How Can China Win Friends and Influence ASEAN?

With few disagreements, the United States has undoubtedly played the role of a hegemon in the region by extending a security cordon to friendly countries and access to a huge consumer market for export wares. However, the demise of the Cold War and the onslaught of a subprime crisis emanating from America have caused a reappraisal of this situation. Perhaps inevitably, the question is asked: Will China supplant the United States as the most influential presence in Southeast Asia?

International Political Economy Zone | Wednesday, March 3, 2010

OK, it's shameless self-promotion time for yours truly. In line with my duties as a research fellow on Southeast Asia International Affairs, I had to prepare a piece for our IDEAS newsletter which goes out to our rather disparate stakeholders. This being more or less a piece of academic writing, I had to tone down my usual semi-theatrics somewhat. Yet, the themes I bring to the table in thispiece entitled "How Can China Win Friends and Influence Southeast Asia?" should be familiar to regular blog readers: Yes, it's in China's best interests to revalue its currency--more so if it wants to curry favour in Southeast Asia since countries in the region are also forced to prop up the (rather useless) greenback insofar as China pegs the yuan at 6.83 to the dollar. And yes, the US has become an also-ran in Southeast Asia as it's at the back of the bus in terms of establishing a free trade agreement with ASEAN. China, India, South Korea, and the antipodean pair of Australia and New Zealand have not only done so but their agreements are in the process of being implemented already.

I hope you find it interesting and I've actually begun trying to turn this into a full-fledged journal article [fingers crossed]. Meanwhile, read about what I believe China should do to improve relations with ASEAN in...
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HOW CAN CHINA WIN FRIENDS AND INFLUENCE SOUTHEAST ASIA?

To the untrained eye, ASEAN resembles any number of other regional alliances with collective action problems. Not only is economic integration proceeding at a pace incommensurate with establishing a single market by 2015, but there are also several ongoing intramural tussles such as Thailand taking umbrage with Cambodia’s appointment of ousted Thai Prime Minister Thaksin Shinawatra as an economic adviser. A closer look at ASEAN, however, reveals that one of its peculiar strengths has been an ability to function despite the unending cacophony of such conflicts. In ASEAN’s case, the whole is truly greater than the sum of the parts for reasons explained here.

With few disagreements, the United States has undoubtedly played the role of a hegemon in the region by extending a security cordon to friendly countries and access to a huge consumer market for export wares. However, the demise of the Cold War and the onslaught of a subprime crisis emanating from America have caused a reappraisal of this situation. Perhaps inevitably, the question is asked: Will China supplant the United States as the most influential presence in Southeast Asia? Postwar Japan has largely been regarded as a welcome neighbour by providing generous aid to the region, but it has never been regarded as the United States’ equal in furnishing public goods. Although Japan cannot be disregarded altogether, China is arguably better poised to take up the mantle of regional despite its frequent disdain for the term “hegemony” in official discourse. That is, its avowals of diplomatic friendship can coexist with a willingness and ability to provide public goods to others.

Interestingly, the United States and China’s respective strengths and weaknesses complement each other: America still controls international financial institutions that shape economic interactions in the region and beyond: the Asian Development Bank, World Bank, International Monetary Fund, and World Trade Organization. America’s institutional richness in setting the rules of the game, however, is no longer complemented by financial preponderance given the woeful state of American finances. In addition to structurally ingrained trade deficits, estimates conservatively place the present value of US fiscal deficits at $56.4 trillion after including unfunded liabilities for health care and pensions. By contrast, China’s exporting prowess and low fiscal debt are more consistent with a country in relative ascent. Yet, deploying this financial strength to win friends and influence ASEAN requires that the PRC set up institutions of its own. In this regard, it pales in comparison with the United States.

The manner in which the United States and China treat Southeast Asian countries further informs regional dynamics. The Asian financial crisis which preceded the current one figures large in this respect. The United States controversially implemented “Washington Consensus” loan conditionalities involving liberalization, privatization, and deregulation that were believed to have exacerbated the crisis’ impact by removing social protections in countries like Indonesia and Thailand. When faced with its own crisis, however, the United States has seen it fit to embark on unprecedenteddeliberalization, nationalization, and reregulation to limit the fallout stateside. For obvious reasons, commonplace perception of double standards threatens America’s institutional standing: why were rules like the “Washington Consensus” fit for everyone else…except Washington itself?

