THE ASIA BOOM : China Sets the Pace as Cash, Concrete Pour Into World's Hottest Economic Region

By SAM JAMESON

Nov. 29, 1994 12 AM PT

TIMES ASIA ECONOMICS CORRESPONDENT

In times past, Asian business people could judge the outlook for their own companies by watching the economy of the United States, their biggest export market. More recently, they watched Japan.

Now, a third locomotive of growth has burst forth on the Asian scene.

“China has become an engine, and the principal one for the Pacific region,” Lawrence Krause, a professor at the University of California, San Diego, wrote in the annual prospectus of the Pacific Economic Cooperation Council. Exports to China now play “a large part in forecasts for continued growth” of many Asian countries, the professor explained.

Although Western economists are just beginning to take notice, Asian businesses, even countries, are finding their fortunes increasingly linked with the soaring growth of the mainland giant, now in its third straight year of double-digit expansion.

For instance, Charoen Pokphand, Thailand’s biggest conglomerate, popularly known as the CP Group, already does half its business in China and expects that from now on more than 50% of its revenues and the bulk of its growth will come from China.

“New opportunities are available in China that are not available in Thailand,” Boonmee Chongpison, assistant senior vice president of CP Petrochemical Co., explained in his Bangkok office.

In Japan, Mabuchi Motors, one of the world’s largest manufacturers of miniature motors used in electronic devices in automobiles, appliances, cameras and toys, is about to become one of the first Japanese manufacturing firms to dismantle all of its factories at home. It has tied its future, indeed its survival, to China, where 80% of its production is now being carried out.

After the firm closes its last machinery factory in Japan early next year, only 1,000 of Mabuchi’s 39,000 employees will remain in Japan--in headquarters and research and development jobs.

The Daewoo Group of South Korea has set up 11 joint ventures in China in the past two years. By the year 2000, it expects to operate as many as 50 firms there, doing about $3 billion worth of business, about half in automobiles, according to Sah Jae Chul, a managing director of Daewoo Corp.

Lee Kuan Yew, Singapore’s senior minister, says some Asian nations will find their annual gross national products increased by up to 1% because of China’s growth.

The U.S. market still takes between one-fifth and one-third of each Asian country’s global exports. In the 1970s, a 1% increase in the U.S. economy raised Asian GNPs by the same percentage. But now a 1% American increase produces only one-fifth of that level in Asian growth, a reflection of relative decline in economic influence, says Kwan Chi-hung of Nomura Research Institute in Tokyo.

Neither a U.S. recession, nor a setback in Japan, nor a two-year plunge in Japanese foreign investment--Asia’s second engine of growth--thwarted robust growth in Asia in the early 1990s. Economists failed to predict or even explain the phenomenon, Kwan pointed out.

“The majority view persists that, when the United States sneezes, Asia catches a cold. . . . Economists still focus on the U.S. growth rate when projecting growth in Asia,” Kwan explained.

What they overlook include these developments:

* China not only has become a “giant industrial park” in which other Asians produce for export to third countries, it also is emerging as a new market itself, increasing intra-Asia trade.

* The peripheries of “Greater China”--Taiwan, Hong Kong and Chinese living in Southeast Asian countries--have led the boom in investing in China but are now being joined by other Asian nations.

* Foreign construction companies are playing a major role in developing China’s infrastructure. Meanwhile, Southeast Asian nations, fearing that China’s boom might lure investors away from them, have begun to work on bottlenecks in their own infrastructures, triggering an Asia-wide spree of spending on telephones, roads, bridges, ports, airports, power plants, waterworks and sewers.

* Despite a decline in foreign investment in Southeast Asia, all Asian countries this year are revising upward their initial estimates for growth.

Over the horizon, as China moves from economic growth to economic clout, the potential for new problems is immense. Nomura’s Kwan mentioned some of them:

Will China’s demands strain the global supply of capital? Will its coal-burning power plants destroy the environment? What about the global supply of raw materials, especially oil? Can intense trade friction with the United States and other developed nations be avoided? Will the future economic giant turn into a military superpower?

But for the moment the focus is on the present, and superlatives abound everywhere in Asia.

“China is going to be the biggest trading nation in the world,” said a U.S. diplomat in Bangkok.

“The course (China) is taking will make it one of the greatest nations on Earth within the next two decades,” said Robert Kuok Hock Nien, a Malaysian Chinese tycoon based in Hong Kong, who himself is one of the leading investors in China.

“China is like a plane taking off. We have the wind under our wings. Let’s fly!” Zhu Xiao Hua, a deputy governor of China’s central bank, said in an interview with the German newspaper Handelsblatt.

Lee’s prediction about GNPs has already come true in Hong Kong and Taiwan.

Hong Kong’s manufacturing-on-license in China accounts for about 2% of the British colony’s 7% annual growth in estimated GNP, according to Kwan. Taiwan, he added, obtains about 1% of its 6% yearly growth from its factories in China.

Even countries that now have little trade with China expect to feel China’s impact in the future.

