Written evidence submitted by Standard
Chartered
1. This submission to the Committee is made
on behalf of Standard Chartered, an International Bank based in
the UK and with a long history and large network across Asia,
Africa and the Middle East. This submission is made by Chief Economist
Dr Gerard Lyons, with input from Nicholas Kwan and Tai Hui, respectively
regional head of research and economist based in Hong Kong. Given
the Committee's remit, this submission highlights both China's
regional impact on Asia and its global importance. In looking
at East Asia it is important to appreciate that, whilst China's
role and impact is increasing, this region contains a number of
countries that are of significance in their own right. For instance,
Japan (USD 4 trillion) and South Korea (USD 476 billion) are already
huge economies, as measured by gross domestic product (GDP). Meanwhile,
there are some countries that, like China have low per capita
GDP, and who are, on account of their huge populations, already
of significant size and likely to become even larger in economic
terms. For instance, Indonesia with 218 million people, Vietnam
with 80 million, Thailand with 64 million and Malaysia with 23
million. There are other economies in the region, which whilst
having smaller populations, have relatively high per capita income
levels, such as Hong Kong, whose GDP per head is around USD 23,100
and Singapore USD 20,710. The further ahead one projects, the
more likely it is that Asia will become more important for the
world economy, with a number of sizeable economies and mega cities.
Furthermore, as financial markets across the region deepen, there
is likely to be a shift away from export-led growth to domestic
demand becoming a more important economic driver. This, in turn,
will reinforce the economic and thus the global political importance
of the region.
CHINA AS
A REGIONAL
ECONOMIC POWER
2. China is now the second largest economy
in Asia and the fourth largest in the world. In GDP terms, China,
with USD 2.3 trillion, ranks fourth largest in the world after
the US, Japan and Germany. Its USD 1.4 trillion foreign trade
value in 2005 makes it Asia's largest trading nation, or the world's
third, next only to the US (USD 2.6 trillion) and Germany (USD
1.8 trillion) and exceeding that of Japan (USD 1.1 trillion).
In terms of foreign exchange reserves, its USD 820 billion holding
is second only to Japan's USD 852 billion globally, and is likely
to overtake Japan to become number one within months. These underline
great improvements from even just 10 years ago, when China was
still ranked 7th in GDP and 10th in world trade. In 1979, the
first full year of the new open door policy, China was the 32nd
largest exporter.
3. Asia has recovered strongly from the
1997 economic crisis and now outperforms other regions in terms
of trade and economic growth. China and India were not directly
impacted by that economic crisis, as at that time they were both
still largely closed economies, driven by domestic demand. Since
then both have opened significantly further. One consequence is
that in recent years, China has emerged as Asia's major growth
driver. China is now the biggest export market for South Korea,
Taiwan and Hong Kong, and it is the largest trade partner with
Japan (including the trade flow that goes through Hong Kong).
It is also the fastest growing export market for the Association
of South East Asian Nations (ASEAN[5]).
China's rapid trade growth within the region underlines two key
development trends:
(a) China's increasing role as a key component
(usually the end-processor) of the global supply chain, with Asian
and multinational firms outsourcing and relocating their manufacturing
facilities to the mainland to take advantage of its relatively
stable operating environment and huge cost advantage; and
With its GDP growing on average, over 9% per
annum for more than a quarter of a century, China's demand for
foreign products and resources has risen sharply. Given its geographical
and resource endowment advantages, Asia naturally becomes a major
beneficiary of China's growing appetite for imports. ASEAN is
now the fourth largest supplier of raw materials to China. As
a result of supply chain restructuring and growing import demand,
China has seen its trade deficit with Asia widen. Meanwhile its
surplus with the EU and US has increased, adding to concerns over
currency policy and future protectionism.
4. China's rapid growth has made it an increasingly
important competitor with the rest of Asia, both in terms of trade
and investment. This has raised concerns that China's expansion
could trigger a hollowing out of the rest of Asia, whereby production
moves offshore from other countries to China. While this has created
pressure on almost all Asian neighbours to adjust and adapt, the
net effect seems to be positive, or mutually beneficial, as evident
from the large trade surplus that Asia enjoys with China and the
growing inter-connection of supply chains across the region. Although
the bulk of foreign direct investment (FDI) that goes to Asia
has been directed to China, the increased demand and the growing
integration of the Asian supply chain means that other countries
in the region have also benefited from China. In is also expected
that other economies in Asia will seek to diversify by moving
up the value-chain to avoid direct competition with China.
5. Since 2000, China has been actively pursuing
free trade agreements (FTAs) in Asia, having concluded them with
Thailand, Hong Kong and Macau, and initiated 17 other bilateral
and regional deals. Such FTAs are pragmatic, focusing on the liberalisation
of trade in goods and services, rather than looking to establish
a template for wider multilateral trade agreements. Such agreements
are allowing China to deepen its regional ties and, in turn, increase
its economic and political influence across Asia. In 2002, China
and ASEAN concluded a framework for a China-ASEAN FTA, which includes
an agreement to remove all import tariffs by 2015. If successful,
this is expected to double trade between the two areas, creating
the world's largest free trade area, with intra-regional trade
totaling USD 1.2 trillion a year.
