I was invited by the Overseas Chinese Affairs Office of the State Council to go on a "Discovery Trip to China for Young Overseas Chinese" from August 29 to September 3. Listed below are some of my thoughts on what I learned on this trip and how we should prepare ourselves for what could be one of the 21st century's greatest shifts in terms of political and economic power in Asia.

It is a well-known fact that China has been displacing the US as the largest export market for an increasing number of Asian countries and pivotal in boosting intra-regional trade. Listed below are some interesting statistics about China:

l A market of 1.3 billion consumers (300 million under 20 years old).

l Volkswagen sells more cars in China than it does in Germany.

l In 2002, China replaced the US as the largest recipient of FDI.

l Fastest-growing economy in the world for the past 10 years.

l Foreign reserves of more than US$950 billion (Bt34.86 trillion).

On the surface, the above statistics are definitely most impressive, but it is important to separate hype from fact. In relative terms, China is still a poor country. Its per-capita income as of 2004 was only $1,290 compared with $41,400 in the US, and out of its 1.3 billion population, perhaps more than 1 billion still live on less than $3 a day. Up to 1979, the main priority of China was purely to survive, politically and economically. However, things began to change after 1979, and in order to get out of the poverty trap, the only realistic policy option for China was to open up the country to foreign trade and investment.

Factory of the world

With more than 1.3 billion people, China used its abundant cheap labour to its advantage by turning China into the factory of the world. Long Yongtu, who was China's chief negotiator for the World Trade Organisation and whom I met on this trip, says what we are seeing right now is a relocation of manufacturing bases from Japan, Europe and the US to China, in order to take advantage of cheap labour.

As for the highly contentious issue regarding a wider trading band for the yuan, I don't think the long-running trade imbalance between China and the US can be solved anytime soon, even if the yuan is allowed to strengthen substantially. The same can also be said for much of Europe, where the minimum wage is 20 times higher than that of China. The only realistic option for developed countries with higher wages is to exit labour-intensive industries and move on to other more value-added fields like IT or service industries.

Challenges ahead

The biggest challenge for China in the coming decade, in my view, is to ensure a smooth transition from a centrally controlled economy (communism) to capitalism. In other words, China needs to reinvent itself by staging another revolution, if you like, only this time not a Cultural Revolution, but an industrial revolution! Job creation on this kind of scale can only mean one thing, and that is: greater urbanisation. Managing natural resources will be one of China's greatest challenges.

Moreover, China still lacks an adequate social safety net, and to make matters worse, it also suffers from a demographic problem. In other words, China is going to get old before it gets rich. Existing pension systems are inadequate and cover only 13 per cent of the population; with the number of Chinese over the age of 60 expected to soar from nearly 140 million now to 250 million by 2020, the financial burden is worsening.

Foreign policies

The challenges on the economic front have a big influence on how China conducts its foreign policies. Wu Jianmin, president of China's Foreign Affairs University, says China is still very timid on the global stage, in spite of its immense new-found wealth (more than $950 billion in foreign reserves), which may not be a bad thing. An emboldened China tends to create uneasiness among its neighbours (Japan and India) and trading partners (the US and the EU). China will need all its diplomatic skills to put everyone at ease while it is growing stronger economically and politically.

Thus far, China has been going out of its way to avoid conflicts with its trading partners, but soon this may not be possible as China becomes more emboldened and begins to push its national interests on a global scale.

The new United States of Asia?

So should we be afraid of China? The answer really depends on how successful China is in transforming its economic might during the next decade or so. Unlike India, China is in a position to get things moving really quickly, because everything is centrally controlled at the expense of limited human rights. But in the long run, it remains to be seen whether a centrally controlled economy is better at allocating scarce resources than a full-fledged capitalist system.

By way of a comparison, I view China as the new United States of Asia in terms of its sheer scale and resolve to get ahead economically without wasting time playing global politics. Whether my observation is correct or not, the jury is still out. But no matter what, China will be a force to be reckoned with, and you can ignore this awakening giant at your own peril.

As Charles Darwin said, "It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change."

Teera Phutrakul is executive chairman of Finansa Asset Management.

Teera Phutrakul

Special to The Nation