when Singapore received 7.55 percent of China's total exports, the figures show that the individual ASEAN-5 countries do not constitute a major market for China. In fact, th6 total exports to the ASEAN only exceeded 7 percent of China's total in 1984_ when it was 7.97 percent and in 1985 when imports.

it peaked

at 10.25 percent,

both due to increases

in Singapore's

From the ASEAN-5's perspective, their imports from China (Fig. 4 and Table 2) likewise do not represent a large percentage of their total imports. From 1980-1995, the average for Singapore Was 3.8 percent, followed by Thailand (3.01 percent), Indonesia (2.68 percent), Malaysia (2.36 percent) and the Philippines (2.35 percent).

The Political

Economy

Figure 3. China's

of China's

Relations

243

Export to ASEAN Countries

as Percentage

of China's

Total Export, 1980-1995

12 1

li',lilil ,il',li',i ,i I',liii 1H

_ I:--,I "1,._1 04-_ -T' _ "" -.::-, _ , I_ .I I'" I I-" I ['":I I_ I I"----t :" i_l:: "" , 1000 1981 1082 1983 1904 1985 1986 1987 1988 1989 1990 1991 1992 1903 1994 1905

[]

r;1Singapore

Thailand

Indonesia

Table 1. China's Export to ASEAN Countries 1980-1995

,,':,,,,, , ,;!,,'=" :,,

l[_at]ancL_._

Malaysia

as Percentage

Philippines

]

of China's Total Export,

]Imdatl},e_ta', â&#x20AC;˘_ _

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995

2.32 3.06 2.96 2.56 4.99 7.55 3.88 3.35 3.07 3.17 3.21 2.80 2.38 2.45 2.12 2.35

1.72 1.06 0.77 0.88 1.01 0.42 0.51 0.76 1.07 0.92 1.36 1.18 1.05 0.82 0.96 1.18

0.12 0.25 0.21 0.22 0.28 0.45 0.46 0.48 0.50 0.40 0.64 0.67 0.55 0.76 0.87 0.97

1.01 0.89 0.83 0.84 0.79 0.68 0.65 0.65 0.65 0.64 0.59 0.73 0.75 0.77 0.93 0.86

1.42 1.19 1.08 0.65 0.90 1.15 0.50 0.56 0.56 0.46 0.33 0.35 0.24 0.31 0.39 0.69

Average

3.26

0.98

0.49

0.77

0.68

Source: Computed from the IMF, Direction of Trade Statistics Yearbook, various issues.

244

China's

Figure 4. ASEAN's lO

Economic

Imports from China as Percentage

Total Import,

Growth

and the ASEAN

of the Country's

1980-1995

9 8 7

85 _ 4

1980 1981 1982 1983 1084 1085 1986 1987 1988 1989 1990 1991 19921993 1994 1995 &

--0-- Singapore

Thailand

Table 2. ASEAN's Imports 1980-1995

--=--

Indonesia'

from China as Percentage

â&#x20AC;˘

Malaysia

of the Country's

Philippines

Total Import,

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994

2.62 2.80 3.13 2.94 4.70 8.63 5.61 4.34 3.86 3.42 3.44 3.36 3.12 2.82 2.81

4.52 3.22 2.73 2.58 3.06 2.41 2.87 3.87 3.35 2.89 3.32 3.06 3.00 1.96 2.55

1.82 1.91 1.37 1.25 1.61 2.43 8.14 3.16 3.09 9.28 2.99 B.23 2.70 3.30 3.80

2.35 2.37 2.23 2.04 2.03 2.04 2.61 2.94 2.91 2.71 1.92 2.19 2.44 2.40 2.29

2.67 2.48 2.70 1.00 3.54 5.32 2.24 3.03 3.05 2.17 1.40 1.90 1.19 0.97 1.42

1995 Average

3.25 3.80

2.83 3.01

9.87 2.68

2.21 2.36

2.57 2.35

L i

Source: Computed from the IMF, Direction of Tradb Statistics Yearbook, various issues.

The Political Economy of China's Relations

245

Chinese Imports from ASEAN Imports from the ASEAN, on the other hand, have grown more than exports ((Fig. 5 and Table 3). 25 For example, the volume of exports to the ASEAN from 1986-1991 grew only 7 percent annually, while imports for the same period grew 20 percent annually. As a percentage of China's total imports, China bought only 1.43 percent from Singapore (average for 1980-1995), while the total bought from the ASEAN-5 for the same period was 4.7 percent. The Philippines contributed only a measly 0.29 percent of this amount. A large increase in China's purchases from Thailand was recorded foÂ˘ 1982, from 0.71 percent of her total the previous year to 1.82 percent. On the other hand, there was a sharp reduction from 1989 to 1990. Imports from Indonesia also abruptly increased in the early 1990s, following the moves to normalize diplomatic ties. From 1980-1989, they constituted an average 0.77 percent of China's total imports, but from 1990-1993 the annual average was 1.78 percent, with the most significant performance in 1991 at 2.2 percent. Again, from the ASEAN's perspective, China's potential as a market is not being tapped significantly (see Fig. 6 and Table 4). Even in 1996, Singapore was only exporting 2.71 percent of its total exports to China. For Thailand, the figure was 3.35 percent, for Malaysia 2.41 percent and for the Philippines 1.61 percent. It was Indonesia which increased significantly its China market, from a very low base of 0.03 percent in 1981 to 3.25 percent on the year diplomatic ties were renewed to 4.31 percent and 4.18 percent in 1995 and 1996, respectively. In terms of volume of trade, however, in the past decade, China's economic relations with Southeast Asian countries developed steadily, from around US$8 billion in 1991 to US$25 billion in 1997. 26 Collectively, the ASEAN now has become China's fifth largest trade partner. China's trade dependence on the ASEAN countries is relatively greater than the latter's dependence on China, mostly in the primary commodities and resource-based manufactures categories. China has also shown that it wants to expand economic relations with the ASEAN countries by taking substantial steps to promote and facilitate such relations, to balance the trade in which China has had a surplus, and attract investments from the ASEAN nations. Besides traditional import items from Southeast

Asia, China has agreed-to

25. Grant (1993), p. 4. 26. Ding (1988),p. 4-5.

buy some items that are not badly

246

China's

Figure 5. China's

Imports

China's

Economic

from ASEAN Countries

Total Import,

Growth

as Percentage

and the ASEAN

1980-1995

'-"

I!1

_ _" J

__lllII ,

"_ _

0 1980

1981

1982

Singapore

1983 1984

1985

Thailand

1986

195"/ 1988

1989

1990

'ndonesOa

1991 1992 1993

Malaysia-

1994

1995

Philippines

Table 3. China's China's

Imports from ASEAN Countries Total Import, 1980-1995 Singapore

as Percentage

........+Â°0â&#x20AC;˘ .

Thailand

st i

alaysia: :

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989

0.95 0.52 0.54 0.53 0.54 0.56 1.27 1.42 1.84 2.53

0.70 0.71 1.84 0.63 0.72 0.61 0.66 0.93 1.15 1.28

0.07 0.29 0.80 , 0.70 10.82 '0.77 0.75 1.36 1.23 0.98

1.20 0.55 0.83 1.01 0.74 0.46 0.41 0.70 1.03 1.17

0.35 0.54 0.72 0.21 0.32 0.23 0.31 0.32 0.24 0.14

1990 1991 1992 1993 1994 1995

1.59 1.67 1.54 2.57 2.14 2.63

0.72 0.66 0.53 0.58 0.75 1.25

11.59 2.20 '1.93 1.40 1.37 , 1.59

1.60 1.26 1.03 1.05 1.40 1.60

0.17 0.20 0.19 0.21 0.24 0.21

Average

1.43

0.86

1.12

1.00

0.29

Source:

Computed

from the IMF, Direction of Trade Statistics Yearbook, various issues.

The Political

Figure

Economy

of China's

6. ASEAN's Exports 1980-1995

Relations

247

to China as Percentage

of the Country's

Total Export,

3.5 3 4.54 2.5

2 1.5

0.5 0

......

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 Singapore --d,--Thailand

Indonesia

Table 4. ASEAN's Exports to China as Percentage 1980-1995

--O-- Malaysia

of the Country's

--_-- Philippines.

Total Export,

_:_V_

.....

Thailand

' lndo_

..,

.... Ma]a

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995

1.58 0.85 1.15 0.98 1.01 1.46 2.54 2.57 3.03 2.68 1.51 1.45 1.75 2.57 2.18 2.33

1.91 2.65 4.42 1.74 2.47 3.81 3.11 3.36 2.98 2.88 1.17 1.16 1.19 1.16 2.02 2.9

0.03 0.06 0.13 0.04 0.45 0.94 2 2.54 2.43 3.25 4.08 4.11 3.39 3.71 4.31

1.67 0.75 0.91 1.46 1 1.04 1.17 1.56 1.97 1.92 2.1 1.86 1.9 2.55 3.29 2.65

0.78 1.36 2.09 0.45 1.12 1.76 2.1 1.54 0.95 0.64 0.76 1.45 1.16 1.48 1.22 1.25

Average

1.85

2.43

2.1

1.74

1.26

Source: Computed from the IMF, Direction of Trade Statistics Yearbook, various issues.

248

China's Economic Growth and the ASEAN

needed. For example, when the Thai economy was battered by severely depressed world rice prices, China signed a US$43 million rice-and-maize deal with Thailand in early 1986. Investment Patterns The ASEAN_5 investments the city-state's 1994 onward

in China are mainly

from Singapore,

investments dwarfing that of any other country (see Fig. 7a and 7b). Thailand also poured

with

especially from in respectable

amounts from 1992 and 1993, according to _hinese official sources. By the.end of 1991, the sum total of Southeast Asian investment in China was US$1.412B. China meanwhile

had set up a number

of joint ventures

in the ASEAN. 27

As a percentage of total investment in China, however, the figures are again miniscule even during the 1990s, with Singapore reaching only 2.64 percent in 1993. Even then, Singapore was by '1994 the fourth largest investor in China, surpassed only by Hong Kong, Japan and the United States. 2_Southeast Asia is, therefore, not a major source of investments for China. Each of the ASEAN-5 countries has ibeen noted to have a different investment pattern, reportedly ranging from contractual and equity joint ventures with local partners to wholly foreign-owned enterprises. It has been observed from the outward investments of these ASEAN countries that Thai investors

tended

to allocate

capital

for human

capital-intensive

and technol-

ogy-intensive industries, while Indonesian, Malaysian and Filipino investors were attracted to unskilled labor-intensive manufactures. These were the sectors where China possessed a strong comparative advantage. 29 By the mid-1990s, the investment from the ASEAN-5 actually utilized by China was three times of that in 1990. Singapore, for example, has invested around US$450 million in infrastructure of Suzhou Industrial Township-now seen as the trademark of Singapore investment in China# 째 Other Forms of Cooperation There

are several

multilateral

fora _vhere economic

cooperation

be_

tween the two sides might also take pla_e, including the APEC and the ASEAN-China Joint Cooperation Committee. The ASEAN has also expressed strong support for China's entry into the WTO. At the sub-regional level is the Mekong 27. 28. 29. 30.

Basin Development

Grant (1993), p. 25. Zhang and Ow (1996), p. 155. Hao and Huan (1989), p. 217. Reside (1988), p.1.

Cooperation,

which was first organized

in 1996.

The Political Economy of China' s Relations

249

Figure 7a. ASEAN-5's Investments in China, !989-1996 (In US$ million) 300 _-250-

200,

1501

1 1

0 1989

[]

1990

Singapore

1991

[]

1992

Thailand

[]

1993

Philippines

1994

[]

1905

Indonesia

[]

1996

Malaysia

]

Figure 7b. ASEAN-5's Investments in PRC as Share in Total DFI, 1989-1996 3 1 2.5

2 I-, Z UJ O n_ 1.5 III n

1 1

0.5

12 2

0 1989

[]

1990

1991

[]

Thailand

1992

[]

The ASEAN, principally Malaysia,

1993

Philippines

1994

[]

1095

Indonesia

1996

[]

Malaysia

is interested in obtaining China's ac-

tive participation in Dr. Mahathir's proposal of an East Asian Economic cus, as added leverage should these East Asian economies need to face pressures from the United States and other major economic powers. The Asia Economic Caucus" or EAEC, a proposal formalized during the

Cauup to "East 1991

250

China's Economic Growth and the ASEAN

ASEAN Economic Ministerial Meeting, proposed to set up a coordinating mechanism among East Asian countries that would help strengthen the economic, technological, trade and investment cooperation among the ASEAN, China, Japan and the Republic of Korea. Strong opposition by the United States and equivocation by Japan led to the shelving of the proposal but consultations were nevertheless inaugurated in 1997 in the form of the so-called East Asian

Informal

Summit

or "9+3"

(the ASEAN

+ Japan,

China,

ROK)

meetings that follow the annual ASEAN P0st-Ministerial Conferences. Separate China-ASEAN Informal Summits also took place in December 1997 and December Myanmar's

1998, after what is now admission to the ASEAN.

a_ annual

"10+3"

meeting

since

One question is, does China have a u_ified economic policy towards the ASEAN, or are economic relations mainly shaped by bilateral considerations? It would appear from the literature that _ the economic arena, China as yet sees no value in crafting a regional economic policy towards the ASEAN or, for that matter, the ASEAN Free Trade Area (AFTA). This stance is in contrast to China's tendency to focus politiCal-security cooperation with the ASEAN at the regional, rather than merely bilateral level. Bilateral trade and investment ties are what make up the ASEAN-China economic ties, while the mechanisms for economic coordination at the regional level have only just been introduced

BILATERAL STRATEGIC

RELATIONS WITH PERSPECTIVES

SELECTED

STATES:

A study of China's relations with Southeast Asia cannot be complete without giving consideration to bilateral relations with certain key countries of the subregion. This is partly because the ASttAN itself has, strictly speaking, no common foreign policy. Its collective politiCal-diplomatic clout is a relatively recent phenomenon. As expected, China has had to define and promote its interests in Southeast Asia through its dealings with individual countries. Sino-lndonesian

Relations

Of all the countries

of Southeast Asia, lexcept for Vietnam, it is Indonesia

that has had the most difficult of relations w!th China. On the other hand, with the possible exception of Thailand, IndoneSia is the most important ASEAN country for China. Normalization of diplomatic ties betWeen Beijing and Jakarta took place in August 1990 when Li Peng went to Jakarta with a promise of, among others, non-interference in Indonesia's internal affairs. Prior to this had been relations

The Political Economy of China's Relations

251

characterized by deep mutual suspicions since 1965, since China was allegedly implicated in internal power struggles in Jakarta leading to the downfall of Sukarno. Indonesia's attraction to China could be attributed to several factors. First is its size and status in the ASEAN, which give it considerable

influenc_

over the positions taken by the organization on international issues. Another would be her strategic location as co-guardian Of the Straits of Malacca, a position that could be a crucial source of control over freedom of navigation by China or any other maritime power in the South China Sea and its gateways to the Indian Ocean. 31A third reason, no less important, is Indonesia's consistent adoption of a foreign policy posture that is independent and non-aligned. _ Such a posture was consistent with China's own distaste for superpower involvement in its Southeast Asian backyard, and was sufficient basis for China to realize the strategic value of cooperation with Indonesia. On the other hand, the Suharto government appeared to have been persuaded on the benefits of normalization after China had demonstrated it could be trusted by the ASEAN in the handling of the Cambodian issue. At the same time, it realized that for Indonesia to be able to continue to play a prominent role in regional and international diplomacy, it must be able to engage China under a framework of normal diplomatic relations. Prospects of economic benefits have also been cited as a factor considered by the Indonesian leadership, although its importance is not highlighted in existing literature. Many private sector groups saw normalization of ties with Indonesia as a new challenge. Some anticipated economic benefits froln the relations, while others saw China as a dangerous economic competitor since a great number of its exports are similar to those from Indonesia. Others were afraid that China's large domestic market would draw away investments, especially from the United States and Japan, from Indonesia. Spokesmen for certain Muslim groups also expressed fears that the normalization of relations with Beijing would further strengthen the position of Indonesian Chinese capitalists, already in control of conglomerates in the country. This, they argued, would intensify local resentment against the overseas Chinese population and, thus, make assimilation even more difficult. 33 Another reason Indonesia took the final steps to normalize ties was the much-improved relationship between the United States and China, coupled with initial moves by the United States to reduce its military presence in the 31. China had in fact supported Malaysia's andIndonesia's aspirationsfor joint controlof the Straitsof Malacca,hailing the Agreementon Safety of Navigation through the Straits of Malacca signedby these two countriesas "an importantmove forward." See Anwar (1990),p. 231. 32. Wayne(1993),p. 321. 33. Sukma(1994),p. 35.