6. If there were an economic setback in
China, it would impact the whole region. One of the key recent
drivers of growth in China has been investment. The Chinese authorities
have tried to curb the pace of investment growth as part of their
desire to achieve more sustainable growth. Indeed, investment
as a proportion of GDP is at the high levels seen in a number
of the Asian economies that suffered an economic crisis in 1997.
Not only is China itself potentially vulnerable to an economic
setback but if it suffered one, there could be a significant regional
impact. An illustration of this was an Asian Development Bank
study in 2004 that estimated that a 5% decline in investment growth
in China could not only impact China, curbing growth by around
2%, but could also lead to a 0.95% decline in GDP growth for Hong
Kong, 0.4% for Singapore, South Korea and Taiwan, and 0.2% to
0.3% for other south east Asian economies.
7. As China and the region's economies become
more interlinked so too are they likely to face common regional
challenges requiring increased inter-governmental coordination.
This has been evident in Asia in recent years, with environmental
issues such as severe acute respiratory syndrome (SARS) in spring
2003, the tsunami at the end of 2004 and the spread of avian flu
in 2005 and 2006. Regional forums such as ASEAN+3,[6]
APEC[7]
(Asia-Pacific Economic Cooperation Forum), PECC[8]
(Pacific Economic Cooperation Council) and others have provided
some outlet for discussion and cooperation. However, the lack
of an authoritative coordinating body and the highly divergent
socio-economic and political backgrounds of the Asian economies
limits the consensus building and decision making process.
8. Another common regional challenge is
resource shortages and environmental issues. With the rapid development
of China and India, demand for natural resources has been rising
and will continue to at a rapid pace. While the global market
mechanism can seek equilibrium between supply and demand for tradable
commodities, such as energy, metals and farm produce, this is
not yet possible for resources such as clean air, water and arable
land. Friction could arise amongst Asian nations over such issues
in coming years. The Sino-Japan dispute over natural gas reserves
in the East China Sea, the struggle for the water resource along
the Mekong River and the bid to secure energy sources in Russia
and Central Asia are several examples of the potential geopolitical
issues that could come on the back of resource shortages.
9. Geo-political considerations always warrant
attention in Asia. There are always a number of low probability,
high impact events that figure on any risk radar screen each year,
such as North Korea, China-Taiwan and China-Japan relations. A
few years ago, India-Pakistan would have figured, but relations
there have improved sharply. Similarly, India-China relations
in the past were not good, but these have also improved. In East
Asia's geo-political issues, China could play the role of peacemaker,
such as in the six-party talks over North Korea's nuclear issues,
or troublemaker. Other regional issues that warrant attention
are China-Japan relations, mainland China-Taiwan relations and
potential Korean reunification. In recent years the Chinese leadership
has acted with maturity on such issues. Instead, it appears that
for them, the main focus has been on the need for domestic, economic
and social stability.
GLOBAL ISSUES
10. Asia's future importance in global economic
affairs will be huge. In recent years the world economy has been
heavily imbalanced, increasingly dependent upon growth in the
US, highlighted by the large US trade deficit. China has been
the other major driver of growth. There are many ways in which
the world economy could become more balanced, but the further
ahead one projects, the more important Asia becomes for the world
economy. And thus, Asia can play a key role in allowing world
growth to become more balanced in coming years. The key here will
be for Asian economies to see a switch away from export-led growth,
driven by demand in the US, to stronger domestic driven growth.
As this happens the region will see the emergence of a largely
debt-free middle class. To achieve such domestic growth, the region
will need to translate high domestic savings into increased consumption
and higher investment. China, given its large market potential
and huge savings, would make a significant contribution to such
a demand-shift, if it succeeds in driving up its domestic demand,
especially consumption.
11. Asia, and China in particular, is having
a profound impact on global inflation. The full consequences of
which have yet to feed through. In recent years, global interest
rates have been relatively low by recent standards and this, in
turn, has contributed to ample liquidity. This has led to asset
price inflation, as evidenced in many equity and housing markets
around the world, but overall inflation has remained low, as the
emergence of China has kept the prices of tradable goods down.
Similarly the emergence of India is likely to keep the price of
tradable services down. The competitive threat from Asia is causing
problems in the west that warrant attention, not least the threat
of rising protectionism. In turn this has triggered tensions,
largely between the US and China, over exchange rate policy. The
US, in particular, has sought a rapid or sizeable appreciation
of the renminbi. Understandably, the Chinese have resisted a sizeable
appreciation, instead opting for a smaller move as seen last summer.
Then, in July, the renminbi was allowed to appreciate by 2.1%
versus the dollar. Although it was a small move, this was a watershed
event. In particular, it was a further sign that the market mechanism
is starting to play a bigger role in Chinese exchange rate policy.
