BEIJING -- The growth rate is robust. Exports remain strong. Record-breaking
foreign investment continues to roll in.
It may not sound like 2001, but as the rest of the planet suffers under the
weight of a less-than-soft economic landing, one nation's boom seems to be
getting started.
China, once the capital of Communism, is now the world's hottest market
economy. The most populous nation, almost immune to the slowdown gripping the
United States, Europe and most of Asia, is on pace for 7 percent growth this
year. Japan, by contrast, is struggling with quarterly negative growth rates.
Indeed, even as major overseas companies hunker down at home and forewarn
stockholders of failures to meet profit projections, they're risking millions
for a shot at enticing 1.3 billion customers with decades of pent-up desire
for consumer products taken for granted in the West.
Foreign direct investment is now on track to hit $45 billion this year, up
from $41 billion in 2000, according to Chinese government statistics.
"This is a country that has doubled its standard of living every eight years
or so over the past two decades," says Deepak Bhattasali, a China expert at
the World Bank. "That has not happened in history before in a sustainable
way. Even if you take (China's) lagging western provinces, they're lagging
behind eastern provinces, but with 5 percent growth rates, they're among the
top performers in the world."
Consider:
* Ford Motor Co announced this spring it would plunge $49 million into a
$98 million joint venture with a car maker in the central city of Chongqing
for a factory that will eventually crank out 50,000 passenger sedans
annually. Those cars are intended for domestic sales, not as exports.
* McDonalds, which spent the 1990s cautiously edging into the Chinese
market via its largest cities, plans to open more than 100 restaurants each
year for the next several years. That's a dramatic surge; the fast-food giant
had opened just 295 from 1990 to 1999.
* China overtook the United States this summer as the nation with the
most cellular phones in use at about 120 million. About 5 million new
subscribers sign up each month. By 2005, 300 million phones may be in use,
estimates that must make market-leader Motorola giddy.
* Legend Holdings, the top Chinese personal computer manufacturer,
reported its second-quarter profits rose fivefold from the year before.
Chinese people are expected to buy 9.5 million PCs in 2001, a huge leap from
the 3.9 million sold in 1999, according to the IT market research firm
International Data Corp.
China holds up well amid this round of bad economic weather abroad partly
because of remarkable timing. The government spent the 1990s pushing through
a litany of reforms now starting to take hold, from allowing the urban public
to buy property to liberalized rules on how foreign companies can operate
here. Almost every industry is being privatized as the state sells off assets
from its conglomerates and opens the gate for competition, so the number of
Chinese in business for themselves is growing astronomically.
Those changes are bearing fruit today in the rise of a middle and upper class
in urban areas capable of buying cars, computers and homes. An estimated 15
million households are now in a "high-income" group, according to estimates
from Javelin Investments, a consultant firm advising mid-sized US companies
on China.
That segment is "actually quite small in a country this large, but it is
growing very fast," says Javelin chairman Kim Woodard. About 35 percent of
businesses are now privately owned in China's major cities, a figure likely
to soar over 50 percent within five years, he predicts.
"In another 10 years, this will not be a state-owned economy," says Woodard,
public policy committee chairman for the American Chamber of Commerce in
China. "This normalization is the reason why you see this surge in foreign
investment."
Foreign manufacturers also are drawn to China for its labor costs, the
second-lowest in Asia behind Indonesia. Per capita income in China is about
$850 a year. Unlike Indonesia and other Southeast Asia nations, though,
there's no political instability in China to scare off investors.
The Chinese economy also isn't as affected by the jolts of the international
stock markets or currency value fluctuations because the government limits
the private citizen's investment options and has yet to allow the Chinese
renminbi to be fully convertible.
"China's economy is so large it has its own internal weather system," said
Desmond Wong of Ernst & Young, the Chicago-based accounting giant with 200
employees in China. "Visualize a farmer in the middle of the country. Their
day-to-day activities don't change that much. Regardless of the foreign
situation, a small village in a particular province will continue its
activities with its neighbor village."