252

China's Economic Growth and the ASEAN

region. From the beginning of the Sino-US d6tente in the early 1970s, as the two consolidated their military partnership at the expense of the then Soviet Union, Indonesia was already fearful that a US-backed economically and militarily powerful China would, in the long-term, move to dominate Southeast Asia. Ali Moertopo earlier cautioned the United States against exaggerating the importance of its strategic ties with China. He bluntly stated that "the role of the People's Republic of China in the military field will always raise great concerns in Southeast Asia because of its history, its unstable domestic politics, its connection with subversion and infiltration of local communist parties, the presence of the overseas Chinese, who are not yet fully assimilated and the fact that China in the last analysis is the one major power in the immediate neighborhood of the Southeast Asian region. "34 Nevertheless, Indonesia's decision to normalize relations was made. Suharto visited Beijing in November 1990, following which President Yang Shangkun came to Jakarta in 1991. While there are no outstanding issues that place these two Asian giants in direct confrontation with each other today, strong mutual suspicions and antipathy remain. For one, the two countries have overlapping claims over historic waters, encompassing the rich natural gas fields around Natuna islands. Indonesia has signed an agreement for these reserves to be developed by the United States Exxon Corporation but exploration has been hindered by doubts regarding possible conflict with China. Indonesia itself is not a claimant to any of the Spratlys or other islands on the South China Sea that China says it owns and which are seen as potential regional flashpoints for interstate conflict in Asia. However, as a sprawling archipelagic state with considerable interests in protecting its access to the region's maritime resources, it has taken an _ctive interest in seeking solutions to the territorial and maritime jurisdiction disputes surrounding it. The sensitivity of the ethnic Chines e issue once again came to a head recently in the wake of the economic crisis and the political turmoil surrounding Suharto's ouster from power. Frequent irioting took place which targeted ethnic Chinese families and businesses. Tfiis occurrence is commonplace in / situations of economic difficulty when reser_tment against the wealthy minority grows. Trade and Economic Relations In the economic arena, the renewal ol diplomatic ties was followed by robust trade, particularly Chinese imports of Indonesian goods. Prior to nor34. Anwar (1990),p.235.

The Political Economy of China's Relations

253

malization, trade had been conducted through third countries, but by the end of 1995, Indonesia was next only to Singapore in volume of trade with China. However, seeing that the increase was due to higher imports by China rather than by Indonesia, one may venture a guess that China was using trade to help consolidate newly restored political relations with a strategically impoctant neighbor. Competition rather than complementarity characterized economic relations between Indonesia and China. Indonesian international oil markets were particularly being hurt by competition from China. For instance, Japan had traditionally been a big market for Indonesian oil but this market contracted when Japan increased oil imports from China. The Japanese were al-qo reported to have used Chinese oil to cut the price of Indonesian oil. China managed to score a diplomatic coup when, following the coUapge of the Indonesian and Thai economies in mid-1997 due to the currency crisis, it quickly came in with an offer of bilateral assistance to these two countries. The assistance package for Jakarta included US$3 million worth of medicine and materials, US$200 million worth of export credits and US$400 million contribution for the IMF's Indonesian bailout package. 35 In light of the post-crisis economic difficulties which has led to am alarming 60 percent poverty incidence in Indonesia, and given the internal political transitions taking place following the removal of Suharto from power, Jakarta has been playing a very subdued role in regional policy. It ia not yet clear how these internal problems will affect its relations with China, or Indonesia's role in China-ASEAN relations as a whole. China-Thailand

Relations

Thailand is in a unique position of being the only Southeast Asian country that is not involved in a territorial dispute with China. For this reason as well as due to other shared geopolitical interests, the deep suspicion that characterizes relations between most Southeast Asian states and China does not exist for Thailand. Nevertheless, relations between Thailand and China went also difficult in the past. Thailand, together with the Philippines, was a merr_ ber of the anti-communist Southeast Asian Treaty Organization or SEATO. China had supported the Communist Party of Thailand's efforts to overthrow the Thai government through guerilla warfare. But the American defeat ill Indochina probably shocked Thailand more than any other country in Southeast Asia so much so that Thailand needed to come to terms with China as a new balancer. 35. Reside (1988),pp. 3-4.

The Political Economy of China's Relations

255

wide range of Chinese arms, which were provided by Beijing at only 10 per cent of the market price. 37These included more than a hundred Chinese T-69 MK-II tanks and several 410 YW-531 and T-63 MK-II armored personnel carriers (APCs), and armored cars. 38 It was also reported that a possible multimillion baht joint venture for the manufacturing of APCs for the domestic market and export was being negotiated. In light of the arms build-up that was already happening in Southeast Asia, the move was interpreted as Thailand's initial step towards establishing itself in the heavy arms export industry and China's attempt at enlarging the regional market for its armament exports? 9 Subsequently, however, the discussions to manufacture APCs in Thailand fell through after the Thai military decided that Chinese equipment performed poorly. 4째 The volume of Chinese

arms transfers

to Thailand

decreased

in 1990,

however, as a result of internal political instability in Thailand that eventually overthrew the Chatichai government in February 1991. 41 Nevertheless, this cooperative military relationship between Thailand and the PRC continues to be a source of some concern for the other ASEAN countries. Many in Southeast Asia still feel strong reservations with regard to China's long-term inte_-Ltions and how its relations with Thailand might allow it extended influence in the region. At the same time, Thailand's own ambitions of a "greater Thailand," which would integrate parts of Myanmar, Laos and Cambodia into a Thai sphere of influence, is a long-standing notion that could help balance both Vietnamese and Chinese expansion in Indochina. 42 Of late, Myanmar's growing strategic and economic ties with China are being eyed with some concern in Thailand. Um Katharya describes the situation: "With tightened economic links between Hunan Province and the northern provinces of Myanmar, the PRC has acquired a quasieconomic hegemony over Upper Myanmar. Cheaper and of higher quality than locally produced goods, Chinese products are flooding the markets of Malanday... For the PRC, this economic linkage has an important strategic dimension. In the face of a changing power alignment between

37. 38. 39. 40. 41. 42.

Sirikrai(1990), p. 255. Khatharya (1991),pp. 255-256. Khatharya(1991), p. 259. Vatikiotis(1993),p. 12. McDougall (1977) pp. 212-213. Khatharya (1991),p. 247.

256

China's Econ'on-lic Growth and the ASEAN

Thailand and Vietnam, China may be looking towards a greater hold on Myanmar (and to a similar extent Laos) as a deterrence to any prospective Power consolidation on its southern border. With Myanmar economically and militarily dependent upon the PRC, China could remain poised at Thailand's western flank."43 Economic cooperation has developed as an offshoot of strategic cooperation. The first time China came to Thailand's assistance was in 1974, when Thailand requested shipments of diesel oil to help relieve the consequences Of the world oil shortage. Since then, China has on several other occasions tried to bail Thailand out in time of need, not for _xpected economic returns but for political advantage. In 1985, China willingly absorbed an additional 50,000 tons of Thai sugar in order to help Thailand alleviate _ surplus problem. In 1986, China bought US$43 million worth of rice and maize and 30,000 tons of Thai glutinous rice, 20,000 tons of green, mung bean_, and 10,000-200,000 tons of raw sugar even if China itself was exporting some of these products. 44 Bilateral trade in the period immediately following normalization (1975--1979) grew 129--fold. The major items traded were Chinese petroleum and Thai agricultural products. China was also known to have made voluntary adjustments in its purchasing quotas from Thailand due to political considerations rather than economic objectives. Thai exports to China increased 71 percent in 1994 and two-way trade leapt up again the following year to a total value of US$2.3 billion, making Thailand one of China's top ten trading pa rtners.'L_ Both countries have emphasized multi-faceted cooperation in trade and investments, cultural exchanges as well as in technologies and scientific cooperation. This is believed to have been made possible by the strong political and military cooperation that had already the Cambodian crisis. Following

the collapse

takeniplace

of the Thai currency

between

the two sides over

in mid-1997, China offered

aid consisting of a bail-out of US$1 billioni (apart from contributions to the IMF's US$17.2 billion bail-out package). It also promised infusion of new investments into the Thai economy, and pledged to buy more agricultural and marine products from Thailand. Thailand's huge conglomerate Charoen Pokphand Group, by the early 1990s, had over 20 major investment projects in various parts of China. They notably expanded investments after the 1989 Tiananmen incident when West43. Khatharya (1991), p.259_ 44. Kllatharya (1991), p.259. 45. Vatikiotis (1993),p.21.

The Political Economy ql: China's Relations

257

ern investors shunned any dealings with Beijing. 4Â˘'At the same time, China has also established joint ventures in Thailand covering such projects as construction, travel agencies, transportation, shopping centers, housing estates, and factories for manufacturing chemicals and farm machineries. By 1995, there were 1,900 Sino-Thai joint ventures in China worth more than US$600 million. 47 The close economic and political cooperation has not come without a price. In the aftermath of the Tiananmen massacres of Chinese civilians, many Western countries decided to impose limited sanctions against China. A visit by the Thai Prime Minister had already been scheduled prior to the June 4_h incident, placing the government in a dilemma as to whether or not to proceed with the visit. In response, Beijing cautioned Bangkok against imposing sanctions, reminding it at the same time that China was Bangkok's largest purchaser of rice. The visit by Chatichai Choonhavan proceeded in October 1989 signifying Thailand's commitment to a strong relationship with China. Bangkok demonstrated that it was willing to break ranks with the near universal sanction against summit meetings with Chinese leaders. Analysts remarked that although Chatichai's visit to China was linked to Thailand's strong interest in resolving the Cambodian conflict, it also underscored the necessity of accommodating Chinese power, regardless of the circumstances. 4_ At the regional level, Thailand has long wanted to turn its special relations with China into a high-profile diplomatic role as interlocutor in ChinaASEAN relations, much as it had tried to play a similar role in IndochinaASEAN relations prior to the ASEAN membership Thai Prime Minister, Chuan Leekpai, had spoken

expansion. 4_ At least one about Thailand playing a

mediating role in the Spratlys dispute between China and other ASEAN countries, although he appears unsure of how to proceed. _ China's

feature

Relations

with Malaysia

and Singapore

High-level visits to and from Malaysia and Singapore of China's foreign relations in the 1990s. Premier

Singapore

in August

1990 and Kuala Lumpur

in December

have been a key Li Peng visited 1990. President

46. Ding (1988),pp. 54. 47. Hao and Huan (1989),p. 212. 48. Ross (1990),p. 115. 49. Chatichai's 1991 campaign to turn Indochina from a " battlefield to a trading market" appeared to some to be a reversal of its opposition to Vietnam. Thailand indicated it would focus less on military actions against Vietnam and more on developing business links. This spurred China to call for a stronger anti-Vietnam united front among the ASEAN,China 8aid the United States. Chatichai's new policy was overturned upon his removal from office. 50. Vatikiotis (1993),p.21.

258

China's Economic Growth and the ASEAN

Yang Shangkun went to both capitals in January 1992, as did President Jiang Zemin in November 1994 and Li Peng once again in August 1997. In June 1993, Malaysian Prime Minister Mahathir Mohamed visited Beijmg. During his meetings with Jiang Zemin, the Chinese side used the occasion to refute any suggestion that China wanted to fill in a power vacuum in Asia. Mahathir suggested that China and Malaysia instead should "seize the present mutual

opportunity to contribute to regional peace and stability and promote development by actively boosting economic cooperation." 51 It may be observed that a strong unifying factor in Chinese ties with these two countries since the end of the Cold War has been their opposition to United States' propensity to interfere in their countries' internal affairs, particularly Washington's outspoken criticism of their respective human rights records. Even in the early 1970s in the absence: of diplomatic ties, China had seen Malaysia as a desirable partner because among the ASEAN countries, it was not a client state of the United States. In 1971, Beijing had unequivocally supported the Malaysian proposal to turn SoUtheast Asia into a Zone of Peace, Freedom and Neutrality. s2 After relations with Malaysia had bee_n normalized in June 1974, two sensitive issues remained: continued support by the Chinese Communist Party of the outlawed Communist Party of Malaysia, and the presence of over 200,000 stateless Chinese in Malaysia. s3Deng Xiaoping's 1978 visit to the ASEAN capitals addressed both issues and sought to reassure Malaysia, which had a significant and influential ethnic Chinese population, that China's overseas Chinese policy was one of non-interference. Ever sensitive to China's dominant presence, Malaysia had early on adopted a well-calibrated pragmatic posture vis-a-vis China. Ghazalie Shafie, in 1982, articulated this in a speech: "...(D)o the countries in Southeast A_ia accept the need for their policies and activities to be such as ndt to jeopardize the basic national interests of China, and do they also accept the need for adjustment and accommodation to takel into account the legitimate r01e of China in the region? It is in this particular context that Malaysia has advocated the neutralization of Southeast Asia based on respect for the integrity and independence of the countries of the region and guaranteed by the three superpowers--China, the Soviet Union and the United States..." 51. McDougall (1977),p. 214. 52. Shee (1987),p. 142. 53. Shee (1987),p. 145.