During the Asian financial crisis, China saw the amount of social upheaval faulted against following IMF strictures and decided on a path of concentrated export promotion to ensure that it would not inherit its neighbours’ plight. China’s refusal to devalue its currency during the height of the crisis is widely perceived as a welcome action by Southeast Asian countries insofar as doing so would have resulted in even more export competition during a time when these countries were experiencing great difficulties. With China in the lead, Asian countries have subsequently accumulated massive reserves to guard against a recurrence of another crisis. However, with current reserves for many Asian nations (including several in ASEAN) now being well in excess of standards for reserve adequacy such as cover for debts coming due within a year, this pattern has arguably become an unhealthy one. China’s current reluctance to revalue the renminbi forces the rest to follow suit by also purchasing reserve assets to buoy the US dollar’s value against their own for maintaining perceived export competitiveness vis-à-vis China. Public monies that could go towards more socially productive activities like bolstering health and education are thus allocated to ever-greater accumulation of reserve assets of dubious social value.

Understandable mistrust of America stemming from the contrast between its handling of the Asian financial crisis and the subprime crisis gives China a golden opportunity in Southeast Asia. In speech, Chinese leaders alike Premier Hu Jintao have alluded to weaning the PRC off exports to subprime-hit developed economies and moving towards domestic consumption consistent with relatively faster income growth in Asian countries. President Wen Jiabao has even characterized China’s current growth pattern as “unstable, unbalanced, uncoordinated, and unsustainable.” Yet, in deed, China has shown limited signs of moving to a more domestic focus. For example, the PRC’s recent stimulus package has largely targeted investment for building export capacity. Although bank lending to export industries has just been placed under more scrutiny, this pattern is inconsistent with China’s stated goals of rebalancing its economy. Insofar as Southeast Asian nations perceive themselves to be threatened by Chinese export competition, PRC lending that may result in worse global overcapacity is unwelcome.

What, then, can China do to curry ASEAN’s favour in the economic realm? It is a truism that the exigencies of the PRC’s political system allow it to take a longer-term view than America. Overall, making China more of a consumer market can reverse several undesirable dynamics set into motion by the Asian financial crisis. A modicum of renminbi revaluation can ease pressures on Southeast Asian countries to accumulate large reserve holdings to keep their currencies weak as well. Although PRC officials disdain American pressure to revalue the renminbi, Chinese interests can still hold via a large one-off revaluation or a gradual strengthening consistent with China’s economic gradualism. While all concerned will likely lose some market share from higher prices of export wares abroad, the burden will be shared equitably. In this manner, China can actuate its oft-stated good-neighbourliness towards fellow developing countries in the realm of international trade.

By allowing what would have gone into reserves to go into provisioning health and education, the region can refocus itself from an outmoded post-Asian financial crisis economic paradigm to one based on homegrown demand with China in the vanguard. In simple terms, it is high time that East Asia placed its consumers’ interests ahead those of others. Also, the resulting revaluation improves the purchasing power of Chinese consumers, making goods from Southeast Asia more affordable to them in a way that can help spur intraregional trade.

People’s Bank of China Governor Zhou Xichuan recently made overtures towards weaning the world economy off “dollar hegemony” or the fact that most trade is invoiced in dollars and most reserves are denominated in the same, giving the United States unparalleled ability to abuse the system during times of duress by making others bear its costs of adjustment. Similarly, at a workshop on ASEAN economic integration hosted by LSE IDEAS, Professor Shaobang Kang of the Central Party School advised Southeast Asian nations to hasten processes of financial and monetary integration with China. Here again China is handicapped by its lack of clout in present institutions. However, this situation may change given China’s long-term perspective. Already, China has established pilot programmes enabling trade clearing and settlement in renminbi with ASEAN countries. The larger point is that free trade requires a free flow of currencies. At present, though, the renminbi is not readily traded outside of China. There are a number of ways China can hasten this eventuality—by establishing a synthetic currency alike the IMF’s Special Drawing Rights (SDR) albeit with greater participation; by making the renminbi the regionally targeted currency instead of the dollar, or by establishing a currency basket shared by the region’s economies. No choice is likely to emerge unless China is willing and able to take up the mantle of providing public goods to the region by expanding the role of its currency.

To be sure, Uncle Sam may not be down and out of Southeast Asia, but he is down nonetheless due to largely self-inflicted wounds. Having no aspirations to regional hegemony itself, ASEAN is an attractive partner for both the US and China and effectively serves as a gatekeeper to the region. America’s perceived double standards and abuse of the international monetary system for its own ends draws ASEAN closer to China in seeking alternative arrangements for regional growth and stability. Southeast Asia’s attention shifts to China in the hope that it can begin to lay the groundwork for lasting growth and stability the wider region is still searching for in the wake of the Asian financial crisis all those years ago.

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