October 27, 2005
The Wisdom Fund

China Today

by Mohsin Ali, O.B.E.

Today the People's Republic of China has embraced the modern world as never before. Is that cause for celebration or anxiety? On this small green planet, the stakes are big. The U.S. and China are intimately linked -- for better or worse. Can we make room for each other?

The United States relations with communist China are better than they have ever been. So, why is Beijing engaged in a major military buildup?

Firstly, let us take a glimpse at the China of today:

SPACE FLIGHTS

China earlier this month celebrated a successful predawn landing of its second manned space flight, the touch down of the Shenzhou 6 capsule in the northern greenlands. China's first human space flight was two years ago. A moon probe and a small space station by 2010, shared with allied nations, is China's stated goal.

Shenzou (which means 'heavenly vessel') will carry astronauts to and from the station. But it will also carry the meaningful message of China's technological advances, with all their international ramifications. When a central communist government in Beijing has a 'mandate of heaven' it can more easily maintain order and security.

ECONOMY

China's trade surplus is heading for an all time high this year, for the 11th year running. Recent official Chinese reports estimated that the country's trade surplus for this year would hit $70 billion.

In 2003 China's GDP was estimated at over

$6 thousand trillion and GDP growth at nine percent, while that of the US was only four percent.

Chinese per capita GDP was $5,000.

China's 2002 budget was about $300 billion.

Figures released by the People's Bank of China indicate a surge in China's foreign exchange reserves to US $711 billion at the end of June 2005 that could hit US $900 billion by the year-end. This would take China ahead of Japan, making it the world's largest holder of foreign exchange.

American critics say that the Chinese currency is undervalued by as much as 40 percent, pushing exports higher and contributing to a bilateral trade imbalance that topped $162 billion last year.

Consumer price was at the low level of 1.2 percent.

The Yuan Renminbi (RMB) exchange rate was 8.27 to US $ 1. On July 21, 2005 the People's Bank of China announced a managed floating exchange rate based on market supply and demand with reference to a basket of currencies.

The peg to the U S Dollar was removed, making the Yuan more flexible. Chinese officials now say they cannot move any faster on currency reforms after having revalued the yuan by 2.1 percent last July. The currency has gained only 0.3 percent in value since then.

Here are some random snapshots of China's new economic and military heights:

A Shanghai resident has an annual disposable income of $2,000.

There are 1.3 million cars in Beijing, up 140 percent since 1997.

Last year retail sales were 600 billion; 25 million owned cars; 300 million cell phones.

Aircraft departures last year were about one million.

China's defense budget in 2002 was about $268 billion, compared to the over $300 billion of the U.S. Chinese active troops strength is about two and a quarter million.

On the export-import front, in 2003 Chinese total imports were about $350 billion (9 percent from the US) while exports were some $440 billion (22 percent to the US.)

China's total exports last year amounted to over 500 billion dollars.

Agricultural products exported in 2003 totaled 30 billion dollars and imported 23 billion dollars.

Two-thirds of counterfeit goods seized at US borders come from China.

In the big and important trading sector, direct foreign investment in China last year was 60 billion dollars.

POPULATION

China has more than four times the 295 million population of the U.S., nearly all of it concentrated in the eastern half of the country.

About 11 million people live in the Chinese capital.

The wealth so evident in cities like Shanghai, with a population of about 13 million, remains out of reach for most of China's population of 1.3 billion.

Shanghai's skyline shows over 300 skyscrapers compared to only one in 1985.

OIL CONSUMPTION

Please note this startling projection:

Within possibly the next 25 years the combined demand for oil of China and India, with a total population of over two billion, will exceed the current world consumption, including the US, of about 70 million barrels of oil daily.

China's oil production in 2005 is three million barrels a day but its oil consumption is twice as much.

At present China's crude oil reserves amount to 18 billion barrels.

ENVIRONMENT/HEALTH

The World Bank calls China home to 16 of the 20 most polluted cities on earth, thus making the country's blighted environment a cautionary corollary to its phenomenal economic success.

Environmental degradation robs the nation of up to 12 percent of its GDP according to the World Bank and each year 300,000 Chinese die prematurely of respiratory ailments.

Although the US still produces far more greenhouse gases, particularly in per capita terms, China is the world's second largest polluter. In the next 10 years the problem will become even more serious.

Most of the year, the air in Beijing hangs as thick as egg-drop soup. Even the billboards promoting a 'green Olympics' in 2008 are covered in grime.

Now the following statistics will give you an idea of life and taste styles in the world's most populous country:

Life expectancy is 70 years for male and 72.7 for female.

