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3 ASIA HAND
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
