Thursday, December 9, 2010

Inexorable pull of China's economy

Dec 9, 2010

By Lee Kuan Yew

DURING the last three decades, China's economy has grown at the phenomenal rate of 10 per cent per year, sometimes even exceeding 12 per cent. Can China maintain such high rates for at least another decade? I think it can. China is starting from a lower base, and its 1.3 billion domestic consumers will keep rates up because their disposable incomes are growing.

As its GDP has increased, China has become more assertive regarding international issues. Those economies on its periphery - Korea, Japan, Taiwan and the 10 Asean countries (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam) - have felt China's growing influence. When these governments make policy decisions they now have to take China into account.

There is no direct intimidation, but, by denying access to its huge consumer market, China can punish those who are against its interests. Therefore, none of these economies wants to be viewed as antagonistic. Increasingly, this same pressure is being felt worldwide: The balance of power has changed.

The United States realises that China's status has grown and that its views must be accorded their due weight. Were it to feel slighted, China could make its displeasure felt by being uncooperative on international issues or policies that require its support.

Singapore has a special relationship with China. We are 75 per cent Chinese. As one of our second languages is Chinese, it is taught in our schools. Thus we share an ease in communication, which has been a factor in about 3,500 Chinese companies deciding to base their operations in Singapore - 155 of which are listed on the Singapore Exchange.

From Singapore, the Chinese are able to study the region and eventually enter the markets of Malaysia, Indonesia, the Philippines, Thailand and Myanmar. Because Singaporean Chinese speak Mandarin, our businessmen, when investing in China, have found it easy to integrate China's workers with ours.

But lest Singapore - or any other economy in the area - forget that it is a smaller and younger country, Chinese officials obliquely remind ours that their written history goes back 5,000 years to 3,000 BC, leaving unspoken the question: 'How old is your country?'

None of the economies on its periphery can resist the attraction of China's market. Slowly, but inexorably, we are being drawn into China's economic orbit. If you look at China's policies over the last three decades there is little doubt that it has every intention of bringing its three northern neighbours - Korea, Japan and Taiwan - as well as the Asean countries into its economic fold. Of course, at the same time we do enjoy benefits in trade and investment.

China is a political and economic power the region cannot ignore. But neither, indeed, can China ignore the US. Although it has a smaller population - 310 million versus China's 1.3 billion - the purchasing power of Americans is many times that of the Chinese. There is still time for the US to counter China's attraction by instituting a free trade agreement (FTA) with other governments in the region. This would prevent these countries from having an excessive dependence on China's market.

Unfortunately the US Congress is against any new free trade agreements. If the next Congress continues to oppose FTAs, valuable time will be lost, and it may be too late to try again. Congress must be made to realise how high the stakes are and that the outlook for a balanced and equitable relationship between the American and Chinese markets is becoming increasingly difficult.

Every year, China attracts more imports from its neighbours than the US does from the region. Without an FTA with the US, Korea, Japan, Taiwan and the Asean countries will be integrated into China's economy - an outcome to be avoided.

A considerable counterbalancing force would be to add India to the mix. Whether India would be willing to enter into an FTA with the US, Korea, Japan, Taiwan and the Asean nations is the question. Singapore has a free trade agreement with India, but we are a small country, enjoy good relations with India and do not present a threat to either its export or import market. If India joined such an agreement (with the US) the combined markets would be more than equal to the pull from China.

Minister Mentor Lee Kuan Yew rotates in writing this column for Forbes Magazine with David Malpass, president of Encima Global LLC; Amity Shlaes, senior fellow in economic history at the Council on Foreign Relations; and the historian Paul Johnson.


No comments: