Philippines: Piggybacking On China’s Phenomenal Growth: Prospects For The Philippines

China’s market size, workforce, and economic power presents many opportunities for the Philippines.

The late great United States Senator James E. Watson, in reference to his numerous battles in the august halls of the US Senate, once said, "If you can’t beat ‘em, join ‘em!" This popular adage has been used over and over again and, in our view, is never more apropos than in the case of the Philippine economy in the context of China’s phenomenal growth.

While the county’s bureaucrats, technocrats, and economic planners continue to debate and think about how the Philippines can position itself in the light of China’s economy, it may well be prudent to consider just finding our niches and "piggybacking" on the prodigious economic trends in China.

Since the initiation of economic reforms in 1979, China has become one of the world’s fastest-growing economies. From 1979 to 2005, China’s real GDP grew at an average annual rate of 9.6%. It is said China could well become the world’s largest economy provided that its government is able to continue and deepen economic reforms, especially in regard to state-owned enterprises and the state banking system. China also faces difficult challenges, such as pollution and income inequality.

China is now the third-largest trading economy after the United States and Germany. Over half of China’s trade is accounted for by foreign-invested firms in China. Trade continues to play a major role in its economy. In 2005, exports rose by 28.4% to US$762 billion, while imports grew by 17.6% to US$660 billion, producing a US$102 billion trade surplus.

The size of China’s economy has been the subject of debate among economists. Measured in US dollars using nominal exchange rates, China’s GDP in 2005 is estimated at about US$1.9 trillion and per capita GDP at $1,460. Such data would indicate that China’s economy and living standards are significantly lower than those of the United States and Japan (numbers one and two largest economies). Many economists, however, contend that using nominal exchange rates underestimates the size of China’s economy. This is because prices in China for many goods and services are significantly lower than those in developed countries.

If a purchasing power parity (PPP) measurement, which converts foreign currency (based on prices of goods and services), is factored using the PPP exchange rate to convert foreign economic data in China into US dollars then this changes figures significantly.

The PPP exchange rate raises the estimated size of the Chinese economy from $1.9 trillion (nominal dollars) to $8.1 trillion (PPP dollars), significantly larger than Japan’s GDP in PPPs ($4.0 trillion) and about 65% the size of the US economy. PPP data also raises China’s per capita GDP to $6,210. These PPP figures indicate that while the size of China’s economy is substantial, its living standards fall far below those of the US and Japan. China’s per capita GDP on a PPP basis is only 14.7% of US levels. Thus, even if China’s GDP were to overtake that of the US in the next decade or two, its living standards would remain below those of the United States for many years to come.

The clamor for greater flexibility and reforms in China’s financial system has led to major reforms in its currency policy. In July 2005, China’s currency, the renminbi or yuan, was no longer pegged to the US dollar but instead to a managed float regime with reference to a basket of currencies.

Another recent development was in January 2005, when China made major revisions to its estimates of China’s GDP from 1993-2004. The new revisions indicate that China’s economy grew significantly faster than previously recorded.

Foreign Direct Investments and Trade Patterns

China’s trade and investment reforms led to a surge in foreign direct investment (FDI), which has been a major source of China’s capital growth. The cumulative level of FDI in China stood at about US$618 billion at the end of 2005. Analysts predict that FDI will continue to pour into China as investment barriers are reduced under China’s WTO commitments and Chinese demands for imports continue to increase.

China’s trade has grown dramatically. Economic reforms have transformed it into a major trading power. Chinese exports rose from US$14 billion in 1979 to US$762 billion in 2005, while imports over this period grew from US$16 billion to US$660 billion. In 2004, China surpassed Japan as the world’s third-largest trading economy (after the United States and Germany). From 2002 to 2005 alone, the size of China’s exports and imports more than doubled. In just one year, China’s trade surplus, which totaled US$32 billion in 2004, tripled to US$102 billion in 2005.

China’s top five trading partners in 2004 were the European Union, the United States, Japan, Hong Kong, and the Association of Southeast Asian Nations (ASEAN).

China’s cheap labor has made it globally competitive in many low-cost, labor- intensive manufactures. As a result, manufactured products constitute a large share of China’s trade. A large share of China’s imports is used to manufacture products for export. Its top five imports in 2004 were electrical machinery and parts, boilers, machinery, mechanical appliances, and parts; crude oil; plastics; and organic chemicals. China’s top five exports in 2004 were boilers, machinery, and mechanical appliances and parts; electrical machinery and parts; apparel; furniture, bedding, and lamps; and, optical photo, and medical equipment and parts.

China’s rise as an economic superpower will pose both opportunities and challenges for the Philippines. In terms of opportunities, China’s rapid growth has boosted incomes and created a huge market for goods and services that the Philippines can take advantage of, especially in the service sector, where the Philippines can compete against developed countries in terms of lower manpower costs.

The International Monetary Fund (IMF) said the Philippines may benefit from China’s rapid economic growth. "A higher growth rate in China would elevate growth especially in Hong Kong, Indonesia, South Korea, the Philippines, Singapore and Thailand – given the strengthening intraregional trade linkages".

With respect to the service sector, the Philippines may well position itself in tourism, business process outsourcing, and the latest industry arising out of BPO – knowledge process outsourcing (KPO).

BPO is still the fastest rising industry in the Philippines. BPO is divided into two main sub-industries: (i) contact or call center industry, and (ii) business process outsourcing industry.

Based on recent figures, as of the first Quarter of 2006, contact centers number 108 with total seats of roughly 70,000 and a full-time employee complement of 112,000. Estimated revenues as of end of 2005 is at US$1.7 billion, with a growth rate in 2005 of 90%.

