Alternative Insight

China Rises and Rises
A New Force Propels the World Economies


China's economy, and not George Bush's tax cuts, is fueling the American and other national economies. Exportation of high priced industrial goods and commodities to China have provided huge markets for Western and Asian surplus. The People's Republic's massive production and exports of low priced goods to leading industrial countries have contained inflation. Currency flows from trade with China serve to increase trade between other nations. China is becoming a new engine in the world's economic system. However, it is an engine that could stall. China might engage itself in the world economy until it becomes self-sufficient. After then, the western world could face a fierce struggle for markets.

Economic Statistics Tell the Story

China has become the world's fourth largest trading nation.
Preliminary statistics show that China's exports in year 2003 increased to US$438.37 billion, (Japan $470 billion) an annual rise of 34.6 per cent, and imports totaled US$412.84 billion, (Japan $381) an annual rise of 39.9 per cent. Liu Wenjie, deputy director of the General Administration at Customs.

China's 2003 Gross Domestic Product (GDP), at the February 2004 exchange rate, was estimated to be1.4 trillion US dollars, (United States GDP at ~11 trillion dollars) up 9.1% over the previous year. The per capita GDP reached 1,090 US dollars.
Source: Li Deshui, Commissioner National Bureau of Statistics 20 January 2004.

Note: The CIA considers China to have the second-largest economy in the world. The CIA Factbook for 2003 lists the U.S. GDP at $10.4 trillion and China's GDP (measured on a purchasing power parity basis) at $5.7 trillion. This gives China's 1.3 billion people a per capita GDP of $5,000.

In its trade with the United States, China's exports to the U.S. totaled $163.3 billion and its imports from the U.S. registered at $28.4 billion. The U.S. suffered a trade deficit of $134.8 billion with China. All of these figures have increased monotonically since 1999. In that year, China's exports to the U.S. were $87.8 billion and imports from the U.S. were $13.1 billion. The U.S. deficit with China was $74.7 billion in 1999.
Source: US International Trade Commission, US Department of Commerce

Two interesting facts:
(1) In 2003, China consumed 55 percent of the world's cement production and 36 percent of its steel production.
(2) In 2003, China surpassed the United States as the world's most favored nation for foreign capital investment.

China's Growth Stimulates Other Economies

China has revived semi-stagnant economies throughout the world.

Each factor by itself is insufficient to revive world economies. China's additions to international trade and industrial production have checked inflation and created more purchasing power. Its effects have rippled throughout the world. Selling more to China enables buying more from other countries and so it goes.

Some examples:

Table 1: Top US Exports to China, 2003 ($ million)
SOURCES: US International Trade Commission and US Department of Commerce

 COMMODITY  2002 EXPORTS  2003 EXPORTS  % CHANGE
 Electrical machinery & equipment  3,950.1  4,782.6  21.1
 Power generation equipment  4,109.1  4,639.6  12.9
 Oil seeds & oleaginous fruits  917.9  2,877.4  213.5
 Air & spacecraft  3,428.8  2,451.2  -28.5
 Medical equipment  1,258.6  1,594.0  26.6
 Plastics  995.2  1,247.5  25.4
 Iron & steel  591.1  1,213.9  105.4
 Organic chemicals  619.9  1,105.3  78.3
 Cotton  153.4  769.3  401.6
 Copper  319.6  652.3  104.1
 TOTAL  22,100  28.4  28.5

Except for a temporary glitch in Boeing's aircraft shipments to China (Many Boeing airplane parts are now manufactured in China) U.S. exports to China have increased dramatically in all fields. The total exports of goods are slightly less than 4% of U.S. total goods exports, but the additional and increasing amounts stimulate U.S. industry and world trade.

Japan and Korea have greatly benefited from China's growth.
Korea has a unique situation. In 2003, Korean trade with China surpassed its trade with the U.S.. China is now Korea's largest trading partner and this trade has elevated Korean prosperity. However, China's robust growth and its construction boom generate huge material demands and these demands have raised material prices. "Minister of Finance and Economy Lee Hun-jai said the country's (Korea) economy may have trouble achieving its growth target of 5 percent this year, citing concerns about the high costs of crude and raw materials." (Unite d Press International, Feb, 23, 2004)

Japan's economic prosperity is becoming attached to China's growth.

