Dragon set to tow boat of Asia's economic recovery

There is little doubt that China's economy has started to turn the corner.

Consider the statements of Chinese policymakers. When the crisis broke out last fall, China appeared worried and inward looking. Contrast that with the mood through the first half of this year and you find China to be proactive and forceful.

This reflects their confidence about the ability to overcome domestic economic difficulties and to make the policies work at home. In turn, this has given world leaders, especially Asian policymakers, the assurance they were seeking from the world's leading growth engine of recent years.

Undoubtedly, the US, Europe and Japan are still the biggest drivers of the global economy, and they are likely to experience slow growth for at least some more years, leaving Asian economies to seek alternative engines of global economic development.

While China's market is not big enough to offset the dramatic slowdown in the developed world, it is likely to play a greater role in the economic fortunes of Asian countries. Its economy is expected to rebound to an 8 percent growth in 2010 after slowing to a still enviable (predicted) rate of 7.4 percent this year. And as China rebounds, it will lift the rest of the region to varying degrees.

Regions such as Hong Kong and Taiwan are in the best position to gain from the Chinese mainland's recovery because of their close trade, tourism and capital flow links.

Take tourism, for instance. Hong Kong is the biggest beneficiary of the growing numbers of tourists venturing out of the mainland. The city attracted 16 million mainland visitors in 2008, or 57 percent of its total tourist arrivals last year.

South Korea, Singapore and Japan welcomed more than 1 million Chinese tourists each, which was more than 10 percent of their annual total visitors.

The warming of cross-Straits ties has already seen more than 400,000 mainland tourists visiting Taiwan. Taiwan hopes to attract more than 3 million mainland tourists by 2012, up from 330,000 last year. The only constraint for the island is its lack of infrastructure to welcome that many mainland tourists. Clearly, big investments in tourism infrastructure are in the offing.

That does not mean the rest of Asia will miss out on China's rebound. Indonesia's natural resources sector should be able to capitalize on an expected infrastructure-led boom on the mainland. Vietnam is another country that should gain from the shifting out of low-cost manufacturing from China.

Many observers question whether China will be able to pick up the slack from the slowing Western economies. The US consumer market is reportedly worth $10 trillion, whereas China's is just $1.6 trillion. In that sense Chinese consumers cannot compensate for their US counterparts.

Or perhaps they can. US consumption will fall by $170 billion this year, while China's will rise by $115 billion, which means Chinese consumers will make up for two-thirds of that fall.

Second, the potential of Chinese consumption is underestimated. It is true that China's exports have been hit hard, causing widespread job losses in the export-oriented coastal region. But other regions are growing strongly, too, especially central and western China, and domestic consumption remains stable.

While international imbalances have grabbed the headlines, China has been working to correct its own imbalances: coastal, rural social, environmental, as well as international.

The authorities have made some progress in their efforts to build a harmonious society following the Scientific Outlook on Development. They are especially trying to boost rural spending on white goods and durable items.

Some figures suggest this is starting to make a difference: About 920 billion yuan ($135 billion) will be spent on these goods next year. That is about 4 percent of the national income. Consumer spending, I think, will continue to rise in China and provide a stimulus for the rest of the Asia.

One of the most significant developments is the decision by the Chinese government to provide an expanded social welfare safety net. Though it will take time, it will reduce precautionary savings and increase consumption.

Finally, and perhaps most significantly, China can help the rest of Asia escape a prolonged downturn through its growing trade ties. In recent years, intra-Asian trade has risen significantly, and China has been at its center.

Exports to China from other Asian countries are either consumed directly in China or re-exported. About 60 percent of Asian exports is meant for G7 countries. As a result, the reprocessing extent of China's trade can be underestimated, but not its domestic consumption.

Late last year, the Hong Kong Monetary Authority conducted a study breaking down the exports to China from other Asian countries into those re-exported and those consumed within the country. China consumes everything that it imports from Vietnam (7.1 percent of the country's exports). The domestic consumption of goods imported from Indonesia is 70 percent; South Korea 50.4 percent, Singapore 50.3 percent, Malaysia 49.2 percent, Thailand 47.3 percent, and the Philippines 39 percent.

These are positive indicators as Asian economies search for a bulwark against the global downturn. Chinese consumers may not be a substitute for those in the US or Europe - at least not yet. But the trend is unmistakable.

The author is CEO and executive vice-chairman of Standard Chartered Bank (China) Limited

(China Daily 07/29/2009 page9)