One: Asian Century vs diversity

The idea of an “Asian Century” is one that Deng Xiaoping himself approached with scepticism. Proponents of the concept often cite the historical dominance of China and India in the global economy and the rising dysfunction of Western politics, which has created a leadership vacuum that they say Asia is destined to fill.

China has emerged as a power in manufacturing, technology, and inexpensive loans, inspired by the growth of the “Asian Tigers”, and rousing the dynamism of India and Southeast Asia. But Asia is too diverse to be treated singularly. Economic growth has too often been confined to urban coastal areas and remains tempered by widespread population ageing, worsening climate risks, and formidable frugality.

Since the rise of the Asian Tigers, no nation in Asia has overcome the middle-income trap, unlike some 20 other mid-sized countries, such as Poland, Chile, and Estonia. And for all of Asia’s dominance in global trade, it often relies on Western markets for final demand.

Asia’s influence will not keep pace with its economic growth to the same degree as the West, because Asia is a contrived geographical agglomeration, glossing over irreconcilable differences not seen in the West. This diversity is both a strength and a challenge. When harnessed effectively, it can be a source of creativity, economic synergy, and cultural richness, giving Asia a competitive edge.

But diversity can also bring political instability, economic disparity, and cultural divides that hinder cooperation. It’s time we recognise Asia’s true diversity, and this starts with China, India, and Southeast Asia.

Two: US-China relations

When analysing U.S.-China relations, it’s essential to remember that great power conflict has historically been the rule rather than the exception. Heightened geopolitical tensions reflect a return to this historical norm, and for investors, signal an expiration of justifications for poor investment returns.

This isn’t to say that tensions are limitless. As beneficiaries of global supply chains, no major Asian country has an incentive to dismantle the global capitalist system. Although the current U.S.-China relationship is fraught, it has endured far more tumultuous periods in the past.

Contemporary U.S.-China relations can be understood through four broad 20-year cycles. The first began with the Korean war in 1950. Given that conflict has often been the norm, a U.S.-China war would not be unprecedented.

The second phase commenced with U.S. President Richard Nixon’s meeting with Mao Zedong in Beijing in 1972, marking a major diplomatic turning point that ended two decades of animosity and paved the way for China’s eventual integration into the global capitalist system.

The third phase was China’s painstaking accession to the World Trade Organizationin 2001, ushering in the heyday of globalisation and U.S.-China cooperation that peaked with the global financial crisis, which diverged their paths.

Thanks in part to the WTO, China dominated low-cost manufacturing and made significant technological advancements, narrowing the gap with the U.S.. America, meanwhile, refocused on domestic priorities while attempting to rein in currency manipulation, intellectual property theft, and other unfair trade practices. Populism re-emerged.

The fourth phase, when the balance finally tilted from cooperation to competition, began with President Donald Trump’s trade and tech wars in 2018. The Biden administration has since intensified these measures, resulting in the landscape of intense competition and technological decoupling we see today.

If the 20-year cycle thesis holds, we may see another 14 years of U.S.-China decoupling before a new paradigm emerges. Alternatively, if China’s gross domestic product surpasses that of the U.S. within the next five years, it could be viewed very differently by the global community. Conversely, if China struggles to revive its economy, then Pax Americana is likely here to stay.

Three: China’s consumer market

Domestically, China is attempting a transformation that no developed Asian nation has achieved: shifting its economy away from real estate towards real value.

The trouble is that attempting to monopolise global production without corresponding demand could export unemployment to countries that do not enact trade barriers.

Neither monetary stimulus nor new productive forces sufficiently address weak domestic consumption, which is exacerbated by low welfare spending stemming from imbalances between local governments’ revenues and responsibilities. We already know quantitative easing has proven ineffective for most of the population lacking financial assets.

To gauge consumer confidence, we must look at investment levels from China’s private enterprises and, ideally, see foreign investors following suit. China is also pivoting from Western markets towards future demographic opportunities in the Middle East, Southeast Asia, Africa, and India, facilitated by initiatives like the Regional Comprehensive Economic Partnership, Belt and Road Initiative, Shanghai Cooperation Organisation (SCO), BRICS, and Asian Infrastructure Investment Bank.

Western multinational corporations must remain in China to compete effectively, adapting to the country’s leaner margins, continuous innovation, and rapid product cycles. So invest in Western multinationals that succeed in China, and Chinese firms that succeed in major emerging markets such as India.

Four: India is not yet China

India’s population now exceeds China’s, and this gap will widen. In the past decade, the South Asian nation has witnessed a surge in digital transactions, tripled its share of global services exports and doubled the length of its highway network. Projections suggest that within the next 10 years, India will become the world’s third-largest economy.

India’s vast, young, and growing middle class will drive consumption and, ideally, foster the next generation of global businesses. Coupled with its democratic governance, India offers greater transparency and adherence to the rule of law. But India is not China; its per capita income remains six times lower, and China’s annual growth rate of 9.5 per cent has outpaced India’s 6 per cent over the past four decades.

India’s government also lacks the same capability as China to direct industrial activity or land acquisition. Supply chains are fragmented, manufacturing expertise is limited, labour laws are restrictive, land acquisition is complicated, and urbanisation has been slow. As a result, India has yet to capitalise on supply chain diversification or establish itself as an export-led manufacturing powerhouse.

That said, securing iPhone production is a promising development, and efforts are under way to “back-build” manufacturing so that India’s large youthful population becomes an asset rather than a liability.

Five: The Indian Ocean’s role

The Indian Ocean can be either an asset or a liability for India. Around 80 per cent of China’s oil imports and trade routes with Europe, the Middle East, and Africa traverse this region. Through its Maritime Silk Road, or “String of Pearls”, China has invested in ports in Pakistan, Sri Lanka, Eastern Africa, and Myanmar, along with a naval base in Djibouti. The presence of China’s fourth aircraft carrier fleet may also be indicative of strategic interests in this maritime corridor.

As the Indian Ocean increasingly becomes a focal point for trade and investment, American military attention will also shift there. The U.S. will help India build its manufacturing sector, and secure New Delhi’s support to contain China in the Indian Ocean. The core interests of India and the US are closely aligned. The geopolitical centre of gravity that shifted from the Atlantic to the Pacific Ocean post-World War II is now moving to the Indian Ocean.

Six: Southeast Asia as a connector

Southeast Asia serves as the connective tissue between the Pacific and Indian Oceans. It has been under the political and economic influence of both India and China for more than a millennium. The region is both non-threatening and promiscuous, working happily with bigger powers but remaining loyal only to its own interests.

The region boasts strong demographic dividends and is ideally positioned to link the East and West, as well as China and the U.S.. The U.S. invests more in Southeast Asia than in China, Japan, South Korea, and India combined, and this trend will continue as companies seek to de-risk and diversify their operations. China is also looking for new consumers outside of the West, while India’s growth presents opportunities for neighbouring regions.

All this bodes well for Southeast Asia in the coming decade and beyond. The region must leverage its unique position as the connecting tissue in a world where global supply chains are becoming more complex yet secure. If successful, the region could experience significant growth during this contentious and unpredictable phase of U.S.-China relations.

As great power tensions play out, the geoeconomic landscape is shifting from the Pacific to the Indian Ocean. This is the next battleground for primacy and prosperity, and we will need to watch closely for attendant opportunities.

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Robin Hu is the Asia chair of Milken Institute, and an Advisory Senior Director at Temasek. This essay was first published on 2 Nov 2024 in the South China Morning Post (https://www.scmp.com/).