December 6, 2004
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December 6, 2004
The Two Faces of China
By KEITH BRADSHER
UANGZHOU, China
FEW business executives watch the growth of the Chinese economy as closely as Michael R. P. Smith, the chief executive of the Hongkong and
Shanghai Banking Corporation.
Yet even Mr. Smith was startled when his staff recently projected that in 2034, bank assets in China would surpass those in the
United States.
“When I saw that, I said, ‘That can’t be right,’ and I went back to the economics guys,” who confirmed the projection, Mr. Smith recalled.
Much the same surprise is cropping up in industry after industry and in country after country. From steel to oil to cars to credit cards, China is poised to become the world’s biggest producer and market for many goods and services.
Along the way, China has come to terrify many foreign business executives and attract others – and sometimes both at the same time, depending on whether they see the country as a competitor, a cheap source of supply, a market, or all three.
Companies across many industries are facing enormous pressure to match prices that are available in China or lose their customers. That can mean deep price cuts of 25 to 50 percent, leading in some cases to job losses, cutbacks and even closings. At the same time, American and European companies are taking advantage of China’s vast and inexpensive labor force by moving some of their operations there – and by offering their products to a country whose role as a consumer continues to grow.
China is already the largest user of steel and cement and is poised to overtake the United States in consumption of everything from copper to soybeans. These goods are needed in a fast-growing economy with many highways, factories and office towers to build – and with 1.3 billion mouths to feed.
China has become the world’s largest market for cellphones, and it is catching up with
Germany and Japan as a market for cars, although it considerably trails the United States in its appetite for new vehicles.
Businesses reaping the biggest rewards include companies that supply China’s need for infrastructure, like the General Electric Company, which sells large turbines and aircraft engines. G.E. currently ships roughly $3.5 billion worth of goods each year to China from other countries, mainly the United States, while exporting $2 billion of merchandise from China, mainly to the United States.
But companies like G.E. are the exception. American imports from China exceed exports by more than five to one, as retailers like Wal-Mart Stores buy immense and growing quantities of goods from China. With as many people as the entire industrialized world combined, China has tens of millions of unskilled workers willing to work for less than $100 a month.
During the Democratic primaries this year, Senator John Kerry repeatedly denounced “Benedict Arnold C.E.O.’s” who moved jobs overseas. Those statements drew strong objections from the business community, including Democratic business leaders, and Mr. Kerry’s comments about trade were relatively tame during the general election campaign.
YET many corporate executives wonder how much longer a big American trade deficit and the moving of jobs overseas can persist without becoming the subject of strong protests by Americans who say that foreign workers are taking away their jobs
“China kind of got a pass in this campaign; that may not always be the case,” said Benjamin W. Heineman Jr., G.E.’s senior vice president for law and public affairs.
Even trickier could be the Chinese relationship with the European Union, another big market for exports. Powerful European labor unions could force limits on Chinese exports, much as they forced tighter restrictions on Japanese automobile exports in the 1980′s and 1990′s.
“I’m quite gloomy about
Europe – the big industrial countries like Germany, Italy and France,” said Frank-Jürgen Richter, the president of Horasis, a consulting company in Geneva. “How do you keep growth in these countries if everything is moving to China?”
Like Japan from the 1950′s through the 1980′s, China has shown that a country can sustain high growth rates for many years by combining hard work with a closed financial system that channels very high household savings into countless industrial projects and other ventures selected partly by government bureaucrats.
Japan’s stagnation since the early 1990′s suggests that such policies may have limitations. Predicting when China might hit such a wall has become something of a cottage industry. This has been particularly true in the last year, as
Beijing has imposed fairly strict controls on bank lending. The government has raised bank reserve requirements three times and increased the benchmark interest rates for bank loans and deposits once, in response to evidence that the economy may be overheating.
Climbing prices for industrial commodities like steel, bid up around the world mainly because of China’s rapid growth, have alarmed manufacturers across China. Xin Yumei, an export manager at Yangquan Metals and Minerals in China’s north central Shanxi Province, said the price of steel for the company’s scissors and pocketknives had jumped close to 20 percent in the last year.
“The price is going up, and I have to raise our prices soon,” she said.
Overhanging every assessment is the question of how much more competitive China can become globally if its domestic economy slows, freeing even more goods for export at ever cheaper prices while trimming China’s demand for imports.
Most executives say they see no sign of this yet, but they are still cautious. “We don’t see the danger of a huge collapse that would cause them to export huge tonnage,” said Nicholas Tolerico, the president of ThyssenKrupp Steel Services, the trading and distribution arm of the German giant. Still, he warned, “If there were even a slight downturn, probably the first thing that would be adjusted is the amount they import.”