The Political Economy of China's Relations

259

"...We do not.., deny that China has a legitimate right to play her part in world affairs or for that matter to take an interest in the affairs of our region because of her geographical situation..."_

rather

Since 1993, it has been Malaysia's position that China is not a threat but should be understood in a more positive light. Like Thailand, Malaysia

had explored the possibility of co-manufacturing arms with China's Norinco. This was interpreted as a purely political move meant to improve relations with China so as to increase Mahathir's leverage with the United States and the West which had been very critical of his governmentY In a 1995 Kuala Lumpur forum on Malaysia-China relations, Prime Minister Mahathir was quoted as saying, "It is high time for us to stop seeing China through the lenses of threat and to fully view China as the enormous opportunity that it is...In my view, to perceive China as a threat and to fashion our security order around this premise would not only be wrong policy, but it would also be a bad and dangerous one. "s6 China also has closer economic relations with Malaysia now than ever before, particularly since 1994 when China became Malaysia's fourth largest trade partner. Total trade reached an estimated US$2.5 billion, an increase of 40 percent over the previous year. One, hundred thirty-four Chinese companies were also reported as having invested more than US$200 million in Malaysia, s7 As for Singapore, a study of its relations with China should begin with recognition of its peculiarities as a predominantly ethnic Chinese city-state. Of Singapore's 1993 population of 2.87 million, 77.5 percent were ethnic Chinese. s8 Attempts by the government of Lee Kwan Yew to instill a sense of Singaporean identity and nationalism have had some success but Singaporeans still have a long way to go to overcome their character as overseas Chinese. Moreover, Singapore is located in Southeast Asia, surrounded by the predominantly Malay and Muslim peoples of Malaysia and Indonesia. means Singapore has to be extra cautious in its dealings with China, and exert more effort than most in proving its solidarity and affinity with Southeast Asia. Prime Minister Goh Chok Tong was quoted to have said in 1997 that: "We must be very clear in our minds that geographically, politically and socially, we belong to Southeast Asia and we have to be 54. 55. 56. 57. 58.

Ghazalie(1982). Vatikiotis (1993),p. 12. Ching(1995),p. 32. Ching (1995),p. 32. Bolt (1996).

260

China's Economic Growth and the ASEAN

Southeast Asians fh-st. If Singaporeans that will spell trouble for us." s9

leaders

don't

understand

that...

Despite its small size, Singapore has been touted by mainland China's as a model, in a way that Hongl Kong and Taiwan--also Chinese-

populated NICs--could never be considered due to political reasons. Singapore's lessons seen as worthy of emqlation are:

Among

"...its authoritarianism, discipline, limited freedoms, one-party rule, absence of corruption, high growth rate, and skillful management of public affairs.'6째 Given their similarities attracted Singapore

in political

culture,

Chinese

leaders

to the Singapore model of "sdft authoritarianism." have also been cited as "allies in a rhetorical battle"

have been

Beijing and with the West,

opposing the predilection by some Western governments to impose , way of thinking on others as universal. 61Both China and Singapore the United States' pressure on human rights is hypocritical as well tive. Lee Kwan Yew has been quoted to have said at one time that

their own argue that as ineffec"You can't

change a Chinese civilization of 4,000 years by an Act of Congress or canceling Most Favored Nation status," referring to the United States' pressures on China's human rights record. He is seconded by his successor Goh Chok Tong, who more pointedly stated that "The new generation of Chinese leaders, like the previous generation, will want a strong government that can maintain stability and order... They are not closet democrats. They do not want China to descend into chaos, and neither does the rest of Asia. ''62 Singapore's support for Chinese Confucian authoritarianism has been unconditional. government's

Even while expressing shock and sadness by the Chinese behavior in Tiananmen of JUne 1989, Lee Kwan Yew Continues

to defend the lack of political liberalizatio_ in China. 63 Leaders of both countries, however, have acknowledged that political liberalization can follow economic development. It is economic relations with SingapOre that is strongest between and any ASEAN country. Singapore investment in China was minimal

China before

1990, mainly because of political factors and the absence of formal diplomatic ties. 64 But since Lee Kwan Yew's 1976 visit to China, there was already a grow59. 60. 61. 62. 63. 64.

Bolt (1996),p. 34. Bolt (1996),p. 45. Roy (1994),p. 235. Roy (1994), p. 237. Roy (1994), p. 241. Bolt (1996),p. 8.

The Political Economy of China's Relations

261

ing realization that China presented much economic opportunity. In December 1979, a trade agreement was signed between the two. In 1981, Singapore established a commercial representative office in Beijing to facilitate the efforts of Singapore businesspersons. Lee visited again in 1985, during which an investment protection treaty was signed by the two sides. Other agreements followed: a 1986 pact on mutual cooperation in tourism, civil aviation and avoidance of double taxation, and a 1989 Shipping Agreement. In 1993, Singapore's National All-China Federation

Trade Union Congress signed three agreements with the of Labor to invest over US$10 million in Chinese busi-

nesses. Both the Trade Development Board and the Economic Development Board of Singapore are active not only in providing information, giving guidance or bringing as well as hosting business delegations to and from China, but themselves make it a point to invest in China. China became Singapore's fourth largest trade partner in 1995 while being China's fifth largest foreign investor after Hong Kong, Taiwan, Japan and the United States. 65 In addition, by 1996, Hong Kong was Singapore's fourth largest export market, compared to Taiwan which was ninth and the Chinese interior which ranked tenth. But while Singapore's trade volume more than doubled from 1989 to 1996, its percentage in China's total actually declined from 2.8 percent to 1.9 percent in 1992 and went up to only 2.5 percent in 1996, reflecting the expansion of China's trade with other countries. This reflects also the low dependence by China on the ASEAN trade. Among Asian countries, China remains the principal target of Singapore's foreign investments. This is in part because of long-standing cultural affinities and connections, but mainly because of China's huge economic potential and power status. Because of the size disparity between the two, Singapore's strategies in China focus on provinces and regions rather than the whole of the mainland. A Singapore-Shandong Business Council was launched in 1993 and a working committee for Singapore-Sichuan development cooperation was set up in 1995. 66In 1993 as well, Singapore also began investing in the development of a township in Suzhou which it dubbed "Singapore II." The project has come to symbolize the special affinities between Singapore and China. Other investment projects include a housing complex in Shanghai and other industrial parks. By 1992, Singapore's contracted investments grew to almost US$1 billion, higher than the 1979-1991 total but still only 2 percent of the total US$57.5 billion in contracted foreign investment in China for the year. Investments for 1994 totaled US$3.78 billion, increasing-by a billion while most 65. Liao (1988),p.3.. 66. Bolt(1996),p.14.

262

countries mulative

China's Economic Growth and the ASEAN

were cutting back on their China exposures. By the end of 1995, cuinvestment commitments in China reached US$9.47 billion in 4,811

projects of which US$2.4 billion had actually been invested. 67 A 1994 report indicates that 80 percent of such investments were in real estate projects, tending to have high earnings and short development cycles. Eighty percent, as of 1992, were in Guangdong and Fujian provinces, where most of Singapore's own Chinese originated from. On the other hand, one source reports that there were more than 70 Chinese enterprises of all kinds in Singapore in 1997, engaging in banking, insurance, transport, production, trade, survey, labor service, and other businesses. Another source says 150 Chinese companies were based in Singapore as of October 1995, mainly in the financial sector. 68 Chinese companies reportedly use Singapore as a base with which to raise capital and expand into Southeast Asia. Among these were the China Metallurgical Import and Export Corporation, the Bank of Communications, the Industrial Commercial Bank of China, the Agricultural Bank of China and the People's Construction Bank. Singapore has taken advantage of its close links with China to offer itself as investment partner to other foreign companies operating in China. With an admirable industrial base but only 1.8 million workforce, Singapore is under pressure both to maximize productive potentials and to expand market possibilities by relocating certain operations to China. In electronics, Singapore's strongest point, it has been noted that Chinese demand for computers has been growing by 70 percent to 80 percent per annum. Chinese surplus labor has also moved into Singapore, 20,000 of them as of 1995. It is not surprising that Singapore leads the ASEAN pack in terms of volume of investments in China because Singapore has all along been leading the regionalization effort in its part of the world. Among incentives granted by its government to those who would invest in Asia are tax incentives, support for Singaporean expatriates, promotion of entrepreneurship, sponsoring the creation of a joint venture capital fund, and investing its own reserves in Asia. 69With such a policy, dynamic economy, and given its ethnic affinity with the Chinese mainland, it is no wonder that Singapore has been the most successful ASEAN state to oStain economic advantage from the Chinese economic miracle.

67. Bolt (1996),p. 14. 68_ Bolt (1996),p. 34. 69_ Bolt (1996),p. 34.

The Political Economy of China's Relations

263

CONCLUSIONS At the outset, this author hypothesized that from China's perspective, political and strategic factors do considerably affect China's economic policy and relations with its Southeast Asian neighbors. The theory rests on an appreciation of China's historical foreign policy behavior, especially during its earlier period of heavily planned socialist economy. At the time, in China, everything was "politics in command." Foreign economic relations were not a first priority, as the development model being pursued then suggested self-reliance. The strategy of import substitution was itself a political imperative in the face of isolation by the West and Soviet abandonment rather than a conscious economic goal. But where economic ties were pursued by China, very often these would be tied to its strategic and political objectives. 7째 Since the reform and opening up of 1978, Chinese foreign policy changed very substantively in the relative importance it began to attach to domestic economic interests as the primary driving force in external relations. The fact that the United States and Japan, two strategic rivals, became China's major trade and investment partners could not have been effected were it not for the major paradigm shift in the thinking of China's leaders--principally Deng Xiaoping. Yet, there is still a strong basis to think that China sees economic modernization not only as a goal in itself but, perhaps more importantly, as instrumental to its long-term political goals, n This goal is to become a comprehensive power and to uplift China's standing and influence in the international community as a whole, but most especially relative to the major powers. The economic sphere in foreign policy has become very important in China. However, it is the State, rather than China's budding private sector that still has strong influence over the directions of foreign economic relations,

70. For instance, Beijing'said to developing countries, particularly in Africa, despite its own meager economic resources, was completely divorced from expected economic returns. Third World policy was part of a strategic end-game of strengthening capacity of the developins world to resist the forces of "imperialism" or Soviet "social imperialism_" 71. One event that tends to confirm this was the so-called accidental bombing of the Chinese embassy in Belgradeby US-ledNATOforces targeting Yugoslavdefense outposts. The Chinese are convinced it was a deliberate US move against China. The initial reaction of the Chinese government was to tolerate and even encourage mass public outrage on the issue. But after much angry rhetoric and somewhat violent public expressions of anti-US sentiment in China, the Chinese leaders concluded that their best response to such actions would be to concentrate on modernizing their economy. One implication is that no country would dare make such a blatant move against China ifit were economicallypowerful. The other, more ominous message is that a more modern China would have the technological wherewithal to hit back against the biggest of their perceived oppressors.

264

China's Economic Growth and the ASEAN

making it difficult to imagine that foreign economic policy can be free from the influence of other strategic interests and goals of the Chinese leadership. Until now, most of the Chinese investment and trade with the ASEAN are undertaken by state-owned companies. The private sector plays a very limited role as such businesses are not yet globally competitive and, therefore, remain oriented to internal markets. Some exceptional private companies which had earlier explored trade and investment opportunities in the Indochinese countries found the situation there discouraging. Therefore, SIno-ASEAN economic relations are still mostly stateqevel state-to-state political relations. 72

and

easily

influenced

by the

One example of China's use of economic instruments for poiitieal ends could be seen in its response to the Asian financial crisis. China, long before the United States or Japan could muster proposals to put a halt to the currency free fall in Southeast Asia, offered immediate assistance to Southeast Asian economies hardest hit by the crisis. China then pledged not to devalue its own currency--the renminb_--for fear that it would spark yet another round of currency falls in East Asia. This move came at a time when Japan was under severe criticism for not being able to decisively address its own economic and political problems, much less lead the way for the rest of the region. Thus, China's speedy offer of assistance, and its readiness to put its money up front, was like a welcome dose of medicine given to a rapidly deteriorating patient. Weeks after the initiative and until Japan came up with its own Miyazawa initiative, international news commentators and analysts lauded China's responsible actions and touted China (probably prematurely) as the new economic leader in the region, nudging Japan from its long-held position. China also obtained political mileage, as Thailand and Indonesia, two ASEAN countries-were placed in a situation of indebtedness to China. One could of course argue that the Chinese economy was very much affected by the crisis, if only indirectly at _he start, through a decline in the total volume of Chinese exports to Asia. Whatever the motivation, the Chinese government has said it will stick by their pledge not to devalue the renminbih unless the instability of the Japanese yen forces it to. Chinese leaders have stated that they are willing to bear economic losses for the sake of financial stability in the rest of East Asia because of fhe fact that in the long run China will benefit from the quick recovery of the economy in the region. China's

There is little doubt, however, that Such a policy is also informed by other strategic interests in relations_ with Southeast Asia. The ASEAN

as a collective

organization

is important

for China's

diplomatic

and security

72. Author's written interview with Pan Yining,Guangzhou Academy of Social Sciences,] 1999_

The Political Economy of China's Relations

265

objectives in East and Southeast Asia. These include maintaining a balance in the relationships among the major powers of the region (principally the United States, Japan, Russia and China itself) and preventing any power from dominating all the rest. To the extent that the ASEAN has projected a posture on security issues similar to China's own preference for a multipolar post-Cold War security order, China sees the ASF.AN as being more than the sum of its parts. On this basis, China is bent on improving political cooperation with the ASEAN at the multilateral level, apart from its emphasis on close bilateral ties. Moreover,

while trade

ASEAN have indeed pendence increased

and economic

grown remarkably

relations

between

China

in recent years, the degree

and the

of interde-

on each other as export markets and investment sources has not in the same proportion. This leads to an observation that the princi-

pal dynamic in China-ASEAN relations may still be the political-security or the strategic dimension. Improvements in economic relations are sought by both sides for mutual economic benefit. But more than just economic benefit, it is believed that solid bilateral economic linkages will help provide a firmer basis for broader types of cooperation in the regional and international arena. At the national level, both China and the ASEAN have a good understanding of the linkages between economic stability and political resilience. From Southeast Asia's perspective, China is a big and powerful neighbor that will figure prominently in any effort to build peace, security as well as economic prosperity in Southeast Asia. The ASEAN is only gradually developing a common attitude towards China, an issue on which the members have had differences of opinion in the past. There is still some suspicion towards China, but the general approach of the Southeast Asian countries has been to pursue engagement with China rather than to try to isolate or contain it. In the matter of Sino-American conflicts, the ASF.AN is more likely to take an equidistant posture than anything else; not only to protect relations with both but in realization of China's looming presence on the one hand, and the United States' distant and uncertain commitments on the other hand. The South China Sea territorial and maritime disputes remain a potential flashpoint in Sino-ASF.AN relations. How China decides to pursue its territorial and resource claims vis-a-vis the ASEAN claimants will be a litmus test of China's attitudes towards the ASEAN and its perception of its own emerging role as the big power of the region. To a lesser extent, relations may also be negatively affected by internal problems involving treatment of ethnic Chinese minorities, especially in Indonesia and Malaysia. The propensity of some Southeast Asian governments to flirt with the issue of Taiwan recognition is another source of friction.

