Is China killing the Tigers? China is now the world's most popular investment magnet, with more than US$50 billion expected to flow into the country this year. But has the dragon's growth been at the expense of Asia's "Tiger" economies? - Cover Story

Business Asia, Dec, 2002

For most Western corporations, China represents a land of golden opportunity. Cheap labour, a gradually opening business regime and a gigantic potential market makes an attractive package many companies looking to expand find hard to resist.

But some commentators say China could spell threat as much as promise. Its very lure to the West could suck already faltering investment from within the Asian region, particularly in Asia's "Tiger" economies like Singapore, Thailand, Malaysia, Indonesia and the Philippines. China has already displaced manufacturing across Asia as companies move into the cheaper Chinese environment, and in the process kneecapping local economies struggling to grow in tough global conditions.

China itself, however, is vocal in denying such claims. Its success is Asia's success, Chinese officials say, with a growing China good for the region as a whole.

Impressive figures

Investment statistics and movements from some of the world's largest manufacturers certainly paint a grim picture for the rest of Asia.

The United Nations Conference on Trade and Development (UNCTAD) has predicted that foreign direct investment (FDI) flows into China for 2002 will top the US$50 billion ($89 billion) mark--a record for the country and a rise of at least 20 per cent compared to the previous year. The US$50 billion figure makes China the single most popular destination for foreign investment in the world, beating out the United States.

In stark contrast are the investment figures for the rest of Asia, with FDI flows into developing Asia expected to decline further in 2002 by 12 per cent, following on from a 24 per cent reduction in 2001. While these overall figures do include China, the rise in that country's investment clearly shows that the drops are being experienced elsewhere.

"Driven by the liberalisation process and industrial restructuring, and further accelerated by the country's accession to the WTO, China's FDI is experiencing faster growth in medium and hi-tech manufacturing industries and services," the UNCTAD said in a statement.

And the strong investment is expected to grow even further in coming years. The Australian Department of Foreign Affairs and Trade's Economic Analytical Unit (EAU) has forecast that China's FDI could reach US$67 billion by 2005 and US$84 billion by 2007. The Economist Intelligence Unit is also projecting similar figures, with a prediction of US$72 billion by 2006.

This significant volume of money flowing into China can be clearly seen in the amount of new manufacturing being set up within the nation's borders. And the variety of businesses moving into the nation is impressive. Dow Chemical and Asahi Kasei Corp have recently begun a joint venture polystyrene plant in Zhangjiagang. European car companies, PSA Peugeot Citroen and Renault SA, are pumping millions into local car manufacturers in an effort to break into the market. Mitsubishi Electric will increase computer chip production at its Beijing plant by a third by the year's end. Even Taiwan's Semiconductor Manufacturing Co has shifted its production to the mainland.

More pain

It is in South-East Asia, some analysts say, that most of the pain of China's rapid rise will be felt. The region is already floundering with lacklustre economic performances across the board. Strong future growth is also in jeopardy as the spectre of terrorism continues to linger in countries like the Philippines, Indonesia, Malaysia, Thailand and Singapore.

Manufacturing is the industry most at threat, as South-East Asia's plants are being easily undercut by China's cheap labour and low operating costs.

Asian Development Bank chief economist Ifzal Ali has urged other Asian firms to boost their productivity or perish at the hands of China.

"It's firms that export and it is the creation of enabling conditions for these firms to operate, to advance and grow that will really decide who will be able to compete with this juggernaut (China) and who won't," he said. "In the next three years they have to change or they will perish."

South-East Asian governments have long recognised the possible threat that China poses, and have made some positive steps towards countering that danger. Most recent of these steps was the agreement to fast-track an Association of South-East Asian Nations (ASEAN) free trade agreement (FTA) with China. The two sides have now pledged to start concrete action towards the FTA in 2004, with full implementation planned by 2011.

But it is not only Asia's developing members that need to address the China challenge. Japan is increasingly finding that its clout and relevance in the region is waning, superseded by a vibrant and fast growing China.

Japan's Prime Minister Junichiro Koizumi has publicly stated that he does not see China as a competitor, preferring instead to say that China's rapid growth was good overall for Asia. But in a move clearly designed to try and stay important to the region, Japan has also moved towards having a FTA with ASEAN, and has been talking up possible bilateral agreements with countries around the world.