::: Star Weekend Magazine :::

Economy

Undisputed Dynamism

Despite the 'China magnet' investors are still interested in Southeast Asia

Bunn Nagara

In recent weeks, Asian business reports have delved into rising wages and growing trade union activity in China.

The natural response is to ask: Is China's Communist Party and government losing its grip on industrial workers, or deliberately loosening it as part of a larger strategy in the country's industrial policy?

A short-term analysis might just say that China's policy-makers have long been pressured by their US counterparts, notably vocal members of the US Congress. They have repeatedly chastised Beijing for not revaluing the yuan (again), or not floating it enough.

There have been on-off charges of currency manipulation, repeated over the past few years, despite explanations by US fund managers and others that the fate of the yuan has little bearing on the US economy. As it happens, China's position on anything also has little bearing on the fact that US Congressional concerns are largely tied to domestic politics.

The big bogey there has been and remains so is China's pull on industry, making US producers export jobs to China. Since capitalism means maximising profit at the expense of the other factors of production, the lower labour costs and weaker social and environmental regulations have made outsourcing to China attractive.

As a large industrial country, the US has felt this particular 'China syndrome' most, but the phenomenon is also familiar in much of Asia. There has been a hollowing-out of industry as transnational corporations already established in Southeast Asia for the lower costs here pack up and move to China for its even lower costs.

Then, in recent days, all this was said to be set for change again. Various business and financial reports have talked of further wage rises in China, to the extent of signalling the end of the “cheap made-in-China era”.

For many, this may seem too much and happening too soon. Certainly, as a very large country long steeped in its way of doing things, changes will come only slowly for China.

However, the changes revolving around higher pay and improved work conditions along with their economic, social and political implications are here to stay. They are virtually irreversible, exerting considerable long-term impact on Chinese society.

Contrary to common belief, it is not a new phenomenon. For some years now wages in China have been rising, a condition exacerbated by shortages of skilled labour and the proliferation of manufacturing plants.

Industrial action, even suicides, have also concentrated the mind of employers on better terms and conditions for their workers. In all these developments short of forming independent unions, the government has permitted the reforms instead of obstructing them as before.

Changes had been afoot at least since 2007, when tax breaks for foreign corporations ended. The following year, new labour laws helped workers become more aware of their rights, and the Associated Press reports that wages have been climbing 15 per cent a year since.

Political economist Behzad Yaghmaian argues that far from US pressure forcing China to revalue its currency, Beijing's decision to do so last month has been measured and deliberate. And this relates to China's long-term plan to climb the technology ladder in its production and export capacities.

Regional analysts might want to take the longer view by looking at the larger picture of East Asian production and wealth creation. This would require going back further than Japan's post-war rise.

In the late 19th century, Meiji Japan engaged in productive industrialisation. The Pacific War was a costly interlude, but when it ended in 1945, Japan resumed industrial development that grew rapidly through the 1960s to the 1990s.

In that period the rest of East Asia welcomed the influx of Japanese capital, which powered their economies through employment and more affordable goods as the “Asian tigers” flourished. Then as China also grew, beginning with policy changes in the 1970s, foreign capital was diverted there.

After benefiting from an earlier round of foreign investment, China is now poised to go further. With labour shortages and rising wages, the obvious way is through value-added (higher technology) production.

Corporations operating in China like Honda, Toyota and Denso have lately been jolted by industrial action and demands for pay hikes. Toyota reflected the general sentiment of foreign investors in accepting the wage demands, saying that it also means more people in China would be able to buy its cars.

Improved work conditions are clearly good for China in that its workers would be getting a fairer deal. There would be greater social peace and industrial harmony, while the resulting development also means more political stability.

Nonetheless, foreign investors are generally eyeing other Asian production locations like Vietnam and Indonesia largely because of cost differentials. Some US firms are considering returning production to the US mainland, particularly since shipping costs are also rising.

Meanwhile, Nissan and Mitsubishi are particularly active in Thailand. A low birth rate, shrinking labour force and high industrial capacity have made Japan an outstanding exporter of capital looking for the best returns.

A couple of years ago I talked to Japanese policy-makers and industrialists and was surprised that despite the “China magnet” attracting foreign direct investment, they were still interested in investing in Southeast Asia. Had they been interested all along, or are they only lately becoming interested again following the latest changes in China?

Ultimately, it should not matter so long as foreign investment grows in ways that help integrate East Asian economies towards more development. In time, exported Chinese capital may also come to compete with Japanese and other capital in the region.

All of this points to the need for an East Asian economic institution conducive to more harmonious and optimised trade and investment for the region.

This article was first published in The Star, Malaysia.