China has left its sweatshops behind

The sheer size of China’s contribution to Asian and global economic growth means that if China slows down, the rest of Asia will experience a significant ripple effect.

For example, Deutsche Bank estimates that a one percentage point growth slowdown in China would cause a drop in most Asian countries with the exception of India. Southeast Asian economies Singapore, Malaysia, Thailand and Indonesia would be the most affected.

A trade shift from Japan to China

In 2015, China brought an end to Japan’s dominance of Asia’s high-technology exports. China’s share has risen to 43.7% from 9.4% back in 2000.

The shift marks China’s success in boosting innovation and technology development as key drivers of the country’s growth as it moves up the manufacturing value chain.

Since 2000, there has been a trade shift within the Asian region from Japan to China. While Japan has remained the largest source of foreign direct investment, outbound tourism from China has increased substantially.

In the most recent global economic outlook forecast, the dark clouds looming over China’s slowdown can only be partially lifted through the rise of India, with some contributions from the Philippines and Vietnam and Indonesia.

Japan is not in a position to help to cover the risks with China’s slowdown.

Leaving the sweatshop behind

In the past, China typified the sweatshop—low wage Asian workers making branded clothes in crowded, unsafe factories for consumers overseas.

China has started to move up the ladder on the global value chain and is leaving its sweatshops behind.

These sweatshops have since moved on to other Asian economies, including Vietnam, Indonesia, Cambodia, Thailand and India.

But this transfer is unlikely to be that smooth. The International Labour Organisation suggests that 9.2 million textile and footwear jobs in Asia are threatened by automation.

These include 88% of those in Cambodia, 86% of those in Vietnam and 64% of those in Indonesia.

The effect of technology is inevitable. The only challenge is that many workers in Asia need upskilling. Over-capacity is present everywhere across industries and across countries.

China’s continual influence

In a recent poll conducted by US-based Pew Research Center, three-quarters of more than 3,100 mainland Chinese respondents said they believed China is now playing a more important role in the world than it was 10 years ago.

The majority of respondents, i.e. 56%, however, thought that China should spend time dealing with its own problems. Only 22% believe that China should help other countries deal with their problems.

Two recent reports suggest that China also influences investors’ perceptions of the Asian region.

The first study by the Bank of International Settlements (BIS) concluded that the country’s influence on regional equity markets has risen to a level close to that of the US in non-stress periods.

The second study by the International Monetary Fund (IMF) showed that the co-movements of Asian and Chinese equity and currency markets have jumped since the global financial crisis. This suggests that China is taking up the role of Japan in Asia in these areas.

Since the global financial crisis, China’s product imports from Asia have dropped from 62% of total imports in 2008 to 56.7% in 2015. Exports to Asia to total exports have risen from 46.4% in 2008 to 50.3% 2015.

Trade between China and Asia rose by 79.6% from US$2.21 trillion to US$3.96 trillion in the same period.

Its erstwhile trade deficit of US$38.7 billion in 2008 has now become a trade surplus of US$194.5 billion in 2015.

With rising trade between China and Asia and China’s influence in Asia in many other areas, it is hard to see the two becoming disentangled over the next years.

That is, we are far from a world where the Asian region is expected to pick up the slack from China’s slowdown.

Published on interest.co.nz