ChinaWatch: Forward Frontiers

Welcome to ChinaWatch, WMB’s digest of news from the country with the world’s second largest economy and our chief rival to global dominance. Our aim is to keep you informed.


True Car Culture

After more than an eightfold increase in auto sales over the past decade, China has developed a true car culture.

Amid the buzz for last month's Shanghai auto show, ads for a single car papered entire subway stations in Shanghai, a city of 19 million people. Outside a luxury hotel, an employee is overcome as she takes photos of a red Ferrari. “Oh, it's beautiful!” she says.

Auto plants throughout China, with potted bamboo or fish tanks in break areas, are viewed as essential to the development of smaller cities of a million or more people.

After a decade of double-digit annual sales growth, excepting one year, light-vehicle sales in China topped 17 million last year. While that represented a 33 percent year-over-year increase, it was smaller than the 48 percent surge in 2009.

Still, China's growth is slowing.

Government actions held growth in the first quarter to about 8 percent, compared with a 20 percent increase in the recovering U.S. market, where sales haven't hit 17 million since 2001. Last year, U.S. sales were a below-average 11.6 million.

For Ford Motor Co. and Chrysler Group, which are still getting established in China, the slowing market means they largely missed out on a stretch of record growth, and, in some cases, profits.

Chrysler is leaning on a small business importing Jeeps, while its part owner Fiat is introducing its 500 minicar in China this year and won't have a locally built car to sell until next year. Ford's 2010 light-vehicle share was 3.4 percent.

“We could have gone faster and should have gone faster in China,” says Joe Hinrichs, CEO of Ford China.

For General Motors Co., whose sales in China last year made up 28 percent of its worldwide volume, the slowdown might mean a chance to catch its breath. After having doubled its sales in two years, GM is planning to take five years to accomplish the feat again.

Missions To Mars

U.S. President Barack Obama views China as a potential partner for an eventual human mission to Mars that would be difficult for any single nation to undertake, according to a senior White House official.

Near-term engagement with China in civil space will help lay the groundwork for any such future endeavor, says White House science adviser John Holdren.

He prefaced his remarks, before the House Appropriations subcommittee on commerce, justice and science, with the assertion that human exploration of Mars is a long-term proposition and that any discussion of cooperating with Beijing on such an effort is speculative.

“(What) the president has deemed worth discussing with the Chinese and others is that when the time comes for humans to visit Mars, it's going to be an extremely expensive proposition and the question is whether it will really make sense — at the time that we're ready to do that — to do it as one nation rather than to do it in concert,” Holdren says.

Holdren, maintaining NASA could also benefit from cooperating with China on detection and tracking of orbital debris, stresses that any U.S. collaboration with Beijing in manned spaceflight would depend on future Sino-U.S. relations.

“But many of us, including the president, including myself, including (NASA Administrator Charles) Bolden, believe that it's not too soon to have preliminary conversations about what involving China in that sort of cooperation might entail,” Holdren says.

“If China is going to be, by 2030, the biggest economy in the world … it could certainly be to our benefit to share the costs of such an expensive venture with them and with others.”

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ChinaWatch: Land Of Opportunity

Welcome to ChinaWatch, WMB’s digest of news from the country with the world’s second largest economy and our chief rival to global dominance.


Fat Growth Forecast

China is on course for another five years of robust growth, but inflation threatens social stability and must be tamed, Premier Wen Jiabao says.

Wen, in China's version of a “State of the Union ’’ address to the annual parliamentary session, says the top priority this year is to curb price rises hurting ordinary people in the world's second-largest economy, Reuters reports.

Laying out a plan for the next five years, Wen says the drivers of China's meteoric economic rise remain firm.

“There is huge potential demand in the market, the supply of funds is ample, the overall scientific and educational level of the people is rising,” Wen says in his report to the National People's Congress .

He vows to boost spending on education, health care and public housing, initiatives intended to narrow the chasm between the rich and poor in China that has stirred resentment.

A huge police presence in the capital and a rare public warning against protests underscored the government's sensitivity to even the faintest whiff that the unrest roiling the Middle East could spread to China.

Building a fairer society has been a core goal of Wen's premiership, but the income gap has widened during his eight years in power and he is trying to lay the groundwork for improvement before a leadership reshuffle in late 2012.

“As Deng Xiaoping said, the first step is to make a part of the people rich and the next step is to make everyone rich,” says Shen Jianguang, economist with Mizuho Securities, referring to the Chinese leader who launched market reforms in the late 1970s.

They’re Too Busy

With single young men at the heart of Arab world revolt, China might seem a country ripe for uprising. But while it’s got millions of single young men, they don’t appear interested in amassing a movement for change.

China now has at least 20 million young men with no chance of ever finding a female partner, according to population experts. In short, there are too many men.

Demographers predict the gender gap will grow to 35 million by 2020.

The reason: China’s one-child policy and a culturally ingrained preference for male children, along with a rise in accessible ultrasound technology and sex-selective abortion, led to a staggering surplus of young men born in the 1980s and 1990s.

The overall trend is beginning to change for new families, but there remains a bubble of young men that can’t be reversed or repaired. So why aren’t they rising up and causing trouble for the authoritarian regime of China? In short, they’re too busy.

Andrea den Boer, co-author of the 2005 book “Bare Branches,” an in-depth investigation of surplus males and related potential security issues in Asia, says China’s situation is different than that of Egypt, which suffers from what is know as a “youth bulge.”