266

China's Economic Growth and the ASEAN

Tensions over such issues are expected to periodically emerge as part of the normal state of relations. Both the ASEAN and China must therefore exert greater efforts to expand mutual trust, promote mutual understanding of their convergent as well as divergent interests, and, most importantly, begin defining the norms which will guide their political-security as well as economic relations in the next century and in the next millenium become the comprehensive power that it seeks to be.

when China may have

The situation of China facing us today presents both challenges and opportunities for the ASEAN and for the Philippines. These include the opportunity as well as the challeng e of constructively engaging China rather than isolating or antagonizing it, while raising the costs for China of ultra-nationalist or "bl$-power" behavior. If China's rise as a power is indeed inevitable, then the ASEAN must make every effort to ensure that China becomes a benign, rather than a hegemoni c, power. Treating China as an enemy and a threat can be a self-fulfilling prophecy, with possible serious repercussions for Southeast Asian countries. There is also the challenge and opportunity of using the collective strategic importance of the ASEAN to obtain collective as well as individual economic advantages in their relations with China. Individual countries such as Indonesia and Thailand have on occasion demonstrated the ability to obtain economic advantage from strategic factors, but not ASEAN as a bloc. To date, China does not have a common economic policy towards the ASEAN. Economic relations are shaped by complementarities with individual countries as well as by common strategic interests and friendly political relations. 73 Neither does the ASEAN have a common economic policy or strategy for integration into the Chinese economy. This is understandable given the fact that the ASEAN economic integration, whether through the ASEAN Free Trade Area or other mechanisms, is still in the making. The ASEAN's economic leaders must nevertheless begin to explore, through its dialogue relations with China as well as through the EAEC (ASEAN-Plus 3) framework, how the comparative advantages and complementarities of the economies of the ASEAN and China may be maximized to help both sides achieve their common goal of prosperity. At the same time, the ASEAN and China can find common ground in dealing with impositions from Western-dominated international trading regimes. Within the debating halls of the WTO and the APEC there will be occasions where, as representatives of developing countries, the ASEAN and China may be expected to see eye-to-eye On certain issues, including liberal73. Author's written interview with Pan Yining, GUangzhou Academy of SocialSciences, July 1999.

The Political Economy of China's Relations

267

ization globalization. Having said that, it is important to note that both China and the ASEAN are in general committed at this point to open trade and investment regimes, both being dependent on the advanced capitalist countries as their respective major markets and sources of capital and technology. These are but some of the challenges the ASEAN must address in crafting the directions of Southeast Asia's future relations with China. The Philippines can play an important role in ensuring that these relations will be cooperative and mutually beneficial, rather than confrontational, for the generations to come. Our ability to do so requires that our decisionmakers take a long, strategic view even in our responses Kalayaan Islands disputes with China.

to short-term

issues such as the

Economic and political-security relations cannot develop entirely independent of each other especially when one deals with a country such as China where a strong centralized State machinery plays the dominant role. If the Philippines shares the objectives of other ASEAN countries in seeking to gain advantage from the dynamism of China's economy, then it will have to take firm steps to improve political-security relations, notwithstanding our territorial disputes over the Spratlys. While sovereignty and territorial integrity are indeed vital concerns of the nation that aeed to be defended and promoted, the long-term imperatives of,Philippine security demand the maintenance of peace and stability in the regional environment. Ultimately, the only guarantor of this is a friendly, not a hostile, relationship with the major powers in the neighborhood--notably China.

268

China's

Economic

Growth

and the ASEAN

BIBLIOGRAPHY

Anwar,

D.E 1990. Indonesia's Relations with China and Japan: and Realities• In Contemporary Southeast Asia 12(4).

Images,

Baviera, A. 1997. China as a Rising Power. Paper presented at Philippine Centers Network Conference, December, Quezon City. • 1999. lands. • 1999. Social

Perception APEC Study

Much Ado about Something: The Stakes are High in the Kalayaan UP Observer, March-April. U.niyersity of the Philippines. Author's written interview wi!h Pan Yining, Guangzhou Academy Sciences, July.

Isof

Baviera, A. and J. Batongbacal. 1999. When will Conditions be Ripe: Prospects for Joint Development in the South China Sea. Paper presented at the 13 thAsia Pacific Roundtable, 30 May-2 June, Kuala Lumpur, Malaysia. Bert, W. 1993. Chinese March:

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and US Interests

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Chia Siow-Yue and Cheng Bifan (eds.) 1989. ASEAN-China Economic Relations: Developments in ASEAN and China. Singapore: Institute of Southeast Asian Studies. .1992. ASEAN-China Economic Relations: In the Context of Pacific Economic Development and Cooperation. Singapore: Institute of Southeast Asian Studies. Ching,

F. 1995. Malaysia Charts China's Course: Kuala Lumpur Warm s to Beijing as China's Policies Shift. Far Eastern Economic Review, February 23. Custodio, E.T. 1988. Laying the Foundations for a Philippine Strategy on Multilateral Issues in Philippine-China Economic Cooperation. In Towards the 21st Century: The Philippines and China in the Asia Pacific. Carlos P. Romulo Foundation, Makati, Philippines• Ding, Kuisong. 1988. China and ASEAN: Enhancing Cooperation to Meet Economic Challenges. In The Sixth China-ASEAN Dialogue. Institute of Security and International Studies, Bangkok, Thailand. Ghazalie S.M. 1982. Malaysia: International Relations (Selected Speeches). Malaysia: Creative Enterprise Sendrian Berhad. Grant, R.L. 1993. China's Domestic and Foreign Policies: An Overview. In China and Southeast Asia: Into the 21_tCentury. Washington, International Studies. Han, Hua. 1997. Visiting cance - Previewing Wei Po, August• Hassan,

D.C.: Center for Strategic

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Malaysia and Singapore Again is of Extraordinary SignifiLi Peng's Visit to Malaysia and Singapore. [tong Kong Wen

M. 1988. ASEAN and China in the Asia Pacific Region: Common Challenges and Search for Cooperation. In The Sixth China-ASEAN Dialogue. Institute of Security and International Studies, Bangkok, Thailand. Hao, Yuan and Guofang Huan. (eds.) 1989. _FheChinese View of the World. New York: Pantheon Books.

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International Monetary Fund. Various issues. Direction of Trade Statistics Yearbook. Washington D.C. Khatharya, Um. 1991. Thailand and the Dynamics of Economic and Security Complex in Mainland Southeast Asia. In Contemporary Southeast Asia 13(4). Liao, Shaolian. 1988. China-Philippine Economic Relations: Features and Prospects. In Towards the 21st Century: The Philippines and China in the Asia Pacific. Carlos P. Romulo Foundation, Makati, Philippines. McDougall, D. 1977. The International Politics of the New Asia Pacific. Singapore: tute of Southeast Asian Studies.

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Reside, R.E., Jr. 1988. ASEAN and China: Economic Cooperation or Economic Competition? In The Sixth China-ASEAN Dialogue. Institute of Security and International Studies, Bangkok, Thailand. Ross, R.S. 1990. China's Strategic View of Southeast Asia: A Region in Transition. In Contemporary Southeast Asia, 12(3), September. Roy, D. 1994. Singapore, China and the 'Soft Authoritarian Challenge.' Asian Surwy, March. Shee, Poon Kim. 1987. Peking's Foreign Policy toward Malaysia. In Issues and Studies, August. Sirikrai, S. 1990. Thai Perceptions of China and Japan. In Contemporary Southeast Asia 12(4). Sukma, R. 1994. Recent Developments in Sino-Indonesian Relations: An Indonesian View. In Contemporary Southeast Asia 11(2). Vatikiotis, M. 1993. Political Weapons: Mahathir's Nod to Chinese Arms Raises Eyebrows. Far Eastern Economic Review, August. Wanandi, J. 1992. Conference paper presented at the 2 "d ASEAN-China Dialogue, ASEAN Institutes of Strategic and International Studies, October, Beijing, China. Zhang, Zhaoyong and Chin Hock Ow. 1996. Trade Interdependence and Direct Foreign Investment Between ASEAN and China. In World Development.

Chapter Seven

ThePolitical Economyof Philippines-ChinaRelations by Benito

O. Lim*

ABSTRACT

rly history of Philippines-China economic relations (10"'-17 'h C) howed that there were many instances when good political relations ften led to good economic relations. There was direct and regular ade. It was extensive and covered large portions of the Philippine archipelago and the neighboring Southeast Asia. Conducted in a friendly manner, under the aegis of what the Chinese imperial court called "vassal tributary missions," it benefited the Filipino traders on the whole. Philippine colonial history (17"'-19 LhC), however, was characterized by bad political relations. Spanish colonial policy was discriminatory against the Chinese but, regardless of all kinds of impediments placed on the Chinese traders, these did not necessarily impede business relations. Vigorous commercial relations continued since they served the needs of rival parties. Spanish colonial administrators, despite their fear of the Chinese as a threat to their colonial outpost, learned to co-exist and cooperate with the Chinese who were indispensable economic instruments in preserving and sustaining the colonial economy. American (1902-1945) discriminatory laws against the Chinese did not deter them from active participation in the Philippine economy. Economic relations with China was suspended since World War II until 1970. Trade with China

* Professor,Asian Center, University of the Philippines, Diliman, Quezon City.

272

became vigorous

China's Economic Growth and the ASEAN

after diplomatic

relations

Marcos followed good political relations (PRC) during his rule. When the Aquino

were established

in 1975. President

with the People's Republic of China administration took over, it focused

its attention on Taiwan which made trade volume with China plummet significantly. The 1995-1998 China-Philippine trade and investment data have shown that positive economic policies such as trade liberalization and investment incentives can bring about good economic relations despite political sions brought about by conflicting claims over the Mischief Reef.

ten-

INTRODUCTION It appears that for over a thousand years of recorded history, the direction and improvement in economic relations between the Philippines and China have been dictated, molded and forged by political considerations, either good or bad2 There were, of course, some historical developments that challenged the merit of this observation. Whether the observation that good political relations lead to good economic relations (or vice versa) and if this observation is applicable to contemporary times is the concern of this paper. For instance, since 1995, the political conflict between China and the Philippines over the Mischief Reef has occupied media headlines for over three years. The perception of a majority of our political leaders and the molders of public opinion, as expressed in the mass media, is that Chinese occupation of the Mischief Reef is bad politics. The next question is, does it have adverse effects on the commercial relations between the Philippines and China?

PRE-COLONIAL

POLITICAL

ECONOMY

From the very beginning of Philippine Jtrade with China, the good trade relations between Philippine chieftains and Chinese traders were forged on the basis of good political relations. Chinese records show that regular and active trade between China and the Philippines took place only in the tenth century. Earlier trade between China and the Philippines had to be transacted mainly through the Champa (South Vietnam) coast. 2 However, in 972AD, Mai-i (Mindoro) traders who previously went through Champa before proceeding to China decided to circumI

1. Philippines-China relations as used in this paper cover not only commercial relations between the two countries but include the economic rolelof the Chinese in the Philippines. 2. Scott (1983),pp.1-19.

The Political Economy of Philippines-China

Relations

273

vent Vietnam and trade directly with China by sailing into Canton. 3 To do so, Mindoro traders had to secure the blessing of the Chinese emperor with a tribute mission. They gifted the emperor with-exotic gifts like pearls, sandal wood and colorful animals. Thereafter, Mindoro delegation was treated as state guests and enlisted as feudatory princes of the empire. They were bestowed with corresponding seals and patents of office. No doubt, the ceremonial acknowledgment of Chinese imperial sovereignty by tributary missions was good politics. It was, in turn, rewarded by the grant of accreditation to Mindoro traders to engage in direct commercial activities with China. Economic exchanges with the southern countries were so lucrative and extensive that in 972AD, the first emperor of Sung Dynasty established offices of maritime trade in Kwangchow, Hangchow, and Minchow with separate superintendents to deal with all Arab, Achen, Java, Borneo, Ma-i (Mindoro), and Srivijaya "barbarians."4 Indeed, Sulu's good political relations and cooperation with China dated back to the Yuan dynasty (1278-1368). 5 The Sulu missions had convinced the Chinese to view Sulu as an equal of Malacca. With Chinese cooperation, Sulu subsequently became an international emporium. Since trade missions were viewed by the Chinese as diplomatic initiatives, the Butuan missions can be viewed as the beginning of official relations between the Philippines and China. The residence of Paduka Batara's heirs in Techow can, in fact, be interpreted as the first Philippine embassy in China. More importantly, from the standpoh_t of the Philippine traders, the Mai-i trade mission, the Butuan and Sulu missions were attempts by separate Philippine chieftains or polities not only to bypass Champa as a trade entrepot but to establish themselves as new centers of international trade. Luzon ships were also plying the Manila, Fujian, Timor, and Malacca route during this period. By this time, the tung-yang chen-lu, the eastern route from the South China Sea to Sulu, Borneo and the Moluccas was fairly well established. 6

POLITICAL

ECONOMY

UNDER

SPAIN

By the time of Magellan's arrival to the Philippines in the 16 _hcentury, regular trade and cultural contacts between China and the Philippines was already firmly instituted. However, the flourishing trade between Filipinos 3, 4. 5. 6.

Scott (1983), p.2. Sung Shih, Monographs Wu (1959), pp_ 1-181. Wu (1958), pp. 307-393.

(Chih) as cited by Scott (1983).

274

China's Economic Growth and the ASEAN

and Chinese deteriorated by the late 16 'h to the 17 'h century. The entry of the Spanish colonial government imposed restrictions to direct Philippines-China trade. The Spaniards sought to capture and monopolize trade and commerce and direct it towards her colonies in the Americas and to Spain in what is known as the Manila-Acapulco or Galleon trade of 1565-1815. 7 In the process, the Spaniards took over much of Philippines-China trade and excluded the native Filipino traders and merchants. Moreover, the Spaniards closed all other ports and concentrated trade in their fortress city of Manila, whereas before several Philippine ports were active in international trade. The publication of Marco Polo's account regarding the fabulous wealth of China aroused Western fascination with China. Spaniards, heady with the conquest of the Americas were particularly tempted by the prospects of an easy military victory over China. Spanish colonialists repeatedly submitted proposals to the King and the Council of the Indies to lead military expeditions to China on the pretext of spreading the Catholic faith and the expansion of trade against the competition of their European rivals, s In 1573, Diego de Artega, the military officer of the Spanish colonial government in the Philippines, wrote the Spanish crown for permission to survey China preparatory to trade and to future conquest. 9 Subsequently, Governor Francisco de Sande offered to lead 4,000 to 6,000 men and, together with troops from Central America, assemble in Manila to be joined by the Japanese "who were redoubtable and mortal enemies of the Chinese" to conquer China. The Spaniards considered the Chinese army so weak and vulnerable that the Spanish factor in Macao, Juan Bautista Roman, claimed that he needed only 7,000 men to subdue the Chinese empire. 1째 All these ambitious schemes of conquest were put to a halt in 1586 when Governor Santiago de Vera proposed a more sober policy. He said that "if the Spaniards go into China in their usual fashion, they will desolate and ravage the most populous and richest country that ever was seen." The King promptly ordered colonial officials to "desist from entertaining such a project and instead guard the friendship of China. ''_ Discouraged from their plans of conquest, the Spanish governors in the Philippines pursued direct trade with China. It was Antonio de Morga, president of the Royal Audencia in 1609, wh0 proposed the direct trade with China. He argued that direct trade would not only win Chinese goodwill but would also obstruct any Chinese military threat. Direct trade was perceived as the means

for the Spanish

7. Schurz (1939)_ 8. Nonse (1986). 9. Schurz (1939),pp. 67-70. 10. Schurz (1939),pp. 68-69. 11. Vera (1586),pp. 197-229.

traders

in Manil_ to control prices of imported

Chi-

The Political Economy of Philippines-China

Relations

27_

nese goods. However, unfortunately for the Spaniards, the Chinese had already made earlier arrangements with other Europeans. The Portuguese, French, and Dutch had already established factories in Canton and Macao. Unable to pursue plans of conquest and direct trade with China, the Spaniards settled for dealing with the Chinese traders as middlemen. This arrangement led to an increased number of Chinese merchants and 6migr6s to the Philippines. It also allowed the Chinese to maintain a dominant position i_ the economy of the Philippines. This trade arrangement eventually became one end of Manila's entrepot trade, wherein Chinese goods, especially silk, were traded for Mexican silver dollars. '2 As a consequence, Spain was forced to pursue a policy of compromise that allowed Chinese entry to the Philippines and play a dominant role in Philippine business activities. So, the Spaniards relaxed its immigration rules and allowed the entry of more Chinese. But this arrangement, while it placed the Chinese in a dominant role in the economy of the Philippines, it did not allow them to enjoy equal status with the Spaniards. The Spaniards restricted Chinese movement, Chinese residence and Chinese trading to only designated parts in the Philippines. The Spaniards also imposed heavy taxes on the Chinese and required them to recv der labor on colonial building and construction projects. As a consequence, the political collaboration between the Spaniards and the Chinese traders was characterized by bad faith, lack of trust and betrayals. Regardless of iniquitous and harsh conditions, the Chinese population in the Philippines increased. In 1570, there were about 140 Chinese in Manila. Twenty years later, the number increased to 4,000 and, by 1600, there were over 26,000 Chinese in Manila. In 1603, when the Chinese staged an insurr_* tion, about 24,000 Chinese were slaughtered and only 1,500 were left. During the second Chinese insurrection in 1639, another 23,000 were killed. Ten years after, the population in the Parian, the Chinese 15,000. Much of the increase in Chinese population

