East Asia's substantially market-led economic integration is a very complex process and is leading to some surprising effects.  One example is that of Australia's booming trade and investment with China, which is pushing up the value of the Australian dollar, and in consequence enticing Australian companies to offshore business processing services to the Philippines.

Over the past decade or more, Australia has enjoyed one of the best economic performances of any OECD country.  While many structural reforms over the past few decades and sound macroeconomic management have underpinned this, Australia's closer relationship with China has also played a major role.  China is now by far Australia's most important merchandise export destination, accounting for some 26 per cent of the total.  These exports are predominately iron ore, along with smaller quantities of coal, petroleum and wool.

China is now also the leading destination for Australia's services exports, accounting for 11 per cent of total.  In particular, China tops the list for foreigners studying in Australia with 126,000, or 27 per cent of the total in 2010.  It also tops the list of international tourist expenditure in Australia, even though the UK beats China into second place for the highest number of international tourists to Australia.

Chinese foreign direct investment is also making its mark in Australia.  While the stock of foreign direct investment in Australia is dominated by the traditional partners of US, UK, and Japan, the fast mover over the past decade has been China whose stock of FDI in Australia has jumped from $3 billion in 2001 to $17 billion in 2009.

All of these of these booming linkages between Australia and China have contributed to the cumulative strengthening of the Australia dollar by almost 20% over the past four years.  This has also provoked strong adjustment pressures in the Australian economy, most notably through the drive to reduce costs and gain market flexibility by offshoring electronically deliverable services like customer relations, information technology, back-office support and form processing, finance and human resources.

In this context, the Philippines has emerged as the top offshoring destination for Australian firms, outranking India in all categories, according to a recent report by the Australian Contact Centre Outsourcing Market Study 2011.  The Philippines has become a prized offshoring destination due to its competitive labor costs, good customer service, and high English literacy rate among college graduates.  The Philippines, which has the world's third largest English-speaking population, has now become the world's leading nation for business process outsourcing.  There are even reports of Indian companies offshoring their business processing to the Philippines!

These past few months, the mood in the Australian economy has been turning down due to the ongoing euro crisis, and uncertainties about China's future growth path.  In light of these factors, and the Philippines' proven track record, large banking, financial and telecommunications institutions have been announcing their intention to accelerate offshoring of business processing services to the Philippines.

Although business process offshoring only employs at this stage about 1 per cent of the Philippine work force, it is now the country's fastest growing sector.  Together with the rise of creative process outsourcing (such as 3D animation, video game development, and music and sound engineering), this represents a very promising area for the development of the "Pearl of the Orient".  And it is of course a pleasant surprise that one factor driving demand for these business processing services is the appreciation of the Australian dollar caused by the country's rapidly growing exports of natural resources, and education and tourist services to China.