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This article was first published 12 years ago

BIG winners from China's economic success

Last updated on: July 26, 2011 08:12 IST

Image: Visitors walk through the Lujiazui Financial Area in Shanghai.
Photographs: Aly Song/Reuters.
China has unsettled its neighbours with naval displays and diplomatic spats.

But could erstwhile Asian strategic rivals end up as big winners from China's economic success?

In one sense, at least, Asian economies are already winning from Chinese growth - slack global demand has meant that China increasingly powers the growth of nearly every major economy in Asia.

The author is head, Asia Practice Group, at Eurasia Group, and is also adjunct senior fellow for Asia at the Council on Foreign Relations, Washington, DC.

BIG winners from China's economic success

Image: A 35-year-old man spreads one jiao and two jiao banknotes to dry in the sun in Kaili, Guizhou.
Photographs: Reuters.
But the question increasingly matters in another sense, as well: Chinese leaders are committed to rebalancing at least some elements of their country's economy.

And while that will mean a more competitive and powerful China, it will also create new opportunities for those countries in Asia that get manufacturing and investment policies right.

BIG winners from China's economic success

Image: A woman walks on a pedestrian bridge in front of office buildings in Beijing.
Photographs: Jason Lee/Reuters.
Why the change? China is approaching the upper limit of its existing growth model.

It has emerged from the global crisis earlier and stronger than nearly any other major economy.

But China's leaders are hardly complacent about their country's future economic path.

BIG winners from China's economic success

Image: A Chinese man rides his tricycle laden with recyclable styrofoam along a main road in Shanghai.
Photographs: Aly Song/Reuters.
To the contrary, despite remarkable successes, Premier Wen Jiabao has repeatedly called the current model which relies disproportionately on exports and fixed-asset investment "unbalanced, unstable, uncoordinated and unsustainable".

China produces much but consumes little.

BIG winners from China's economic success

Image: An employee assembles a car at the production line of Anhui Jianghuai Automobile Co in Hefei.
Photographs: Jianan Yu/Reuters.
The creation and perpetuation of its production-intensive economic model owe much to inefficient capital allocation.

Few Chinese are reaping the windfalls of China's growth, and those who are benefiting do so at the expense of the many. Vast regional disparities mean wide gaps in living standards and quality of life.

BIG winners from China's economic success

Image: A schoolgirl performs in front of the flag of China's Communist Party during a song concert.
Photographs: Jason Lee/Reuters.
And China's investment-intensive growth model has exacted heavy environmental and energy costs.

The Communist Party of China relies heavily on economic success to assure political legitimacy.

BIG winners from China's economic success

Image: Workers make shoes, to be exported to the US.
Photographs: Donald Chan/Reuters.
And it is now increasingly clear that the major pillars of the existing model are flawed: the global economic crisis provided stark evidence that China's export-driven economy is vulnerable to dips in demand in the rest of the world.

At the same time, China's industrial and financial policies have introduced distortions and inefficiencies into its economy.

BIG winners from China's economic success

Image: An employee works at a garment factory of Hefei Shichao Clothing Co in Hefei, Anhui province.
Photographs: Reuters.
For these reasons, China's growth model is almost certain to change in the coming years as Beijing works to establish a more rational balance between production and consumption and tempers its long-standing preoccupation with GDP growth in favour of a greater emphasis on human capital-oriented growth.

That, in turn, will yield important changes in China's political economy.

BIG winners from China's economic success

Image: A Chinese worker checks mobile phones at a production line of Ningbo Bird Co.
Photographs: Reuters.
The country will become more urban. Capital allocation could begin to shift from corporations to more households.

Interior China will become more developed. And Chinese industry will move rapidly up the value chain.

Indeed, Beijing has long been determined to develop higher-value-added and technology-intensive industry, and its huge capacity to mobilise domestic capital gives it the power to do so.

BIG winners from China's economic success

Image: Workers use irons to smooth out a Communist Party of China flag at the Beijing Jingong Flag factory.
Photographs: David Gray/Reuters.
That means more competition for multinationals, including in third-country markets, as Chinese firms produce substitutable (but cheaper) products.

But it will also give others opportunities to fill a vacuum.

Take labour-intensive manufacturing in coastal China. Export-oriented manufacturers are already reassessing traditional production strategies as labour costs rise.

BIG winners from China's economic success

Image: A worker leans inside the shell of a wind turbine tower in the assembly workshop.
Photographs: David Gray/Reuters.
There are stronger incentives to relocate production to interior China.

And new options are emerging as some choose to leave China entirely rather than relocate inland.

For example, rising costs in China could make Indonesia a more attractive hub for some production.

BIG winners from China's economic success

Image: A worker checks drink bottles at PT Coca-Cola Amatil Indonesia's factory in Cibitung.
Photographs: Beawiharta/Reuters.
This would help drive Indonesian growth in the near term and ultimately wean its economy off its traditional reliance on natural resource exports.

As Chinese demand levels grow, Indonesian manufacturers will also benefit by producing and selling their products in China.

BIG winners from China's economic success

Image: Employees work on the assembly line of the Ford Ranger truck manufacturing plant located in Rayong.
Photographs: Sukree Sukplang/Reuters.
Likewise in Vietnam, Thailand, and even smaller economies like Cambodia. Cost advantages will attract new investments to Vietnam.

Regional advantage and stronger intellectual property protection will make Thailand more attractive, provided political risk can be held in check.

BIG winners from China's economic success

Image: Workers at LG Electronics India Pvt Ltd. assemble television sets inside a factory.
Photographs: Reuters.
For India, rising incomes and higher-value-added production in China could bring benefits.

Real appreciation of the renminbi, alongside growing Chinese demand, would help India narrow its trade deficit with China over the next five years.

The deficit has been of growing concern to the Reserve Bank of India and the commerce ministry.

BIG winners from China's economic success

Image: Computers packed into boxes are transported on a conveyor belt at a Dell factory in Sriperumbudur.
Photographs: Reuters.
And with the growth of manufacturing, not least in southern states such as Tamil Nadu, India could also capitalise in some areas of production as China moves up the value chain.

The national manufacturing policy could yield new manufacturing zones with industrial parks, warehousing, and opportunities in special economic zones.

BIG winners from China's economic success

Image: A blacksmith works inside an iron workshop on the outskirts of the western Indian city of Ahmedabad.
Photographs: Amit Dave/Reuters.
And as the Indian government works to increase the share of manufacturing in GDP from around 16 per cent to 25 per cent in a decade, India need not compete only at the bottom of the value chain.

It could also aim to compete in machinery, auto parts, and even automobiles, particularly through the adoption of new policies at the state level.

BIG winners from China's economic success

Image: Boeing India President Dinesh Keskar (C) poses in front of the Boeing 787 Dreamliner in Delhi.
Photographs: Reuters.
But huge obstacles remain. Some in India view this as a backdoor to relaxing labour laws. And such policies could falter, too, on land acquisition.

That would be a shame. Investors are aggressively seeking new opportunities in Asia.

BIG winners from China's economic success

Image: Men work at the construction site of a commercial complex in New Delhi.
Photographs: Parivartan Sharma/Reuters.
So government policies including new investments in infrastructure, fiscal incentives and tax breaks, and improvements in supply and distribution networks will shift Asia's industrial landscape.

Who will be the winners? Who will surge ahead? Policy choices over the next three to five years will play a central role in determining the answers.

Source: source