With GDP growing at 8% China is forcing other Asian economies to scrap uncompetitive industries and focus on what they can produce profitably
At the height of the Asian financial crisis, China found itself in an unfamiliar position, as an economic role model.
As much of Asia struggled to steady itself, China was called an 'island of stability'' by none other than then-US President Bill Clinton and his finance minister, Robert Rubin. As Indonesia, South Korea and Thailand plunged, and Japan slid anew, the US gave Beijing some of the credit it so desperately desired.
Five years after the start of the Asia crisis, China is still topping the growth charts. Gross domestic product is growing nearly 8%, the fastest in the world. The growth is another sign that China continues to boom, while many other economies slide.
Far from being excited about this huge, new market being created in their midst, many view China's rise as an ominous and scary force. One hears much about the 'hollowing out'' of Asia as executives, frustrated by the cost of doing business in places such as Hong Kong, Japan, Singapore and Taiwan, are moving to mainland China, where labour and property costs are far lower.
'It's one of those forces Asia can't control, but one that, like it or not, will have a huge impact,'' says James Miller-Stirling, head of research at WorldSec International in Bangkok.
Admittedly, China could turn out to be an economic temptress. It may be surging at the moment, but so is the multitude of questions about the outlook. They include the state of the nation's banking system, political stability and how China's 1.3bn people will react to the nation's transition from socialism to capitalism.
Beijing is actively trying to divine how to maintain stability as communist China morphs into capitalist China. While the transition is already under way, officials are under no illusions that it'll be pretty or smooth. It'll be anything but, and that's why the nation is so set on maintaining growth of more than 7%. Such output, it is believed, is needed to absorb the shock of opening China's economy.
Achieving high growth is easier said than done. It requires throwing tens of billions of dollars at the economy. The spending will go to welfare programs aimed at cushioning job losses and smoothing the transition from a controlled to a free-market economy.
For all its promise, China faces daunting challenges that will only get worse as it lives up to its agreements under the World Trade Organization. For example, the livelihood of China's 800m rural residents is at risk as Beijing phases out import tariffs that shield industries from foreign competition. The government must figure out how to help these masses.
Yet even as Beijing struggles internally, the outside world is increasingly feeling China's influence. Its economy is the second largest in Asia, and its trade policies are exponentially forcing Asian policy makers to figure out how to compete. And make no mistake about it, they will have to compete aggressively.
The longer-term prize is the creation of the growth anchor the region lacks. Japan used to play that role. That was before its asset bubble burst in the early 1990s, paving the way for today's deflation. For 11 years now, Japan has been less of a locomotive than a wagon with square wheels. And the nation's leadership is looking more rudderless by the day.
China boasts what Japan lacks: growing cities, a rapidly expanding population and a middle class hungry to display its new wealth. China's entry into the WTO adds even more fuel to the economy, extending the nation's reach. Internationally minded companies are well aware of China's potential. Foreign investment rose 19% in the first half of the year.
That dynamic could be what Asia needs. China has shaken up Asia's trade systems, and that's not entirely bad. Its rise is forcing companies, and, indeed, entire governments, to reconsider what they can and should be producing. If higher wages in Korea or Taiwan make it hard to compete with China, producers may have to shift production elsewhere. Or if Japan can't manufacture electronics goods and cars profitably at home, companies may have to do it elsewhere.
Economies slammed by the Asian crisis are learning similar lessons. Bangkok, Seoul and Kuala Lumpur are realising it is not enough to reform their economies, they also need to deal with China and other low-cost producers. That's chastening Asian officials and forcing them to rethink their economic models. And that's a good thing.
It's a sign of maturity when a nation moves up the economic ladder and focuses on what it can produce profitably. There's also a net benefit for consumers of a nation that can import high-quality goods more cheaply than it can produce them. Importing goods you used to make is a healthy part of any country's development. It's why nations trade in the first place.
At its core, the concept of free trade is about countries scrapping uncompetitive industries and focus- ing on what they can produce efficiently and profitably. If you can import textiles, rubber or vegetables cheaper than you can make them, do it. Many East Asians still fight that logic and turn to trade barriers and weakening currencies to protect their goods.
The arrival of knowledge-based economies, combined with the rapid pace of globalisation and the profound changes it has engendered, demand flexibility and adaptability. It's not clear how much Asia has met those demands since 1997. Thanks to China, it may not have much choice in the matter.
Bloomberg newsroom, Bangkok