Chinese growth has wide fallout

by Yukon Huang



South-East Asian economies more closely resembling China and offering similar comparative advantages have often found themselves outmuscled by their much larger neighbour.


Yet over the next decade, a split emerged in how China’s growth affected North and South-East Asian economies.

Between 2000 and 2010, Japan, Taiwan and South Korea saw their collective trade surplus with China soar from $US30 billion to $US210 billion.

The story for ASEAN countries is more complex because their resource endowments are similar to China’s. After the Asian financial crisis, countries across the region benefited as their overall trade balance with China shifted from a deficit in the late 1990s to a surplus.


Evolving regional production patterns have affected capital flows, investment rates and wage trends in ways that have benefited some East Asian countries more than others. The more developed North Asian economies are likely to benefit the most from China’s industrialisation process because they have strengthened their position at the high end of the consumer electronics and IT product lines.

Production patterns in the region are affecting investment and labour markets in South-East Asia, thus complicating efforts to moderate widening income disparities, increase productivity and possibly escape the middle-income trap.

Real wage growth for the middle-income economies of Thailand, the Philippines and Malaysia was in line with GDP growth for much of the 1990s, but then declined or stagnated. Starting in the mid-1990s, real wages in China surged. Stagnant real wage growth and relatively low investment rates have largely been viewed as the result of country-specific conditions.

But the region’s production network has played a significant role in enabling China to pull away from its South-East Asian neighbours. With multinational firms managing decisions about where components are produced, location is influenced by the relative productivity of labour and wage costs and the logistical advantages China’s size offers.

China’s exceptional investment rates have contributed to industrial labour productivity’s estimated 10 to 20 per cent annual increases since the mid-1990s – much higher growth than its neighbours and exceeding manufacturing wage increases. Over time, China’s declining unit labour costs have put pressure on countries like Malaysia to limit wage increases.


Surging energy prices and the complexities of a dispersed supply chain are also encouraging some firms that had previously outsourced components to South-East Asia to relocate their operations within China.

Both China and middle-income South-East Asian countries face the same challenge of constantly innovating to achieve high-income status.



The Australian Financial Review