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Asia

China's economic problems are exactly why its global influence is expanding

Slowing economic growth in China is spurring its top leadership to expand the country’s influence beyond its shores — a development that was most recently on display at an annual forum of the Association of Southeast Asian Nations.

Over the weekend meeting, foreign ministers grappled with how to refer to differences in the South China Sea, highlighting divisions within the trade bloc under the shadow of the neighboring economic powerhouse.

Aside from its stunning economic ascent, China’s growing clout overseas is also about bolstering confidence at home.

“In recent years, the government wants to show the country is becoming stronger and stronger, so to make people feel better about country. That’s the main driving force of the shift to a foreign policy agenda like South China Sea and ‘One Belt, One Road’ and a lot of things,” said independent economist Andy Xie.

“It has a lot to do with the domestic economy,” he told CNBC recently.

“One Belt, One Road” — also called “Belt and Road” — is China’s globe-spanning investment program to connect countries along a new high-tech and transport Silk Road. That’s being unfurled as the Chinese economy shifts from a manufacturing focus to services and consumption.

The transition comes with growing pains, with efforts to reform state-owned enterprises (SOEs) and slash excess capacity spurring layoffs and widespread resistance.

To maintain a certain degree of economic growth — targeted around 6.5 percent in 2017 — China needs to find new markets, and help keep massive state-owned enterprises afloat, Nadege Rolland, senior project director of political and security affairs at the National Bureau of Asian Research, said at a recent forum hosted by the Center for Strategic and International Studies.

The SOEs, many of which are involved in the industrial sector, are burdened with over-capacity and debt after years of turbo-charged growth in China that is now decelerating. “One Belt, One Road,” observers say, will help to mitigate the impact of the economic shift.

Kunal Ghosh, emerging market portfolio manager at Allianz Global Investors told CNBC that the initiative is a “fantastic way of getting someone to pay for your debt and use your surplus capacity.”

The initiative is not necessarily a universal win-win, though: “The Belt and Road is a great plan, but you must also look at its consequences,” said ASEAN Business Club President Munir Majid.

Chinese outbound investments follow similar longstanding efforts by Japan and South Korea. Those countries have been battling economic problems at home from the fallout of aging demographics and over-reliance on important trading partners like China.

Now, all three of those countries are looking to the same engine of growth.

“The eyes of the three regional giants have fixated on Southeast Asia,” said Ricard Torné, economic research head at the Barcelona-based FocusEconomics, adding that the North Asian countries are seeking economic and political leverage from investments.

Those economic powerhouses are outsourcing parts of their production chains to benefit from Southeast Asia’s lower salaries and proximity as the emerging governments roll out red carpets for foreign investment.

With a growing middle class, the emerging economies also offer a market of over 600 million consumers, said Torné.

South Korea was the first mover into Vietnam, and has met with success, with investments dating from the 1990s focuing on labor-intensive manufacturing projects, Torné noted.

It is Japan, however, that is Southeast Asia’s second-largest foreign trading partner — after China.

Mitsubishi UFJ Financial Group is a Japanese company bullish on the emerging region, having invested over $6 billion in the last few years, according to its Asia and Oceania CEO Takayoshi Futae. He cited optimism in consumer spending and the potential of young populations in the ASEAN states.

Still, it is now China that has captivated imagination with its grand vision of the “One Belt, One Roas” that promises major infrastructure investments across and linking different countries in Southeast Asia to Europe. That’s a geostrategic move that will cement the Asian giant’s predominant role in the region, added Torné.

China is also trying to buy its way into influence with its massive investment, particularly under the leadership of President Xi Jinping, who observers say is the most powerful leader in the Chinese Communist Party in decades.

Under his vision of a “China Dream,” the country is showing it is rejuvenating and growing its economy through a coherent strategy, said Rolland.

“On the economic side, the hope is that it will bring back benefits for economic growth and development. On the political and geopolitical side, using that wealth and that economic development to attract more foreigners and to attract more power and influence,” she said.

There are already tangible results.

The influence, she said, has already caused foreign countries to tamp down the criticism about human rights in China and it has divided European countries on the South China Sea topic.

“This kind of economic incentive has a very big power on our own positioning on political issues and on China’s geopolitical and geostrategic interests,” she said.

Source: cnbc china
China's economic problems are exactly why its global influence is expanding

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