Worries that the recent boom in the Chinese economy might be followed by a sharp bust have receded considerably since last spring, when ships were waiting up to a month to unload at clogged Chinese ports, and many Western economists were predicting that Beijing would have to impose draconian measures to prevent an inflationary spiral.
But some experts point out that the biggest imbalance in China’s economy – the fact that most of its growth depends on often-speculative construction spending – may not be sustainable. Morris Goldstein and Nicholas R. Lardy, two experts at the International Institute for International Economics, contend in a new paper that instead of a “hard landing” or a “soft landing,” China may be due for a “long landing” of slower economic growth that could last for years, as few additional apartment buildings and office towers are built until recently erected ones are fully occupied.
China experienced slower growth in the mid-1990′s, as it struggled with the effects of a frenzy of construction that reached its peak in 1993. But China did fully recover from that episode. Optimists point to a flourishing of entrepreneurial energy that has long been part of the culture of overseas Chinese communities and has now emerged with full force in mainland China, with productivity improvements that are still being felt.
One such entrepreneur is Chen Chenmei, who started making shoelaces in her home a decade ago in Wenzhou using a machine that cost $50, and delivered them on her bicycle to shoe factories. Now, she and her family own a small shoelace factory, rent a car and employ a driver to make deliveries to factories and have their own stall at a wholesale shoe market here.
Laces in many hues and lengths, from brown bootlaces to pink laces for tennis shoes, filled the stall up to the rafters on a recent morning. Yet Ms. Chen was wearing cheap tennis shoes that had scruffy white laces with the tips broken off.
Savings are important to keep the factory growing, and sometimes for loans to family members who want to start their own businesses, Ms. Chen said, adding that “money flows all around among relatives.”
The biggest question hanging over China is its political stability. Historians point out that the prosperity in China now has coincided with nearly three decades of the greatest social and political stability that China has seen in more than a century.
How long that will endure is anyone’s guess. A big problem for China is how to address the wide gap in incomes between urban and rural residents. In countries across Asia this year, voters have shown considerable concern not just over expanding economic output but over how the gains are distributed.
“In all these countries, the verdict the electorates have given is: strengthen the inclusiveness of growth,” said Ifzal Ali, the chief economist of the Asian Development Bank.
While China, a one-party state, does not allow free elections, public opinion still counts for something. Hu Jintao, the leader of the Communist Party for the last two years and China’s president since early last year, has taken some steps to improve the lives of China’s poor.
Letting food prices rise steeply has helped considerably, as farmers have taken in more money for their crops. The Chinese government has also tried to improve worker safety. Many small protests have bubbled up in numerous Chinese cities, often over unpaid wages, but there has been no sign of their spreading to become a national problem.
Corporate executives, politicians and economists generally agree that if China does suffer a sharp economic reversal, the results will be severe – both within China and far beyond its borders. A downturn could lead to severe unemployment, social and political unrest and large-scale emigration. The effects could also include plunges in financial and commodity markets if China’s demand for foreign goods dried up and it unloaded unneeded items on world markets.
Western Europe helped maintain
Russia’s stability in the mid-1990′s with big infusions of financial assistance, but China’s larger economy and much greater population make it impossible for the outside world to offer nearly as much aid, said P. Christian Hauswedell, Germany’s top diplomat for Asian and Pacific affairs.
“The thought of a failure of this modernization just makes us all shiver,” he said. “We would not be able to support China if it failed.”
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December 6, 2004
The Successor to Greenspan Has a Very Tough Act to Follow
By EDMUND L. ANDREWS
ASHINGTON
WHEN Alan Greenspan finally retires from the Federal Reserve, will he leave behind any of his DNA?
Now in his 18th remarkable year as Fed chairman, the owlish and idiosyncratic Mr. Greenspan is required by law to step down in January 2006.
Nominating a successor could be President Bush’s biggest economic decision next year, given Mr. Greenspan’s mythic reputation as the guardian of price stability and economic growth. A big uncertainty is how any successor will extend Mr. Greenspan’s approach to monetary policy, which has been as much an art as a science.
Though he is famous for poring over reams of often obscure data, Mr. Greenspan, 78, has been outspoken in his skepticism over econometric models. “Rules by their nature are simple,” he said at a Fed symposium in August 2003. “Our problem is not the complexity of our models but the far greater complexity of a world economy whose underlying linkages appear to be in a continual state of flux.”
A devout believer in anomalies – trends that conflict with what standard models predict – he has defied conventional wisdom about the natural level of unemployment, the growth of productivity and the likelihood of inflation. And most of the time, he has been right.
