Deeper integration boosts prospects for China, Asean

IN A short span of 40 years, China has transformed itself from a poor country to an upper middle-income and the world's second largest economy. While it faces challenges such as an ageing population and income inequality, and headwinds from protectionism in trade and technology, deeper China-Asean economic integration will be mutually beneficial.

Since China's accession to the World Trade Organization in 2001, it has quickly become a major trading partner for almost all Asean economies. A regional production network quickly emerged with China as the final processing centre to take advantage of its abundant labour, and various Asean countries specialising in component parts of the production value chain.

This was coupled with rising Asean exports of commodities to China, particularly following the 2008 Global Financial Crisis, when China ramped up its infrastructure investment as part of a stimulus package to support its economy.

More recently, China has become a major importer of food products and consumer goods from Asean, as its population has become more affluent, and its economy has begun rebalancing from investment towards consumption-led growth. This has resulted in the share of Asean-China trade in Asean's total trade climbing from 1.9 per cent in 1993 to 16.7 per cent in 2017.

Over the past decade, China's outward investment into Asean has increased steeply from practically zero to about US$122 billion in 2016. In addition to the bigger Asean economies, investments have flowed into the newly emerging economies of Cambodia, Lao PDR, Myanmar, and Vietnam, supporting growth and development in these countries.

The Asean region has also benefited significantly from the boom in Chinese outbound tourism in the region, rising from just 1.7 million in 2000 to 24 million arrivals in 2017. This figure still accounts for only 1.7 per cent of China's population, suggesting significant room for further growth.

BRIGHT PROSPECTS

Developments witnessed in the past few decades are likely just a precursor of the enormous benefits that Asean can reap in the future from a deeper integration with China.

First, China will become an even much bigger market for Asean. In 2017, China's GDP stood at US$12.2 trillion. Projections by the Asean+3 Macroeconomic Research Office (Amro) indicate that by 2035 - the year by which China aspires to become an advanced economy and a global leader in digital technology - China's GDP would be US$31 trillion.

With the largest middle-class population in the world, private consumption in China is expected to balloon from US$4.3 trillion at present to a whopping US$12.4 trillion by 2035. During this period, Asean's GDP will grow from US$2.8 trillion to US$7.8 trillion, and as in China, an increasing share of its 750 million population will become more affluent and enter the middle class, expanding the market size for Chinese products.

Second, China's labour force will decline from over 60 per cent of its population in 2017 to around 50 per cent in 2035 while Asean's labour force will remain unchanged at around 55 per cent. This means that labour-intensive industries will likely relocate to those Asean countries with an abundant pool of young workers and lower wages.

Third, increasing trade and technology-related protectionism will catalyse the further deepening of regional trade and investment links between Asean and China, although it may also cause short-term disruptions in many Asean economies, particularly those plugged into regional supply chains. However, it is likely that companies affected by the higher tariffs imposed by the US will look for new locations for production, and Asean will likely be their first choice.

And finally, China can help cover the large gaps in infrastructure funding in Asean and transfer expertise and technologies that it has accumulated over the past few decades. Increasing connectivity between Asean and China and within Asean, buttressed by the Belt-and Road Initiative (BRI) and further progress of the Asean Economic Community (AEC), will boost multilateral trade and investment flows across the region, strengthening Asean integration.

Given these factors, we expect integration to deepen - and with that, for trade, investment and tourism in Asean to flourish. Asean's exports to China are expected to increase about fourfold to nearly US$1 trillion by 2035; while FDI will continue to expand led by BRI projects and investment in the digital technology projects. In addition, AMRO anticipates that by 2035, 100 million Chinese tourists will visit Asean annually with the rapid growth of the middle class.

China stands to gain significantly from further integration with Asean too because of the many complementarities. For Chinese producers, Asean is a large and relatively affluent region with diverse economies, rich in natural resources, and with a rapidly growing middle class. It is therefore an ideal destination for Chinese businesses looking to expand their markets overseas.

For instance, for the poorer south-western provinces of China, improved physical connectivity with Asean will support economic development and help narrow the gaps with the richer coastal provinces. These developments, coupled with greater liberalisation of the financial markets in China, will strengthen the economic rationale for the wider usage of the renminbi, supporting China's push to make it a regional and global currency.

IT TAKES TWO TO TANGO

Deeper integration requires China and Asean to develop a deeper understanding of one other's requirements and socio-economic contexts. This includes an understanding of the strengths, capacities, and priorities of the two economies over different phases of development in the decades ahead. And against the backdrop of an increasingly protectionist trading environment, managing the balance between collaboration and competition will be critical.

China and Asean must make a conscious effort to manage their relationship in even-handed and mutually beneficial ways. Doing so will ensure that trust runs deep and economic progress is sustained.