China’s relations with East Asia

This region contains many of China’s strongest allies and trading partners but also its greatest (potential) foes, there are flashpoints which could spark regional conflict and derail the Chinese economy and its overseas expansion. The Korean peninsula, the Taiwan issue and the dispute over the Spratly Islands are all manageable for now, in fact the threat of conflict has not hampered the economic performance of South Korea or Taiwan; far from it the two countries have outperformed their peers in economic terms in almost every respect. But conflict is not always predictable and events could unexpectedly spiral out of control at any point.

Despite these tensions China has integrated strongly with East Asia, forming economic ties with the likes of Korea, Japan and Taiwan as well as South East Asia. In fact for all the noise around ties with the US, Africa and Latin America the majority of China’s overseas investment has flowed into East Asian countries, this trend has been accelerated by the presence of many ethnic Chinese businessmen, prominent in countries like Singapore, Malaysia and Indonesia. As China becomes more successful suspicions rise of their real intentions towards these smaller nations, whether they intend to dominate their neighbours either economical or politically. Many countries in Asia have military and political alliances with the USA, the question remains; will this come under threat as Chinese power grows, or will the region cling to existing alliances fearing China’s embrace.

Sino-Japanese relations have been poor since the Second World War and now arguments over tiny islands have perhaps obscured the bigger picture of a China in economic ascendancy steadily overshadowing its neighbour to the east. Japan had been the most powerful economy in the region for a long time and although the amount of business and trade conducted with China has been significant and highly beneficial for Japan, the pride of the nation’s leaders has no doubt been hurt by the fact they are no longer number one in East Asia.

However stand further back and things look differently Japan has a strong alliance with the USA, which together with other smaller regional allies such as South Korea, Thailand, Australia and the Philippines means that the USA remains the hegemonic power in the region. China has close relations with the likes of Cambodia, North Korea and Laos, but these are minnows in comparison to other nations in the region. In short China is an economic giant, but is not yet as politically powerful as it profile would suggest.

China’s trump card is its economic heft, its huge demand for the likes of wood, oil and metals means that it is many nation’s most prominent customer and those same countries are the “beneficiaries” or “victims” depending on your viewpoint of a wave of cheap Chinese electronics, textiles machinery etc. China’s banks are also taking on a greater role financing more and more projects throughout the region.The newly founded Chinese dominated Asian Infrastructure Investment Bank (AIIB) will cement this impression. Altogether FDI, trade and finance means that China’s economic footprint in the region is becoming ever more significant and eventually this commercial influence should translate into more political power, although Beijing will be torn between enjoying the US led peaceful status quo, which has allowed them to prosper, or asserting themselves more vigorously and potentially provoking anger and a backlash with inevitable negative economic consequences.

China is still reaping the benefits of the current US dominated system of global trade and investment but at the same time challenging it by setting up its own institutions and pushing its own interests in defiance of the US.

From a commercial point of view China look set on continuing their investment charge in the region, which will have various “knock on” effects and see certain trends begin to emerge:

Investment in agricultural assets will grow thanks to China’s declining agricultural output along with rising demand for foodstuffs. China Highland Capital Management was formed with the backing of the southern province of Yunnan and will inject as much as USD 2.4 billion into agribusiness and natural resources in neighbouring countries, we can expect this to be repeated across Asia and other parts of the world. While some of this demand will be met in Latin America and Africa, the majority will be met regionally, this will be a boon for regional food producers in the region.

There will be a growing trend to offshore production facilities to the likes of Indonesia and Myanmar and Cambodia as the “end of Cheap China” arrives. As wages and productions cost rise in China, allied to the government’s desire to become a more innovative, modern economy, the dirtier, low-tech and margin manufacturing will seek to relocate to foreign and less expensive shores. This process has begun, but as China is the world’s biggest manufacturer, the potential is massive.

Offshoring also represents a threat, these industries, garment manufacturing, plastics, shoe, leather and so on are difficult to justify on labour and environmental grounds, they cause pollution and workers have to toil for long hours in miserable conditions. The advantage is that the country begins its journey to developing a manufacturing base, a well-established route to economic wealth and power, in the same way the British, the Germans and most recently the Chinese have done.

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