IIAS | IIAS Newsletter Online | No. 17 | Regions |East Asia
How did the Asian Crisis affect China? The Case of GuangdongUntil the recent crisis, Asia attracted almost half the total capital inflows to developing countries - nearly US$ 100 billion in 1996. In the last decade, the share of developing and emerging market economies of Asia in world exports has nearly doubled to almost one-fifth of the total. However, since July 1997, both Southeast and East Asia have experienced an economic shock of unprecedented severity after decades of uninterrupted high growth. The crisis in Asia has raised questions about the Asian economic miracle.
China has been one of the fastest growing countries in Asia. In 1996 alone, China actually utilized foreign investments amounting US$ 42.35 billion, which makes up about 42.3% of total foreign investment in Asia in the year. Between 1978 and 1995, China's economic growth accounted for nearly two-thirds of the increase in total income of the low-income countries, and per capita income has increased at an average annual growth rate of 7 to 8%. How has the Asian crisis affected China? Can China avert the crisis? The author tried to find answers to these questions during her recent field study in Guangdong, South China.
Guangdong export makes up more than forty per cent of mainland trade. In the past fifteen years, Guangdong has attracted a total of US$ 36 billion foreign investments, and it had a high economic growth rate of up to 15% in 1996. Guangdong has been in the front line in meeting the challenge of the Asian crisis, and it can be seen as a window through which to glimpse what the Asian crisis has meant to China. With this purpose in mind, the author interviewed government foreign trade and economic officials and foreign investors in Guangdong in order to understand their experiences and perspectives on the Asian crisis. Indubitably the Asian crisis has had important impact in the province, which can be summarized in the following points.
First of all, foreign investments have declined. For example, Shantou, one of the three Special Economic Zones in Guangdong, approved 62 new projects with foreign investments of US$ 75.49 million in the first quarter of 1998. Although the total number of the new projects was up 32%, the amount of the contract investments was down 46% on the same period last year. Studies reveal that at least 80% of the total foreign investments in Guangdong is from overseas Chinese sources, and the overseas Chinese have suffered badly in the Asian crisis. Another report reveals that in the first quarter of 1998, Japanese investment in Guangdong was down 42%, and South Korea investments were down by 50% on the same period last year.
Secondly, export slowed down in the first seven months in 1998. Owing to the depreciation of currencies in many Asian countries, exporters are seeing business shift to cheaper factories in Thailand and Malaysia. As a result, Guangdong export is facing great difficulties in competing in price with Southeast Asian exporters, especially when the Chinese Yuan still remains strong. The study found that export orders declined by an average drop of 20-30% in many small and medium export firms. During the Guangzhou Spring Trade Fair in May 1998, the export prices were forced down up to 20% on the same period last year.
International buyers took the opportunity to demand lower prices, which in some cases were even lower than the production costs. This is because the buyers could find cheaper importers elsewhere. An overseas Chinese investor in several export firms told us that he was worried about how to compete with rivals in Southeast Asia who lowered prices after their currencies tumbled. With earnings dropping, this investor has dismissed one-third of his workers. His experience and the worries in its wake represent those of many foreign investors in the region. It has emerged that in some heavily foreign invested industrial zones, the shortage of labour supply is no longer a problem. On the contrary, many export firms studied have laid off or are planning to lay off workers owing to insufficient manufacture orders.
The third impact was that the charitable donations from overseas Chinese to Guangdong qiaoxiang dropped significantly. The overseas Chinese have played an important role in Guangdong's development through substantial donations of money and materials towards the construction or renovation of schools, hospitals, and other welfare projects. Now the Asian crisis has caused the decline of such donations in Guangdong. A survey found that in the past ten years Chaozan county of Shantou, for example, benefited from overseas donations in an annual range of RMB 30 million, but in the first six months of 1998, it only received a tenth of that amount. Several social welfare construction projects in the county have to stop because of the discontinuitation of the overseas financial support.
