Why a highlight of China's Two Sessions could pose as a double-edged sword for Southeast Asia

With China's annual parliamentary meetings known as the Two Sessions in full swing, Southeast Asian countries are keeping a close eye on what Beijing says about its economic goals, including its "dual circulation" strategy that focuses on domestic consumption and internal development to ensure self sufficiency.

First spelt out in May last year, the plan places greater emphasis on the domestic market, or internal circulation, and less on overseas markets and technology - though it does not abandon these latter two altogether.

Analysts believe that even as China looks inward - a response to ongoing tensions with the United States - the world's largest trading nation will also focus on boosting regional cooperation.

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Said Hao Zhou, a senior emerging markets economist at Commerzbank: "[The dual circulation strategy] means China's domestic market will become more important, but Beijing will also have to ensure a bigger export market for its products."

"Asean [the Association of Southeast Asian Nations] is part of the Regional Comprehensive Economic Partnership [RCEP] and will clearly be an important market for China," said Zhou, referring to the world's largest free-trade deal between 15 nations that account for about one-third of the world's population and economy, but does not include the US.

But besides looking out for opportunities, Asean countries will also be assessing the risks of closer cooperation with China, especially if the US comes up with punitive trade measures.

According to Chinese data, the Asean bloc is China's largest trade partner. Chinese direct investment in Asean in the first three quarters of last year reached US$10.72 billion, surging 76.6 per cent year-on-year. The Chinese state news agency Xinhua reported that bilateral trade between China and Asean had grown to US$641.5 billion in 2019 from US$292.8 billion in 2010.

At the opening of the National People's Congress on Friday, China's Premier Li Keqiang delivered his annual work report - similar to the US State of the Union address - and said China would set a growth target of "above 6 per cent" for this year while addressing hurdles to domestic economic recovery such as financial risks and unemployment.

A television screen shows Chinese Premier Li Keqiang giving his annual work report at the NPC opening in Beijing, China. Photo: Simon Song alt=A television screen shows Chinese Premier Li Keqiang giving his annual work report at the NPC opening in Beijing, China. Photo: Simon Song

China would also ramp up free-trade negotiations with Japan and South Korea, and "actively consider" joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), a trade deal comprising 11 Pacific Rim economies, Li said.

In the coming days, NPC delegates are expected to discuss the work report, which outlines policy directions, and approve China's fiscal budget for 2021 as well as the country's 14th five-year plan, which covers the years 2021 to 2025.

This will be the first five-year plan to devote a specific chapter to technology, framing self-sufficiency in technology as a major pillar of China's economic development.

OPPORTUNITIES

Francoise Huang, Asia-Pacific senior economist at Euler Hermes, a global trade credit insurance company, said that at the end of 2020, around 15 to 20 per cent of exports from major economies in Southeast Asia went to China.

While China's growth rate would have an impact on Asean, the focus should be on the "language and targets" used by Beijing to describe its fiscal and monetary policies, as these would indicate how fast Chinese authorities aimed to tighten the policy mix, a process it began late last year, Huang said.

"Targets such as government bond issuance quotas, fiscal deficit, aggregate financing growth, M2 money supply growth, etc, should be of particular notice," Huang said, adding that Southeast Asian countries should watch out for the impact of China's industrial plans.

Huang said Euler Hermes research had shown some countries in Southeast Asia were likely to be among the biggest losers in the medium term as China embraced industrial autonomy. This was because goods from the region tended to be less hi-tech than those China imported from the US, Japan and Germany, which would be harder to replace.

In the semiconductor sector for instance, Malaysia, the Philippines, Singapore and Thailand had lost market share "nearly continuously in the past few years", Huang said.

Dane Chamorro, a partner at Control Risks, said Beijing had been "spooked" by how vulnerable it was to export controls the US had put on some technology imports, such as chips, over the past few years.

This had forced Beijing to place greater emphasis on securing vulnerable supply chains, Chamorro said, adding this would have the biggest effect on Japan, Taiwan and Southeast Asian countries such as Thailand, Malaysia and Singapore.