The key players in the industry include captives like Dell, America OnLine (AOL), JPMorgan, Siemens, Hong Kong Shanghai Banking Corporation (HSBC), American Insurance Group (AIG), and IBM Daksh. Captives refer to companies with in-house contact or call center requirements. The key third party providers include Sykes, Convergys, PeopleSupport, Clientlogic, ePLDT Parlance, ICT Group, Ambergris, Teletech and eTelecare.

As of the first quarter of 2006, the business processing or back-door operations sub-industry has 62 service providers and a full-time employee complement of 22,500. Their estimated revenues in 2005 total US$180 million, and their growth rate for that year was 80%.

Captives in this industry include AOL, AIG BPSI, Chevron Texaco, Hewlett Packard, HSBC, Proctor & Gamble, Fluor Daniel, Henkel Financial Services, Deutsche Bank, Citibank Crescent Services, Shell Shared Services, Manulife, Alitalia, and Watson Wyatt. Key third-party providers include Accenture, American Data Exchange, SVI Corp., SPI Technologies, DAKSH eServices, The Environments Collaborative, Eximius BPO, and Bayan Trade Dotcom.

There are also other sub-industries that the Philippines is exploiting. These include medical and legal transcription, software development, animation (which includes 2D, 3D, interactive gaming, and medical animation), and engineering design.

Will China ever be in a position to avail of this wealth of talent and expertise in the Philippines? This must be answered in the positive considering that the BPO industry is here to stay for at least another 15-20 years. And, when China’s entrepreneurs – not just US or European countries that set up manufacturing plants there – expand into the global markets, there will be a need for our highly skilled, English-speaking workforce to provide BPO services.

The question that now begs us is: Can our manufacturing and export sector benefit from China’s growth? Again, based on recent trends, the answer is in the positive, at least for certain industries.

Figures show that in 2005 alone, the Philippines exported a total of US$4.1 billion to China. Philippine merchandise exports to China rose from US$793 million in 2001 to US$4.077 billion in 2005. Compared to exports to other countries, this five-fold increase translates to an average annual growth of 51%, compared to the 6.4% average for all other countries. The growth was due primarily to electronic products, which grew from US$447 million in 2001 to US$3.502 billion in 2005. In 2005, electronic exports accounted for 86% of all merchandise exports to China. China has become the country’s second largest market for electronic exports behind Japan.

China’s emergence as the world’s leading manufacturer resulted in its increased demand for primary commodities. According to the "Asian Development Outlook 2006 Update" in 2004, China accounted for at least 5% of world’s imports for petroleum products, 15% of crude rubber, and 19% of pulp and paper. Also, China accounted for at least 1/5 of the world’s imports for metal ores and scraps, oilseeds and nuts, and textile fibers.

The Philippines has taken advantage of this increased demand for commodities, with exports growing at double-digit rates, as illustrated in Table 2. These include other manufactures like machineries and transport equipment, metal manufactures, textile yarns. Also included are petroleum products, mineral products, and other resource-based commodities.

In 2006, based on figures obtained from the National Statistics Office, global demand from electronics and copper pushed Philippine exports up by 21.3% in August of this year, or from US$3.96 billion to US$4.26 billion. This represents the seventh straight month of double-digit growth for the export sector.

This time, this export growth had to do largely with China’s rising demand for copper, a raw material used for telecommunications wires/lines and automobile components. In fact, cathodes of refined copper emerged as the Philippines third biggest export product in August, totaling US$115.53 million, or a 298.3% increase from the US$29 million recorded for the same month last year.

It is therefore clear that the export to China of electronics, copper and other Philippine products is our country’s way to "piggyback" on China’s growth. Economic planners would be well advised to drive both the public and private sectors to support existing exports to China, and determine other Philippine products China can use in further strengthening its economy. Now is the time for the government and private sector to get its act together to support existing export champions, and discover emerging ones, so we can grow alongside China.

The above notwithstanding, the IMF has warned of a potential investment boom-bust cycle in China and its regional impact, higher oil prices, the heightened threat of protectionist action in advanced economies and an outbreak of the avian flu.

Volatility in international financial markets will still affect the region, although the IMF noted that most economies in emerging Asia are now better positioned to weather such a deterioration.

In the case of the Philippines, the fund said that continued fiscal consolidation of its debt "would contribute to reducing the vulnerability swings in global investor sentiment and enhance monetary policy credibility."

Moreover, China has big investments in the Philippines such as the North- Rail project (a US$400 million loan out of a total US$503 million project) plus other official development assistance. A deceleration in the Chinese economy would have a direct impact on the Philippines considering these investments.

Figures don’t lie, at least those that are oft repeated in varied studies and publications. Due to China’s sheer market size, economic power, and work force, it can no longer really be considered as one of our competitors. It seems that in terms of GNP and GDP, plus the lower cost of living in China, it is obvious that our economy will never rival that of China.

Contrary to doomsday scenarios previously peddled by skeptics, however, there are still some niches that the Philippines can take advantage of, and service and export products that it can provide and/or have already provided to China, thereby "piggybacking" on the latter’s growth and success. We don’t need to compete with China. We can content ourselves with providing what it needs, and at the same time going about our business in supporting traditional services and exports that have brought in much needed foreign exchange. This is the only way the country can survive the economic onslaught of China. Perhaps one day, China will be our biggest trading partner with Japan and the United States relegated to the second and third spots, respectively. This is by no means far-fetched.

Sources:

Wayne Morrison. China’s Economic Conditions. U.S.Congressional Research Service. January 2006.

Global Insight Report: China. September 2006.

National Statistics Office

Bureau of Export Trade Promotion, DTI

Asian Development Outlook 2006 Update

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