Other forces also factor in. China's impending entry into the World Trade
Organization in November is expected to grant foreign investors even wider
access to Chinese markets and lower tariffs. The government in recent years
has laid down hundreds of miles of new highway, built or renovated airports
and oversaw the construction of one of the world's most effective cellular
phone systems.
And the triumph of Beijing in landing the 2008 Olympics also came at the
right time. Spending in July, the month the Summer Games bid was sealed, was
up 9.8. percent over July 2000, the State Statistics Bureau said. That's
lower than the figures for other months this year, but still far ahead of any
other major economy.
Still, China isn't completely immune to the global slowdown. The nation finds
itself less able to sell products abroad because consumers overseas have less
to spend. Export growth was reported at 8.4 percent in the first seven months
of 2001 year on year, significantly lower than the astounding 27.8 percent
rise in the same period of 2000 versus 1999. And top Internet portals
Sina.Com and Sohu.Com struggle just as their counterparts overseas are.
Nonetheless, the rest of the world is envious. Leaders of rival Asia-Pacific
nations recognize China's economic stability could help them emerge from
their own woes.
"China's experience in economic reforms in the last 20 years and its
resultant transformation are clear evidence of what open trade and investment
can bring," Singapore Prime Minister Goh Chok Tong told a meeting of
Asia-Pacific business leaders last month.
South Korea, China's main rival, is slumping badly, too, with July marking
the fourth straight month in which the industrial output dropped. After a
robust 8.8 percent growth in 2000, that nation recently adjusted a previously
forecast 4 percent growth rate down to 3.4 percent growth. That would mark
South Korea's second-worst showing in 20 years.
Even Taiwan, the renegade Chinese province that for years has pushed its
economic independence by barring most direct trade and transportation links
with the mainland, appears to be making a stunning political about-face to
cozy to China's enduring boom. Amid its own devastating economic slump,
leaders on the island late last month recommended a sudden liberalization of
trade that would allow more Taiwanese investment in China, even in such
sensitive areas as high technology that Taipei had tried to keep new
technological innovations from getting across the Straits.
"This is a huge shift," said Nathan Midler, a China analyst for International
Data Corp. "It shows where both economies are now."
Midler and others do worry that some investors may be racing from a dot-com
craze, which collapsed, to a China craze fraught with similar risks that the
consumer market may not actually exist to the extent many fantasize. That 1.3
billion population figure is impressive, but only a small fraction of them
are actually capable of affording computers or cars.
"China is not a 1.3 billion market because 64 percent of it are farmers and
they're not potential Internet users, at least not for a while," Midler said.
"Although this market is growing, there are still a lot of risks. Anyone
seriously thinking about China should do it right away, but it'll be a long
time before there are results here."
Other more significant systemic challenges exist, including China's inability
to effectively combat rampant counterfeiting and piracy of established
products . Infringements of intellectual property rights cost foreign
companies billions of dollars each year -- Proctor & Gamble estimates it
loses $15 billion a year in sales because of knock-offs of its products --
and make some companies limit what they do here.
"Western companies know not to put sophisticated technology into this market
that they cannot afford to lose," Woodard said. "It will be a long time
before the intellectual property rights regime here well-controlled, even
though a lot of work is being done now in that area."
Corruption also reigns in some of the more undeveloped areas, where local
officials attempt to cause problems for foreign companies in order to give
domestic firms advantages. Last week, (SEPT 3) in fact, a state-sponsored
conference promoting investment opportunities and new preferential tax
policies in the nation's vast western provinces degenerated into a gripe
session for multinational companies demanding less corruption and more public
scrutiny of official actions, the state-owned English-language China Daily
reported.
Yet the reforms enacted in the 1990s show that at least China's top leaders
are sincere about economic changes that make this a more appealing investment
option, experts say.
"The 1990s in China proved to be a massive growth period and companies that
came in and accelerated it turned out to be correct," says Woodard, citing
Motorola, Volkswagen and Proctor & Gamble as huge successes. "It's my
personal belief we're in for another strong decade in the Chinese economy."