]

district in Manila, rose to could also be explained by

the lack of political will and failure by lower echelon bureaucratic authorities to implement immigration restrictions and deportation orders. Despite intermittent massacres, trade and commercial networks were continued. The Spaniards and the Chinese not only co-existed but depended on each other to maintain a viable and lucrative commercial relationship, albeit, uneasily. Although most Spaniards hated the Chinese, they could not manage the colony's economy without them. The Spanish bureaucracy relied on trade and other commercial activities with China as a source of income, as the annual subsidy of the Spanish colonial bureaucracy was sorely inadequate, and it often arrived late or not at all. The Chinese, for their part, 12. Schurz (1939),pp. 73-74.

276

China's Economic Growth and the ASEAN

needed the Philippine market to ply their trade_ This uneasy political compromise was maintained by the Spaniards for over 250 years of its colonial history. The long fitful history of this partnership revealed that political policies from higher colonial authorities were subverted by the rank-and-file for personal considerations and economic gains. However, Spanish political relations with China were not totally bad. After failures in 1820 and 1840, the Spaniards tried again in 1858 to negotiate with China to facilitate Chinese immigration to the Philippines and to provide favorable trade arrangements. By 1864, the Chinese entered into a treaty with Spain to allow more favors to Spanish ships at Chinese ports. In return, Spain granted the "most favored nation" treatment to Chinese merchants coming to the Philippines. Despite the treaty of 1864, trade between the Philippines and China during the second half of the 19 _hcentury saw a decline compared to Philippine trade with Great Britain and the United States. 13 However, if we look at Philippines-China trade statistics over the years, it remained relatively constant from 1850 to 1872. After 1872, there was a decline of Philippine exports to China. No doubt, when the other Western traders started to join the ManilaChina trade, they cut into the existing junk trade. Indeed by 1870, junks stopped coming to Manila, although some went to other Philippine ports. This clearly indicates that, contrary to widespread expectations, good political relations did not always lead to good commercial relations.

POLITICAL

ECONOMY

UNDER THE UNITED

STATES

When the United States took over the IPhilippine government of the Treaty of Paris of 1898, the American Colonial administrators

by virtue tightened

further the Spanish discriminatory laws against the Chinese. The first few proclamations were the implementation in lthe Philippines of the Exclusion Law which originally applied to the Chinese in the United States. They also abolished the Gremio de Chinos as well as the positions of the cabecillas and governadorcillos. These were positions given to the Chinese by Spanish authorities to help the Spanish colonial government in collecting taxes from their fellow Chinese. It also allowed the Chinese tb settle problems and differences among themselves. The United States Congress in 1902 {ormally extended the Exclusion Law to the Philippines despite the immediate protest of the Chinese Consul. 'This law which prohibited Chinese immigrhtion to the Philippines was in13. Legarda (1955).

The Political Economy of Philippines-China

tended mainly to regulate Chinese Philippines-China trade relations. desire to keep the Philippines as its volume of trade between China and

Relations

277

economic role in the Philippines, hence, These developments plus the American exclusive market led to the decline in the the Philippines. However, in 1904, when

the Americans successfully subdued Filipino armed resistance to the United States rule in Manila, commerce and industry started to flourish. The application of the Chinese Exclusion Law in the Philippines did not reduce the number of Chinese in the country. On the contrary, the number of Chinese increased by threefold between 1903 and 1909. This increase in the number of Chinese was due to the American colonial government's need for both "coolie" and skilled labor. The Exclusion Law was bad politics and it failed to anticipate the manpower and other economic needs of American colonial officials. This led American immigration officers to face reality (as with their Spanish predec_sors) and look the other way at the rampant practice of illegal Chinese entrants who came in as relatives of the legitimate Chinese residents in the Philippinas. This started the entry of Chinese who had to recourse to the use of two nar_es in immigration documents. The first were their legal names (the names of their sponsors that appeared on their immigration papers) and their second names were aliases (their real names in China). These new immigrants eventually became the middlemen of American importers and traders. Political and legal differences notwithstanding, the total Chinese investrnents in the Philippines in 1939 reached US$100 million, second only to the United States investment of US$331 million. That same year, the Chinese government opened a branch of the Bank of Communications in Manila. The bank financed many of Chinese mercantile and industrial activities in Manila as well as in the remotest places in the Philippines. Trade between China and the Philippines came to a complete halt during World War II and resumed in 1945. The trade figure for 1945-1946 was US$40 million. mercial

Philippine relations

colonial history has shown that the Philippines-China comsurvived and flourished despite a hostile colonial govern-

ment and intermittent rebellions by Chinese traders and workers when conditions became unbearable. These sporadic uprisings were caused by a combination of discriminatory immigration laws, excessive tax and labor levies imposed by the colonial government and the extortion of exorbitant bribes by rank-and-file colonial bureaucrats. However, despite of all these negative practices, the market forces remained stronger than the political policies of the colonial governments. Discriminatory domestic laws did obstruct commercial activities but may have even intensified consumer demands for Chinese goods and products. Market forces, revenue needs of the colonial government and personal greed of the law enforcers ran counter to stated government policies.

278

POLITICAL

China's Economic Growth and the ASEAN

ECONOMY

AFTER

INDEPENDENCE

The Philippines-China commercial relations were suspended after the Chinese Communist Party captured political power in China on October 1, 1949. In the same year, the Philippines immediately instituted anti-Communist policies which isolated China from the rest of the "free world," prohibited Chinese immigration and banned travel to or from China. At the same time, the Philippine government signed an agreement with Taiwan on trade relations, exchange of specialists and information which led to our very close ideological and economic partnership with Taiwan. 14 In 1956, President Carlos P. Garcia opened a Philippine Embassy in Taiwan. During the early days of the Cold War, this political and economic arrangement was not questioned. Furthermore, the Philippines considered partnership with the United States and its allies as the only assurance for its survival. The Philippines agreed to play down its growing economic friction with the United States due to the unequal terms of trade as stipulated in the Laurel-Langley agreement. Although many Filipino leaders could no longer tolerate what they considered as unfair American trade policy, they refrained from pursuing trade disputes lest it jeopardized our security alliance with the United States. Their position at the time was to wait until the Laurel-Langley agreement

expired.

POLITICALECONOMYUNDERTHEMARCOSGOVERNMENT When President Ferdinand Marcos Opened diplomatic relations with China in 1975, nearly after a quarter of a chntury, commercial relations with China were renewed. Since his election as President in 1965, President Marcos had initiated a program to review Philippine foreign policy. One of the key points of the new policy called for a closer study of Asia and how the Philippines can accelerate trade with other Asian and socialist countries as well. The Philippines' primary trading partner was the United States but trade with her was on the decline. The downtrend in Philippine-United States trade together with near expiration of the Laurel-Langley Trade Agreement, compounded by the oil crisis of 1973, forced Marcos to search for new markets and alternative trade partners. The Marcos government saw in socialist countries new markets and wider scope of economic possibilities that could also put an end to the "special relations" with the United States. Thus, the opportunity for new business ventures led to the formulation of a new foreign policy. With this, the 14. DiplornaticAgendaof PhilippinePresidents,p. 9

The Political Economy of Philippines-China

Relations

Marcos government prepared the country ties with China and the Soviet Union. To facilitate

the search

travel ban on Philippine

for new

279

for the establishment

markets,

President

citizens to socialist countries

of diplomatic

Marcos

lifted the

in 1966. He argued

be-

fore Congress that the lifting of the travel ban would make some of our countrymen who traveled to Russia and China "a bit wiser": We adopted a liberal view on travel to communist countries. This gave some of our countrymen a chance to see for themselves what economists call the Russian and Chinese models. These travelers returned, ably much wiser because mainland. On January President Marcos

I think, a bit wiser, and they are probof recent developments in the Chinese

27, 1969 in his "state of the nation" unveiled his new foreign policy:

We, in Asia must strive

toward

address

in Congress,

a modus vivendi with Red

China. I reiterate this need, which is becoming day. Before long, Communist China will have ing power a thousand-fold with a sophisticated for its nuclear weapons. We must prepare for prepare to co-exist peaceably with Communist

more urgent each increased its strikdelivery system that day. We must China. is

The new Philippine foreign policy was precipitated to a large degree by international developments. By the 1960s, a serious rift occurred between China and the Soviet Union; Nixon announced the withdrawal of American forces in Asia, the relaxation of cold war tensions, and America's dOtente with the Soviet

Union.

The looming

worldwide

monetary

crisis, coupled

with

worsening domestic economic difficulties, as a consequence of deteriorating trade with the United States and other industrialized nations, led President Marcos to announce a new policy which was to normalize commercial relations with the socialist states. On December 12, 1970, then Secretary of Foreign Affairs Carlos P. Romulo recommended to President Marcos the establish"rnent of preliminary contacts with selected socialist countries to determine the possibility of concluding executive agreements to precede diplomatic or consular relations as the need arose. On September 21, 1972, Marcos declared martial law. The announced intention was "to stop the rebellion from the left and the right" and "to continue the 15. MarÂ˘os (1969).

280

China's Economic Growth and the ASEAN

economic development of the Philippines." Critics disagreed and claimed that martial law was declared to extend his term of office indefinitely. One year after the declaration of martial law, "developmental diplomacy" was launched. The Philippines normalized relations with Bulgaria, Poland, Czechoslovakia, East Germany, Hungary and Mongolia. By March 1974, trade relations with these countries, as well as with China and the Soviet Union, reached US$80,398,309.00, ports US$34,021,936.00.16

with exports totaling US$46,376,372.00, Forty nine percent of the overall trade

and imwith so-

cialist countries was with China. With these trade figures, the prospect expanded trade looked bright especially with the impending expiration the Laurel-Langley Trade Agreement on July 3, 1974. The Philippines

for of re-

ceived assurance from these countries that they were interested in importing traditional export products, which the Philippines exported to the United States, and which were also the Philippines' principal foreign exchange earners. The East Europeans expressed interest in buying abaca, copra, sugar and sugar products. The Soviet Union and the Chinese lists included nearly all Philippine export products. In March 1974, Philippine ambassador to China Benjamin Romualdez went to Beijing to continue talks for normalization of relations. In July-August of the same year, Ambassador Rornualdez made three more trips to arrange for Mrs. Imelda Marcos' proposed visit from September 20 to 27, 1974 upon the invitation of China's Prime Minister Zhou Enlai. 17Mrs. Marcos concluded a trade agreement providing for sale by China of petroleum, and purchase of major export products from the Philippines. In November of the same year, Beijing signed an agreement to import coconut oil, logs and plywood, copper concentrates, and sugar. 18 Ten months before normalization, the PRC government had already demonstrated their willingness to help ease the economic difficulties of the Philippines brought about by the steep increase of oil prices. On September 25, 1974, an agreement was signed for China to sell high quality petroleum to the Philippines and, in turn, buy Philippine products such as coconut oil, lumber, sugar, copper ore, and other metals. The initial shipment of 125,000 barrels of crude oil was delivered in October of that year. On June 7 to 9, 1975, President MarcOs went to the People's Republic of China and signed a Joint Communiqu6 normalizing relations between the Philippines and China. 19Among other things, the Communiqu6 recognizes that "there is but one China and that Taiwan is _n int_c;ral part of Chinese territory..ff Thereafter, the Philippines terminated all extant official relations with Taiwan. 16. 17. 18. 19.

"RP-Red Trade Surplus: $12.3M," PhilippineDaily Express(September 21, 1974). DiplomaticAgendaof PhilippinePresidents,pp. 227-228. DiplomaticAgendaqf PhilippinePresidents,pp. 227-22째 Diplomat'icAgendaqf PhilippinePresidents,, pp. 239-i

The Political Economy of Philippines-China

Relations

281

The Taipei embassy in Manila was renamed the Pacific Economic and Cultural Center, now known as the Taipei Economic and Cultural Office, while the Philippine Embassy in Taiwan was renamed Asian Exchange Center, Inc., subsequently renamed as the Manila Economic and Cultural Office lodged under the Office of the President. Barely two months after normal relations, more agreements were signed to increase trade, cultural and scientific exchanges, official visits, and to obtain loans. On March 12, 1978, China's Vice Prime Minister and Vice Chairman of the Chinese Communist Party, Li Hsien-nien and Foreign Minister Huang Hua visited the Philippines. An agreement on scientific and technical cooperation was signed between the two countries aboard the presidential yacht, Ang Pangulo. On October 13, 1980, a loan amounting to US$30 million from the People's Republic of Chins was obtained to pay for the purchase of 500 mini-hydro power plants. The agreement was signed by President Marco$ and Ambassador Chen Hsin Jen. On August 6, 1981, for the first time in the Philippines' post war history, a Chinese Prime Minister came on a four-day state visit to the Philippines. Prime Minister Zhao Ziyang's entourage included Li Qiang, Minister of Foreign Trade, Chen Chu, Deputy Secretary General of State Council, and others. Zhao agreed to continue to supply crude oil to the Philippines at concessional prices. The oil deal was one of the three issues President Marcos discussed with Prime Minister Zhao. Other issues were Philippine purchase of high grade coal from China and increased Chinese importation of Philippine coconut oil. Prime Minister Zhao also pledged that China would not intervene in the internal affairs of the Philippines nor will it seek to impose its policies in Asia. a째 During a 1984 visit of Imelda Marcos, the Chinese agreed to increase its trade volume with the Philippines from the targets of US$20 million in 1974, and US$30 million in 1978 to US$500 million. The Chinese also agreed to buy more Philippine products to balance the two-way trade. The trade in 1984, in fact, had reached US$300 million. Mrs. Marcos ment for China to supply US$60 million worth payment basis.

also negotiated an agreeof crude oil on deferred

The PRC also kept its word not to interfere in the internal affairs of the Philippines and refrained from providing any substantial support to the Communist Party of the Philippines. This hands-off policy delighted the Philip* pine Armed Forces leaders and surprised President Marcos himself. However, it also gave the opposition Kuomintang (KMT) opportunity fluence among the local Chinese in the Philippines. 20. DiplomaticAgendaof PhilippinePresidents,pp. 344-345.

to expand

its in-

282

China's Economic Growth and the ASEAN

There is no doubt that under the Marcos administration, trade volumes between China and the Philippines increased. It was the outcome of deliberate positive political decisions made by the leaders of both countries. From zero volume in 1970 to a target of US$20 million in 1973, the amount nearly doubled in 1975 and, again, in 1977. China moved from an insignificant trade partner in the early 1970s to dislodge Taiwan as the Philippines' sixth largest trading partner in 1985. See Table 1. The Marcos administration

indeed

demonstrated

that good political re-

lations with China could lead to good business relations. China's purchase of Philippine products had followed the number of diplomatic missions Marcos sent to China. However, there were two stages of _ignificant drops in the volume of trade between China and the Philippines during the period 1971-1986. (Table 1 does not include figures for 1986). Thes(_ were the outcome of political and economic developments in the Philippinesi There was a drop in trade volume from US$311.5 million in 1982 to US$151.5 million in 1983. This was due to the Philippine balance of payment crisis as a Consequence of the assassination of Senator Benigno Aquino. Another case Was a drop in trade volume from US$355.8 million in 1985 to $215.3 million i_1986, which was due to the political uncertainties during and immediately after the snap elections. Table 1. Foreign Trade of the Philippines with China (F.O.B. Value in US$) '_ ...... ..... ..''_:

Total

i if!:!_i_ _'i_' .....'"_ '_'' .......... _ ''_....... .............. _"_'_:' '"....... ..... ._,.'I.'. ' ][_rts _' '": '. ,' '. '" _:'I|".":.'",.

