This is China! BLOG

Inexorable China: Increasing Integration with the Global Economy

China’s GDP will nearly have eclipsed America’s by 2020; by 2030 China’s will be the largest in the world. Per capita GDP income at that time, however, will still be less than many of the members of the Organization for Economic Development and Cooperation (OECD), made up primarily of Western countries. Still, the heft of the Chinese economy will serve as a gravity well for Western companies that want to take advantage of the country’s burgeoning middle class and consumers in the countryside and smaller cities in China that are also benefiting from the country’s increased wealth. The American Chamber of Commerce in Shanghai in its 2006 survey of its corporate members saw the majority of members investing in China to sell into the China market; not to export to other countries, especially their own. With most companies saying in the same report that China is their most lucrative and fastest growing market, the fortunes of Western companies and their employees in the companies’ home countries will be become more dependent over the foreseeable future on China markets.

American, European and International newspapers are daily filled with articles about “increased trade tension” with China. Typically, it is the Western countries that are feeling the tension, while China works to temper emotions and perceptions about the quickness and depth with which China has penetrated international markets. Indeed, it is essentially through China’s purchase of United States Treasury Bills (T-Bills) that American consumers were insulated from high interest rates that allowed them to take the savings and buy Chinese goods manufactured in the Mainland. The depressed interest rates also enabled the Americans to buy homes at lower mortgage rates than would otherwise be the case.

China sold a net $5.8 billion of treasuries in June 2007, the first drop in its holdings since October 2005, according to statistics on the website. The country held a total of $414 billion, according to the US Treasury Department. News of the Chinese government sell-off implied to Western punters that China was losing confidence in the American economy, especially with the sub-prime loan catastrophe beginning to unfold. The Chinese government either diverted its current account surpluses to domestic infrastructure and social development projects, or selling off its holdings in American T-bills to invest elsewhere in the world would result in American interest rate rises that would make it more expensive for American consumers to buy goods and services, more expensive for corporations to borrow, and more expensive for the American government to pay down its own debt. Companies in America would have to shed workers because of weaker consumer demand, and would also find it difficult to expand into new markets and develop new offerings because of the greater cost of borrowing.

Increasing integration between China and Western economies has also and will continue to affect labor markets around the world. As manufacturing bases in countries like America, Germany, Italy and the UK continue to contract, labor and trade lobby groups of respective countries become more vocal about the displacement of hundreds of thousands of workers worldwide. American states like North Carolina have seen their textile bases erode severely over the past fifteen years – accelerating dramatically since China entered the World Trade Organization (WTO) in 2000 – while Italian shoe makers have been vociferous about the extent to which their traditions have been supplanted by less expensive Chinese-made goods. Entire government platforms are formed around meeting the “China Threat,” typically through protectionism. The EU and the American governments at the beginning of 2006 put back into place a trade barrier against textile imports from China, despite an agreement made ten years before that all duties on such goods would be zero in the consuming countries.

China’s economic development portfolio of foreign investment is markedly different from Japan’s and South Korea’s, Asian countries against which the development of China’s economy is often compared. Japanese and South Korean governments banded their largest banks and corporations in their respective countries to develop the domestic economies, create world-famous brands, and lock foreign investors out of their markets. China’s approach has been just the opposite: liberalizing State-Owned Enterprises (SOEs) to free up labor, assets and financial resources; and opening its doors to foreign investment to supplant the United States from 2004 as the number one destination for Foreign Direct Investment (FDI) in the world. Since 1991, according to the Council of Economic Advisers, China’s FDI as a percentage of its GDP has been consistently higher than the United States’. In other words, China’s economy is one of the most open in the world to foreign investment, a condition that will accelerate its integration into the world economy.

China’s greater integration with the world economy implies that one day its capital accumulations will have to be released into the global financial system to offset balances in its own domestic money supplies, to right its own banking system and to develop its domestic infrastructure and social projects. A strengthened yuan will embolden the country to invest abroad in countries with weaker currencies as it divests its holdings beyond T-bills into assets. American and European companies and institutions overloaded with debt will find themselves lining up to take Chinese money in order to grow and, in some instances, just to survive to the interesting times ahead.

Bill Dodson
SUZHOU, China

Other articles in the Series:
1. Inexorable China
2. Inexorable China: Land Grabs
3. Inexorable China: Increasing Water Demands
4. Inexorable China: Increased Infrastructure Availability
5. Inexorable China: Go West for Cheap Sneakers
6. Inexorable China: China at Your Services
7. Inexorable China: Re-making the Military
8. Inexorable China: Hot Wired