Despite this negative impact of the Asian crisis on Guangdong's economy, the province still enjoys the advantages of being the leading exporter and foreign investments recipient in the country. Guangdong foreign trade and the economy continue to grow. For example, in the first quarter of 1998, Guangdong approved 3473 new projects with foreign investments of US$ 1,994 billion, which were up 16.19% and 38.58% respectively on the same period last year. Export was US$17.6 billion and the actual foreign investment was US$3.06 billion, which were both representing a 20.2% increase compared to 1997.
Although the foreign investments from Japan, South Korea, Hong Kong, and Southeast Asia declined, direct investments from Europe and America increased. During the first six months in 1998, Guangdong received European investments of US$ 1.2 billion, which was up 60.62% on the same period last year. The American investment in Guangdong was US$ 71.27 million, up by 86.91%.
Another big leap in foreign investment in China is represented by Taiwanese investments. In the first four months in 1998, Taiwanese investment in China amounted to US$550 million, up 41.2% on the same period last year. In the first half year of 1998, Taiwanese investments went down in Indonesia with 96.62%; in the Philippines with 87.69%, and in Thailand with 45.7%. It was interesting to note that the turmoil in Indonesia and the crisis in the Asian economy seem to have made the Taiwanese investors feel that China might be a safer and more stable place to realize their dreams of international development.
In addition, two new developments in Guangdong's foreign economy have been observed. One is the scope of foreign investment on individual projects. In the first half of 1998, Guangzhou, the capital of the Guangdong province, approved 70 projects with a contract investment of US$ 10 million or more each, 50 projects more than in the same period last year. Another observation is that the foreign investors were encouraged to invest in some new industrial areas, such as private housing projects, and high technology projects. Dongguan is where the computer industry has established its professional production zone. The professional and technological industrial zones have become an important factor in attracting foreign investments in Guangdong.
In a nutshell, the Asian crisis did have a great impact on China, but China has not, at least so far, suffered the way the other East and Southeast Asian countries have. The challenges facing China come from several sources. Although most academics and governments believe that China can and will maintain its current RMB exchange rate, the market seems to have a different opinion. Black market currency trading to sell RMB has reappeared on the mainland of China. Investors have shown hesitation. The IMF forecasts that China can only grow 7% this year, while the Chinese government expects its GDP growth to reach 8.1% in 1998. However, the target of 8% simply means that the economy can generate nearly enough jobs to soak up the six million Chinese entering the workforce each year, as well as the 12 million being laid off by restructuring state enterprises. The current massive laying-off in turn requires substantial investments in new firms to absorb the unemployed. Foreign investment is a major source of financing the non-state sector. So, it implies that any decline in capital inflow means a rise in the unemployment rate. Considering the lack of social welfare system and of a channel to dilute the discontent arising from joblessness and corruption, high unemployment in some contracted areas is a possible precursor to social unrest.
The Asian crisis has been a good lesson for China in terms of how to adjust its direction of the future development. China must make the effort to meet putative challenges not simply by reconstructing its economic structures and banking systems, but also by strengthening its social welfare and legal systems. China needs to re-establish its confidence and competitive positions in the global market. The case of Guangdong is not representative of how other provinces were affected by the Asian crisis, but it reveals that there are also opportunities in the crisis which depend on how these challenges are handled. It is hoped that China will learn lessons from the Asian crisis and not only to survive it, but also be able to maintain its fast economic growth.
The Guangzhou Daily, 2 September 1998, Guangzhou.
The Overseas Chinese Affair Office of Guangdong (1998), 'Impact of the Asian Crisis on Overseas Chinese Invested Enterprises in Guangdong, An Investigation Report,' May, Guangzhou.
Stiglitz, J. (1998), 'Second-Generation Strategies for Reform for China,' an address given at Beijing University on 20 July, World Bank Vice President, Beijing.
The South China News, 13 July 1998, Guangzhou.
Zhang, Jiaheng (1997), 'China's Opening Policy Guidance,' Beijing Review, February 10-16.
Dr Cen Huang is a research fellow at the IIAS. She can be reached at: email@example.com.
IIAS | IIAS Newsletter Online | No. 17 | Regions |East Asia