Coping with China

By Clay Chandler

Tuesday 1st April 2003

Philip Yeo is taking on Asia's "big dragon" with a mouse. Or to be precise, 150,000 genetically modified mice that are being cloned in a government-sponsored biotechnology complex.

"My knockoff mice!" Yeo chortles, scribbling on the whiteboard walls of his book-filled office at A*Star, Singapore's Agency for Science, Technology and Research. "They're going to save us all."

Yeo's mice are at the centre of Singapore's bid for pre-eminence in the $35 billion biotech industry. The complex is called Biopolis, and Singapore has vowed to staff it with the best brains money can buy. Yeo, as co-chairman of the government's influential Economic Development Board and head of A*Star, has the political and fiscal heft to make it happen. He persuaded Alan Colman, the Scotsman who famously cloned Dolly the sheep, to relocate to Singapore and is wooing others with the promise of a legal code free of US-style restrictions against using embryonic stem cells for research.

But as much as this master plan bears the distinctive stamp of Singapore Inc, it was largely made in China. Stung by the worst recession in Singapore's history, the island's planners are struggling to shift away from electronics, chemicals and other labour-intensive manufacturing activities vulnerable to Chinese competition. China is the big factor behind this push to retool the economy, says Singapore's deputy prime minister, Lee Hsien Loong. Even the occasional visitor to Beijing or Shanghai, he marvels, leaves feeling that "there's an energy there, a tremendous eagerness to get ahead, and a sense of total confidence they will make it". And Singapore? Lee pauses. "If we stay where we are, our cheese is going to be taken away."

Singapore is one of many Asian economies scrambling to save its cheese from China. As the world's most populous nation sucks in foreign investment and spits out low-cost exports, executives and government leaders all over the region are losing confidence in the economic strategies that have served them well for decades. They're loath to toss out Asia's post-war development playbook, with its emphasis on government guidance, manufacturing and exports. But only a year after Beijing's admission to the World Trade Organisation, China is whipping them at their own game. "China is the new reality," says Singapore Airlines chairman Koh Boon Hwee. "Anybody who thinks the economic models that worked for us in the 20 years before China was part of the world economy will work in the 20 years after - they're just dreaming."

China's neighbours are adjusting to that new reality with an array of coping mechanisms. Taiwan's manufacturers have boxed up vast swathes of the island's high-tech industry and shipped them to the mainland, where cheaper labour enables them to remain competitive in global markets. Many that have opted to stay in Taiwan have taken to importing lower-cost workers from places like the Philippines. Japanese firms have joined the stampede, and they are stepping up efforts to sell to the China market, not just make things there. In Singapore and Malaysia, government planners are trying to climb the value chain into knowledge-intensive industries like biotech, design and software development. Hong Kong officials are betting that a Disney theme park scheduled to open by 2006 will boost tourism, which is already dominated by mainland Chinese now that quotas on how many can come into the territory have been scrapped. South Korea and Thailand are compensating for weak US demand by redirecting exports to China and boosting sales to their own consumers.

So far these responses have yielded mixed results. While moving factories to China has clearly benefited some companies, millions of workers, especially in countries with rigid labour policies such as Japan and South Korea, are being left in the lurch. Government efforts to nurture knowledge-based industries sound good in glossy planning documents, but they have yet to generate significant employment or revenue. China's growth is creating new trade opportunities for Asian neighbours, but it will be years before the spending power of Chinese consumers matches that of shoppers in the US, Europe or Japan. In the meantime, most of China's purchases from the region are old-fashioned commodities that Asian economies have been trying to grow out of - oil from Indonesia, palm oil from Malaysia, sugar from Thailand - or components incorporated into products assembled in China, or factory equipment that will make China only a greater export rival.

In public, Asian leaders often extol Chinese growth as a win-win proposition and observe that they are better off living next to a prosperous China than a poor one. But the homilies belie the pain of adjustment. China's emergence as factory to the world is putting enormous pressure on every economy in the region. Even for the richer players like Japan and South Korea, competition from China could push unemployment higher while dragging down prices, exports and profits. In smaller economies whose exports compete more directly - Malaysia, Singapore, Thailand, Indonesia and the Philippines - the China syndrome could bring much greater trauma. Workers in Southeast Asia "will be the clear victims" of China's success, says Charles Santiago, a Malaysian labour economist. "Whether we like it or not, our societies are organised around manufacturing work. These are good jobs, and when we lose them what will be left for us? We will be nothing more than a Chinese enclave."

China is already a formidable rival. In the five years since Asia's financial crisis it has clocked annual growth rates of 7-8%. Exports surged 21% last year to $322 billion, making it the largest exporter of goods to the US. The UN estimates that China took in about $US50 billion in foreign direct investment - more than the rest of Asia combined.

Already the world's dominant manufacturer of textiles, shoes and toys, China is gaining swiftly in the production of computer components, telecommunications devices and other electronic goods that have been a mainstay of growth in many Asian economies. It is using foreign cash and know-how to build capacity in ever more sophisticated forms of manufacturing, including semiconductors, machine tools, petrochemicals and automobiles. That prospect has its neighbours in a sweat. "We can really feel the heat of competition," says Koh Tsu Koon, chief minister of Penang, Malaysia's largest manufacturing centre. "China is breathing down our necks."

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