1971 1972 1973 1974 1975 1976 1977 1978 1979 1980

1,408,195 6,312,859 27,889,132 37,231,327 72,251,804 93,344,544 186,372,229 159,085,110 172,417,464 250,691,740

1_006,390 5_530,309 21i924,670 231924,670 47!036,027 531792,649 78i351,890 111;627,098 120_953,005 205 705,312

1981

272,742,410

19,11516,918

78,225,492

1982 1983 1984

311,531,991 151,542,102 280,441,795

20(1327,132 1221150,595 220i255,977

105,204,859 29,391,507 60,185,818

276i084,896

79,792,768

1985. 355,877,664 Source: National StatisticsOffice.

401,805 782,550 6,571,480 13,306,657 25,215,777 39,551,895 108,020,339 47,458,012 51,464,459 44,986,428

The Political Economy of Philippines-China

Relations

283

Despite friendly political decisions to keep trade mutually beneficial for both China and the Philippines, the balance of trade for the period 1971-1985, except for 1977, had been in China's favor ever since the opening of diplomatic relations between the two countries. The main reason for the imbalance was due to the Philippines' purchase of large quantities of crude oil at a "friendship price." China's main exports during this period were mainly energy products--from crude oil, petroleum products, steel billet, chemical raw materials, machinery products, canned goods, textile, to coal and coal products. China also exported other manufactured products (which were the outcome of its "Four Modernization Program" which started in 1979) such as generators, tires, and processed food but these were not among the Philippines' top imports. On the other hand, Philippine export products were limited to coconut oil, lumber, fertilizer, timber, plywood, sugar, copper ore, and other metals. Due to its modernization program, China's shopping list consisted of such items as complete turn-key plants for steel, fertilizer, combustion engines, computers, chemicals, advanced electronics, air crafts, scientific equipment, precision machinery, nuclear plants, robotics, and raw materials that were in little quantities or not available inside China. Except for copper concentrates, the Philippines did not offer the other products included in China's shopping list. Another reason for the trade imbalance stemmed from the fact that the Philippines and China produced similar products, putting the two countries in a competitive rather than complementary footing. Moreover, China purchased only those items listed in the Trade Protocol. New products that were not incorporated in the protocol were not purchased by the Chinese. Finally, although the Chinese listed a lot of items in the trade protocol, the Chinese pegged their prices way below the prevailing prices in the world market. Clearly, the Chinese wanted the Philippines to sell its exports at "friendship price" the way the Philippines pegged Chinese crude oil on a "friendship price" basis. No doubt, even good political policies during the Marcos administration, including provisions of a trade agreement granting most-favored-nation treatment to each other cannot erase decades of propaganda that inculcated the fear of communism among majority of the Filipinos, including ChineseFilipinos. Among the Chinese leadership, there were those who harbored fear of capitalism and its concomitant moral decadence. Thus, political rapprochement did not remove protectionist policies that demanded strict adherence to the maintenance of trade balance. In the case of trade with China, President Marcos pursued neo-mercar_ tilist interventionism. Beginning 1977, both China and the Philippines held annual meetings of the Philippines-China Joint Trade Committee, alterna-

284

China_ Economic Growth and the ASEAN

tively in Beijing and Manila. The specific purpose of which was to pursue a "trade balance policy" and "to set target for trade." No doubt, this was intended to cultivate "good political relations" with China, which complemented China's command economy at the time. The committee had to meet every year to come up with a trade protocol, which set the target amount and volume of trade for the two countries. Difficulties arose since both negotiating goods for which

teams could not ensure they negotiated.

production

and

quantities

Compounding the problem was that the Marcos' government development program relied on unpredictable preconditions: a strong government shored up by military force; government intervention in the market; authoritarian control of labor activities and other forms of oppositions (all of which were excluded from political and economic decisionmaking), and nurturing of a few selected businessmen known as "crony capitalist." After Marcos was deposed from office and the dissolution of the Martial Law regime, it was widely expected that many of the Marcos economic policies would be dismantled and that new priorities would implement more liberal economic policies.

POLITICAL

ECONOMY

UNDER THE AQUINO

ADMINISTRATION

No doubt the Aquino administration (1986-1992) marked a return to democracy and the restoration of civil rights in the Philippines following 14 years of Marcos martial rule. Congress was re-instituted, governmental control changed hands, and the military, which earned notoriety as the most repressive and most brutal instrument of martial rule, was placed under civilian control. Most political prisoners, including leading member of the Philippine Communist Party, were freed; some of them were even given a role in the government. Civilian control, however, led to a succession of coup d'etats. President Aquino faced enormous economic, political and social problems. Government was bankrupt, there was double-digit inflation, unemployrr,_nt rose, strikes and demonstrations by farmers, laborers, and students were staged regularly. There were assassination_ and counter-assassinations between the adherents of left and right ideolqgies. In general, the government suffered from disorder and confusion even _vithin the highest administrative echelons. Worse, the Philippine elite, which had united against the martial law regime, fought each other fiercely to gain control of the machinery of government. Many of the military officers who helped depose Marcos staged several coups against the government. Economic production and business activities

Eo,,o.,vo/phJ;pp,'na -Chha Relations

285

_.were also hamstrung by questions of ownership of Marcos-established enterprises and prosecuting former "Marcos cronies." Much government effort was expended in the search for and the recovery of the "Marcos ill-gotten wealth" by the Presidential Commission on Good'Government. In the meantime, the presence of progressives, nationalists, left-leaning elements within the Aquino administration stoked the agitation to rescind the United States bases agreement which was due for re-negotiation. Still, it was clear that the Aquino administration had two major goals: to rid the country of the lingering legacy of military authoritarianism to overcome the economic crisis; and, to stop graft and corruption spawned by the Marcos administration Under these circumstances, the Aquino government was in no position to formulate a coherent foreign policy to give direction to foreign trade, much less attend to the Republic's relationship with the PRC. Although China was one of the first few countries that recognized the Aquino government two days after the EDSA "people power revolution," the Aquino government did not give due attention to China. China was the one who took the initiative to revitalize its relations with the Philippines. One month after EDSA, the Chinese Minister of Culture came Manila to sign a Cultural Agreement Executive Program. In May 1986, the Chinese agreed to: 1. restructure payment of US$11.2 million in rice import credit given to the Marcos administration in 1985, and 2.

renew a credit line for US$20 million given to the Philippines Bank of China.

by the

Given these developments, it was widely expected that PhilippinesChina relations under the Aquino administration were headed to a good start. It was speculated by many observers that Aquino would seek some form of economic cooperation with China. Some even believed that she would continue the Marcos era of good relations with China. Expectations, however, were proven wrong. In sharp contrast to the earlier Marcos policy, where commerce, security and friendship were the substance of Philippines-China r_lations, President Aquino's East Asia policy was clearly dominated by Taiw-an. Indeed, from the start of the Aquino administration, several "unofficial" trips were made to Taiwan by Aquino officials at all levels. Cabinet members, legislators, provincial, city and even municipal officials traveled to Taiwan, presumably, to observe Taiwan's land reform program and other development projects. These unofficial trips did not escape the attention of the Chinese Embassy in the Philippines. Taiwan press agents made it a point to provide the names, full accounts, and details of these visits to the Philippine pres_ and the staff in the Chinese Embassy. According to the Chinese Embassy _taff, these Taiwan

visits by Filipino

officials contradicted

Philippine

"one-C_ina"

286

China_ Economic Growth and the ASEAN

policy. The PRC embassy ostensibly filed diplomatic protests but they were ignored, denied, or dismissed by the Philippine officials who argued that the Taiwan-China tive Secretary Taiwan,

dispute was a "private or _amily quarrel." An Assistant Execuand Chief of Staff of President Aquino told a public forum on

"RP-Taiwan relations must be' viewed within existing realities. We need to face the fact that Taiwan exists..We also cannot ignore the fact that there are FilipinOs there whom the Philippine government should protect. ''2_ i It took the Aquino government almost three years to reactivate RPChina relations, albeit, mainly through the/initiative of the Chinese-Filipinos who supported her presidency. In DecemlJer, 1988, before her trip to China, she signed Executive Order No. 313 which _rohibited Philippine government officials from visiting Taiwan. In the interim between 1986 and 1988, Taiwan continued to intensify its economic activitie_ which could not but have political repercussions. Although the Aquino administration officially maintained Marcos' "one-China" policy, Philippines-China relations under her administration came to a near standstill. The policy of maintaining trade balance continued but was complicated by the creation of the .Philippine International Trading Corporation (PITC) which literally replaced the Joint Trade Committee (JTC). The JTC required importers to insure that the equivalent value be exported to China. While this requirement improved somewhat Philippines' trade balance with the China, it also brought down imports from China. z2 Volume of trade may have also diminished due to political decisions to accommodate Taiwan, which was seen by China as an attempt to pursue a "two-China" policy. Accommodation with Taiwan was not a_ indiscretion of the Aquino administration alone. Although the Marcos administration opened diplomatic relations with China, it encouraged its Ministry of Trade to continue to pursue vigorous economic and trade relations with Taiwan (see Table 2). Due to the long-term mainly

and close Philippilae

on a con_-non anti-Communist

relations

with Taiwan based

stance f_om 1946 to 1975, trade contin-

ued with the island state even when diplomatlc tablished. KMT influence on the local Chinese and institutions also lingered.

relations with China was esand Philippine policymakers

21. Lotilla (1993). 22. Interview with Xue Ruixhia, Economic and Commercial Attach_ of the Chinese Embassy in the Philippines (March 4, 1999).

The Political Economy of Philippines-China

Table 2. Philippine-Taiwan

287

Trade (F.O.B. Value in US$)

_!i!!si!' T.v_'.iI _ ,_. _. _

1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986

Relations

107,035,517 108,325,591 116,449,716 108,735,870 173,092,353 242,575,129 283,220,829 306,440,007 276,774,230 288,128,482 269,205,086 264,008,733 403,328,904

. _. ,_._.,_, _.;.

78,888,794 79,622,111 74,117,624 81,404,387 131,816,634 173,261,298 182,668,981 204,880,$27 220,114,928 213,242,042 177,756,435 177,909,368 279,662,720

28,146,723 28,703,480 42,332,092 27,331,483 41,278,719 69,313,831 100,554,848 101,559,480 $6,659,302 74,886,440 91,448,651 86,099,365 123,666,184

Source:National StatisticsOffice.

Two other factors had prejudiced

Philippine

view of China during

the

Aquino administration. First was Taiwan's twin decision to reduce reliance the United States and Japanese markets and to comer a larger share of the Ksian market. Second was Taiwan's use of flexible diplomacy to campaign for _olitical recognition from as many countries as possible, by rejoining the UN md by greater participation in world affairs through its economic clout. In the _hilippines, the campaign took the form of linking political concessions to raiwan with economic investments and aid. Officials of the Taiwan Chamber _f Commerce

even lobbied to the Philippine

government

to allow 100 perce_t

!oreign ownership of real estate, removal of constitutional limits on forei_n _wnership of stocks of Philippine corporations, and foreign participation in :etail trade. _ Indeed, Taiwan's initial campaign was so successful that many ?hilippine legislators competed with one another in initiating a review of the :ountry's "one-China" policy, the passage of a Philippine-Taiwan Relations _ct, and granting diplomatic status to Taiwan officials and businessmen in the Philippines.

No less than five bills were filed in the Philippine

House of Re_-

23. Productive enterprises must have.invested at least US$10million and registered an op_ati0_ _eIiod of m0_ than ten years to be eligible for the income tax exemption and rate red_Â˘ti0n. For service enterprises, amount of investments and operation period must be at least U_$$ mi_ion and ten yea_s, _espec_we\_.

288

China's Economic Growth and the ASEAN

resentatives to promote trade, commercial, economic, and scientific cooperation. According to Congressman Chairman, House Committee on Foreign Affairs:

cultural, educational Jaime Lopez, Vice-

"Taiwan would like to have a law that will protect their investments, business interests, and properties in our country. They are probably apprehensive that if there would be unification of the PROC and Taiwan, there might be a change in the political system which would adversely affect their investments, business interest and properties in foreign Countries. ,,24 Another reason for the seeming prejudice of the Aquino administration against China may be the propensity of the Aquino government to reject, halt, or set aside, projects initiated under the Marcos regime. Since diplomatic and good economic relations with China were initiated by Marcos, the Aquino government showed little interest in continuing such a policy. The Taiwan campaign for diplomatic recognition was so successful that a content analysis of the major Philippines' papers at that time showed much coverage of news about Taiwan's financial investments. Media coverage centered on Taiwan's readiness to help the Philippines out of its economic trouble, Taiwan's superior political system following Philippines' democratic path, Taiwan's plan to establish a futuristic city in Manila, provided the Phib ippines can extend official protection to these economic ventures. These media blitz edged out any positive coverage about Mainland China, which had already been very skimpy to begin with. Taiwan's diplomatic,offensive ma_e headway due mainly to what Taithemselves called money diplo_nacy. A year of massive Taiwan media campaign and pro-Taiwan lobbying in the Congress helped spark enormous enthusiasm for Taiwan among many Filipino political leaders. Several believed that Taiwan might indeed help set the Philippines' sinking economy afloat. After two more years of "money diplomacy," some Filiphxo leaders were already talking about reconsidering the merit of the country's "one-China" policy. In Congress, bills were filed prowanese

posing either to officially recognize Taiwan as separate from China or, at the very least, grant to Taiwanese citizens undertaking business in the Philippines the same rights as Filipino citizens in the acquisition of real estate and ownership of enterprises. Taiwanese officials, it was proposed, should be granted the status of diplomats. Advocates of a "two-China" policy in the Philippines asked:

"Why not two Chinas,

resources

we need/or

when the smaller one is offering

our economic

recovery I

24. Lotilla (1993),pp. 46-47.

while the bigger

to give us the one cannot?"