Japan reported a 7% annualized growth in its economy for the October-December quarter. Much of this is due to a record surge of exports to China, up 44%, to $60 billion in 2003. In comparison, Japanese exports to the U.S. fell by 10% last year. China has become Japan's top trading partner and may soon overtake the U.S. as Japan's largest export market.

China accounted for more than a third of the 2.7% advance in Japan's real gross domestic product in calendar 2003. The Chinese economy is making a bigger contribution to Japan than the U.S. right now. Mamoru Yamazaki, chief economist at Barclays Capital in Tokyo.

Another assistance that China has provided to the U.S. economy is in its investment - a repatriation of surplus dollars to the U.S. has prevented a precipitous decline in the dollar and helped keep U.S. interest rates low.

Last year, China's foreign exchange reserves grew by $160 billion as the central bank tried to mop up the flood of investment from abroad and keep a lid on the exchange rate. Then the Chinese turned around and spent more than $60 billion of this to buy United States Treasury and other government bonds. EDUARDO PORTER, February 29, 2004, New York Times on-line.

The New Competition

China has built-in economic, social and political features that enable it to become competitive in many industries:

The argument to China's competitiveness is that it will not be possible for China, in the near future, to overcome the productivity advantages developed by the world's leading industrial powers. Selling competitively on the world's markets requires streamlined manufacturing methods, marketing tools, sales outlets, advertising, maintenance shops, well structured banking systems and customer confidence. At this moment China's principal forte is inexpensive skilled labor and manufacturing capacity. Will these be sufficient to make China a competitive nation in the global market? Does China want to be a player in global markets?

Chinese wages average around 60 cents in manufacturing jobs. Even if foreign firms are more productive (U.S. workers are presently estimated to be 20 times more productive than a Chinese worker), twenty skilled Chinese workers still add more value to a product than an American worker whose wages average $15-$20 per hour. The low wages, combined with economies of scale in massive production for domestic use and an undervalued currency, allows China to be competitive in many industries. Some examples: (1) China dominates bicycle production and the cost of a mountain bike has fallen around the world. (2) U.S. textile manufacturers are finding it difficult to compete with China and have filed a petition with Congress that requests legislators to cap textile imports from China.

Marc Faber, a well known investment advisor, fund manager and broker/dealer, has noted that China now ranks as the world’s largest producer of cereals, meat, fruits, vegetables, rice, zinc, tin, and cotton. It is the world’s second-largest producer of wheat, coarse grains, tea, lead, raw wool, major oil seeds, and coal, the world third-largest producer of aluminum and energy (measured in million tons of coal equivalent), and ranks between fourth and sixth in the production of sugar, copper, precious metals, and rubber. It is also the world’s largest manufacturer of textiles, garments, footwear, steel, refrigerators, TVs, radios, toys, office products and motorcycles. KWR International Advisor article, March 1, 2003.

Does China want to become a leading competitor in the global economic system or does its trade have other purposes?

It's difficult to believe that a nation with a history of isolation, an inward looking culture and socialist government wants to become firmly attached to the world's economic system or will be able to compete in world markets. China has other purposes and its economic thrust reflects those purposes:

Despite its massive production facilities, China has few companies that have global operations:

Haier holdings, a conglomerate, is one of the largest manufacturers of household appliances and electronics, and the world's second largest producer of refrigerators. Haier has some facilities in the U.S. and Europe, but can be conceived as a company with a large production that needs external markets.

TCL has merged with the French company Thompson and is now the world's largest producer of color TV sets. Another company with a large production that needs external markets.

Huawei is a high tech company in wireless systems. It competes with Cisco Systems in production of high end routers and can sell them at 40% less than Cisco. After establishing a plant in Texas, Cisco sued Huawei for patent infringement and Huawei agreed to halt some of its production lines. The Chinese high tech company is building wireless networks in Pakistan and Indonesia and has allied with Siemens to develop mobile technology. Despite Huawei's technical excellence and lower prices, it is not believed it can overcome the marketing lead and name recognition that Cisco has established.

