China – Friends of threat?

By Terry Lacey

(April 08, Jakarta, Sri Lanka Guardian) Anindya Novyan Bakrie, the deputy chairman of the Indonesian Chamber of Commerce writing in The Jakarta Post (06.04.10) of the coming visit of Chinese Premier Wen Jiabao to Jakarta in April concludes the China threat theory needs to be discarded.

“China should be given the benefit of the doubt as it takes its place at the table of the great powers. The stakes are high for Southeast Asia. A China that is a leading player, and therefore a major stakeholder, in the Asian century will help turn Asian dreams into reality”.

But he also says, “A China that is thwarted by jealous powers will turn Asian dreams into nightmares”.

Indonesians are watching out for another anticipated arrival in Jakarta, but the visit of President Barack Obama timed for March is now postponed from March until June.

But it’s the same in trade and investment across Asia, and globally. The Chinese are getting their first, and beating the West at what used to be their own game.

When the 1998-1999 Asian economic crisis hit then the West lost its nerve and its previous comparative advantage in ASEAN and Indonesia. And in the years of recovery since then the enterprises of China and ASEAN, many of them state-backed, have stepped in where the businesses of the US and EU now seem to fear to tread.

And while US Treasury Secretary Timothy Geithner was in Delhi for trade talks with India, his visit is overshadowed by Washington´s tense relationship with China while both the US and India were pushing trade and foreign exchange agendas with China.

Arvind Subramanian, senior fellow at the Peterson Institute for International Economics, a Washington think tank recently argued, “China´s undervalued exchange rate affects emerging market economies like India even more than it does the United States.” (The Jakarta Post, 06.03.10).

Logically India will back G20 efforts to achieve global currency rebalancing. The G20 is expected to lobby Beijing to delink the yuan from the dollar.

But Lee Kuan Yew quoted Wen Jiabao recently as saying “We will not yield to any pressure of any form forcing us to appreciate”. (April 2010, Forbes Asia Magazine).

Instead China urges the US to maintain the maintain the value of the dollar while US exports to China in 2008 were $69.7 billion and US imports from China were $337.8 billion, leaving a trade deficit of $268 billion.

And Western economists estimate the yuan is undervalued by between 24 and 40 percent.

This means the less powerful ASEAN economies, especially their backward manufacturers, are likely to be flattened by the Chinese steamroller, mopping up ASEAN domestic markets and presenting a mountain for them to climb to sell into China. Chinese financed adjustment measures may help, but without restructuring, modernization and currency rebalancing many firms will hit the dust as ACFTA zero tariffs bite.

Protectionism can´t protect you from the tide of history, you have to get off your backside.

Meanwhile US and EU dreams of breaking into big new clean energy and environmental markets in China will prove to be castles in the air without the backing of a Copenhagen-backed money mountain to fund technology transfer. Why should China pay for expensive Western equipment instead of building its own, cheaper?

An environmental business conference in Singapore at the end of last year estimated that if Asian environmental and clean energy markets were worth $24 billion a year, then $21 billion of that was in China and being financed mostly by state-backed money with the erstwhile Western capitalists hardly in sight.

Infrastructure and power projects throughout ASEAN are being mopped up by the well-led Chinese tiger, pushing ahead with aggressive comprehensive FFBR deals (fix it, fund it, build it, run it) backed by a grossly undervalued currency, backed by a mutually supportive network of state-backed enterprises and state-backed banks printing money.

FFBR is the future for Africa, the Middle East and Latin America as China moves into agriculture, mining and infrastructure. The best you can do is to push the model more towards a joint venture but to do that you need money and people you don’t have.

Boohoo for Western dreams of BOT and BOO which have all got the boot. FFBR is easier, already bundled, and faster. All you have to work out is your percentage. Of course there´s a downside, but it´s better than a percentage of nothing.

By comparison the US is chugging along with a Ford Model T with a driver who has just come out of hospital and has to take it gently, while the EU needs all its energy to push its wheelbarrow in one direction, and the front wheel could fall off on the rocky roads of Portugal, Italy, Ireland or Greece.

If this is what it´s like while China still ranks 109th out of 185 countries in terms of GDP per capita with up to 17 percent of Chinese people living on less than $1 US per day, then what´s it going to be like when China really takes off in the next decade or two?

We used to play the international finance and trade chess game according to Western rules, but if all you decision-makers out there want some sound advice, teach your children Mandarin and how to play Chinese chequers.

Terry Lacey is a development economist who writes from Jakarta on modernization in the Muslim world, investment and trade relations with the EU and Islamic banking.