China’s Economic Power Unsettles the Neighbors

China’s Economic Power Unsettles the Neighbors
By MICHAEL WINES
Copyright by The New York Times
Published: December 9, 2009
http://www.nytimes.com/2009/12/10/world/asia/10jakarta.html?th&emc=th


PASARKEMIS, Indonesia — In the Dickensian depths of the Dunia Metal Works here, all is cacophony: the bam bam bam of grease-drenched punches; the rhythmic clank of unspooling steel wire; the storm and stress of glinting, freshly minted nails cascading onto a broad metal table for boxing.

The Dunia Metal Works in Pasarkemis, Indonesia, is running at 40 percent of its capacity as its export markets have dried up.

But for all the industrial din, Dunia is undergoing a painful slump. Today it runs at 40 percent of its capacity, its domestic nail business imperiled — and its exports wiped out — by cheaper Chinese alternatives.

“We have been competing with the Japanese and the Koreans,” said Juniarto Suhandinata, the factory’s director. “But the Chinese — no chance.”

The Chinese are tough competitors, and Dunia is hardly the first to find out. But Mr. Suhandinata’s lament speaks to something different: a sense of disquiet, even in developing Asian nations in Beijing’s orbit, over the implications of China’s swift, seemingly boundless economic growth.

China has long claimed to be just another developing nation, even as its economic power far outstripped that of any other emerging country.

Now, it is finding it harder to cast itself as a friendly alternative to an imperious American superpower. For many in Asia, it is the new colossus.

“China 10 years ago is totally different with China now,” said Ansari Bukhari, who oversees metals, machinery and other crucial sectors for Indonesia’s Ministry of Industry. “They are stronger and bigger than other countries. Why do we have to give them preference?”

To varying degrees, others are voicing the same complaint. Take the 10 Southeast Asian nations in the Association of Southeast Asian Nations, known as Asean, a regional economic bloc representing about 600 million people. After a decade of trade surpluses with Asean nations that ran as high as $20 billion, the surplus through October totaled a bare $535 million, according to Chinese customs figures, and appears headed toward a 10-year low. That is prompting some rethinking of the conventional wisdom that China’s rise is a windfall for the whole neighborhood.

Vietnam just devalued its currency by 5 percent, to keep it competitive with China. In Thailand, manufacturers are grousing openly about their inability to match Chinese prices. India has filed a sheaf of unfair-trade complaints against China this year covering everything from I-beams to coated paper.

The Asia-Pacific Economic Cooperation forum, the biggest regional group, last month urged the adoption of “market-oriented exchange rates” for Asian currencies without mentioning — or needing to mention — China’s currency, which many economists say China keeps artificially undervalued to promote its own exports.

In Southeast Asia, Indonesia is having second thoughts about a free-trade pact China negotiated with the six core Asean nations.

Under strong pressure from industries as varied as steel and motorbike makers, the Trade Ministry said last week that it would seek to renegotiate some of the 350-odd tariff reductions that were envisioned in the first year of the accord, set to take effect in January.

Jong-Wha Lee, the chief economist for the Asian Development Bank, noted that Japan and South Korea were also seen as juggernauts — and were criticized — when their state-backed industries rapidly increased exports. But the challenge from China seems different.

“Not just the size, but the speed of China’s emerging power is really unprecedented in the region,” Mr. Lee said. “So it creates a lot of issues — not just trade and exchange-rate policies. But in the future, what will be the role of China?”

China has taken some steps to mollify complainers. In April, it proposed a $10 billion investment fund to help build badly needed roads, railways and ports in Southeast Asia, and a $15 billion fund to give Asian nations low-interest development loans.

But it has so far done little to address regional and global unease over the value of its currency, the renminbi. Because the currency is lashed by effective government fiat to the sinking American dollar, China’s exports have become significantly cheaper in countries whose own currencies have not compensated for the dollar’s recent fall.

In Asia, the renminbi is doubly significant. During the 1997 Asian economic crisis, the values of many regional currencies collapsed, making their goods cheap to foreign buyers. The Chinese then won the gratitude of their neighbors — and cast their country as a responsible power — by keeping the renminbi’s value fixed. That prevented a competitive spiral of devaluations that many economists feared might make the crisis much worse.

The latest financial crisis tells a different story: China’s exchange rate controls are cited as a leading cause of huge global imbalances that contributed to the collapse of 2008.

This time, China has resisted pressure to untie the renminbi from the dollar and let it rise. And its neighbors’ exports have suffered as a result.

Michael Pettis, an economist and scholar with the China program of the Carnegie Endowment for International Peace, argues that China can no longer pursue the same export-driven development model at a time when Western consumers no longer are able to gobble up whatever it and other Asian manufacturers produce.

Until 2008, Mr. Pettis said, “most of these countries ran trade surpluses, and the U.S. was the countervailing trade deficit.”

“The entire model depended on the ability of an external agent — the United States — to absorb trade deficits,” he added.

Indonesia is especially vulnerable to the shift. It is the most populous and arguably the least economically advanced nation among the onetime Asian Tigers, and perhaps the least able to accommodate itself to a new regional order dominated by China.

Didik J. Rachbini, a professor and the founder of an economic research institute here, said that in the past four years, Indonesia had swung from more or less parity in bilateral trade to a deficit equal to one-third of its annual exports to China — and rising.

The lowly nail is one focus of tension. Making nails is not complicated: start with a bale of steel wire, shave it down to the proper diameter, then feed it into a punch that shapes the nail, cuts it and spits it into a bin. Labor and machinery account for 10 or 15 percent of the cost of a nail. The rest is the cost of the wire.

And that is Indonesia’s problem.

“Many Chinese steel factories have overcapacity, so they sell their wire very cheap,” said Ario N. Setiantoro, who leads the Indonesia Nail and Wire Factory Association. “Chinese nails enter the market here at about the same price as our wire.”

He is right. Most analysts say China has too many steel mills. Its excess steelmaking capacity equals the entire annual production of the world’s No. 2 steelmaker, Japan. Every Chinese province wants a steel industry, because it conveys prestige, creates jobs and attracts other business.

Beyond supply, Chinese state-run banks support industry with construction loans so cheap that credit can be almost free, holding down operating costs. China’s vast purchases of iron ore lock in volume discounts that Indonesia’s small steelmakers cannot match.

Export markets have dried up.

Like Dunia Metal, Surabaya Wire, a nail maker in east Java, has given up on exports altogether. “I used to have 450 workers,” said, Sindu Prawira, the chief executive of Surabaya. “Now, we have 170. Almost everybody is like that.”

Industries everywhere tend to accuse competitors of dirty tricks when they lose market share, of course, and Indonesia’s anemic steel industry shoulders its own share of blame for the nation’s competitive problems.

But as layoffs mount, the Indonesian government has been forced to try to shore up ailing producers.

In October, Indonesia’s Trade Ministry invoked World Trade Organization rules and slapped a 145 percent safeguard tariff on Chinese nail imports, pending negotiations to settle complaints that the Chinese are competing unfairly.

Irvan K. Hakim, a co-chairman of the Indonesian Iron and Steel Industry Association, said he had aired those sorts of complaints to Chinese officials for years. He did not appear optimistic about a meeting of the minds.

“China is China, you know?” he said, shrugging. “Even the U.S. cannot talk to China.”