Thailand, which fueled its emergence as an industrializing nation by selling cheap-labor products in markets that China is now penetrating, expects an incremental addition from China’s boom to appear in its GNP in about 10 years, Vasim Teeravcchyan, deputy director of the East Asia Department of the Thai Foreign Ministry, said in Bangkok.

Syed Jaafar Aznan, deputy secretary general of Malaysia’s International Trade and Industry Ministry, agreed that “China will complement growth” for members of the Assn. of Southeast Asian Nations (ASEAN)--and will be an engine of a different color than Japan.

“Japanese just buy Japanese products. But China is different. We can sell there,” Aznan said.

South Korea, which lacked even diplomatic relations with Beijing until two years ago, expects China to surpass Japan and replace the United States as the nation’s No. 1 export market. Kim Do Kyoung of Lucky-Goldstar Economic Research Institute foresees that epochal event--for Korea--within 10 years. Kim Dong Yong of the government’s Ministry of Trade, Industry and Energy sees it coming by 2010.

The same shift could even occur in Japan.

“The United States absorbs about 30% of Japanese exports, China only 5%. But by 2000, the United States will be down to 20%, China maybe 12% to 13%,” Nomura analyst Kwan said.

Kenji Miyahara, senior managing director of Sumitomo Corp., dismissed as “excessive” a Chinese forecast for a tenfold increase in Japan-China trade, to $390 billion, by 2004. “But trade probably will increase by five times in 10 years,” to about $200 billion, exceeding the 1993 two-way Japan-U.S. trade, he predicted.

Eventually, Japan-China trade will surpass Japan-U.S. trade, he added.

Trade between Taiwan and the mainland topped $10 billion in 1993, up from $7.5 billion in 1992. In 1992 alone, Taiwan businesses contracted to invest $5.5 billion in China, according to the Nomura Research Institute.

Engineering and construction firms from Singapore, which established diplomatic relations with China just four years ago, have found a new boom market in China building about a dozen “industrial parks.” One of them will be a 27-square-mile city designed to attract $20 billion in investment and create a “mini-Singapore” in Suzhou, west of Shanghai. The development spree has sent Singapore soaring up the list of China investors to fifth place, with $6.5 billion in commitments.

China has eaten into export market shares of nearly every country in Asia in textile garments and cheap electronics products. Shoes once made in South Korea and Taiwan are now practically all made in China. More than 60% of all toys in the world, accounting for $9 billion in trade, are made in China.

Yet no Asian nation has suffered any loss in GNP growth this year. South Korea, which grew 5.5% in 1993, is heading toward 8%. Thailand and Malaysia both expect to continue about 8% growth at least for the next five years. Even the Philippines is moving up.

So far, negatives produced by China’s emergence have been matched, or exceeded, by positives.

What South Korea has lost in apparel exports it has gained in overseas sales, especially to China, of textile raw materials and polyester fabrics. Meanwhile, China has become a new Korean market for exports of heavy industry goods, including whole plants, machinery and cars.

Worries about China grabbing away foreign investment have had a boomerang effect, inducing such countries as Indonesia and the Philippines to adopt more favorable terms for foreign investment. The result in Indonesia was a 2.8-fold jump in Japanese investment in the first half of this year; in the Philippines, a 5.6-fold spurt.

And according to the U.S. diplomat in Bangkok, ASEAN is finally getting serious about lowering tariffs and trade barriers among its six members--raising hopes for the emergence of yet another engine of growth for the region.

Despite the boom, optimism is restrained in some quarters, even toward business in China. Although growth there is being spurred by foreign investment, Asians say that China does not offer a first-rate environment.

“We don’t see much of an advantage in China’s low wages. Productivity is very low. Infrastructure is a big problem. Inflation is rising in the coastal areas. Management, engineers and skilled labor all will have to be sent in at the beginning of operations,” said Koo Ja Il, director of the China division of Daewoo Corp., echoing Asia-wide complaints. Then, too, there are defects in China’s legal and financial systems, worries about exchange rates and bureaucratic red tape.

Beyond the pan-Asia boom it is stirring, China could serve as an even more powerful engine for growth if it eliminated high tariffs and other import barriers and allowed private ownership of its own enterprises, says Staporn Kavitanon, who heads Thailand’s Board of Investment.

China, he said, “is a gold mine for those who can penetrate the domestic market and for those who can tap its natural resources. But for others trying to export their products, it’s still a closed market.”

Still, for the droves rushing in, the lure of the market of 1.2 billion people, and the fact that since 1992 China has extended its “open door” policy beyond its special economic zones and beyond export-only production, overpowers the drawbacks.

“Indeed, China is already the largest market for certain industries, such as telecommunications and aerospace,” the International Monetary Fund noted in September in its semiannual report.

Mabuchi won the right to sell only 10% of its production in China when it started building its first factory in Dalian in 1987, but it was permitted to sell 50% of production in China at a plant it opened near Shanghai in July.

