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December 6, 2004
The Two Faces of China
By KEITH BRADSHER
GUANGZHOU, China
FEW business executives watch the growth of the Chinese economy as closely as Michael R. P. Smith, the chief executive of the Hongkong and Shanghai Banking Corporation.
Yet even Mr. Smith was startled when his staff recently projected that in 2034, bank assets in China would surpass those in the United States.
"When I saw that, I said, 'That can't be right,' and I went back to the economics guys," who confirmed the projection, Mr. Smith recalled.
Much the same surprise is cropping up in industry after industry and in country after country. From steel to oil to cars to credit cards, China is poised to become the world's biggest producer and market for many goods and services.
Along the way, China has come to terrify many foreign business executives and attract others - and sometimes both at the same time, depending on whether they see the country as a competitor, a cheap source of supply, a market, or all three.
Companies across many industries are facing enormous pressure to match prices that are available in China or lose their customers. That can mean deep price cuts of 25 to 50 percent, leading in some cases to job losses, cutbacks and even closings. At the same time, American and European companies are taking advantage of China's vast and inexpensive labor force by moving some of their operations there - and by offering their products to a country whose role as a consumer continues to grow.
China is already the largest user of steel and cement and is poised to overtake the United States in consumption of everything from copper to soybeans. These goods are needed in a fast-growing economy with many highways, factories and office towers to build - and with 1.3 billion mouths to feed.
China has become the world's largest market for cellphones, and it is catching up with Germany and Japan as a market for cars, although it considerably trails the United States in its appetite for new vehicles.
Businesses reaping the biggest rewards include companies that supply China's need for infrastructure, like the General Electric Company, which sells large turbines and aircraft engines. G.E. currently ships roughly $3.5 billion worth of goods each year to China from other countries, mainly the United States, while exporting $2 billion of merchandise from China, mainly to the United States.
But companies like G.E. are the exception. American imports from China exceed exports by more than five to one, as retailers like Wal-Mart Stores buy immense and growing quantities of goods from China. With as many people as the entire industrialized world combined, China has tens of millions of unskilled workers willing to work for less than $100 a month.
During the Democratic primaries this year, Senator John Kerry repeatedly denounced "Benedict Arnold C.E.O.'s" who moved jobs overseas. Those statements drew strong objections from the business community, including Democratic business leaders, and Mr. Kerry's comments about trade were relatively tame during the general election campaign.
YET many corporate executives wonder how much longer a big American trade deficit and the moving of jobs overseas can persist without becoming the subject of strong protests by Americans who say that foreign workers are taking away their jobs
"China kind of got a pass in this campaign; that may not always be the case," said Benjamin W. Heineman Jr., G.E.'s senior vice president for law and public affairs.
Even trickier could be the Chinese relationship with the European Union, another big market for exports. Powerful European labor unions could force limits on Chinese exports, much as they forced tighter restrictions on Japanese automobile exports in the 1980's and 1990's.
"I'm quite gloomy about Europe - the big industrial countries like Germany, Italy and France," said Frank-Jürgen Richter, the president of Horasis, a consulting company in Geneva. "How do you keep growth in these countries if everything is moving to China?"
Like Japan from the 1950's through the 1980's, China has shown that a country can sustain high growth rates for many years by combining hard work with a closed financial system that channels very high household savings into countless industrial projects and other ventures selected partly by government bureaucrats.
Japan's stagnation since the early 1990's suggests that such policies may have limitations. Predicting when China might hit such a wall has become something of a cottage industry. This has been particularly true in the last year, as Beijing has imposed fairly strict controls on bank lending. The government has raised bank reserve requirements three times and increased the benchmark interest rates for bank loans and deposits once, in response to evidence that the economy may be overheating.
Climbing prices for industrial commodities like steel, bid up around the world mainly because of China's rapid growth, have alarmed manufacturers across China. Xin Yumei, an export manager at Yangquan Metals and Minerals in China's north central Shanxi Province, said the price of steel for the company's scissors and pocketknives had jumped close to 20 percent in the last year.
"The price is going up, and I have to raise our prices soon," she said.
Overhanging every assessment is the question of how much more competitive China can become globally if its domestic economy slows, freeing even more goods for export at ever cheaper prices while trimming China's demand for imports.
Most executives say they see no sign of this yet, but they are still cautious. "We don't see the danger of a huge collapse that would cause them to export huge tonnage," said Nicholas Tolerico, the president of ThyssenKrupp Steel Services, the trading and distribution arm of the German giant. Still, he warned, "If there were even a slight downturn, probably the first thing that would be adjusted is the amount they import."
