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Devour!
January/February 2005 Issue
From "Devour!" by Forward, a global perspective from MSCI

Devour!
The Chinese economy is devouring the world—commodities as well as finished goods. But when the dragon is full, what becomes of global markets? And what if this dragon is, in fact, insatiable?

by Ted C. Fishman

It is hard to read news about China's fast-growing economy without a twinge of envy, a measure of awe and, if one happens to be in a business that must compete against the Chinese dynamo, some fear and anger. Surely the factories that power China's economic revival can't consistently boost their output, cut their prices and undercut rivals.

China's roaring success sharply contrasts with the news about American manufacturing over the last three years, when factories have been shuttered, often to move overseas. Is China's status as a super-competitor the natural result of market forces, or is there something fundamentally unfair about the way the country, and its producers, go about business?

According to the World Bank's recent East Asia Update, 2004 was the strongest ever for the economies of the 11 countries and self-governing territories it counts as East Asia. Growth in the region topped 7%. The economy of the entire world grew at 4%, a lower but still robust pace. Yet, the world's true miracle economy in 2004, as in nearly all of the previous 20 years, was China's. It grew 9.2%, a rate that is both astonishing, and now, for China, commonplace.

Since economic reforms began to revolutionize China's moribund economy in the 1980s, the country's gross domestic product (GDP) has doubled and doubled again. Where China once meant little to the world economy, it is now one of its chief drivers. China is today the world's fourth largest trading country, the biggest consumer and manufacturer of steel, the greatest producer of consumer electronics, builder of ships, consumer of cement and the second largest consumer of petroleum. "China alone accounts for 40% of all the world's growth in oil consumption since 2000," notes Daniel Yergin, chairman of Cambridge Energy Associates, a consulting firm that analyzes oil trends worldwide for governments and international business client.

The hunger for raw materials and industrial machinery to build the country's infrastructure, satisfy its domestic consumers and feed its ever-expanding base of export industries has helped pull up Asia's developing economies and lift Japan out of its long doldrums. The World Bank report is unambiguous: The great strength of East Asia's economies in 2004, and the strong performance of the world, including the United States, owes much to China's boom.

And yet, it also offers a warning. China's appetites, which pushed up the prices of nearly every important commodity in 2004, also can squeeze the world economy pressed to pay dramatically higher prices for raw materials and energy. China's economy also may falter, sending global prices of commodities sharply down and cutting the imports into China that have helped spread China's prosperity.

Why China Drives U.S. Concerns
For North American companies, China's economic designs and fortunes will play an increasingly influential role. As impressive as China's economic development has been in recent years, the country still is at the beginning of a long climb up. China's entire economy is about the size of the U.S. manufacturing sector alone. Average per capita income in China, at about $1,000 annually, is still only around one-fortieth that of the United States. Or, using the more generous measure of purchasing power parity (PPP), one-fifth, as calculated in the 2004 CIA country study of China. PPP measures different currencies' relative purchasing power by comparing the price of the same goods in different countries with that price converted by the foreign exchange rate of that country's currency against a base currency, normally the U.S. dollar.

China's population, officially counted at about 1.3 billion people, means, however, that even relatively modest gains in incomes in China can rock the world economy. John Mearsheimer, a political theorist at the University of Chicago, warns that China's growth could make it a superpower that is both rich and poor at the same time, a fact that not only is economically important, but also could determine the country's geo political ambitions. If incomes in China double (using PPP), the country's economy would be equal in size to the United States, where GDP is nearly $11 trillion annually.

China is heading in that direction. President Hu Jintao predicted in 2003 that China's GDP would grow four-fold again to more than $4 trillion by the year 2020. As it does, China's demand for the world's resources and manufactured goods will grow, too.

Consider that China is now in the midst of the greatest wave of human migration in history. Hundreds of millions of Chinese have picked up and moved, leaving farms and moribund inland cities, to take up places in China's booming industrial economy. Today, an estimated 150 million migrant workers traverse the job markets of China's east coast. In 2003, Shanghai added 3 million migrants to its official population count, most of whom fill menial factory and service jobs.

But migrants also play a big role in another of China's booms, the phenomenal growth of the entrepreneurial economy. According to a study of business executives in Shanghai conducted by researchers at the Shanghai Academy of Social Sciences, the vast majority of the city's entrepreneurs are from other regions of the country, while executives who are native to Shanghai tend to work for multinational companies. Kellee S. Tsai, a political scientist at Johns Hopkins University, calculates that over the first 20 years of reform, from 1978 to 1998, the Chinese started 30 million new private businesses. On top of that, there were tens of millions more businesses that fit into the broad category of public/private hybrids of many varieties that could, given the evolution of reform, only exist in China. Some of China's new businesses now are big enough to challenge giant multinationals.

These businesses, domestic and foreign alike, help create a string of megacities. China's most prosperous cities also have civic infrastructures—new roads, subways, telecommunication links, ports—that are among the most advanced in the world. Some grow by a million people a year, a fact that amazes until one considers that China still has a disproportionately large rural population even when compared to other developing nations, and that hundreds of millions of Chinese are expected yet to leave the farm.

To accommodate the new urban population, China must build out and power up the equivalent of a new Philadelphia or Houston every month. When Robert Ivy, the editor of Architectural Record, America's premiere architecture magazine, visited Beijing, he had to readjust his sense of the possible. "The numbers are mind-boggling. Millions of square feet of new construction render Beijing the busiest construction zone on the planet," Ivy reported. "Two thousand high-rise buildings are under way, in one form or another, in a concatenation of architecture, urban design and construction that makes Berlin look like an opening act."

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