Aids rate is 0.1 percent.

Births per thousand are 13, deaths 6.9.

There are some 350 million smokers in China.

The estimated rural Chinese who have never brushed their teeth, western style, is 500 million.

China ranks number one in the world in automobile deaths.

About 20 percent of the world's total ice cream is consumed in China.

EDUCATION

China, with one fifth of the world's population, has a literacy rate of 85 percent.

By 2000 there was a 400% increase in the number of Internet users in China.

The percentage of urban Chinese with a college education is 5.6, rural 0.2.

Now, let us analyze these stubborn facts and hard statistics.

Three million US manufacturing jobs have been lost in the past five years and six million more could be lost in the coming 10 years.

The US merchandise trade deficit with China has been growing 20 percent a year and could surpass a trillion dollars by 2015.

Thus China stands to trounce Detroit in autos and Silicon Valley in info' tech, while India captures software and high finance. This would leave the US to export raw materials, colony-style.

But the US can still thrive if it invests in new innovative industries to stay ahead of the growing competition from China and India.

By focusing on innovation rather than brawn, and ensuring that labor and regulatory conditions are attractive, the US could continue to attract and retain the best and brightest.

China and India are certainly on the rise. Whether the US can match Asia's dynamism is in America's own hands.

Now let us examine related political and social developments in China.

All over China, peasants are speaking out on grassroots concerns and building a new civil society.

Almost anything goes these days but you still cannot oppose the Communist party. Will China ever really be a 'free democracy' like the US?

Meantime China is an economic powerhouse that is growing, competing for world natural resources and bursting with consumers.

In the domestic political sphere, official statistics showed that last year almost 180,000 communist party officials were disciplined for corruption.

Sixty-three percent of Chinese polled had a positive view of U S-Chinese relations.

So please let me sum up the complex Washington-Beijing relationship in this way:

China is the second biggest investor in US Treasury bonds after Japan. At the end of June 2005 China held US funds of $243 billion, up from $165 billion in 2004. Japan held $680 billion at the end of last June.

According to my friend Brian Horton, former Reuters Editor in Chief, the United States has, of course, created a huge consumer society and productive economy, but in fact Asia holds the mortgage on it.

He recalled that the prestigious Economist journal of London, in a recent article had argued as follows: If abandoning its dollar peg causes China to reduce its purchases of T-bonds, then yields will rise.

But this depends on several uncertainties. For instance, will the recent small revaluation of the Chinese yuan currency reduce inflows of speculative capital into China, and hence its need to intervene in the foreign-exchange market by buying dollars?

A large chunk of China's foreign-exchange intervention over the past year has been to offset not its current-account surplus but inflows of "hot" money.

Some economists believe that, in the short term, the small yuan revaluation will intensify speculation of further reevaluations and so attract even more capital inflows, forcing the People's Bank of China to buy more US Treasury bonds to stabilize its currency. If so, bond yields will remain low.

On the other hand, the switch from a dollar peg to a currency basket may cause China to diversify its reserves away from dollars.

It is unlikely to dump its dollars, but it could well reduce its new purchases of US Treasury bonds in favor of other currencies.

But if China really breaks the yuan's link with the dollar, then this could be the trigger for another general slide in the greenback against the euro, the yen and other currencies, prompting investors to demand higher yields.

The fate of American house prices could thus be determined by unelected bureaucrats in Beijing rather than the unelected central bankers of the West.

Some British and other western economists have argued that global inflation, interest rates, bond yields, house prices, wages, profits and commodity prices are now being increasingly driven by decisions in China.

In the view of Brian Horton, who was also a former Foreign Editor of The Times of London, this could be the most profound economic change in the world for at least half a century. And its effect could last for another couple of decades.

By some estimates, China has almost 200 million underemployed workers in rural areas, and it could take at least two decades for them to be absorbed by industry.

Incidentally, there is a tendency in Washington to blame China for the likely US trade deficit of $800 billion. But as Brian Horton pointed out Beijing is only responsible for $100 billion of this, so the imbalance of trade with the rest of the world is mainly to blame.

Meanwhile, India, about to reach one billion people, is already on the cutting edge of the computer world. Giants like Microsoft have pleaded with Congress to give special visas to thousands of Indian and other foreign computer scientists and programmers to come and work in their Silicon Valley and other American research industries.

Thus China and India create immense opportunities, but these also bring new risks. If China stumbles, or if it decides to buy fewer American T-bonds, pushing up yields, then America might really have something to complain about -- the first global downturn made in China.