Worries that the recent boom in the Chinese economy might be followed by a sharp bust have receded considerably since last spring, when ships were waiting up to a month to unload at clogged Chinese ports, and many Western economists were predicting that Beijing would have to impose draconian measures to prevent an inflationary spiral.
But some experts point out that the biggest imbalance in China's economy - the fact that most of its growth depends on often-speculative construction spending - may not be sustainable. Morris Goldstein and Nicholas R. Lardy, two experts at the International Institute for International Economics, contend in a new paper that instead of a "hard landing" or a "soft landing," China may be due for a "long landing" of slower economic growth that could last for years, as few additional apartment buildings and office towers are built until recently erected ones are fully occupied.
China experienced slower growth in the mid-1990's, as it struggled with the effects of a frenzy of construction that reached its peak in 1993. But China did fully recover from that episode. Optimists point to a flourishing of entrepreneurial energy that has long been part of the culture of overseas Chinese communities and has now emerged with full force in mainland China, with productivity improvements that are still being felt.
One such entrepreneur is Chen Chenmei, who started making shoelaces in her home a decade ago in Wenzhou using a machine that cost $50, and delivered them on her bicycle to shoe factories. Now, she and her family own a small shoelace factory, rent a car and employ a driver to make deliveries to factories and have their own stall at a wholesale shoe market here.
Laces in many hues and lengths, from brown bootlaces to pink laces for tennis shoes, filled the stall up to the rafters on a recent morning. Yet Ms. Chen was wearing cheap tennis shoes that had scruffy white laces with the tips broken off.
Savings are important to keep the factory growing, and sometimes for loans to family members who want to start their own businesses, Ms. Chen said, adding that "money flows all around among relatives."
The biggest question hanging over China is its political stability. Historians point out that the prosperity in China now has coincided with nearly three decades of the greatest social and political stability that China has seen in more than a century.
How long that will endure is anyone's guess. A big problem for China is how to address the wide gap in incomes between urban and rural residents. In countries across Asia this year, voters have shown considerable concern not just over expanding economic output but over how the gains are distributed.
"In all these countries, the verdict the electorates have given is: strengthen the inclusiveness of growth," said Ifzal Ali, the chief economist of the Asian Development Bank.
While China, a one-party state, does not allow free elections, public opinion still counts for something. Hu Jintao, the leader of the Communist Party for the last two years and China's president since early last year, has taken some steps to improve the lives of China's poor.
Letting food prices rise steeply has helped considerably, as farmers have taken in more money for their crops. The Chinese government has also tried to improve worker safety. Many small protests have bubbled up in numerous Chinese cities, often over unpaid wages, but there has been no sign of their spreading to become a national problem.
Corporate executives, politicians and economists generally agree that if China does suffer a sharp economic reversal, the results will be severe - both within China and far beyond its borders. A downturn could lead to severe unemployment, social and political unrest and large-scale emigration. The effects could also include plunges in financial and commodity markets if China's demand for foreign goods dried up and it unloaded unneeded items on world markets.
Western Europe helped maintain Russia's stability in the mid-1990's with big infusions of financial assistance, but China's larger economy and much greater population make it impossible for the outside world to offer nearly as much aid, said P. Christian Hauswedell, Germany's top diplomat for Asian and Pacific affairs.
"The thought of a failure of this modernization just makes us all shiver," he said. "We would not be able to support China if it failed." :~
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clay dubeThe article Paul's added is excellent (thanks for sharing it!) and the NY Times website has a good deal more. PLEASE: Rather than posting entire articles into the message area, please save them as text files or word processing files and then attach them. If people want to read them, they can click on the attachment to open it.
clay dubeThe BBC has published a report by Louisa Lim on drug use in Yunnan. It's available at:
http://news.bbc.co.uk/2/hi/asia-pacific/4085049.stm
The article focuses on the Dai ethnicity and tells of A Bao's addiction. The young man shoots heroin 4-5 times daily. Lim cites official statistics reporting 1 million addicts, but also notes that others put the estimate at 10-12 times that.
Unlike most goods, drugs are becoming cheaper in Yunnan. The article includes a description of a rehabilitation center Daytop.
It would be great to hear what others think of the problem and how the Chinese are addressing it. Beyond that -- how might this be discussed with our own students?
clay dubeThe UN says that China should now be a food donor rather than a food aid recipient. The BBC report on the announcement includes a video link on why China no longer needs such help.