“He is very idiosyncratic,” said Allen H. Meltzer, professor of economics at Carnegie Mellon University and longtime historian of the Federal Reserve. “His greatest weakness is at this point. He had a very successful way of running the Fed, but he doesn’t leave a method that somebody else can pick up and carry on.”
Mr. Greenspan disagrees. Rather than rely on one economic model or another, he told a conference last January, his approach involves risk management – allowing for a range of economic developments and trying to assess their relative probabilities.
His authority has become so outsized that any successor may well encounter more market turbulence and more dissent from other members of the policy-setting Federal Open Market Committee. “It’s going to have to be less of a one-man show,” said John H. Makin, a senior fellow at the American Enterprise Institute.
Speculation on who will succeed Mr. Greenspan has focused on Martin S. Feldstein, a prolific author and former adviser to President Reagan who is now a professor at Harvard University and president of the National Bureau of Economic Research in Cambridge, Mass.
But a growing number of Republicans say that the top candidate may be R. Glenn Hubbard, 46, who was a chief architect of President Bush’s tax cutting packages of 2001 and 2003 and is the dean of Columbia University’s School of Business.
Mr. Feldstein, 65, has a formidable reputation as an economist. But he has also displayed a fierce streak of independence that may not sit well with Mr. Bush, who places top value on unflinching loyalty.
As chairman of President Reagan’s Council of Economic Advisers from 1982 to 1984, Mr. Feldstein angered many White House officials by criticizing the soaring budget deficits that followed the Reagan tax cuts. Mr. Feldstein has refrained from criticizing the deficits under President Bush, and has been an outspoken defender of his tax cuts.
Mr. Hubbard was chairman of Mr. Bush’s Council of Economic Advisers in 2001 and 2002. An advocate of bold tax cuts and a longtime student of tax overhauls, Mr. Hubbard’s views mesh with those of Mr. Bush, and he was a relentless advocate for Mr. Bush’s proposal in 2003 to eliminate taxes on stock dividends. Congress ultimately cut dividend taxes but did not end them. Mr. Bush is expected to seek their elimination next year.
The Fed chairman plays a major role in the public debate on tax cuts and Social Security. Mr. Feldstein and Mr. Hubbard support the president’s two big domestic priorities: to overhaul the tax code and to let people divert some Social Security payroll taxes to private accounts.
But the next Fed chairman could easily clash with Mr. Bush, as Mr. Greenspan did with Mr. Bush’s father. Fed officials are worried about the nation’s huge foreign debt and soaring deficits, and a possible sharp drop in the dollar’s value. The central bank might feel compelled to raise interest rates faster than expected to attract foreign capital and cool inflationary pressures.
But because inflation expectations have declined to almost negligible levels under Mr. Greenspan, his successor will inherit the central bank’s credibility, and hence its maneuvering room with investors.
Mr. Greenspan’s legacy will include some permanent changes in how the Fed operates. For one, he has made it far more open than it once was. Under Paul A. Volcker, Mr. Greenspan’s predecessor, the Fed never told the public whether it had raised the overnight lending rate, leaving it for traders to figure out themselves.
Today, officials not only announce their decisions on interest rates; they also hint strongly about their plans for the near future.
“There has been a tremendous increase in transparency,” said Laurence H. Meyer, a former Fed governor and author of “A Term at the Fed.” “You can argue that that has contributed to good monetary policy.”
Edward M. Gramlich, a Fed governor since 1997, said: “Compared to what the situation was before Greenspan started here, there is much more of a structure today.”
Mr. Greenspan has also brought changes to the way the Fed crunches its numbers. He has introduced dozens of analytical techniques for teasing out ever more subtle insights from the mass of economic data available.
The essence of Mr. Greenspan’s approach has been to look for exceptions rather than rules. His intuition became the accepted wisdom, but there is no accepted wisdom on how to summon that intuition in the future.
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December 6, 2004
OP-ED COLUMNIST
Putin’s ‘Chicken Kiev’
he elder President Bush’s most memorable foreign-policy blunder took place in Kiev in 1991, then under Communist rule. With the Soviet Union coming apart, the U.S. president – badly advised by the stability-obsessed “realist” Brent Scowcroft – made a speech urging Ukrainians yearning for independence to beware of “suicidal nationalism.” His speech, which he now insists meant only “not so fast,” was widely taken as advice to remain loyal to Moscow’s empire.
I dubbed this the “Chicken Kiev” speech. That so infuriated Bush, who mistakenly saw the phrase as imputing cowardice rather than charging colossal misjudgment, that he has not spoken to me since.
Contrariwise, the reaction of President Vladimir Putin of
Russia to the latest manifestation of the desire of the majority of the Ukrainian people for independence from Moscow is that of a dictator gripped by fear.