Washington is faced with a very complex and sensitive problem in dealing with China's emergence as a world power.

Firstly, there is the explosive issue of Taiwan.

I have contended for decades that Beijing will never give up its fundamental and principled position that Taiwan is a part of the mainland and belongs to China.

Hardly known in America is the 1942 Cairo summit declaration. In this President Franklin Roosevelt, British Prime Minister Winston Churchill and the then Chinese nationalist leader Generalissimo Chaing Kai-shek solemnly pledged that following the unconditional surrender of Japan in World War II, Formosa (now known as Taiwan and then occupied by Japan) would return to China.

In fact, successive US Presidents have accepted a one-China policy, that there is only one China and not two -- China and Taiwan, where Chaing Kai-shek's forces, defeated in the civil war with the communists, fled to in December 1949 and were protected by the US.

The US Administration and Congress have firmly insisted that the Taiwan conflict must be solved only by peaceful means.

Today about 700 Chinese ballistic missiles are reported to be pointed at Taiwan, which the U.S. is pledged to defend against any external attack.

If the 'Republic of China' government in Taipei moves Taiwan (with a population of 23 million and per capita GDP of $24,000) towards independence, which I am confident the US will not allow, then all bets for a peaceful solution are off.

(Here is a frightening Asian aside: published American studies estimate that a nuclear exchange between India and Pakistan would initially kill two million people, cause 100 million casualties and, with radioactive fall out, contaminate south and central Asia, as well as much of the globe.)

Bowing to the inevitable, Britain returned its crown colony of Hong Kong to China in July 1997 while Portugal gave back Macao to Beijing in December 1999.

The vital long-term US relationship with Japan too has inevitably become an urgent issue.

Who will eventually be Washington's favored Asian partner -- Japan, India or China. Anyhow, I think there is NO alternative to having a good cooperative relationship with Beijing. There is too much at stake for China to be regarded as a rival.

The rise of China is ineluctable; the US has no option but to live with an emerging supereconomic power and make the best of it.

Please let me add this POST SCRIPT. It vividly shows how right the late British Labour prime minister Harold Wilson was when he said, "a week in politics is a long time." It is even longer in our high tech' global economy.

No sooner had I completed this painstaking speech that the Organization for Economic Cooperation and Development (OECD) reported that China's economy would leapfrog that of Britain, France and Italy within five years to become the third largest in the world.

And, China is set to surpass even the US as the biggest exporter by the end of the decade, said the September 16 report of the Paris based OECD of 30 rich industrial nations.

The OECD in its first major assessment of China, already the seventh largest economy, praised Beijing for its bold economic reforms which had allowed the emergence of a powerful private sector. It expected China to maintain its rapid 9.5 percent growth of the past two decades for some time.

The report, in making several business and monetary recommendations, called for better enforcement by China of company, bankruptcy, intellectual property rights and anti-pollution laws.

The US-Chinese relationship is absolutely key to a whole range of politico-economic-social and strategic issues and global prosperity. On it will depend future world peace.

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[Mohsin Ali, O.B.E., is a former diplomatic correspondent for Reuters. The preceding is from his talk at the Pinehurst Rotary Club in North Carolina.]

Adam Dunn, "Did the Chinese Discover America?," CNN.com, January 13, 2003

Pranab Bardhan, "China and India: Giants unchained? Not so fast," International Herald Tribune, November 3, 2005

Mohsin Ali, "CHINA MARCHES," alt.news-media, June 6, 2006

William Jones, "China's Three Gorges Dam Completed Ahead of Schedule," Executive Intelligence Review, June 2, 2006

Michael Sheridan, "China bets billions on the future: canals," Sunday Times, July 2, 2006

Alexa Olesin, "High Road: Tibet Train Finishes Journey," Forbes, July 3, 2006

Clifford Coonan, "Confucius say... learn Chinese and prosperity will follow," Independent, July 8, 2006

Jonathan Watts, "A glut of villas, shopping malls, steel mills and car plants is raising fears of a crash," Guardian, August 23, 2006

Will Hutton, "Power, corruption and lies," Guardian, January 8, 2007

[It would also cause a spike in US bond yields, hammering the US housing market and perhaps tipping the economy into recession. It is estimated that China holds over $900bn in a mix of US bonds.--Ambrose Evans-Pritchard, "China threatens 'nuclear option' of dollar sales," Telegraph, August 8, 2007]

"The Jewish Monpoly on Opium Still Fuels Chinese Resentment Today," bearcanada.com, xxxxx

Copyright © 2005 Mohsin Ali. All rights reserved.