Legend Holdings (Lenovo) is the leading Chinese PC producer, with a 27.7% share of the internal market as of 2002. The company might have ambitions to capitalize on its domestic and go global it but has not moved in that direction - and for good reason - it will be difficult to compete outside China against entrenched firms such as Dell, IBM and Hewlett Packard.

If China has scant expectation of having several of its corporations operate internationally, as local competitors scattered with factories and sales outlets within other nations, what does China want to achieve by its present involvement in the global markets? The answer is self-sufficiency.

Becoming Self-Sufficient

China has the physical and material resources to eventually become self-sufficient. It only needs time to develop the infrastructures that harness its assets. By developing its own computer and communication standards, China is assuring its developments will not be subordinate to foreign developments. By regulations, China is making certain that foreign companies will follow its developments rather than China following the global tracks. Recent daily communiques describe China's efforts to become self-sufficient in semi-conductor capacity in order to become self-sufficient in electronics manufacture.

Standards

Regulations

Semi-conductor Manufacture

The China of the present era needs the world economic system to assist it in rapid growth. The future China might have a different outlook.

The Future
The Chinese government has never relinquished its stated aims of becoming a planned Socialist state. The People's government might not want to admit its earlier planning concepts were incorrect or it might be following a course of uncertainty. In retrospect, its thrust follows aspects of Marxist theory: Utilize the best modes of production for progress or face revolution and develop capitalist structures before entering a socialist stage.

It is difficult to believe that the Chinese, that throughout history isolated themselves from the western world, always feared foreign domination, rejected most of western customs and thinking and eschewed freedom, democracy and individualism, will suddenly want to participate in the economic cycles and conflicts that mar western capitalism. China must have other plans.

China realizes it cannot build a Great Wall to keep out its neighbors. It must make peace and relate with bordering nations. It is doing that. A symbiotic relationship is developing between China and Korea and Japan and other South-east Asian countries. China is essential to the health of these Asian country economies and they know that. After fighting brief wars over disputed territory with Vietnam, Russia and India during the latter decades of the twentieth century, China has made peace and now has no enemies.

China wants to remain neutral in world politics. A North-South alliance is developing between China, India and Russia to provide a neutral thrust to U.S. policies. China has settled its quarrels with India and Russia.

Ex-foreign minister of Russia Yevgeny Primakov coined the formula of "Russia-India-China strategic triangle" in 1998. Earlier this year, the Russian foreign minister Igor Ivanov was quoted by 'The Hindu' as saying "Trilateral interaction is important for global stability…Dialogue between Beijing, Delhi and Moscow will be carried forward".

The three countries, dubbed the future 'locomotives of world growth', were brought together by a common desire to challenge unfettered American hegemony. They also faced a common adversary in Central Asia terror that fueled secessionist movements in Kashmir (India), Chechnya (Russia) and Xinjiang (China). The three foreign ministers have already met twice and now plan to summit together at Russia in a move sure to give a boost to trilateral cooperation. Economic factors like the need to evolve a strategy to counter globalization also forces marginalized economies to join hands.
Triangular Alliances Involving India, Rajesh Tembarai Krishnamachari,
South Asia Analysis Group, Paper no. 829, 03. 11. 2003

China is creating an Asian co-prosperity sphere. This trend is different than Japan's more aggressive WWII policies but tends to deter western influences. China's imports seem to give preference to the Asian nations.

China's economic and political trends are becoming established:

Cooperate with the west to quickly develop its economy and infrastructure, leading to;
Become economically self-sufficient, leading to;
Align economically and politically with other Asian nations, leading to;
Guard from western influences, leading to;
Gain more independence from the western nations, leading to;
Grow slowly and more uniformly.

The next Chinese Great Wall will be invisible, but its barriers will be apparent to the west.

alternativeinsight
march 1, 2004

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