Another sign was the previous autumn, when Chinese interest rates
rose for the first time in almost a decade. We are still some
way from the Chinese currency being set solely by the market mechanism,
but it will become more influenced by the market in the future.
The future impact of the market mechanism is likely to be seen
in further currency flexibility, although last summer's move suggest
that the Chinese authorities will still intervene and opt for
only gradual appreciation. Also, last summer, the Chinese indicated
their desire to manage the renminbi versus a basket of currencies
in the future. This makes complete economic sense and is likely
to become an increasingly common policy, in our view, across Asia.
Increased cross-shareholdings of other Asian currencies by more
countries across the region will help deepen Asia's financial
markets. This will be an important development in helping future
growth. This outlook will also have longer-term implications for
the dollar's position as the world's major currency.
12. As mentioned in paragraph 2 China has
huge reserves. In 2004, Asian foreign exchange reserves rose by
USD 535 billion, of which 39% of the increase was from China and
32% from Japan. Last year Asia's currency reserves rose by just
under USD 250 billion and of this, China's reserves increased
by USD 209 billion, reflecting a record high trade surplus, capital
inflows, foreign direct investment and currency intervention.
Although the US trade deficit has recently mainly been funded
by global private sector flows, the importance of Asian central
banks in terms of the future direction of global currency and
financial markets should not be overlooked. We would expect to
see passive diversification of Asian currency reserves away from
the dollar—that is, we would not expect to see Asian countries
actively selling the dollar on a large scale, instead they are
likely to put less of their future reserves into the US dollar.
13. In view of the increasing economic impact
from Asia there is a strong argument for global policy forum to
change, in order to allow developing countries a greater say in
global issues. There is the need for the UK to be fully engaged
in how best to involve China. Economic issues are often addressed
by organisations such as the International Monetary Fund or the
World Bank and by meetings of global forums such as the Group
of 7 (G7) or G8 leading industrial nations. There is a strong
case for such bodies to change to ensure that the views of emerging
new economic superpowers such as India and China and of different
regions, whether it be Africa, Asia or the Middle East, are taken
fully into account. In the past, the industrialised countries
may have had the answers to the global economic problems but in
the future other countries and regions need to be consulted. International
forums must contain the appropriate membership if they are to
resolve issues.
14. China's huge demand for energy could
have a profound future impact on global/regional growth and geopolitics.
One of the major features in the world economy in recent years
has been the high price of energy, particularly oil. This recent
oil shock is very different in nature to the shocks that characterised
the early and late 1970s. Those previous oil price spikes were
driven largely by supply shocks, with damaging global economic
consequences. This oil price shock has been largely driven by
increased demand; although lack of investment in refining capacity
has been an influence. Whilst oil-importing countries have been
hit by high oil prices, this had been offset in many respects
by the favourable economic climate that led to higher oil prices
in the first place, namely stronger world growth and rising global
trade. The longer-term economic and political implications are
hard to determine fully, because of the large degree of uncertainty
regarding future energy prices. Many energy experts, for instance,
expect prices to trend lower as new supply materialises. Yet,
the International Monetary Fund has already referred to 2004 as
being a permanent oil shock. The implication being that the increased
demand from China now, and elsewhere in Asia in the future, means
that the old highly positive correlation between world economic
growth and oil prices has re-emerged. If so, then strong future
global growth will keep energy prices high. This will have huge
implications: for instance, being positive for the Middle East,
allowing economies there to invest in and diversify their economies,
helping their young populations. And in this environment, the
economies with the world's largest gas reserves, Russia, Iran
and Qatar, should benefit immensely.
15. Another important aspect of growth in
China is the emergence of new trade corridors. For instance, not
only has intra-regional trade increased within Asia, but also
trade between Asia and Africa, between Asia and the Middle East
and also, now, between Asia and Latin America. This rise in South-South
trade is likely to continue, heavily driven by China's demand
for commodities but also reflecting the increasing economic and
trade linkages between these emerging regions.
Dr Gerard Lyons
Chief Executive
Standard Chartered
6 March 2006
5 ASEAN member countries: Brunei Darussalam, Cambodia,
Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand,
Vietnam. Back
6
ASEAN + China, Japan, Korea. Back
7
APEC member countries: Australia, Brunei Darussalam, Canada,
Chile, China, Hong Kong, Indonesia, Japan, Korea, Malaysia, Mexico,
New Zealand, Papua New Guinea, Peru, Philippines, Russia, Singapore,
Chinese Taipei, Thailand, United States, Vietnam. Back
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PECC member committees: Australia, Brunei Darussalam, Canada,
Chile, China, Colombia, Ecuador, Hong Kong, Indonesia, Japan,
Korea, Malaysia, Mexico, New Zealand, Peru, Philippines, Russia,
Singapore, Pacific Islands Forum, Chinese Taipei, Thailand, United
States, Vietnam. Associate members: France (Pacific territories),
Mongolian National Committee on Pacific Economic Cooperation. Back
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