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China's rise becoming zero-sum game for Asia

"Integrating China into the global economy is the greatest challenge for the world in this century."

Andy Xie, chief Asian economist at Morgan Stanley

If you think 2002 was China's year, just wait; next year will see the country all but eclipse Asia's other economies, including Japan's. Even more companies will rush to move production to the mainland and more investors will pull the plug on developed markets in favor of China's.

Sound like an exaggeration? Not at all. That great Chinese sucking sound is increasing in volume and intensity, and its ramifications for Asia are huge. China's rise is looking more and more like a zero-sum game for the region. Every notch higher that China goes, other economies seem to slide a corresponding amount.

The dynamic is a new one for Asia and complicates things for investors. It challenges the normal rules of diversification and the spreading of risks. Why buy South Korean stocks, Thai real estate or Indonesian companies when China's boom might hurt your investment?

It's not that simple, of course, but some of Asia's biggest fears came true this year. For one thing, lower land and labor costs are helping China hog far more than its fair share of global capital.

For another, Chinese exports are rapidly replacing other Asian goods in US and Japanese markets. Foreign direct investment in China surged 20 percent in the first 10 months of this year as Asian nations outside Japan saw a 12 percent drop.

The rush to China features a who's who of globalization's biggest players: Allianz AG, Carrefour SA, Citigroup Inc, Coca-Cola Co, Eastman Kodak Co, General Motors Corp, Hutchison Whampoa Ltd, Michelin & Cie, News Corp, Siemens AG, Sony Corp, Toyota Motor Corp, Wal-Mart Stores Inc and so on. Name a company, and chances are, it's scurrying to China.

The challenge for many Asian economies and companies won't be how to compete with China but how to avoid being swallowed up by it. The test for investors will be figuring out how to profit from China's rise. There's certainly money to be made here, but -- with limited access to assets, a currency that's not internationally convertible and scant transparency -- it'll take some legwork.

It's been a year since China joined the WTO and Beijing is balking at boosting foreign investors' access to its 1.3 billion consumers. While local sales have risen at Citigroup, General Motors Corp and other overseas companies, regulations aimed at protecting domestic companies are curbing their expansion plans.

Japan is still the region's biggest economy. It's also the home of Asia's biggest markets and boasts its only truly international currency. It has some excellent, internationally competitive companies like Sony and Toyota, too. Yet Japan's economic plight dramatizes China's rise.

It's fallen and it can't get up, and its status in Asia has been shrinking steadily. It's hard to overstate the significance of all of this for Japan, Asia's traditional growth engine. China is unleashing once-in-a-century competitive forces, and Tokyo has no choice but to contend with them.

Much of the rest of Asia is adopting a Nietzsche-like approach to China, figuring that what doesn't destroy their economies makes them stronger.

China used to be seen as an ominous and scary force about to consume Asia's economies. Now, leaders say, Asia's salvation lies in the purchasing power of China's surging population and its booming economy.

Yet the zero-sum nature of China's rise can be seen in a number of once vibrant Southeast Asian economies. Singapore, for example, has seen China corner markets like high-end technology products that once provided jobs and prosperity. It also shares Hong Kong's fear that dynamic Chinese cities like Shanghai will supplant it as a financial services center.

The "China factor" is both a crisis and an opportunity for the region. It's a crisis because Asian economies desperately need the foreign investment and trade that create wealth in the age of globalization. It's an opportunity because China may shake the region out of complacency.

Still, the process will be neither pretty nor smooth. Says Andy Xie, Hong Kong-based chief Asian economist at Morgan Stanley: "Integrating China into the global economy is the greatest challenge for the world in this century."

If this year has been any guide, that challenge will unfold sooner rather than later.
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