China and its neighbours

China’s growth as a regional economic powerhouse has been rapid. However, the historic ties between the mainland Chinese manufacturers and the local Chinese traders go back for centuries. Already in the 15th century the “Straits Chinese” or Peranakan (土生華人) established a trading route between China and Malacca in Malaysia[1]. From there the influence of Chinese traders expanded to most of the South East Asian region, eventually taking over major parts of the local economies. In Indonesia, despite severe discrimination, 70-80% of the country’s economy is influenced if not owned by Chinese. Singapore has a population of 80% of Chinese origin, The Philippines, Vietnam, and most other SE Asian nations have an influential and economically powerful Chinese minority. It wasn’t until the economic reforms initiated by Deng Xiaoping in the late 70’s that China began to directly influence SE Asian - and to a lesser extend - Australian economies.
South East Asia countries have always looked at their big brother China with ambivalence. On the one hand China imports raw materials and agricultural products from countries like Burma (Myanmar), Indonesia and Thailand. On the other it exports silk, rice and in modern days electronics and heavy machinery to feed the booming Asian economies. It has not been until recently that the domestic market in China has developed to a point that domestic supply isn’t sufficient anymore. To complement their manufacturing capabilities China is now looking to develop services for their local financial, IT and administrative needs. China's software outsourcing revenue will more than double, to $5 billion, by 2005. Gartner Inc. predicts that by 2007 China will pull in $27 billion for IT services, including call centers and back-office work, matching India[2].
One of the major issues for China will be to keep up with demand. Local talent is scarce and mostly focused on manufacturing, the backbone of China’s booming growth. Local wages continue to rise making local Chinese companies increasingly look to opportunities abroad. One of the big 4 banks in China has established a call center in The Philippines where customers can inquire in Mandarin or Cantonese. Chinese clothing manufacturers are already looking to establish a presence closer to the US market by outsourcing to Mexico. Original brand manufacturing (OBM) is gaining penetration in China. Big electronics chain stores—Gome and Suning, for example—outsource both design and manufacturing of consumer electronics to top Chinese manufacturers. Assembly no longer takes place in China but has been off shored to Indonesia, where local wages are lower than even Chinese can accept.
The growing dependence of APAC economies on the Chinese domestic market means that if this market stops growing there will be no substitute unless these countries manage to get their own internal markets growing.

At home, China faces even bigger issues. To keep even with the population growth and the number of new workers entering the workforce each year, the Chinese economy has to grow by 7% a year. If it doesn’t, the resulting poverty will end domestic demand before it takes off. The resulting gap between the rich coastline cities and the poor inland provinces can cause major political and social disturbances, eventually ripping the country apart. When this happens, the end of China as the manufacturer of the world will be at hand. Despite the appearance, China is not one unified country but a collection of different peoples with as varied a background as any European country. Since the Chinese emperors and their communist successors, the union of China has been assured by central rule alone. If the Chinese government fails to hold the country together the resulting chaos will cause foreign companies to withdraw their assets which in turn can lead to China withdrawing their foreign investments, which are substantial. For instance, almost half of US State Bonds are owned by China, which recycles the US dollars it gets back into the US economy financing the US trade deficit. The result will be a collapse of the US economy which in a way has been financed by China all along[3].
In the APAC region, the result of a disappearing or severely shrinking Chinese market will be even more severe. In the scenario described above, the US market will be heavily affected by the collapse of the Chinese economy. The resulting downturn of the US market combined with the halt in Chinese investment means there is no way to fuel the domestic economy anymore.
The best way local governments can avert the worst effects of the China-US scenario is to create an independent, unified internal market. ASEAN, the Asian economic organization, is the first step towards this goal. There is still a long way to go though. The mistrust between the member states, combined with blatant corruption and local political issues make a unified market like the European Union has an option that is far away. Indonesia so far has failed to fully leverage its potential to create critical mass for its internal market. Like in The Philippines, there are issues with local corruption as well as a possible disruptive terrorist threat[4]. Inconsistency in foreign relation policies is a possible impediment for economic unity as well. For instance, Singapore was dependent on Indonesia for the supply of sand to support the real estate boom the small country is currently enjoying. Indonesia in an attempt to leverage this dependency to solve some long standing but unrelated political issues suddenly banned the export of sand to Singapore[5]. This halted Singaporean construction almost immediately causing real estate prices to rocket. Investing in local infrastructure, schooling and a fair and open wage policy is something all local governments should strive for. In ASEAN member state Myanmar, the very basics of democracy have been suppressed by a dictatorial government. Still, Myanmar ruling General Tan Shwe could freely travel to Singapore to receive treatment for an intestinal tumor[6].
Now China has become a member of the WTO it faces similar issues. Despite the name, The WTO is basically a US dominated body which brings the main issues of the US-Chino relationship to light. One of the issues is China’s record of human rights abuse. Despite the fact that the US presently is known one of the worst human rights abusers in the world China is constantly reminded that as a WTO member it should put human rights high on the agenda. In itself there’s nothing wrong with that as long as the criticism can go both ways.
A major issue is China’s shallow integration into the world economy. Its protective stance is not only limited to trade tariffs but also affects information services. Later this year the US and the EU will take China to the WTO over the fact that financial news companies are not allowed to interact directly with their customers. The companies are not allowed to have their own local branch but must act through the China Economic Information Service. The CEIS has its own vested interests as a news provider[7].
Most political issues China faces have to do with its obsessive control over its own population. One major problem however is its policy on Intellectual Property rights. The US film, music industry claim losses of billions of dollars because of pirated movies and CD’s. Branded clothing designers like Louis Vuitton don’t mind using Chinese sweatshops to add to their bottom line but resent the fact that the $5 knock offs available at Beijing’s local markets are virtually indistinguishable from the real thing. As long as a genuine copy of Microsoft Windows Vista costs the equivalent of 6 months of wage, this issue will not go away.