China's willingness to throw its weight around unsettles its neighbors
Growing economic power is casting a shadow over its regional relations

Michael Wines

ABSTRACT: There is a sense of disquiet, even in developing Asian countries in Beijing's orbit, over the implications of China's swift, seemingly boundless economic growth.

PASARKEMIS, Indonesia -- In the Dickensian depths of the Dunia Metal Works here, all is cacophony: the bambambam of grease-drenched punches; the rhythmic clank of unspooling steel wire; the sturm und drang of glinting, freshly minted nails cascading onto a broad metal table for boxing.

But for all the industrial din, Dunia is undergoing a painful slump. Today, it runs at 40 percent of capacity, its domestic nail business imperiled - and its exports wiped out - by less expensive Chinese alternatives. ''We have been competing with the Japanese and the Koreans. But the Chinese - no chance,'' says Juniarto Suhandinata, the factory's director.

The Chinese are tough competitors, as Dunia is hardly the first to find out. But Mr. Suhandinata's lament speaks to something different: a sense of disquiet, even in developing Asian countries in Beijing's orbit, over the implications of China's swift, seemingly boundless economic growth.

China has long cast itself as a leader of developing countries, even as its economic power far outstripped that of any other emerging country. But those two roles - champion of the third world and major industrial power - are becoming harder to reconcile after the global financial crisis, which has seen China compete aggressively with its neighbors for dwindling export markets.

Now, China is reluctantly confronting a new international reality: It is increasingly unable to cast itself as a friendly alternative to an imperious American superpower. For many in Asia, it is the new colossus.

''China 10 years ago is totally different with China now,'' said Ansari Bukhara, who oversees metals, machinery and other main sectors for Indonesia's ministry of industry. ''They are stronger and bigger than other countries. Why do we have to give them preference?''

To varying degrees, others are voicing the same complaint. Take the 10 Southeast Asian countries in Asean, the regional economic bloc representing 600 million people. Through September, they ran up a collective $74 billion trade deficit with China. That is a sharp reversal of the surplus they enjoyed in most recent years, and it is prompting some rethinking of the conventional wisdom that China's rise is a windfall for the whole neighborhood.

Vietnam recently devalued its currency, the dong, by 5 percent, in part to keep it competitive with China. In Thailand, manufacturers are grousing openly about their inability to match Chinese prices. India has filed a sheaf of unfair-trade complaints against China this year covering everything from I-beams to coated paper.

The Asia-Pacific Economic Cooperation forum, the biggest regional group, urged the adoption of ''market-oriented exchange rates'' for Asian currencies last month without mentioning - or needing to mention - the renminbi, which many economists say Beijing keeps artificially undervalued to promote its own exports.

In Southeast Asia, Indonesia is having second thoughts about a free-trade pact China negotiated with the six core Asean countries. Under strong pressure from industries ranging from steel to motorbike makers, the trade ministry said last week that it would seek to renegotiate some of the 350-odd tariff reductions that are envisioned in the first year of the accord, set to take effect in January.

Jong-Wha Lee, the chief economist for the Asian Development Bank, noted that Japan and South Korea were also seen as juggernauts - and were criticized - when their state-backed industries rapidly increased exports. But the challenge from China seems different.

''Not just the size, but the speed of China's emerging power is really unprecedented in the region,'' he said. ''So it creates a lot of issues - not just trade and exchange-rate policies. But in the future, what will be the role of China?''

China has taken some steps to mollify complainers. In April, it proposed a $10 billion investment fund to help build badly needed roads, railways and ports in Southeast Asia, and a $15 billion fund to give Asian countries low-interest development loans.

But it has so far done little to address regional and global unease over the value of the renminbi. Because the currency is lashed by effective government fiat to the sinking dollar, Chinese exports have become significantly less expensive in countries whose own currencies have not compensated for the dollar's recent fall.

In Asia, the renminbi is doubly significant. During the 1997 Asian economic crisis, the values of many regional currencies collapsed, making their goods more affordable to foreign buyers. The Chinese then won the gratitude of their neighbors - and cast itself as a responsible power - by keeping the renminbi's value fixed. That prevented a competitive spiral of devaluations many economists feared might make the crisis much worse.

The latest financial crisis tells a different story: China's exchange rate controls are cited as a leading cause of huge global imbalances that contributed to the collapse of 2008. This time, China has resisted pressure to untie the renminbi from the dollar and let it rise. And its neighbors' exports have suffered as a result.

Michael Pettis, an economist and scholar at the Carnegie Endowment for International Peace in Beijing, argues that China can no longer pursue the same export-driven development model at a time when Western consumers are no longer able to gobble up whatever it and other Asian manufacturers produce.

Until 2008, he said, ''most of these countries ran trade surpluses, and the U.S. was the countervailing trade deficit. The entire model depended on the ability of an external agent - the United States - to absorb trade deficits.''

Indonesia is especially vulnerable to the shift, as the most populous and arguably the least economically advanced among the one-time Asian Tigers.

Didik Rachbini, a professor and founder of an economic research institute here, says that in the past four years, Indonesia has swung from more or less parity in bilateral trade to a deficit equal to a third of its annual exports to China - and rising.

The lowly nail is one focus of tension. Making nails is not complicated: Start with a bale of steel wire, shave it down to the proper diameter, then feed it into a punch that shapes the nail, cuts it and spits it into a bin.

Labor and machinery represent 10 or 15 percent of the cost of a nail. The rest is the cost of the wire.

And that is Indonesia's problem. ''Many Chinese steel factories have overcapacity, so they sell their wire very cheap,'' said Ario N. Setiantoro, who heads the Indonesia Nail and Wire Factory Association. ''Chinese nails enter the market here at about the same price as our wire.''

Beyond supply, Chinese state-run banks support industry with construction loans so affordable that credit can be almost free, holding down operating costs. And China's vast purchases of iron ore lock in volume discounts that small Indonesian steel makers cannot match.

Export markets have dried up. Like Dunia Metal, Surabaya Wire, a nail maker in east Java, has given up on exports altogether. ''I used to have 450 workers,'' said Sindu Prawira, the chief executive of Surabaya. ''Now, we have 170. Almost everybody is like that.''

As layoffs mount, the Indonesian government has been trying to help ailing producers. In October, it added a 145 percent tariff to Chinese nail imports, pending talks to settle complaints that the Chinese compete unfairly.

Irvan K. Hakim, a co-chairman of the Indonesian Iron and Steel Industry Association, said he had aired those sorts of complaints to Chinese officials for years. He did not appear optimistic about a meeting of the minds.

''China is China, you know?'' he said, shrugging. ''Even the U.S. cannot talk to China.''