The Political Economy of Philippines-China

Relations

289

For those who were pushing for Taiwan's line of "one-China, two governments," they maintained that diplomatic status and the right to buy real estate are small concessions in exchange for loans and investments that will help _e Philippine economy turn around. They raised question on whether it will serve Philippine national interests to isolate Taiwan in view of its rise as Asia's largest economic tiger next to Japan affd the fact that Taiwan was now a member of to the Asian Development Bank and GATT. In the Filipino Chinese community, the pro-Taiwan Chamber of Commerce,

members of the Federation of the Chinese-Filip_o who suffered setbacks under the martial law regime,

were in the forefront of Taiwan propaganda efforts. From 1987, Taiwan's trade figures with the Philippines continued to rise dramatically, from US$264 million in 1985 to US$403 in 1986 and US$515 million in 1987, dislodging China as the fifth largest trading partner of the Philippines. In 1988, Taiwan became the Philippines' number four trading partier (US$711,571,647), next to the United States, Japan, and Hong Kong while China plunged to number 12 (US$309,084,635). From 1989 to 1991, Taiwan became the Philippines' number three trading partner, dislodging Hong Kong (see Table 3). Soon, government officials were saying that the invitation to Taiwan businessmen and the Taiwan government to invest was merely an attempt to rehabilitate the country's economy rather than an outright rejection of the "one-China" policy. In February 1989, three years after President Aquino assumed office, the Philippines and China signed an agreement to expand bilateral trade to between US$400 and US$450 million. This was lower than the target set by Marcos in 1978. The primary item that motivated the Aquino government to sign the agreement was crude oil. On April 14, 1989, President Aquino left for China seeking to strengthen diplomatic ties and to retrace her roots in Hongjian, Fujian. In Beijing, President Aquino met Deng Xiaoping, Premier Li Peng and President Yang Table 3. Philippine-Taiwan _...,,_

Trade (F.O.B. Value in US$)

...... _ _'Â°'_'_'i' "_' ill_!_ i .... , _, _,; _ " â&#x20AC;˘ .......

1986

403,328,904

279,662,720

123,666,184

1987 1988 1989 1990 1991

516,818,930 711,511,467 912,097,478 1,014,832,191 1,034,319,245

372,430,385 510,737,872 701,799,164 805,569,506 824,596,914

144,388,545 200,833,775 210,298,31/ 209,262,685 209,722,331

Source:National Statistics Office.

290

China's Economic Growth and the ASEAN

Shangkun. They reiterated China's policy of non-interference in Philippine domestic affairs and their support of President Aquino's government. President Aquino was given a donation of 10,000 metric tons of rice by the PRC government. There was an agreement to further increase bilateral trade over a five-year period to US$800 million. President Aquino's state visit did not significantly change her policy toward Taiwan. A year after her "sentimental journey" to China, when the Tiananmen incident broke out, she and Filipino prelate Jaime Cardinal Sin, expressed sadness "over the violent dispersal of the student-led protest movement" in China. On July 16, 1991, near the end of Aquino's term, Assistant Executive Secretary Rafael Lotillla, acting as Chairman of the South Sea Fishery Dispute Settlement Committee, signed a Manila-Taipei Agricultural and Fisheries Agreement with Taiwan officials. Immediately after Beijing learned of the agreement, it sent a very strong.protest to the Department of Foreign Affairs claiming that the agreement was illegal for it violated the "one-China" policy. In a press interview, Foreign Affairs Secretary Raul Manglapus told the press that the Department of Foreign Affairs (DFA) had warned would violate the "one-China" policy and that the DFA "has such an agreement." President Corazon Aquino announced agreement but took no action. It was only in 1996, during the

that such action always opposed a review of the Ramos adminis-

tration, that the Philippine Senate passed a resolution nullifying the Fisheries Agreement with Taiwan. On August 6, 1991, when the National Electrification Administration asked China for concession to cancel Philippine orders for hydropower machines costing US$420 million, the Chinese readily agreed to the request. On November 2, 1991, when Fu Hao, a Chinese parliamentarian working with the United Nations called on President Aquino, the Taiwan issue was raised. President Aquino and Executive Secretary Joker Arroyo told Fu Hao that the Philippines pursued ties with Taiwan to help solve economic difficulties, and that such relations were strictly economic and not political relations. During President Aquino's six yea_s in power, her attention

became

more and more focused on talks with TaiWan officials for economic support and investments but such efforts achieved little progress. As one paper noted, "Taiwan has taken an exploitative attitude towards us mainly because of our unstable economy, the beggarly attitude and ulterior motives of our government officials frequenting Taipei and a faint hearted political leadership. 25 25. Philippine

Daily Globe, "Tact and Taiwan/'

Septe_nber

17, 1989,

The Political Economy of Philippines-China

Relations

291

Near the end of Aquino's term, Taiwan withdrew several of their socalled mega-industrial investment projects slated in the Philippines, including the controversial Luzon Petrochemical Plant. Chairman Joker the Philippine National Bank claimed that the Luzon Petrochemical tion did not intend to bring in capital but will borrow heavily banks. Subsequent to Arroyo's revelations, news about Taiwanese ment of Filipino overseas contract workers, Taiwanese speculation tate, Taiwanese involvement in kidnapping, and smuggling of

Arroyo of Corporafrom local maltreatin real esTaiwanese

agricultural products into the country and smuggling out of Philippine rare resources into Taiwan began to fill the pages of Philippine newspapers. Close Philippine-Taiwan relations during the Aquino administration had turned back the RP-PRC cooperation cultivated earlier by President Marcos. There is no doubt that Philippine diplomatic alliance with Taiwan and the creation of the PITC had contributed to the downward trend in RP-PRC trade. Conventional wisdom that bad political relations led to bad economic relations was proven correct by events during the Aquino administration. Unfortunately, President AquLno's pursuit of economic diplomacy vvith Taiwan did not progress beyond her administration. Taiwan's promis_:s to help build the Philippine economy failed to materialize when Aquino ste!_ped down as President. The Aquino government was so single-minded in set.king Taiwan economic support that it overlooked the phenomenal rise of China's economy and, therefore, economic growth.

POLITICAL

ECONOMY

failed to use it as a "benevolent

UNDER THE RAMOS

stimulus"

to its own

ADMINISTRATION

Unlike President Aquino, President Ramos took immediate steps to mollify the Chinese. He made a state visit to China from April 26 to May 1, 1993. His agenda ranged from the expansion of commercial relations with China to the resolution of the Spratlys dispute. To emphasize the a_,_nda, President Ramos not only ordered the termination of the trade balancing program but brought with him six top Chinese-Filipino tycoons to China. The new trade protocol encompassed pledges of best-efforts on the part of the Philippines to buy Chinese power plants, transmission lines and towers, transformers, metal-manufacturing and road-building equipment, electrical products, coal, textiles, steel billets, mineral products, chemicals, cotton, foodstuff and other consumer items. For China's part, it will buy Philippine phc_sphatic and compound fertilizers, chromite ores, copper cathodes and concentrates, tin plates, cold-rolled steel, manganese, coconut oil, fatty acid and alcohol, bananas, coffee beans, and shelled cashew. The Ramos delegation

292

China's Economic Growth and the ASEAN

also signed 14 joint venture agreements. China offered a US$25 million energy loan for the construction of mini-hydro electric plants and a commercial credit for two coal-fired power plants. At the same time, President nated US$434,000 to victims of Mt. Pinat_bo_

Jiang Zernin do-

During the meeting between Presidents Ramos and Jiang Zemin, the Chinese host assured President Ramos that China does not have any expansionist ambition and that its arms build-up was part of its modernization program. The Chinese emphasized the importance of shelving the sovereignty issue over the Spratlys while President Ramos reiterated the importance of abiding with ASEAN's Manila Joint Declaration to settle differences peacefully. President Ramos reassured the Chinese that his administration would adhere to the "one-China" policy despite his meeting with Taiwan President Lee Teng Hui at Subic (a former United States naval base situated in Olongapo, Zambales). At the end of his visit, President Ramos invited President Jiang Zemin to visit the Philippines. President Jiang Zemin accepted the invitation and immediately after the APEC Summit in November 1996, he made a state visit to the Philippines. It was the first time in Philippine history that the highest Chinese official made a state visit to the country. During President Jiang's visit, two agreements were signed between the two countries on November 26, 1996. One was the Agreement between the Government of the Republic of the Philippines and the Government of the People'sRepublic of China on the Establishment of Additional Consulates. The Chinese government gave its consent for the establishment of a Philippine consulate-general in Guangzhou, with a consular district comprising Guangdong Province, Guangxi Zhuang Autonomous Region, Hainan Province and Hunan Province. In addition, the consular district of the ConsulateGeneral of the Government of the Republic of the Philippines was established in Xiamen comprising the Fujian Province, Jiangxi Province and Zhejiang Provinces. The Philippine government gave its consent to the Government of China for reserving the right to establish a consulate-general in Davao, with a consular district comprising Basilan, Sulu, Tawi-Tawi, Zamboanga del Norte, Zamboanga del Sur, Agusan del Norte, Agusan del Sur, Davao del Norte, Davao del Sur, Davao Oriental, South Cotabato, Surigao del Sur, Lanao del Norte,

Lanao del Sur, Maguindanao, Nor!h Cotabato, and Sultan Kudarat. The other agreement was for the Maintenance of the Consulate-General

of the Republic of the Philippines in Hor_g Kong Special Administrative Region of the PRC. The most contraversial issue between the Philippines and China during the Ramos administration centered on rival claims on the Spratly islands, West of Palawan. This occurred even after an agreement was signed during President Ramos' state visit to the PRC. The agreement stated that both coun-

The Political Economy of Philippines-China

tries would

shelve the sovereignty

Relations

issue and adhere

293

to the 1992 ASEAN

Ma-

nila Declaration enjoining all claimants in the Spratlys to settle their conflicting claims peacefully. 26 Cooperation between the two countries went on smoothly after the Ramos visit until China's occupation of the Mischief Reef in 1995, the recurrent entry of Chinese patrol boats, fishing vessels, and the attempted occupation of the Scarborough shoal. These developments not only got the attention of the Ramos government but also led to confrontational behavior that soured Philippine-PRC diplomacy over the Spratlys. It gave the Department of Defense reason to lobby for an increase of its budget in order to modernize its defense structures. It also convinced the Department of Foreign Affairs to shift its strategy from quiet diplomacy to "internationalizing the issue" by questioning the legitimacy of China's occupation of the Mischief Reef in international forums. It has also brought Congress into the controversy and has convinced many of its members to seek stronger security arrangement with the United States of America. Some of its members have questioned the wisdom of the Philippine Senate in rejecting a new agreement on the American military bases rejected during the Aquino administration. They claimed that with the presence of the American bases, the Chinese would not dare occupy the islands. The Philippine military interpreted Chinese presence as "invasion," "intrusion," "violation of Philil_pine territorial sovereignty," and "occupation" of Philippine territory and waters. Since 1995, the Philippine military considers Chinese presence in the Mischief Reef as a threat to Philippine security. In 1995, it was feared that friendly relations between China and the Philippines would deteriorate after Chinese occupation of the Mischief Reef. In fact, most observers linked Chinese occupation of the Mischief reefs with 26. China, Taiwan,and Vietnam claim all the islands in the Spratlys. The Philippines essentially claims only the western section of the Spratlys, or the Kalayaan Island group, an assortment of about 51 islands, islets, reef, shoals, cays, and rocks, depending whether it is high or low tide. This group is nearest to Palawan which also contains most of the larger islands in the archipelago. Malaysia claims three islands it presently occupies as well as Amboyna Cay which is held by Vietnam. Brunei has staked its claim to Louisa Reef,one of the Southern Shoals of the Spratlys which is underwater. Vietnam occupies 25 islands with its main base on Spratly island (Troung Sa). The Philippines holds eight islands with its base on ThiTu Island (Pagasa). China holds eight islands. Malaysia has three and has opened Swallow Reef (Torumbu Layang Layang). Taiwan holds Itu Aba, the largest of the Spratlys. Actually the conflicting claims on the Spratlys were considered resolvable by the Chinese even as early 1972,long beforediplomatic relations was established between the Philippines and China. The issue of ownership was raised with the PRCwhen Senator Salvador Laurel visited Chinain March,1972.Senator Laurelreported that then China's ViceMinisterfor Foreign Relations "made it clear that China had always regarded the Nansha Island as part of her territory.When I advised him that the Philippines also has an interestin the islands, he politely replied that in view of the absence of diplomatic relations our conflicting claims could not be iscussed. The ViceMinistersaid that the potential dispute couldbe settled over the conference lble." (See Laurel Report:Mission to China, March12-22, 1972,185 pages).

294

China's Economic Growth and the ASEAN

commercial and trade issues. They argued that commercial relations would only improve if and when the Chinese occupation of the Mischief Reef was resolved. Several Filipino pohtical leaders demanded that the Chinese leave Mischief Reef as a precondition to improved Philippine-China relations. From an international relations perspective and, particularly from a political standpoint, security concerns that are given primary importance as in the case of Chinese occupation of the Mischief Reef would reduce trade activities. Yet, a review of trade statistics from 1995 to 1998 appears to prove these observers wrong. It appears that despite China's construction of a structure over the Mischief Reef in 1995 and with the controversy it has spawned since then, trade volumes between the two countries have increased dramatically over the same four-year period. (See Table 4.) Trade volume increased from US$456.7 in 1994 to US$1306 in 1995 or an increase of 65 percent. Indeed, the trade volume increased more markedly in 1997 (US$1666) when the Mischief Reef controversy became more pronounced and the Asian financial crisis occurred. More striking perhaps is the fact that while the trade volume between: China and the Philippines increased during the 1997 financial crisis, China'S trade volume with other ASEAN countries plummeted significantly. This is also true with Chinese investments in the Philippines. From 1995 to June 1998, when the Mischief Reef issue was, smoldering, China opened Table4. Philippine Trade with China(In Year :,

US$Million)

, Total

_por_

' ,I_ "_'

1998 1997 1996 1995 1994

2013.00 1666.00 1387.00 1306.00 456.97

512_00 327.00 372.00 275.00 163.94

1501.00 1339.00 1015.00 1030.00 293.03

1993 1992

354.53 297.64

173.87 ' 113.90

180.66 183.74

1991 1990 1989

351.27 223.86 271.33

i127.77 61.76 50.23

223.50 162.10 221.10

1988 1987 1986

309.08 293.51 215.38

66.80 87.95 104.69

242.28 205.96 110.69

,Source:Na_onal Statis_calCoor_nation Boa_.

