The Five Things That Could Derail China’s Growth

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Commodities trading was in turmoil yesterday, with copper prices in particular dropping sharply. The sell-off showed there has been intense speculation, which had prompted the chairman of the London Metal Exchange to warn investors last week about the dangers of a “bubble” developing in certain markets. While short-term prices of gold, oil, and copper may be at the mercy of speculators, longer term fluctuations will likely be determined by economic growth in China, which has been the fastest growing consumer of commodities in recent years.

Will China’s extraordinary ascent go on? That was the topic addressed last Friday by Mary Wadsworth Darby, a senior research scholar at the Jerome A. Chazen Institute of International Business at Columbia University, who spoke to a Women in Business forum sponsored by the London-based investment bank Rothschild.

Overall, Ms. Darby is positive about the country’s growth prospects. Among her concerns, however, are some worrisome demographic trends, including an expected peaking of the labor force in 2008. A bigger problem for China could be a peculiar preponderance of males – the result of the decades-long “single child” policy of the Communist government.

The fertility rate in China has dropped to 1.7 today from 5.9 in 1970, with the expected topping out of the labor pool the inevitable result. At the same time, while the number of males born in China has traditionally numbered 107 versus 100 females, by 2000 the figure had increased to 117; some provinces are estimated to have recorded as many as 145 male babies per 100 females. By comparison, the number is 105 in America.

What to do with all those men? Where will they go to find brides? Social planners around the globe will no doubt engage in marathon debates on the subject. While Ms. Darby considers this a serious issue, and she’s no doubt right, we imagine that opportunistic retailers will see plentiful opportunities to cash in on a male-dominated society that is getting richer by the minute. Hooters comes to mind as an obvious export; possibly the NFL as well.

Ms. Darby reviewed five factors that could put the brakes on China’s extraordinary progress. Other than demographics, Ms. Darby also discussed the possibility that high oil prices, mounting environmental issues, possible financial sector instability, or pressure to revalue the yuan could dampen increases in output.

Ms. Darby first went to China in 1973, among the first American students allowed into the country. At the time the country was dressed in the ubiquitous Mao jackets, rode bicycles, and had little financial infrastructure. Business meetings commenced by reading selected passages from Mao’s “Little Red Book.”

She had grown up in Boston in a house full of Chinese antiques, and began studying Mandarin at age 12. She received her BA from Princeton, where she furthered her studies of Chinese languages, and then earned an MBA and an MIA from Columbia University. She has represented various firms in China for most of her career, starting with Allied Chemical, which she assisted in their first $1 million chemicals sale. Most recently she was head of the Asia desk at Morgan Stanley.

Overall, despite the obstacles enumerated above, Ms. Darby thinks China will build on its extraordinary achievements of the past two decades. China has expanded at a real annual rate of 9.7% since 1980; if growth stays at that level, or even is slightly lower, China’s GDP will rival that of America’s within a decade. Moreover, the country is enjoying all the ancillary benefits of such prosperity, such as increased life expectancy and higher literacy rates. It has not hurt that foreign investment has come crashing in, amounting to $60 billion in 2004, or that the government has restructured many sectors of the economy.

These factors alone, however, do not explain the country’s success. Ms. Darby considers China’s insatiable importation of knowledge an essential ingredient. Between 1998 and 2003, the country’s enrollment in university Bachelor of Arts programs quadrupled. In 1998, the number of Ph.Ds being awarded in America was about five times that in China; today the number is roughly the same. In Ms. Darby’s view, the country is absorbing information as fast as humanly possible.

That’s not to say the road forward is devoid of bumps. The demographic trends already cited will likely mean ongoing migration of the rural population to the cities, which some have described as the most massive in any country’s history. The disparity between urban and rural incomes could cause further unrest. The state has seized the land of 30 million farmers in recent years to make room for urban development; last year alone these policies and others occasioned 87,000 protests against the government. These dislocations, combined with the aging of the country, are already straining China’s pension and social services systems.

Another stress point is the country’s reliance on oil imports. Though China has huge coal reserves, environmental concerns plus the need to feed a rising population of cars means that oil will remain a key strategic import. The IMF predicts that China’s car ownership will increase to 260 cars per thousand inhabitants, from 20 today, within the next 25 years. Though high prices will be costly, the country can afford it, Ms. Darby says.

The costs of disastrous environmental conditions are considerably higher, in her view. A shortage of clean drinking water and air quality that ranks among the worst in the world will cause mounting health costs. Ms. Darby points out that today the environmental laws are rudimentary. Moreover, there is insufficient government funding to support any serious clean-up effort or enforcement of existing laws.

On the other hand, the government has worked aggressively to resolve the non-performing loans which at one time appeared to threaten the banking system. Of the four major banks, only the Agricultural Bank still needs serious restructuring.

While Ms. Darby believes China’s government will be able to navigate through these somewhat turbulent seas, she is not so sanguine about the resolution of the massive trade imbalance with America. The Chinese do not appear eager to significantly revalue their currency, and America appears incapable of tightening the national belt (literally or figuratively). Some dollar divestment appears inevitable, and possibly quite messy.

While visiting the country recently, she attempted to buy something from a vendor she has long frequented, paying in dollars, as has been her custom. The salesperson refused, arguing that everyone knew it was just a matter of time before the dollar’s value fell against the yuan. Now there is a real market insight.

peek10021@aol.com


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