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Some perspective on China's boom

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Cal

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China's boom requires perspective
James P. Pinkerton

March 10, 2005

BEIJING

Not so long ago, the big news about China was overpopulation. Times change. Now the news is overproduction.

Everywhere one goes here, one sees cranes and construction. Some of the construction is for monuments related to the 2008 Olympics, but much more is related to the manufacturing that's already changing the world. The Chinese seem to have had enough of political and cultural revolutions; it's time for an industrial revolution.

Just outside of Beijing is one such revolutionary operation, the Beijing Oriental Ye Yang Textile Co. Opened three years ago, it employs 1,200 workers, producing 2 million garments annually, mostly cashmere. While the work is clearly painstaking, this is no sweatshop. The factory is light and airy; the big Stoll knitting machines, imported from Germany at $600,000 each, are spaced widely and safely apart. Even more abundant are Flying Tiger brand machines, imported, interestingly enough, from Taiwan.

What jumps out most to an amateur observer is the enormous amount of technology going into the Chinese rag trade. White-clad technicians hover over the computerized production process, peering at fabric through big Panasonic microscopes, making sure it meets international quality standards.

Of course, no American could live on the wages being paid here, but the world is full of cheap labor. What distinguishes China is quality and reliability, as well as price. The United States has actively subsidized garment production in Latin America and Africa, and yet those countries are losing world market share to the Chinese. Meanwhile, consumers around the world have noted the apparel-price deflation over the last decade, as the Chinese, working closely with big retailers such as Wal-Mart and Costco, have launched a seemingly permanent revolution of low prices.

Where Chinese businesspeople lag is in dealing directly with the consumer, through branded goods. China has yet to build a world-class brand to compete with Apple or Burberry - and that's where the real money is, in marketing, not manufacturing.

Of course, the Chinese are trying to catch up. In December, Hong Kong-based Lenovo reached an agreement to buy IBM's computer division, gaining control of a legendary brand. So China's next Long March, to the capitalist paradise of recognizable brands and fat margins, has begun.

So is the economic picture here sunny? Some see stormy weather ahead. A leading American hedge-fund manager, Peter Thiel of Clarium Capital Management in San Francisco, sees China's enormous expansion as "a bubble," created in part by interest rates so low that they have actually turned negative. That is, because of anomalies in the relationship between the Chinese yuan and the U.S. dollar, lenders are, in effect, paying borrowers to take their money. Needless to say, such money is not always well spent. And of course, such flukish financial circumstances won't last long.

Thiel doesn't dispute China's potential, based on the quantity and quality of its work force, but he is keeping his own money away from China - until after he can survey the damage caused by the bursting of the bubble, which he regards as inevitable. Thiel adds, "If you think China has a great future over the next 20 years, it won't hurt you to wait a year or two to see what happens after interest rates rise 500 basis points" - that is, five full percentage points.

Financial ups and downs are part of any capitalist system. But other concerns are unique to China. For example, this is officially a communist country. For every entrepreneur making a bid for world market share, there's also, seemingly, a state-owned enterprise making a plea for yet another bailout. Such government-run firms are inefficient and uncompetitive, but they and their employees are woven into the politics of this country.

And speaking of politics, what about freedom of the press? Of religion? These are questions that most Chinese prefer not to discuss. And for as long as they keep outproducing the world, they might not have to.

James P. Pinkerton's e-mail ad- dress is [email protected]
Copyright © 2005, Newsday, Inc
 

Brad S

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Cal,

Your interest in China is warranted, and just plain engrossing. In some ways China's economy is an amazing example of free market prosperity, and I tend to believe this free market prosperity will win out over Communism, especially if the government can maintain totaliterian social control after relenquishing economic holdings.

All study of China should keep in mind the dirty secret. Those bastards have been killing female babies (both before and after birth) for about 20 years now. So they have a disproportionate number of males. Males may make a more productive labor force, but they will certainly make a war machine.
 

Cal

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Hey Brad, it's always interesting when you add your opinion. I believe infanticide has been practiced in China for longer than 20 years, and even male babies were sometimes killed in families with over the allowable number of children. I remember a teacher years (in the 70s) ago stating that our biggest threat was from China because of the number of starving people that had nothing to lose from going to war and were desperate, and couldn't all be fed.( support for infanticide?) Looking back it's amazing the number of teachers in our school that were imported, full of sh*t, West Coast Liberals, who came out here to gain experience and "save" the Indians.
 

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