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Replacing US in Asian export market
By Macabe Keliher

Part 1: The dragon seizes market share

BEIJING - Sitting on one of the world's fastest growing economies, the Chinese these days have no hesitations about crediting themselves for regional economic growth. China's economy officially grew over 9 percent last year, and ran trade deficits with everyone except the Americans and Europeans. In fact, China consumed as much as half of the region's exports in 2003.

Chinese Premier Wen Jiabao views China's prosperity as not only beneficial to his country, but to the entire Asian region as well. "A developed and stronger China will bring about development opportunities and tangible benefits to every Asian country. It is a great contribution to the peace and development of Asia," Jiabao told leaders at the Association of South East Nations (ASEAN) summit last October in Bali, Indonesia.

While the back patting may be a bit self indulgent, the extent of China's new economic influence and its contribution in Asia is astonishing. China has become the largest export market for much of East and Southeast Asia, and it is in the process of replacing Japan as the region's economic engine.

"China is now the single largest contributor of export recovery in the Asian region," said Jonathan Anderson, China economist at UBS. Where Japan 10 years ago consumed 20 percent of the region's exports (down to 10 percent today), and provided a third of the region's bank loans, China now assumes that economic role, buying 31 percent of the region's exports and currently preparing to become a source of regional funding.

In the past year China has taken in 40-50 percent of Asia's exports, accounting for all of Taiwan's and the Philippine's export growth last year and over 50 percent of each of Japan's, Malaysia's, South Korea's and Australia's. Such intake has driven more than 7 percent of the GDP (gross domestic product) growth in Taiwan, Malaysia and Singapore, 5.8 percent in South Korea and 4 percent in Thailand, according to UBS figures.

The Chinese Ministry of Commerce said that in the first 11 months of last year China clocked up US$69.78 billion in two-way trade with ASEAN countries, an increase of 42.6 percent over 2002. Of this, China bought $42.44 billion worth of exports from ASEAN countries, an increase of 52.1 percent over 2002, and which resulted in a trade deficit of $15.11 billion. In fact, almost all of China's regional trade in the past year has financially benefited the region. China's trade deficit with Taiwan, South Korea and Japan, for example, grew by 58 percent to US$70.78 billion in the first 11 months of last year.

China's economic fuel in Asia is a recent phenomena, to be sure. In 1990, for instance, China only imported 6.8 percent of the region's exports. In 1999, China accounted for only 11 percent of total Asian trade (it is about 50 percent today), and consumed only 11 percent of Singapore's exports (17 percent today), 10.8 percent of Japan's (18.4 percent today), and 15.8 percent of South Korea's (26 percent today). "In 2001, China's trade deficit with Asia amounted to a monthly average of $10 billion, a dramatic reversal from the huge monthly average surplus of $21 billion in 1998," said Chi Lo, a Hong Kong-based economist and author of When Asia Meets China in the New Millennium.

China gobbles up regional resources to fuel its growth
China's domestic economy is driving the buying spree. The Chinese economy officially grew 9.1 percent last year, but many of the international investment banks say it was actually 2-3 percent higher than that. Such growth needs resources to fuel it, and China does not have the resources domestically. "China is buying so much from the region because it needs to," said Anderson at UBS. "It has run out of things it can pull out of the ground." Anderson estimates that 38 percent of China's imports are resource goods, which include agricultural products, chemicals, minerals, metals and textiles.

The other 62 percent of China's imports are manufacturing-intensive products, such as electronics, machinery, equipment and instruments. Mainland customs data shows that nearly 50 percent of goods imported into China are used for labor-intensive packaging or reprocessing and then re-exporting. Although there is no breakdown of processing trade by individual sectors, Anderson said that regression analysis suggests that foodstuffs, fuels, minerals and non-electronic machinery are purchased for domestic use, and chemicals and plastics, electronic equipment and light manufacturers are reprocessed and exported. Metals and instruments are split evenly between domestic and export use.

Such economic growth and buying power is natural given China's size and relatively recent entrance into the international economic community. Furthermore, if it continues at this pace, China "will likely replace the US as the major market for Asian exports and will eventually become a significant investor in the region," said Lo. In fact, China is already a significant investor in Asia; the Ministry of Commerce approved 510 outbound foreign direct investment (FDI) projects in 2003 for a total of $2.087 billion, an increase of 112.3 percent over 2002.

The problem, economists warn, is that China's economy cannot continue growing at this rate. Overheating remains a big concern and everyone expects a slowdown, by as much as 4 percent off the GDP this year.

"The current cyclical upturn has been driven by investment, which has now reached an unprecedented high share of GDP, similar to those in the pre-Asian crisis countries. Moreover, aggregate supply appears to be outstripping demand," said Anderson. Even the Chinese government predicts that the economy will slow to around 7 percent this year. What this means for the region is concurrent loss, especially for those economies highly exposed by China's investments.

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