Southeast Asian countries including Singapore could benefit as Beijing places greater emphasis on securing vulnerable supply chains. Photo: EPA alt=Southeast Asian countries including Singapore could benefit as Beijing places greater emphasis on securing vulnerable supply chains. Photo: EPA

Andrew Sheng, a distinguished fellow at the Asia Global Institute, University of Hong Kong, said given the size of China's economy, there was scope for diversity in exports to the country. This would allow Southeast Asian economies to focus on products catering to Chinese tastes and standards.

It meant working with Chinese importers, designers and distributors to ensure that the Chinese market remained open and profitable, Sheng said.

"China will not close its domestic markets to Southeast Asian neighbours," said Sheng, adding that there were areas where China could work with countries to improve trade and payments such as in digital currency cross-border payment projects.

Sheng said that Thailand, the UAE, Hong Kong and the People's Bank of China were jointly exploring a project that would facilitate clearing and payment systems for trade and investments.

Alicia Garcia-Herrero, chief economist for Asia-Pacific at Natixis, said Southeast Asian countries were likely to benefit from China's continued investment in the region and efforts in building "a China-centric supply chain in Southeast Asia".

"China needs to keep [Southeast Asia] in its ecosystem in a world that is bifurcating technologically," Garcia-Herrero said, referring to the US-China rivalry to become the world's tech superpower.

Wang Yiwei, director of the Institute of International Affairs at Renmin University in Beijing, said that as China's largest trading partner, Southeast Asia could help Beijing maintain international connectivity post-coronavirus.

Sectors China and Southeast Asia could partner on included digital, artificial intelligence, health and the green economy, Wang said, adding that the extension of the China-Europe rail network would further highlight the importance of Southeast Asia.

"This is especially so in the age of e-commerce and big data, including digital currencies. Given its young population, Southeast Asia is well-placed to undertake digital transformation and industrial restructuring," Wang said.

Commerzbank's Zhou said that, given China's emphasis on technology, Asean economies could expect to see more Chinese IT firms expand into the region.

"We do see Alibaba [the owner of the South China Morning Post] and TikTok planning some expansion in Singapore and [in other] Asean countries," Zhou said. TikTok is owned by the Chinese company ByteDance.

Amid growing hostility from the US and other major markets such as India, China's tech behemoths are increasingly turning to Southeast Asia. Chinese multinational technology conglomerate Tencent has said it will open a new office in Singapore, adding to its premises in Malaysia, Indonesia and Thailand.

Huang said that Asean countries would also be looking at partnering Beijing in its global infrastructure development plan known as the Belt and Road Initiative.

According to the RWR Advisory Group in Washington, in the five years after 2013, China started work on or completed projects totalling US$200 billion in Southeast Asia. More projects could be on the way, with Li mentioning at the NPC opening that Beijing was keen to press on with the initiative.

DOUBLE-EDGED SWORD

However, Garcia-Herrero said greater integration into China's supply chain also carried a risk for Southeast Asia, especially if Washington deliberately tried to exclude China from its own supply chains for hi-tech sectors such as electric vehicles and semiconductors.

"Southeast Asia risks being trapped in China's value chain ecosystem," said Garcia-Herrero.

Chamorro said Southeast Asian countries that had territorial disputes with China would continue to find it challenging to manage their trade relations with China. This was because demand from China - the only major economy to grow in 2020 - had been such an economic "lifesaver" for many of them.

Chamorro gave the example of Vietnam, which was tied into China's supply chain. He said the country had not only managed the pandemic well but had been the number one recipient of foreign direct investments from North Asia, including China.

"It is and will continue to be a complex relationship between Asean and China," Chamorro said.

Sheng said that with China putting more emphasis on technology and innovation in raising national growth, Southeast Asian economies should consider how they too could upgrade their manufacturing and supply chain models.

"They must retrain their labour force, and move up the technology and innovation ladder. They have an added task, because their supply chain must fit both China and Western needs and standards," Sheng said.

This article originally appeared on the South China Morning Post (SCMP).

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