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    Southeast Asia
     Dec 23, 2006
Page 1 of 3
US, China square off
By Shawn W Crispin

BANGKOK - Of all the factors that contributed to Thailand's mid-December decision to impose restrictive controls on short-term capital flows, which subsequently flattened the stock market and sparked howls of discontent from foreign investors, Thai authorities' primary motivation for the fateful policy was left unnamed, but clearly it was China rather than the US.

The rapid appreciation of the free-floating Thai baht against the fixed-rate Chinese yuan rather than the US dollar had in recent

months severely eroded Thailand's overall export competitiveness, particularly in the crucial electronics sector, which accounts for about 35% of Thai exports. If the baht-yuan gap had widened further, Thai central bank authorities feared that a stronger baht would have bankrupted its exporters and severely crimped economic growth.

It's not the first time that China's rigid exchange-rate policy has sent ripples of financial instability through Southeast Asia. In retrospect, some economists believe that Beijing's decision in 1994 to peg the yuan to the US dollar at the artificially low rate of 8.2 per greenback was a crucial determining factor in the 1997-98 Asian financial crisis, which devastated the region's currencies, bourses, banks and broad economies.

The move to a pegged rate facilitated China's emergence as a global economic powerhouse, in many respects at the expense of Southeast Asia's financially crippled export-driven economies. Then, Beijing extended a symbolic US$1 billion to the region's suddenly debt-ridden governments. Since, Beijing has launched an economic charm offensive across the region, facilitating trade and investment linkages for regional countries to share in the Middle Kingdom's explosive growth.

China has firmly emerged as an important new destination for the region's natural-resource exports, a supplier of cheap goods and services and, increasingly, a source of badly needed foreign direct investment. Southeast Asia's growing economic reorientation toward China is expected to accelerate into 2007, as the United States' appetite for the region's exports tapers off because of slowing economic growth.

Geographical pull means Southeast Asia will increasingly look toward its giant northern neighbor for new trade and investment opportunities, a trend that should accelerate as regional business seeks ways to make up for lost sales to the US. That's already happening: Sino-Southeast Asia trade surged to $130 billion in 2005 and is on pace to grow even faster this year. The two sides are now negotiating a free-trade agreement that would potentially form the world's largest free-trade area in the world by 2010.

Double-edged sword
But China's economic advance into Southeast Asia has not been a strictly benign phenomenon, as frequently characterized by Chinese officials upon the announcement of "mutually beneficial" trade, investment and aid pacts. Thailand's recent drastic reaction to China's pegged exchange rate tells a significantly different story, one that threatens to undermine the region's broad post-1997 trend toward more financial openness, particularly in export-oriented economies in Malaysia, Indonesia and the Philippines that, like Thailand, are seeing their exports squeezed by an appreciating exchange rate vis-a-vis the Chinese yuan.

Moreover, Chinese aid and investment, while stimulating much-needed economic growth, has also helped to prop up some of the region's more authoritarian regimes, including those in Myanmar, Cambodia and Laos. With China's rise, Southeast Asian governments are increasingly able to pick and choose between economic engagement with either the US or China, and many are opting to open their economies to Beijing because Chinese capital comes without the political baggage of US finger-wagging about the need to move towards more democracy and universal economic openness.

China's fast rise and the United States' slow fade from Southeast Asia is unmistakably undermining the region's often tumultuous but at the same time highly important experiments with democracy, economic openness and financial liberalism. This represents a significant course shift, one that threatens to undermine the region's once bold, now fading, democratic aspirations.

During the Cold War, when the US, Europe and Japan fueled the region's rapid economic growth through free trade and manufacturing-oriented investments, the economic privileges were often predicated on a loose understanding that recipient countries would move toward more liberal democracy and economic openness - a policy that in retrospect worked to varying degrees of success.

When the 1997-98 Asian financial crisis broke out, the US-influenced International Monetary Fund predicated its multibillion-dollar bailout packages on a commitment to more, not less, economic and financial openness. That strings-attached counsel included the abandonment of the region's fixed-exchange-rate regimes for free-floating ones, and the subsequent market-driven devaluations helped to spark the region's exports and economic recoveries.

At the same time, Washington often scolded and in some egregious cases even imposed sanctions on Southeast Asian countries for their poor rights records, including an arms embargo 

Continued 1 2

Cambodia feels China's hard edge (Dec 8, '06)

Asia searches for security in trade (Nov 16, '06)

Myanmar shakes Western noose (Nov 3, '06)

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