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Possible developments in Pacific Rim this year
San Francisco Chronicle


January 05, 2007
Friday PM

Extrapolating from trends in the year just past, here are some possible scenarios in the Pacific Rim for the year ahead:

- China's explosive growth and its impact. China's gross domestic product grew 10.5 percent in 2006, after GDP growth of 10.2 percent in 2005, according to Chinese government statistics. China's efforts to cool its economy are falling short, in part because provincial officials simply ignore go-slow edicts from Beijing.

With breakneck growth likely to continue, China's voracious demand for oil, cement, steel and other goods - not to mention foreign direct investment, banking, lawyering and other professional services - is likely to keep exercising gravitational pull on the planet's providers.

Only a few years ago, China was a land of backyard kilns and neighborhood bicycle factories; now it boasts the world's fourth-largest economy. With this dramatic growth come breathtaking business opportunities - and heart-stopping devastation of China's air and water, with the inevitable toxic spillover for its East Asian neighbors. This shows no signs of abating soon, either.

- The trade deficit and other dilemmas. China racked up a trade surplus of $202 billion with the United States in 2005, and the number for 2006 is expected to be even bigger. Treasury Secretary Henry Paulson and many others say the deficit is driven at least in part by China's currency, the yuan, which Washington considers undervalued by 25 percent to 40 percent.

Paulson, as he expected, didn't wring any major concessions from China when he and other Cabinet officers visited Beijing last month, along with Federal Reserve Chairman Ben Bernanke, to negotiate with senior Chinese leaders.

Expect more such high-level missions, part of a sustained attempt to resolve differences over the trade deficit, the yuan and widespread theft of Silicon Valley and Hollywood intellectual property.

- China's second-tier cities. The showcase cities on and near the east coast - Beijing, Shanghai, Hong Kong, Guangzhou - will continue to prosper. But as the costs of materials and labor rise, expect growth spurts in so-called second-tier cities.

The Yangtze River city Wuhan, with a population of 8 million, is barely known in the West, yet it is cloning Shanghai's Pudong business district, building a central business district from scratch over the next several years.

Xian, known for its magnificent terra cotta warriors, is a terminus of the old Silk Road that is poised to emerge, remade, as a modern business city. And Chongking, another Yangtze River town, is a growth-obsessed Chinese Pittsburgh cloaked in smog on a hilltop redoubt.

These and other interior cities are beginning to attract big-league foreign direct investment - and provide work for foreign firms.

- Vietnam - enter the new dragon. "Vietnam, Vietnam, Vietnam, we've all been there," Michael Herr wrote at the end of "Dispatches," his 1977 book of war reportage. But he was wrong.

Vietnam has always been a country, not a war, and Americans are finally beginning to go to Vietnam - this time to do deals. In 2006, Vietnam won entry to the World Trade Organization and earned permanent normal-trade-relations status with the United States, untying one of the last entanglements of war.

Although much smaller than China, Vietnam is growing nearly as fast, at 8 percent a year, and the country of 83 million has a young, educated, forward-looking work force.

Intellectual-property protection remains a problem unlikely to be resolved in 2007, Vietnam's first full year in the WTO, but WTO membership improves chances of making headway.

- Japan, resurgent. After the bubble economy burst in the early 1990s, Japan languished for more than a decade, although it remained the world's second-largest economy. But economists are predicting respectable 2 percent growth in 2007, the sixth consecutive year of GDP growth, and Japanese companies are once again beginning to make acquisitions abroad, chiefly in China and elsewhere in East Asia.

Wartime memories remain strong in the region, especially in China and Korea, and with a new, openly nationalistic Japanese prime minister in Shinzo Abe, such sensitivities could slow an otherwise resurgent business sector.

- South Korea grows, North Korea glowers. Land of flat-screen TVs, near-universal broadband access and annual 4 percent to 5 percent GDP growth, South Korea is close to signing a free-trade agreement with Washington in the New Year, and should continue to expand and modernize regardless.

The wildcard here is, of course, North Korea, apparently newly nuclear-armed, and menacing.

- Fly me to the moon - or, failing that, to Guangdong. With all this business activity, the Asia-Pacific region is the second-fastest-growing part of the world for both airline passenger traffic and air cargo, after the Middle East, according to the number crunchers at the International Air Transport Association in Geneva.

In its 2007 forecast last month, IATA predicted worldwide growth of 6.1 percent in passenger traffic and 5.9 percent growth in air cargo. In the Asia-Pacific region, it will be a higher-than-average 6.7 percent for passenger traffic and 6.8 percent in cargo, according to IATA.

- Brain drain ... to Singapore? Generous tax breaks, state-of-the-art scientific facilities, good travel connections across the Pacific and to the rest of Asia and a tech-minded work force have already drawn top scientists from the United States, the United Kingdom and elsewhere to this Asian city-state.

- No new crisis? In 1997, a sudden devaluation of the Thai currency, the baht, triggered a fiscal crisis that hit much of Southeast Asia hard through the late '90s. Later health scares, chiefly SARS and bird flu, originating in China were rather glibly labeled "Asian contagions" in this part of the world.

Late last month, the Thai market again lurched suddenly and lost 15 percent in value for one day, until Thailand's central bank stepped in and rescinded rules changes that had spooked foreign investors.

It may be wishful thinking, of course, but 2007 may turn out to be very different from 1997. Thanks to lessons learned from previous crises, one of the stories of the New Year may be what doesn't happen: i.e., no new contagious panics.


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