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SINGAPORE, Dec 29 (AFP)

Asia's increasing integration with China should help the region outpace the rest of the world in economic growth next year although the US will remain the key driver, Singapore's DBS Bank said.

"In 2003, we believe Asia will outperform other emerging markets as well as industrialised countries in growth terms," Southeast Asia's biggest lender said in a year-end report received at the weekend.

Closer integration with giant neighbour China, a faster recovery in information and communication technology exports and better prices for these shipments were cited as additional drivers for the region's economy.

"Interestingly, the hype that we hear on China exporting deflation and hollowing out the region's manufacturing sector is overblown," the bank said.

As China builds its economy by flushing cheap goods to the world, it is also strengthening the purchasing power of its 1.2 billion citizens, which will mean more imports from the rest of the world including Asia, DBS said.

Additionally, more parts and components manufactured in the rest of Asia are being shipped to China for processing to take advantage of cheaper labour costs.

"As a result, China is one large processing centre for low value-added consumer products such as garments, toys and leather goods," it said.

China is also a net importer of high value added products, running a trade deficit with the rest of Asia in this segment, the bank said.

"In conclusion, the rest of Asia has been engaging in substantive vertical integration with China over the last 15 years.

"The fruits of this process actually appeared quite significantly in 2002, wherein exports from the rest of the region to China grew at double-digit growth rates," it said.

Economic integration is expected to deepen following last month's signing between China and the 10-member Association of Southeast Asian Nations (ASEAN) of a historic agreement to create the world's biggest free trade area by 2010.

The free trade bloc will embrace 1.7 billion people and two-way trade worth 1.2 trillion dollars.

China will continue to lead Asia's economic expansion, with gross domestic product seen to grow at 7.2 percent in 2003, the Asian Development Bank (ADB) said earlier this month.

ADB chief economist Ifzal Ali said China would become the largest market for Asian exports by 2005 and the biggest exporter in Asia by 2010.

Meanwhile, DBS bank said the US economy will remain Asia's growth driver, with Japan and the European Union mired in their own problems.

"We believe that 2003 will be a year in which sustainable US recovery finally takes root," it said.

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