[A-List] China: flexing trade muscles

["Michael Keaney" <michael.keaney@xxxxxx>]

Southeast Asia losing FDI fight to China
By Phar Kim Beng
Asia Times, November 12 2002

HONG KONG - At the recent Eighth Summit in Phnom Penh, the Association of
Southeast Asian Nations and China agreed to establish the ASEAN-China Free
Trade Agreement by 2015. Upon its completion, the agreement will open up a
market of 1.7 billion consumers with a combined gross domestic product of
US$1.5 trillion to $2 trillion and two-way trade of $1.2 trillion.

This is a clearest signal yet that the bandwagon dynamic has begun to
operate in ASEAN-China relations. Implicit in the concept of bandwagoning is
that a group of smaller countries will attempt to align itself with an
emergent power.

This is the case because ASEAN can no longer depend on Japan for an economic
lifeline. Japan has been firing blanks for almost a decade. Deflation and
non-performing loans amounting to $1 trillion have been plaguing Japan.
Despite efforts by Japan's economic czar Keizo Takenaka to reform the
economy, the signs do not appear promising.

Experience has also shown that Southeast Asia cannot rely on the
International Monetary Fund and the World Bank for handouts. Both
institutions are based in the United States. They do not want to be accused
of creating a "moral hazard" that would stonewall reforms in Southeast Asia.
Such accusations would make the international bodies vulnerable to scathing
criticism from the US Congress that is now under the control of the
Republicans.

To be sure, foreign direct investments (FDI) into Southeast Asia have been
declining dramatically. In this context, it is easy to understand why ASEAN
is now trying to endear itself to China. In 2000, Southeast Asia received
just $10 billion, a 37 percent decline from the $16 billion in 1999. The FDI
figure was $27 billion in 1996 and $19 billion in 1998.

It does not appear that this diminishment of FDI will abate any time soon.
In its 2001 projection released by the Economist Intelligence Unit (EIU),
the biggest recipients of FDI for the years 2001-05 were forecast to be the
United States, the United Kingdom and Germany. Each of these countries was
expected to receive $236.2 billion, $82.5 billion and $68.9 billion
respectively.

Other economies slated to receive a lion's share of the FDI for the next
five years were: China, France, the Netherlands, Belgium, Canada, Hong Kong
and Brazil. Thus, of the 10 economies on the list, only two were in Asia.
None in Southeast Asia, however. And, given Hong Kong's role as the de facto
entrepot of China, the possibility of a statistical double count is high.
Hence, China is in effect the lone beneficiary of the investment flows.

While the growth of China should be a boon to the rest of the world in the
long run, it can also be a cause for concern to Southeast Asia in the short
and middle terms. This is because there is a limited amount of FDI each
year. In 2000, total global FDI reached $1.1 trillion. In 2001, it peaked at
$800 billion due to a slowdown in the United States. And up to 70 percent of
the FDI was bound to concentrate narrowly in rich countries where the
financial returns were steadier and higher.

Therefore, the developing world was left to battle for the remaining 30
percent of the FDI. When one considers the fact that China is now expected
to scalp 6.5 percent of the total FDI for the next five years, the fight for
the leftovers is even more severe. That is to say, 10 Southeast Asian
countries have to compete for the remaining 23.5 percent of the FDI left by
China - an average of little more than 2 percent for each country.

As such, in competing for a major share of FDI, Southeast Asia cannot buck
the need for necessary reforms. As one commentator affirmed, globalization
has now turned the world into a beauty contest where the most attractive
country or region will stand to gain the most from the flows of funds.

Indeed, leaders of Southeast Asia have to satisfy the expectations of
international investors in as many areas as possible. Most notably, they
have to firm up the region's business environment where transparency,
accountability and fair competition become entrenched. There has to be a
concerted effort to address the issue of political violence and terrorism
too, as occasioned by the Kuta bombing on October 12.

Barring such efforts, money will continue to make its way into neighboring
and other regions to the detriment of Southeast Asia. Money, as many
international investors like to point out, is a great coward: It only goes
to places where returns can be guaranteed.

Right now, unless ASEAN makes Southeast Asia better and safer than China,
the flows of future FDI will continue to go northward.