Putin’s “Chicken Kiev” moment came when his plan to put in a Ukrainian puppet backfired. He put the Putin system of a phony election, so successful in Russia, in place: central control of major media, lavish government spending on its candidate, harassment of the opposition and, most of all, overt embrace by the powers that be in Moscow.
But Putin’s Ukrainian puppets were sucked into the undercurrent called “people power.” This unexpected democratic force manifests itself when dissenters are willing to defy authority in the streets and on the Internet; when troops and police are unwilling to fire on demonstrating compatriots; and when worldwide disapproval makes the costs of a crackdown prohibitive.
People power failed in Tiananmen Square because workers were not involved and
China’s rulers called in troops from outlying areas. But in this generation, peaceful uprisings have succeeded in Poland, Czechoslovakia, South Korea and Indonesia – and Russia.
Putin remembers all too well how people power worked in Moscow for Boris Yeltsin, overturning 70-year Communist rule; that is why he panicked this month. The K.G.B. alumnus hailed the fraudulent victory of his puppet prematurely; as protests rose, he summoned to Moscow the Ukrainian president, ostentatiously to give him marching orders; and with all else failing, he stooped to standard anti-Americanism.
The U.S. sought the “dictatorship of international affairs,” Putin charged, deriding Bush’s “beautiful pseudo-democratic phraseology.” His spin-niks called attention to the opposition candidate’s American wife, and hinted at danger ahead in case the stolen election did not stay stolen: Putin’s fallback position is to encourage the division of Ukraine, absorbing the pro-Russian east and rejecting the pro-European west – a breakup plan he also has in mind for the “near abroad” people of independent
Georgia.
This is the reaction of a man who fears the contagion of people power. Up to now, conventional wisdom has been that – with some brave exceptions – most Russians long for an authority figure like Putin, embrace his takeover of parliament and provincial government, believe all they see and hear from obedient state-controlled media and befog Russia’s declining population with vodka.
It could be, however, that Putin sees in his Ukrainian setback the handwriting on the
Berlin Wall. He knows how many Ukrainians welcomed Hitler’s army as a lesser evil than Stalin. He senses the danger to his rule of a Ukraine that turns westward to join the European Union. He fears that the outbreak of people power in his huge neighbor could abort his plan to change the Russian constitution to make himself president for life.
As an unreconstructed idealist (and, as the global mushrooming of democracy proves, idealists are the real realists), I believe people power will be unstoppable. But new democracies will not be our clones, and newly liberated peoples will irritate the superpower.
The pockmarked fresh face in Ukraine has already promised to withdraw that nation’s 1,600 troops from Iraq. The repressed youth of Iran, when they overthrow the repressive theocracy, will still press for a nuclear bomb. The free federalists of Iraq will cut shadowy deals with post-Chirac
France and post-Putin Russia. The young lion of a democratic Palestine will lie down most grudgingly with the lamb of Israel.
Thorns in tomorrow’s rose garden? You bet. But it is America’s calling, as well as in our self-interest, to foster the flowering of freedom.
December 6, 2004
EDITORIAL
Talk About Scrooge
n November, wages grew a whopping 1 cent an hour. But that was clawed back by a six-minute decline in the average workweek, producing a $1.25 drop in weekly earnings. Coming on the heels of a sluggish start to the holiday shopping season, the Labor Department’s latest employment report, released Friday, doesn’t presage a particularly merry Christmas or happy New Year for millions of working Americans.
In what is becoming a dismally predictable occurrence, the economy produced far fewer jobs than expected last month – 112,000 new slots versus an expectation of 200,000 – for the worst new-job total since last July, which was widely characterized as an economic “soft patch.” Moreover, job growth in October and September was not as good as once believed. Those monthly numbers, disappointing on their own, reinforce what is now an unmistakable pattern in which the economy grows at a decent pace and corporate profits surge, while wages lag inflation and job creation barely keeps pace with the growth in the labor market.
We know how we got here. Tax cuts were misdirected at investment rather than consumption, resulting in an economic recovery weaker than it might have been. The budget deficit portends higher interest rates and a weaker dollar, both of which impair business confidence and, in turn, inhibit hiring. And then there’s the lack of affirmative policy on jobs, such as a targeted credit that would make hiring more attractive or, at the least, an increase in the minimum wage to help the working poor and put money in the economy, fueling consumption that is critical for job growth.
Persistent subpar job creation might cause some leaders to question their policies. Yet, more high-end tax cuts and higher deficits are the template for President Bush’s second term. And flush with a victory, the president is unlikely to undertake any policy reversals. It will be up to Congress to break out of its lockstep with Mr. Bush and take steps to address the real problems of constituents, rather than the intransigent aspirations of the administration.
