Prepare to profit from Asia's wave of ‘soft power’

This week, most of the Asian markets are closed for Chinese Lunar New Year celebrations. It's the Year of the Snake and an important one for China. Last year, the country outgrew the US to become the world's largest trading country (as defined by the sum of exports and imports of goods). But China is in the midst of a very painful episode in its history. The economy has recently slowed to its slowest pace in two and a half years. And that is likely to continue.

China suffers from serious bottlenecks, including lofty property prices, rising wages and higher logistics costs due to the big push to move manufacturing to the hinterland (the 'Go West' policy). The results are rising inflation and a marked slowdown in foreign direct investments (which in fact peaked in August 2011).

How will China maintain its dominance in this region? Well, it has tremendous military might of course. And it still exerts a formidable influence as an economic power.

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But in the next few years, I think we'll see a new approach by the Chinese authorities. Call it soft power' an attempt by the Chinese authorities to bolster their influence in Asia by reaching out to their neighbours. That means fostering trade links across Southeast Asia. But it also means attempting to improve China's image in the region. As President Hu Jintao recently complained: "The international influence of Chinese culture does not correspond with the international status of China."

Why this change in attitude? Well, I believe it's partly because China recognises a radical change in Asia. As the economies of Southeast Asia continue to thrive, a new powerhouse is emerging. And the end result of this remarkable story is that these Asian economies are becoming more closely integrated and less reliant on the support of China and the West.

Take Indonesia for example

China and the Asian crisis of 1997

Indonesia has a sizeable ethnic Chinese population. But it has had a troubled relationship with them. The situation reached a trough during the Cold War in the 1960s where many of them were accused of having hidden loyalty to Communist China and controlling large parts of the local economy. Other countries in the region also had troubles accepting Chinese culture for similar reasons.

That softened markedly after the Asian financial crisis in 1997/98 when China's economy started its rapid ascendance. The experience of the Asian crisis with vast sums of Western money flooding out of Asia as the economies collapsed soured relations with the West. And so Asia turned to China. When China succeeded in attaining membership of the World Trade Organisation in 2001, it was a key moment for Asia.

During that period I observed first-hand how the candidates in the Bangkok mayoral election openly used their Chinese nicknames and stressed their Chinese family heritage. And many Southeast Asian politicians remain eager to curry favour with the Chinese authorities.

Just last week I watched the Malaysian prime minister, Najib Razak, appear in a TV advertisement giving Chinese New Year greetings. He was dressed in a traditional Chinese suit and was energetically beating on a Chinese drum during a lion dance scene.

The PM also appeared on radio learning to pronounce his own name and speak in Mandarin, while his youngest son, who studied the language at university, was heard correcting him.

Japan, China and Southeast Asia

But this relationship is beginning to change. Most Asian politicians worry about the state of the Chinese economy. They are eager to avoid a repeat of the 1997/8 crisis, where much of Asia was left to sink as Western money fled the region.

Those concerns are now being felt across Southeast Asia, triggering a strategy shift towards affinity with rest of Southeast Asia.

In 2015, as you know, we will see the emergence of a new economic zone called the Asean Free Trade Area. Asean, home to 600 million people and $2.5trn in combined GDP, has decided that it needs to stand on its own feet. And so these economies are investing the enormous spoils of recent growth in fostering trade links in the region. That means heavily investing in infrastructure. It also means establishing manufacturing bases where labour is still.

That's why, as described recently in the New World, the new Japanese government is making such a big move to develop ties with Southeast Asia. And that certainly involves a bit of soft power too. Japanese TV stations, advertising agencies and companies plan to set up TV stations that broadcast Japanese dramas, anime and information programmes in Southeast Asia later this year. The Japanese government will provide economic support through a fund tentatively named Cool Japan Fund'. The new administration of Prime Minister Shinzo Abe regards the Cool Japan' project as one of its measures to revitalise the Japanese economy.

The Japanese are following the example of South Korea, which has been pushing its Cool Korea' campaign since 1997. The Korean government has actively helped to promote South Korean TV dramas, pop music and other cultural events overseas. The result was a boost in the reputation of Korean products and an increase in foreign tourists to the country.

A friend of mine just returned from a two-week tour of Myanmar and was shocked how popular Korean culture was, even in the most remote areas. China is now following Korea's example - launching similar programmes that are focused on boosting its reputation across Southeast Asia.

Obviously, this is something that will take time. But it is happening. Last year a Chinese company acquired AMC Entertainment Holdings for $2.6bn, entering the US to create the world's biggest cinema owner. It is also looking to buy a European cinema operator. And I recently learned that a leading Chinese footwear company owns the gym I use. This place resembles a luxurious nightclub with its black painted walls, mood lighting and loud rock music.

Asia turns Asian

What is the impact of the rise of Asian soft power? Well, the West's influence will certainly continue to diminish. And Asian stocks will offer a tremendous opportunity as the region turns in on itself.

This story started with infrastructure spending, commercial property and manufacturing. But we are already seeing a boom in tourism and consumer finance across Southeast Asia as well.

I've certainly noticed that most of the new franchises set up in shopping malls across the region are Asian. Whether it is food, drinks & beverage or clothing, it is mostly Asian. And famous Asian tourists spots such as Bali and Bangkok register strongest growth from Asian tourists. The most successful film of 2012 was Lost in Thailand, a comedy that is said to resemble The Hangover,but for an Asian market. The film grossed $201m in China, and is the second-highest grossing film ever there, behind Avatar.

So I think people in the West should prepare for the Asian soft power wave as well. Remember, as Plato said, those who tell the stories rule the world.

In fact, I strongly advocate buying Asian stocks with exposure to these themes. And I have some very specific (and hugely promising!) examples for you coming up. Keep an eye out for the news on this.

This article is taken from The New World, MoneyWeek's FREE regular email of investment ideas and news from Asia and Latin America. Sign up to The New World here.