Sublime and Beautiful

East Asia’s Ties: Invested in China in a Time of Trouble

Posted in Uncategorized by chaoren on April 2, 2009

When the global financial crisis began to take shape in the United States all eyes immediately turned to China to see how it’s economy would respond to the rapid deterioration of its largest market. A lot of discussion since the onset of the crisis has surrounded the extent to which China has or has not decoupled from the U.S. economy. The implication being the weaker China’s ties to the U.S. economy prove to be the better its chances are of maintaining its own robust economic growth. But there is more to the modern global economy than U.S.-China trade. In fact, one of the most intriguing stories of the last couple decades has been China’s accelerated integration with the highly-developed economies of East Asia. Although Japan remains the largest economy in the region, China is the fastest growing. In 2007, China surpassed Germany to become the world’s third largest economy behind Japan and the United States; and, if current GDP trends hold, China should claim the number two spot within the next few years–a fact that is not lost on its neighbors.

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As much as China has depended on the United States as a market for its products, the export driven economies of Japan, South Korea, and Taiwan have depended on China’s increasing consumption and cheap labor for much of their growth. This has meant a boon of foreign direct investment (FDI) for China. Japanese and South Korean companies have placed considerable bets on the continued strength and vitality of the Chinese market. Toyota Motor Corporation and Honda Motor Co., Ltd., Japan’s two largest automobile manufacturers, have each established joint ventures in China with extensive manufacturing and distribution operations throughout the country. But they are not the only Japanese enterprises putting down roots in the world’s most populous country. Companies as diverse as food & beverage colossus Suntory Ltd. and pharmaceuticals giant Takeda Pharmaceuticals Co., Ltd. have also set up shop along with thousands of other Japanese firms.

Japan’s FDI (balance of payment basis) in China during the mid- to late-90s was substantial and, after a precipitous drop off in 1999, it has increased every year since, save a small dip in 2006. According to preliminary figures prepared by the Japan External Trade Organization, Japan’s 2008 FDI in China totaled USD 6.497 bln more than 18 times greater than its total of USD 360 mln in 1999. However, in terms of percentage of total outward FDI, Japan’s FDI in China has been steadily declining since 2004.

More telling than Japan’s FDI numbers are its import/export figures and no such figures are more symbolic than those of 2007. That year was a watershed in the history of world trade. It was the first year in modern Japanese history that China was its largest trading partner. Prior to 2007, the United States held that claim. Thus, Japan’s economic ties with China have grown tighter. And, having racked up USD 109.1 bln from exports to China in 2007, Japan will be hard pressed if its greatest trading partner cannot weather the current economic storm as finding new markets may be well near impossible.

South Korea’s need for China to keep steaming along may be even greater than Japan’s. Since 1988, South Korean companies have established more than 19,000 ‘New Overseas Enterprises’ in China. Of these enterprises approximately three-fourths have been established in the last eight years. The degree to which South Korea has staked its own future on that of its neighbor is astonishing. Although Japan has invested many billions of dollars in China, its total FDI for 2008 only represents 5 percent of its total outward FDI of that year. In contrast, over the past two decades nearly one-fourth of South Korea’s total FDI has been in China. Similar to Japan, South Korea is heavily dependent on the Chinese market for its exports. According to the Korea International Trade Organization, the total value of South Korea’s exports to China in 2008 was approximately USD 91.38 bln, nearly twice the total value of its exports to its next largest market, the United States. South Korea has changed its orientation so fast, turning away from the U.S. towards China, that its current trade structure does not resemble its trade structure of 10 years ago in least. In 1999, the U.S. was by far the largest recipient of South Korean exports followed by Japan and China. However, by 2008 China had leapfrogged the U.S. and Japan to become the largest buyer of South Korean exports.

Finally, even the Republic of China (Taiwan) has decided to hitch its wagon to China’s star. Despite tight government restrictions on direct investments in the People’s Republic of China, Taiwanese companies have, by both official and surreptitious means, invested heavily in China. Shu-Ching Jean Chen of states that “Taiwanese companies have been for some time the top investors in China, having stealthily channeled more than $100 billion worth of investment to the mainland indirectly, through third-party intermediaries.” Hence, the presence of Taiwanese companies and capital in China, while relatively inconspicuous, is significant. Moreover, Taiwan shares with South Korea and Japan a newfound dependence on the 1.3 billion consumers in China. A decade ago, China was only Taiwan’s seventh-largest trading partner. But, by 2008, China had become Taiwan’s largest trading partner and market for exports, buying up almost twenty percent of its total exports.

Japan has not thrown its lot in with China in the dramatic fashion of South Korea and Taiwan. The U.S. may no longer be Japan’s number one market but it still runs a close second and it remains the top recipient of Japan’s FDI. Regardless, it is clear that the balance in East Asia has shifted towards China. For the time being at least, decisions China makes will be as important (if not more so) to the economic well-being of the East Asia region as decisions made by the United States. Some might feel unnerved to realize that tremendous powers now lie in the hands of an authoritarian government. A certain amount of disquietude is justifiable. If the Great Leap Forward and the opening up of China’s economy have taught us anything its that things change quickly in a country with a highly centralized authoritarian government running the show. There is always the chance that the Communist Party will react hastily or inappropriately to the future economic problems that are waiting to hit China. In an effort to raise employment the Party might take protectionist measures which would most certainly hurt all the countries of East Asia. Or, in order to deflect attention from its shortcomings, the government might encourage or turn a blind eye to violent expressions of nationalism. Laid off workers in China have already began to show their anger at executives, as witnessed after lay offs at Panasonic Electronic Devices (Beijing) in late-February of this year (See Article). Anger over layoffs at a foreign company could very easily go from a workers’ rights demonstration to an anti-foreigner riot if the Party decides ‘it’s either us or them.’ The possible scenarios whereby China could make Japan, South Korea, and Taiwan regret ever having cozied up to it are countless.

To date, the Party has responded well to the financial crisis. It has sought to combat the financial crisis in a calm but proactive manner. In November of last year, China announced its USD 586 billion stimulus package. Unlike the U.S., China has also seen foreign direct investment as key to its recovery. Just last month the government, seeking to facilitate foreign investment, relaxed FDI rules. These are positive signs for all the nations of the world. It is vital to the international community that both the U.S. and China make good decisions as they try to work their way out of the current economic troubles. But it is extremely important to the countries of East Asia that China feels the weight of its responsibility as the emerging leader of the region and acts accordingly.