China on the Boil (Part 1 of 3)

THE THREE BENEFITS

U.S. Senator Sherrod Brown recently blew the whistle on the United States government’s use of Chinese steel for construction projects along our border with Mexico.

He and United Steelworkers President Leo Gerard called for enforcement of “Buy America” provisions in the stimulus legislation that President Barack Obama signed last week.

“This is about jobs and putting our economy on the right track,” said Brown said. “Buy America provisions will ensure that U.S. taxpayer dollars go toward the creation of U.S. jobs.”

Brown said the Department of Homeland Security used Chinese steel products to build portions of the 854-mile border fence along the U.S./Mexico border. The senator demanded that the government use AmericanAmerican goods for projects it funds.

Brown’s message leaves an impression that China is stealing our jobs, growing stronger economically, and is, well, just passing us by.

China just celebrated 30 years of economic reforms. The stranglehold of central planning and government ownership of just about everything has been transformed into an economy based on capitalism, private enterprise, and astute entrepreneurship.

In a short time, China and its leadership have reaped three benefits: The country is rich, more people are richer than they were, and the Chinese Communist Party gets to take credit for it.

Growth

Let’s examine some of this growth (unless otherwise cited, all figures from the Economist Intelligence Unit).China’s economy has grown from almost nowhere to the second largest in the world. In 2007 its economy was 14 times larger than it was in 1979. Over that same period, per capita GDP was more than 10 times larger.

China has enjoyed an average annual GDP growth rate of 9.8 percent from 1979 through 2007. By comparison, the U.S. average annual GDP growth rate between 1979 and 2006 was 3.04 percent, according to the World Resources Institute.

Trade with the US has gone from a total of $5 billion in 1980 to $387 billion in 2007. Our trade deficit with China in 1985 was $6 million. Today it is a whopping $266.3 billion.

While the U.S. has been bogged down in Iraq and Afghanistan, China has been busy shellingopping its goods around the globe. China’s total world trade in 2007 -- was$1,218 billion in exports and $955.8 billion in imports -- leaving it with a trade surplus of $262.2 billion.


Factory of the World

Many see China as the “factory of the world.” We have lost thousands of American jobs to Chinese factories have grabbed thousands of American jobs. Almost everything we buy, or at least parts of those things, are made in China.

From 2004 through 2007, the Chinese doubled the value of its merchandise.

Half of China’s trade is conducted by foreign firms operating in China. About 60 percent of our trade deficit with China – get this -- comes from American firms operating therein China.

Large trade surpluses, foreign direct investment in the country, and large purchases of foreign currency (U.S. T-bills for example) have made China the world’s largest holder of foreign exchange reserves at $1.9 trillion by the end of September 2008.

According to the U.S. Department of the Treasury, through December 2008 China held U.S. T-bills valued at $696.2 billion, a big jump from the $477.6 billion in held the year before. Last September China surpassed Japan as the largest holder of U.S. T-Bills.

In 2000, China initiated a “go global” strategy to invest in companies overseas. Two years ago it launched the China Investment Corporation, which is directly under the State Council, China’s governmental cabinet. This company oversees $200 billion of China’s $2 trillion holdings of American dollars.

So we are starting to see Chinese brands in the United States such as Lenovo, Haier, and soon an automobile called Chery.

All this provides a frightening prospect for the future. But China has serious problems. Its economy suffers from dislocations caused by incomplete reforms and the continued use of politics to determine economic action. The current global financial crisis doesn’t help matters.

NEXT: THE DARK SIDE (Part 2 of 3)