The Political Economy of Philippines-China

Relations

295

over 100 enterprises with a total investment of over US$140 million. Then, at the height of the Mischief Reef ,'ontroversy, when the Philippines threatened to internationalize the issue, two of the largest corporations in China set up subsidiaries in the Philippines. The Haier Group of China set up a subsidiary company for production and marketing of air conditioners m the Philippines and the China National Technical Import and Export Corporation (CNTIEC) established the CNTIEC Philippine Mechanical and Electrical Products Co. Ltd. Currently, Harbin Power Engineering Company Ltd. is engaged in a coal power station project in Mindanao; the investment totals US$220 million. For this project, China will provide US$165 million of seller's credit. 27 It appears that these new subsidiaries are direct mainland ventures and have no capital contributions from the Chinese-Filipinos. Chinese investments were brought in by the Ramos liberalization policy and as part of the broader incentive measures extended for foreign investments. Moreover, the Chinese believe that they have comparative advantage over competing industries as they have newer technology and machinery. Chinese direct foreign investment (DFI) ventures were started in 1995. The investments were mainly in selected ASEAN countries such as Malaysia, Thailand and, in 1997, the Philippines. These ventures couragement.

DIRECT

FOREIGN

were undertaken

INVESTMENTS

with Chinese

government

en-

IN CHINA

It is significant to note that Chinese-Filipino businessmen did not make significant investments in China until 1984-1985. Notwithstanding close accommodation between the Marcos regime and the Chinese government, and despite frequent trips (10 years) made by Chinese-Filipino businessmen to China to explore business opportunities there, no large investments were made. This is surprising considering that there was a flurry of foreign businessmen wanting to invest in China once the country opened up its economy. China shifted its policy dramatically on DFI, from prohibition to active encouragement. In 1979, China instituted its Four Modernization Program and passed the Joint Venture Law in the same year. Most Chinese-Filipino businessmen, who have businesses in China before 1984, explained why they were hesitant in investing in China. They were uncertain of the Chinese "command economy." Moreover, there were no clear rules on protection and security of foreign investments and they were fearful that, under the Communist system, their investments would be under the control of the Communist regime. Fur27. Chen (1999).

296

China's Economic Growth and the ASEAN

thermore, the centerpiece of Chma's formal DFI promotion during the early 1980s were confined to the Special Economic Zones (SEZs), in southern China, and the Export Processing Zones (EPZs) whose operations were unfamiliar to the Philippine Chinese. Records of direct foreign investment into China from the Philippines confirmed these accounts (see Table 5). In contrast, between 1979 and 1983, there were already increasing direct foreign investments into China from Japan, Hong Kong, Macau, Singapore, Thailand, United Kingdom and, even, the United States. These foreign firms, to use a phrase of Krugman, took advantage of the "fire sale" in China in the opportune time. 2s DFI into China reached US$386 million in 1982, going up to US$4 billion in 1991, US$7 billion in 1992, US$23 billion in 1993 and US$33 billion in 1994. The only other country that surpassed the volume of DFI in China was the United States. Except for San Miguel Corporation, most DFI into China has been un _ dertaken by the ethnic Chinese in the Philippines. Parenthetically, some political analysts claim that Philippine Chinese DFI flow cannot be regarded as foreign since Chinese-Filipinos share common language and culture with the Chinese. However, such investments still fall under the category of DFI since they emanate from the Philippines and from Filipino citizens. Unlike overseas Chinese investors from the United States, Hong Kong, Singapore and Thailand who invested in hi-tech industries and heavy industries, Chinese-Filipino investments are mostly in medium- and small-scale enterprises. 29These were limited banking operations, travel agencies, processing of junk food, manufacturing of nails, bolts and nuts, road and building construction, bags, umbrellas, wallets, shirts, groceries, bakeries, printing shops, real estate directed at residential housing, retail complexes, and assembly of computers. Philippine DFI into China went down from US$15.53 million in 1988 to US$4.71 in 1989 due mainly to the Tiananmen incident. In 1991, due to liberalization of foreign capital participation in property development, there were significant inflows of Philippine DFI into !China (see Table 5). The investment increased from US$17.44 million to US$276.11 million in 1992 and more than doubled to US$630.63 million in 1993. Chinese-Filipinos who have good knowledge of business in China, distributed their investments among different and already established industries in China such as breweries, cigarettes, hotels, recreational resorts, manufacturing of rubber shoes, air-conditioners, and household appliances. One of the reasons given for investing in established Chinese industries was to take advantage of product identity in the host country. Many products of the newly established industries are not known to the Chinese customers. Except for San 28. Krugman (on-line). 29. Tao and Green (1997).

The Political Economy of Philippines-China

Relations

297

Table 5. Direct Foreign Investment into China from the Philippines (Contract Amounts in US$ million)

1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994

,,_

4 22 9 10 22 12

2.1 40.56 3.81 30.5 15.53 4.71

18 30 153 302 162

10.78 17.44 276.11 630.63 290.69

Sources: ChinaDepartmentof Trade and MaterialsBusiness(1979-1991,1992); State StatisticalBureau(1995,1996); Ministryof ForeignEconomicRelationsand Trade(1995-1996). Miguel Beer, the Philippines

has no other brand names

known in China. Part-

nerships were also preferred for these allowed them to overcome impediments arising out of local and arcane "rules of the game." Compared to Hong Kong's 60 percent, Japan, Taiwan and the United States, each having 10 percent, and European Union's 5 percent, Philippine DFI in China is miniscule at only 0.5 percent of the total DFI into China in 1992. 30As with all early foreign investors, a large number of these investrnen_ were not profitable. Interviews with most medium- and small-enterprise Chinese-Filipino investors in China from 1987 revealed that their investments in real estate and small-scale manufacturing were wiped out long before the 1997 financial crisis. This is particularly true to real estate investments which is a "high-risk and high-return investment." Their early loses were due to fierce competition from other overseas Chinese investors from Hong Kon$, Taiwan, Malaysia, and Thailand. They also found that after the first five yea_s of tax and other incentives, there was no other support from the local Chinese government. After five years, when tax exemptions and other investment incentives lapsed, their competitive advantages were virtually wiped out by businesses of the host country. It appeared, too, that by the mid-1990s, China was more interested in drawing DFI into technology-intensive industries. 30. BusinessChina (June, 1993).

298

China's Economic Growth and the ASEAN

Moreover, China was more interested in channeling DFI into large-scale and advanced technology-intensive industries. China was no longer interested in attracting DFI whose products were intended They wanted production for both domestic and most of the DFI in medium-and small-scale funded enterprises accounted for 15 times more expected

on the basis of their contribution

CONCLUSION

solely for the China market. foreign markets. This ruled out industries. By 1994, foreignexports than would have been

output# 1

It is clear from the 1995 to 1998 tradeand investment data that bad po",,.%, litical relations such as the conflict over the Scarborough Shoal and the Mischief Reef did not lead automatically to bad business relations. Neither did the data show that the increase in Philippine investments in China were capital flights or the direct outcome of rampant kidnapping of Chinese-Filipinos in the Philippines. Rather, it was the result of the attempt of some Chinese-Filipinos to t_ke advantage of China's liberalization policy that allowed foreign capital participation in real estate development in that country. The trade and investment data also show that it was President Ramos' policy under Executive Order 244 that abolished the strictures on trade balancing policy that led to the remarkable increase in trade volume between the Philippines and China. It is also clear that not only can correct economic policy such as EO 244 hardly be deterred by bad political relations, it can even overcome the adverse effects of the 1977 financial crisis in Asia. In principle, there is no necessary connection between good politics and good commercial relations but they can be complementary. In the history of the political economy of Philippines-China relations, they need not go hand in hand. A major concern, which is not explored in this paper, is, "When does bad political relations affect good economic relations?" Given the difficult sovereignty issue on the Mischief Reef, Taiwan pressure for the Philippines to issue a visa to President Lee Teng Hui, and the periodic threat of our legislators to regard ment?" Island waters,

pursue a "two-China" policy, "At what point will China continue to the Philippines as a good market and good environment for investConversely, given so much the heated controversy over the Kalayaan Group, illegal entry of Chinese traders, hostesses, and fishermen in our "Will Philippine political leaders provide a more favorable invest-

31. Lardy (1996).

The Political Economy of Philippines-China

Relations

299

ment environment to the Chinese? Will they grant the same incentives extended to other favored nationalities in the Philippines?" Given China's economic growth for the past 20 years, its trade and investment policies are beginning to be governed by more objective economic considerations. But many Chinese political leaders still maintain the longheld view that politics is an important factor in foreign and economic policies. This means that the size of our trade and China's investments in the Philippines will depend in part on our wise cultivation tions with each other.

of friendly

and cordial rela-

The principal issue for the Philippines is not whether our economies are complementary or competitive or whether the sovereignty issue over the Spratlys should be resolved bilaterally or multilaterally but the extent to which we can convince China that cooperation on all fronts is in our mutual interest. Certainly a modernized China and an economically strong Philippines will make good political allies.

The Political Economy of Philippines-China

Relations

301

Philippine Department of Foreign Affairs. 1984. Diplomatic Agenda of Philippines Presidents. Manila. Ramos Upholds One-China Policy. 1992. Philippine Daily Inquirer. August 4. Reischauer, E. 1948. Notes on T'ang Dynasty Sea Routes. Relation de la Chine et de l'inde redigee en 851. RP-Red Trade Surplus: $12.3 M. 1974. Philippine Daily Express. September 21. Schurz, W.L. 1939. The Manila Galleon.New York: E.E Dutton and Co., Inc. Scott, W.H. 1983. Filipinos in China before 1500. Asian Studies. April, August and December:l-19 Sei, W. 1929. The Philippine Islands as Known to.the Chinese Before the Ming Period. In Memoirs of the Research Department of the Toyo Bufigko No. 4. Tokyo. State Statistical Bureau. Various issues. China Statistical Yearbook.State Statistical Publishing House. Tact and Taiwan. 1989. Philippine Daily Globe.September 17. Too, Qu and M.B. Green. 1997. Chinese Foreign and Direct Investment: A Substantial Perspective on Location. de Vera, S. 1586. Memorial to the Council. Vol. 6. Blair and Robertson. Wang, Gungwu. 1958. The Nanhai Trade. Journal of the Malaysian Branch of the Royal Asiatic Society vol. 31, part 2, no. 182. Wu, Ching-hong. 1958. Supplements to a Study of References to the Philippines in Chinese Sources from Earliest Tiines to the Ming Dynasty. Journal of East Asiatic Studies 6:307-393. _.

1959. A Study of References to the Philippines in the Chinese Sources from Earliest Times to the Ming Dynasty. In Philippine Social Sciences and Humanities Review. University of the Philippines, Quezon City. Zhong-guo Gu-ji zhong you guan Fei-libin Zi-liao Hui-bian (Survey of Philippine Materials in Ancient Chinese Records). 1980. Guangzhou.

About the Authors

Dr. Ellen

H, Palanca

is the Director of the Chinese Studies Program

of the Ateneo de Manila University (ADMU) since 1996 and a professor in the university's Department of Economics. She also had a brief stint with the Xiamen University and the Shanghai University of Finance and Economics as a visiting professor. Her fields of specializationinterests development,

are on social economics, economic

human resources, poverty and inequality, economics of education,

gender and ethnicity, and sire has quite a number of research studies and publications on these fields, She is the President of the Philippine Association for Chinese Studies.

Dr. Joseph

Anthony

Y, Lim is a professor at the UP School of Eco-

nomics. An alumnus of the University of Pennsylvania,

he obtained his doctoral

degree in economies in 1985 and had his postdoctoralstudies Cambodia in 1989. He was one of the Ten Outstanding

at the University of

Young Scientists (TOYS)

of 1991, an award conferred by the National Academy of Science and Technology. He has served as consultant for a number of development

agencies such as the

United Nations Development Programme, Development Academy of the Philippines, United States Agency for International Development, and the International Labour Office, among others. He co-wrote four economic books and authored a number of articlesmonographs

that were published in various eco-

nomic journals, both local and foreign. Dr. Raul V. Fabella is currently the Dean of the UP School of Economics. He obtained his doctoral degree in Economics in 1982 yS"omYale University, was a Rockefeller Foundation doctoral fellow in 1975-1982, and a research fellow of the Graduate Program of hzternational Development of Nagoya University in 1991-92. A multi-awarded researcher and educatoT; he was conferred the title of "Academician"

by the Natwnal Academy of Science and Technology in

1995 and was the recipient of the National Social Science Award in 1993 and the UP Diliman Most Outstanding several books on fnancial

Faculty member award in 1991-93. He co-edited

sector issues, analysis of Philippine economic crisis,

economic growth, and resource mobilization and use in the Philippines, He has also written numerous articles that were published in local and foreign journals and monographs. He ;s curren tly a member of the Editorial Board of the Journal of Economic Behavior and Organization,

303

Dr. Rosalina 1"4.Tan is the Director of the Japanese Studies Program and an assista_t professor at the Economics Department of Ateneo de Manila University.

She obtained her Ph.D. in Econtlmics from the Sophia University

Tokyo, Japan, in 1994, Size had also served as visiting lecturer of economics for the University of Nevada-Reno, International Division in Japan; economic consultant for a private firm; and parl-time lecturer:and, thesis adviser for the College of the Holy Spirit, Manila. She has written an_ presented in various seminars and

co_fierences a rlumber

of papers on enviro,1mental policy, trade flnd cap!tal flows, taxation and macroeconomic model building. Ms.

Aileen

S.P. Baviera

Asian Centel, University

is c_rrently an associate professor at the

of the Philippines (UP) Diliman, and the executive

director of the nongovernmental

Philippines_China Development Resource Cen-

ter (PDRC). Prior to these posts, she was head of the Center for International Relations and Strategic Studies of the Foreign Service Institute. Ms. Baviera is a candidate fin" lhe dc%_-ree _ Ph.D. in Political Scielzce at UP Diliman. She has nt_azel'ous publicatiorzs oJ_ the variozzs aspects of Philippines-China

relations,

Philippi_ze foreign policy and regional security. Mr. B enito

O. Lira is a professor at the Asian Center of UP Diliman. He

obtained his master's degree in mass commz_nication from the University

Pennsylvanh_ in 1971 on scholarship (the Annenberg School of Communications Scholarship). A prolific writeb he has written a number of articles on various topics about the Chinese economy, history and culture, and Philippines-China relations, among others, zohich were published in books, scholarly journals, newspaper's and magazines.

3O4

About The Philippine

APEC

the PASCN Study

Center

Network

established on November 23,1996 by virtue of Administrative

(PASCN)

was

Order No. 303, as

the Philippines" response to the APEC Leaders' Education Initiative. Among the goals of the PASCN are to promote collaborative research on APEC-related issues; facilitate

the exchange

of information

between or among government

and

nongovernment organizations, aca-demic or research institutions, business sector and the public in general; encourage faculty and students of higher education to undertake studies, theses and dissertation on APEC issues; undertake capacity-building programs for government agencies on matters related to APEC; and provide technical assistance to government agencies and private organizations on APEC-related initiatives. The Network

is composed of the Asian Institute

Ateneo de Manila University,

Central Luzon State University,

University,

Foreign Service Institute,

University,

University

University Development

of Management,

Mindanao

of Asia and the Paci_c, Univesity

of San Carlos, Xavier University, Studies as Lead Agency.

305

De La Salle

State University,

Silliman

of the Philippines,

and the Philippine Institute for