China will make vassals out of Asean

I do not know if there were any last minute second thoughts but the schedule for making the China-ASEAN Free Trade Area (CAFTA) operational is Jan 1, 2010. I wrote a column last Dec. 14 that pointed out some of the dangers of this arrangement to Asean economies for so long as the Chinese yuan remains undervalued.

Even without CAFTA, China’s policy of tying the yuan’s value with the dollar is also hurting China’s neighbors in Asean. Most of the Asean countries have the values of their currencies determined by market forces and they are at a distinct disadvantage in trading with China and its undervalued currency.

The weak yuan is causing problems for Asean economies as the region adjusts to China’s rise as an economic superpower. Even without CAFTA, Chinese products are already extraordinarily cheap in Asean markets and have been causing many Asean industries to go belly up.

A visit to the 168 Mall in Divisoria is all the proof one needs to gauge the impact of mostly smuggled Chinese made products on locally made goods. It simulates the tax free entry of Chinese goods into our market under CAFTA.

China’s export driven economies already have the scale that enables them to compete in the world market. China has in fact, just overtaken Germany as the world’s largest exporting country. Add to that the currency advantage and government coddling of its industries and it is clear that Asean economies will sooner rather than later, turn into economic vassals of Beijing. Maybe, China is recreating the old days when our sultans paid homage to the Chinese emperors.

A recent story on the start of CAFTA in the local papers carried the comment of the Chinese Ambassador to Manila who cited China’s yuan policy which was welcomed by its neighbors 10 years ago. During the 1997 Asian economic crisis, the values of many regional currencies collapsed. Indeed, China then won the gratitude of its neighbors by keeping the yuan’s value fixed. It made China look like a responsible power as it prevented a competitive spiral of devaluations that might have made the crisis a lot worse.

But then was then. Now is a different story. Most regional currencies are effectively revalued vis-à-vis the weak dollar. This then renders Asean products uncompetitive against Chinese products because of the weak yuan. It also does not help Asean countries that Chinese state-run banks support industry with loans so cheap that credit can be almost free, holding down operating costs.

China cannot continue to pretend that it is just another developing nation. Its economic power far outstrips that of its neighbors or any other emerging country. China is deluding itself if it honestly thinks it is a friendly alternative to an imperious American superpower. For many in Asia, China is the new colossus establishing its economic hegemony.

The question foremost in the minds of many Asean industrialists now is simple: given the many advantages of Chinese industries from state subsidized credit, economies of scale and weak currency, why should Asean give them tax free entry in Asean markets? An Indonesian official told the NYT: “They are stronger and bigger than other countries. Why do we have to give them preference?”

As I cited in my earlier column, the NYT pointed out that through September last year, Asean countries ran up a collective $74 billion- trade deficit with China. “That is a sharp reversal of the surplus those nations enjoyed in most recent years, and it is prompting some rethinking of the conventional wisdom that China’s rise is a windfall for the whole neighborhood.”

By tying the yuan to the weak American dollar, China’s yuan has become weak too. Chairman Mao should rise from his grave as China effectively surrendered its monetary policy to the US Federal Reserve. This would have been unthinkable to Chairman Mao to effectively be so directly subject to decisions in Washington but it doesn’t seem to affect China’s national ego today.

More important to the Chinese is the fact that its exports have an unfair advantage as these become significantly cheaper in countries whose own currencies have not compensated for the dollar’s recent fall. In Thailand, manufacturers are openly complaining about their inability to match Chinese prices. So are our manufacturers here in the Philippines.

The NYT reports that the Indonesian Trade Ministry announced it would seek to renegotiate some of the 350-odd tariff reductions that were envisioned in the first year of the accord, set to take effect last Jan. 1. Our own government has been eerily quiet about its plans. Our already battered and thinning numbers of industrialists are understandably worried. China’s beggar thy neighbor policy is effectively in place with the weak yuan devastating their business and their nations’ economies.

It is silly to think of CAFTA as providing Asean industries access to the large China market, the avowed intention of the agreement. If Asean industries can’t compete with Chinese industries in their own markets how can they hope to compete with the Chinese in the Chinese market? Asean industries simply cannot beat the massive support the Chinese government gives their industries in terms of credit and tax breaks as well as the undervalued yuan.

But our leaders in Asean are afraid of China and don’t have the nerve to bring up the problem. Are Asean leaders just hoping and praying that China will soon do the responsible thing for a world leader and act in the interest of the region’s economies and the world?

Indonesia

Speaking of Indonesia, this item from Bloomberg caught my attention because this is what we should have been if we had a credible leader.

The country’s 40 richest people doubled their combined wealth to $42 billion last year, according to Forbes. Among 12 countries Forbes tracks in Asia Pacific, only China equaled that growth.

More of that wealth is staying home, as investor confidence is buoyed by political stability under the country’s first popularly elected president, Susilo Bambang Yudhoyono. That marks a turnaround since the ouster of former dictator Suharto in 1998, when the economy collapsed during the Asian economic crisis and thousands of rich Indonesians fled the country.

“More and more wealthy Indonesians would like to bring their money back into Indonesia,” said Rizal Prasetijo, managing director of PT J.P. Morgan Securities Indonesia. “At this juncture, unless something really big happens, the trend cannot be reversed.”

In our case, those with money are taking capital out of the country to invest in China and other markets. But given our governance situation. –Boo Chanco (The Philippine Star)