Southeast Asia lures Chinese investors for an even more surprising reason: cheap labor. Although foreign firms still flood into China because of its low wages, labor costs are rising in the country's twin economic engines of the Pearl River and Yangtze River deltas. In Vietnam, Chinese water-heater magnate Pan Xinghua has been filling out reams of application papers and enduring barbs about China's 1979 invasion of Vietnam in an ongoing effort to open a factory in Hanoi, where labor is one-third cheaper than at home. Pan is also doing a civic duty for his hometown of Wenzhou. Last year, the vice mayor of the Chinese coastal city publicly encouraged local entrepreneurs to move light-manufacturing factories overseas to help clear up the city's air. "I was the first one to leave my government job to enter private business in 1988, and no one believed I would succeed," says Pan, 45, who used to work at the local meteorology bureau. "Now no one believes I will succeed in Vietnam, but I'll prove them wrong again."

The Chinese are investing so quickly in Southeast Asia that official statistics may be grossly understated. The Thailand Board of Investment estimates that China is only the kingdom's 10th largest investor, but much of mainland foreign direct investment (FDI) may be slipping through the cracks. "I hear so many stories of investment from China that never makes it onto the board of investment's books," says Sakkarin Niyomsilpa, senior analyst at Kasikorn Research Center, a leading economic think tank in Thailand. In Phnom Penh, Gao from the Chinese Chamber of Commerce recently hosted a trade delegation from the Chinese province of Anhui. He had no idea that the economically backward province had any interest in Cambodia but was told that Anhui already did $10 million in trade with the Southeast Asian nation. Tracking Chinese investment in Southeast Asia is made more difficult by the tendency of mainlanders to funnel funds through the bank accounts of local ethnic Chinese, with whom they often prefer to do business. "There's really a black hole of Chinese FDI," says Frost from the City University of Hong Kong. "The data are missing lots of small and medium-sized enterprises and one-man bands, as well as money that goes through ethnic Chinese or via other countries. It's impossible to know how much investment isn't being picked up, but I reckon it's a lot."

Though much of the money may fly under the radar, China is learning just how much appreciation high-profile investments can earn from locals. In Phnom Penh, Dr. Chen Bing oversees 12 Chinese doctors at the Li Po Long Hua Hospital, which opened in 2000 with funding from the largest medical facility in China's eastern Hebei province. The Cambodian hospital boasts some of the most advanced medical equipment in the country, such as a C.T. scanner and a laser machine to break up kidney stones. "Before, the Cambodians saw Westerners and Japanese as their only friends," says Chen. "But we want to show that China can help develop poor countries, especially ones in its neighborhood." Chinese construction companies are also busy building a vast network of roads across the region. The transport links help move Southeast Asian goods to China more quickly, but they also improve the livelihood of millions of rural residents. "China has been able to accrue a massive amount of goodwill through economic means," says Frost. "Now the question is, how they are going to use it?"

On Taiwan, at least, Beijing appears more than ready to flex its muscle. Last year China postponed free-trade talks with Singapore after Lee Hsien Loong, who later became the city-state's Prime Minister, visited Taiwan in July. "The Americans can be arrogant in their use of power, but this instance shows the potential for Chinese arrogance, too," says Verghese Mathews, a visiting fellow at the Institute of Southeast Asian Studies in Singapore. But China is Singapore's second largest trading partner, and economic realities have a way of shaping politics. Since he took office last August, Lee has gone out of his way to underline his nation's commitment to a "one China" policy, even going so far as to say that Singapore would not support Taiwan should China invade what it calls a renegade province if the island moves toward independence.

With Southeast Asia pulled ever closer into China's orbit, some are worried that the cozy relations could alienate the U.S., the region's traditional superpower. Last year, the Philippines, a longtime U.S. ally, accepted its first-ever military aid from China, even as President Gloria Macapagal Arroyo invited American forces to help train the Philippine military in the country's restive south. Arroyo "should stop treating China as her new big brother," says retired Philippine Commodore Rex Robles, a security expert in Manila. "She will eventually step on the toes of her traditional big brother, which is the U.S. of A. It's a game too dangerous to play." Still, others in Southeast Asia believe the region will be able to adapt to China's rising influence—and profit from it too. "We have always had confidence in our ability to play the balance-of-power game," says Thammasat University's Prapat. "We did it in the colonial period with the French and the British, and we did it again in the cold war." The Chinese century has begun, and Southeast Asia is once again riding on the dragon's back.

With reporting by Bu Hua/Shanghai, Andrew Perrin/Bangkok, Nelly Sindayen/Manila and Jason Tedjasukmana/Jakarta

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