Distribution and retailing sectors were opened just two years ago, and the Japanese leaped at the opportunity. Yaohan, a small regional supermarket chain that moved its corporate headquarters to Hong Kong in 1989, already has started building a chain of stores in China and declares that its goal is to open 1,000 outlets.

One leading Japanese department store operating in Shanghai, where the per capita annual income has reached $1,500, sells its goods at prices higher than in Japan, according to Shinichi Sakakibara, China manager for Sumitomo Corp., a giant trading company. Wacoal, a high-fashion women’s undergarment manufacturer, also is doing well in China, he added.

“Women start wearing brassieres when per capita income exceeds $1,000,” Sakakibara said.

China’s announcement that it would allow new foreign entrants into automobile manufacturing in 1996 sent a stampede of auto executives from Japan, South Korea and Malaysia--not to mention the United States and Europe--rushing to Beijing.

Permission for foreign investment in infrastructure--on which the U.S. Commerce Department estimates China will spend up to $200 billion in the next five years--has produced so many proposals that there is a gridlock in approving them.

Even so, China emerged this year as the No. 1 market for overseas construction by firms from South Korea, which used to do most of their overseas business in the Middle East. Contract signings have been running at an annual rate of $1 billion.

Although it started doing business in China in late 1992, the Berjaya Group of Malaysia won bidding to build a $443-million bridge across the Yangtze River at Nanjing and will soon sign a contract for the job, said Judy Tan, director of the conglomerate’s investor relations. “It is one of the largest infrastructure projects in China,” she said.

CP Group, which entered China in 1979 with its modern animal-feed mills and automated chicken farms, is now engaged in business in China that it never ventured into in Thailand: producing motorcycles, brewing beer, developing a $2-billion satellite town across the river from the Shanghai Bund and, most recently, joining Wal-Mart Stores Inc. in a joint venture to enter the “warehouse store” business popular in the United States.

Mabuchi also is charting astronomical leaps for its new plant: production of 3 million miniature motors this year, 40 million next year and 75 million in 1996. And “we already are planning to expand production beyond that level,” Tsutomu Takahashi, the company’s planning manager, said in Matsudo, Japan.

Nimit Nontapunthawat, executive vice president of Bangkok Bank, said Thai companies have invested $4.5 billion in China--the bulk of it in the past two years. Somkiat Osotsapa, a professor and director of the Indochina and Southwest China Program at Chulalongkorn University in Bangkok, predicted that, by the turn of the century, Thai firms will have invested about $10 billion more in China, bringing the total to about $15 billion.

Moreover, countless newcomers are joining the wave.

Half of the 400 firms listed on the Bangkok Stock Exchange now operate joint ventures in China, Somkiat said. About 50 Malaysian firms now operate in China or plan to invest there soon, Zainal Azam Yusof, adviser to the Malaysian central bank, said in Kuala Lumpur.

“From traditionally labor-intensive to relatively high-tech industries--in all cases--Japanese companies have voted China as the most popular destination for investment,” Nomura’s Kwan said.

The Samsung Group in South Korea this month announced plans to invest $3 billion over the next 20 years to build an electronics complex in China--an amount twice as large as all of the investment South Korea had made in China through last year.

For nearly everyone, the boom in China is beginning to look like a gold rush.

Chinese are sending city and provincial missions all over Asia. More than 200 have visited Thailand in the past few years, said Staporn, the Board of Investment chief. “To this office alone, 150 delegations have come seeking advice and know-how in promoting foreign investment,” he added.

Just this month, Li Peng, on the first visit to South Korea by a Chinese prime minister, signed agreements for the two nations to cooperate in research and development of aircraft, automobiles, high-definition TV, digital telephone exchanges and nuclear power--giving Seoul a foot in the door in joining construction of as many as 30 nuclear plants that China plans by 2010.

CP Group is expanding so fast that its executives insist they don’t know the current number of projects that the Thai conglomerate operates in China. “I think I can say that we have somewhere between 130 and 170 projects,” Eam Ngamdamronk, president of CP Standard Resources Co., said with a straight face.

Phiraboon Phaiboontham, his executive assistant, tried to explain by telling of a river cruise that CP Group’s chairman, Dhanin Chearavanont, took at the invitation of Chinese authorities during a recent visit there. The cruise lasted 10 days, and by the time it ended, “our chairman had signed 50 memoranda of understanding,” or MOUs, in business parlance.

“An MOU is not an IOU,” added Phornsin Phacharintanakul, president of CP Intertrade Co. But an MOU does lock in a project until a feasibility study can be done.

In Kuala Lumpur, Tan of the Berjaya Group noted that “the important thing is to grab the project first.”

Times staff writer Rone Tempest in Beijing contributed to this report.

China Growth

As foreign investment in China grows, the economies of other Asian nations improve. Hong Kong is the leading foreign investor in China.

* Foreign Investment Spending in China

1992: $38 billion

* Source of Foreign Direct Investment in China

(Contractual total, 1979-’93)

Hong Kong: 68%

Taiwan: 8.3%

Others: 8.0%

U.S.: 6.5%