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12/04/2003
China Update
I think you’d agree China has been in the news quite a bit this
past year, owing to its booming economy and the fear it is going
to sop up every single job in America. But with Premier Wen
Jiabao paying Washington a visit next week, it’s a good time to
lay out some facts.
A recent poll in USA Today revealed that 55% of Americans see
China as a source of unfair trade competition, while only 34%
feel it is a market ripe for U.S. goods. Personally, I side with the
latter group, though with the usual caveats when discussing
China’s proclivity to trample on basic human rights.
China joined the World Trade Organization in 2001 and
currently has a trade deficit with the United States of $130
billion, the existence of which is the primary source of friction
and discussion in the halls of Congress.
Much of the following is gleaned from an article by economist
David Hale and partner Lyric Hughes Hale in the November /
December issue of Foreign Affairs.
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China accounted for 16% of the growth in the world economy in
2002, second to the United States.
China is the 5th-largest recipient of foreign direct investment
(FDI) with $450 billion and should be #2, ahead of the United
Kingdom and Germany, by the end of 2004. But with this level
of FDI comes the risk of developing too much industrial
capacity, which can lead to bankruptcies. For example, China
currently has the capacity to produce 2.8 million autos per year,
yet the current rate of sale is about 1.8 million.
A major danger for China is the restive rural population, which
will represent 800 million people by 2020. Thus far, 45 million
workers have been laid off from state-owned enterprises as the
government continues the tumultuous transition to the private
sector, so those fleeing the agricultural areas are obviously
finding it increasingly difficult to find employment in the cities.
[As an aside, did you know there are 200 cities with a population
in excess of 1 million?] But to show you how quickly economic
liberalization has taken place, the private sector is now producing
more than the state enterprises. And if you consider that the
government has basically exited agriculture, the private sector
employs 80% of China’s total labor force.
China is a rapidly aging nation and by 2030, will be over age
65. In the past, when life expectancy was low, this wasn’t a huge
issue, but with the average now around 72 it is a big time problem.
There aren’t any pension funds here and the government is going
to have to come up with a plan, as well as promote efficient stock
and bond markets for the retirement dollars.
On the export front, China’s tally will grow to $380 billion in
2003, 6% of the total worldwide. By 2005 they will surpass
Japan in this regard. For example, China now accounts for 30%
of Asia’s electronics exports.
There has been a steady shift of factories to China from other
Asian countries, with Japan, South Korea, Malaysia, Singapore,
Hong Kong and Taiwan all taking advantage of the low-wage
labor force, just as the U.S. has.
But to give you an idea of how this impacts the U.S., and also
why the debate in America is often misguided, consider the
following example from David Lynch of USA Today.
“Two years ago, Taiwanese computer company Quanta – the
world’s largest laptop maker – moved three-quarters of its
manufacturing capacity to a new plant outside Shanghai.
Quanta’s Chinese workers take parts imported from Taiwan and
assemble them into completed notebook computers. In 2002, the
first full year of operation, the factory assembled $1 billion worth
of laptops. Through the first seven months of this year,
production was on a pace to quadruple that.
“Since Quanta is a major supplier to both Dell Computer and
Hewlett Packard, much of that output shows up in the USA as
Chinese exports – even though less than one-third of the
product’s value is added by Chinese laborers.”
An estimated 52% of Chinese exports are produced by foreign-
owned factories, so as Lynch surmises, “just how ‘Chinese’ is
the flood of Chinese goods onto U.S. shelves?” In turn, U.S.
‘exports’ to China are up 35% since 2001.
Of course much of the criticism in Washington concerns China’s
adherence to the WTO agreement, but David Hale notes that
50% of U.S. companies feel China is ahead of schedule in
implementing its obligations, while only 38% said it was lagging.
Actually, the market that remains far more closed than China is
Japan. One example of this is the fact that 40% of China’s GDP
can be accounted for by FDI, while in Japan it is only 1.1%
(you’re reading that right). China needs this level of FDI, again,
to alleviate the problems created by the tens of millions laid off
from state enterprises.
One of the big losers to China these days is Mexico, whose labor
is now 4 times more expensive than China’s. Mexico also isn’t
doing itself any favors by sticking with government policies
limiting private investment in the energy sector. Electricity, for
example, is twice as expensive as in China. [China’s and
Mexico’s share of U.S. imports were virtually equal in June and
by now Mexico is undoubtedly far behind.]
Some other tidbits:
China is transforming the world’s commodities markets,
consuming between 15 and 30 percent, conservatively, of the
world’s iron ore, platinum, and aluminum, for starters.
With regards to the Internet, despite the highly publicized stories
of citizens being arrested for posting anti-government rants, 69
million now access the Web, up from 9 million in 2000. And
China is already the world’s largest market for cable television
with 200 million homes wired; a figure that could double in just
two more years.
Finally, David Hale concludes:
“No doubt, China will increasingly regard itself as a great power
and expect more deference from other countries. But although it
is understandable that its spectacular growth would spark unease
in Washington, there is no compelling reason to assume that
China will become an enemy of the United States Assuming
that China can sustain the momentum that has driven its
economic boom in recent years, there is little doubt that a mutual
search for economic opportunity will be the defining feature of
China’s relationship with the United States, and the rest of the
world, for many more years to come.”
In other words, lots to write about, both in this space and “Week
in Review.”
Hott Spotts will return December 11.
Brian Trumbore
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