China has the millions of single young men, but what it’s missing is massive unemployment and economic decline. With the world’s fastest-growing large economy, opportunity is abundant.

Development has reached every corner of the country and work opportunities have begun taking tens of thousands of young Chinese men to Africa and other parts of the world.

ChinaWatch

Inflation May Follow Recovery

Many people believe higher inflation is just around the corner, especially with the U.S. government flooding the market with new money. It’s worth keeping a keen eye on several factors that could ignite inflation.

More good news is finding space on the financial pages as the global economy continues a slow recovery.

World trade flows have been rebounding, and business inventories continue to decline. Even unemployment, a lagging indicator of economic upturn, appears to have peaked and is showing signs of improvement.


But the 12 regional banks of the U.S. Federal Reserve have supported the recovery by printing more and more money. Many economists believe this may lead to another round of inflation similar to what happened in the 1970s.

Inflation is a sustained increase in the general level of prices for goods and services. With the huge debt our government has created (in excess of $10 trillion!), many investors believe the value of the dollar is declining.

Forces Feed Beast

Nobel Prize Economist Milton Friedman (1912-2006) defined inflation as “too much money chasing too few goods.” For the last decade or so, however, inflation has been unusually low. And, until very recently, there has been too little money chasing too many goods.

Historically, inflation doesn’t suddenly appear as a beast out of thin air. There are three different forces that drive inflation.

The first requirement is a surge in demand in an overheating economy.

In an overheating economy, the government, corporations and households try to buy more goods and services than can be produced, trending prices higher. That’s not a problem right now since there’s plenty of slack in the global economy. The world’s factories are running well below capacity.

Inflation also requires a significant increase in consumer income. High employment has kept wage increases well below their long-term average. A big increase in wages will not likely occur until there is full employment.

The third requirement is an increase in the money supply and credit growth. The Federal Reserve’s historic money supply increase has certainly stoked inflationary fears.

But WMB believes it will take more than the Fed pumping money into the system to ignite inflation.

Banks must also open the floodgates of credit. To date, we still are not seeing an easing of bank credit. Banks haven’t increased lending levels to their pre-crash highs and many are still recovering from their last credit binge.

Looking Ahead Now

All three factors – demand, wage growth, and money and credit growth – must rise simultaneously for inflation to take hold, according to most financial experts.

That’s only likely to occur only after we’ve had a full recovery and a complete healing of the financial system.

WMB believes that although there has been recent growth in our economy, a full recovery is still far down the road. And, a full recovery of the banking system is likely even further away.

But the borrowing continues, and policy makers may be tempted to take the easy way out by printing new money, which could fuel inflation worries.

WMB believes that over the near term, a small increase in inflation wouldn’t be entirely unwelcome — it would be a sign the economy has finally recovered. Higher inflation may or may not hit us hard at some point in the future.

In the meantime, we should continue to keep all eyes focused on the 800-pound gorilla known as inflation. Feed it too much and suffer the consequences across the board, from industry to consumers.

This post is by TechMan, WMB co-author who blogs about trends, issues and ideas affecting industry, business, technology and consumers. If you like this post, please share it.

China Tops Japan As No. 2 Economy

China has dethroned Japan as the world’s No. 2 economy, amid media hype about the former’s competitiveness. Chalk it up to slowing global growth and China’s strong desire to embrace technology.

The United States, the planet’s No. 1 economy, experienced a disappointing 0.4 percent GDP (Gross Domestic Product) during the first half of this year. This is far below the annualized 4.4 percent growth reported in the first quarter and it reinforces evidence that global recovery is slowing.

The results underscore China’s emergence as an emerging economic powerhouse. Worldwide factors are changing everything from the balance of military and financial power to how cars and microchips are designed. China already is the world’s largest exporter, auto purchaser and steel producer. This means that China’s geopolitical influence is expanding and getting more powerful.

World markets responded negatively, given the situation, and Wall Street is no exception. Since China carries much of our debt, this is really not a surprise. The only market responding favorably to the new shift is Germany.

China was a major force behind the world’s emergence from the deep recession of the 1920s. The country’s economic might provided much-needed demand for goods and services from the United States, Japan, and Europe. Tokyo’s latest numbers, however, suggest Chinese demand may not be enough to sustain other world leaders, especially America.

Martin Schulz, senior economist at Fujitsu Research Institute in Tokyo, says, “Japan is the canary in the gold mine because it depends very much on demand in Asia and China, and demand is cooling quite a bit.” He adds, “This is a warning sign for all major economies that just focusing on overseas demand won’t be sufficient.”

Many financial experts note China surpassed Japan in quarterly GDP figures in the past, but this time it’s unlikely to change and to relinquish the lead. To put this into perspective, China’s economy will almost certainly exceed Japan’s at the end of this year because of the huge difference or comparison of each country’s growth rates.

China is growing about 10 percent a year, while Japan’s economy is forecast to grow between 2 percent and 3 percent this year. Last year, the gap between the two economies narrowed considerably.

Japan’s GDP, not adjusted for price and seasonal variations, was valued at $1.286 trillion in the April-to-June quarter compared to $1.335 trillion for China. (These figures are converted to dollars based on the average exchange rate for the quarter.) By comparison, for our GDP for the same period was $3.659 trillion.

Faced with slow growth, Japan’s government is considering fresh stimulus programs to strengthen its economy. Most likely the Japanese will try to boost consumer spending on eco-friendly products, according to the Kyodo News Agency, citing unnamed government sources.

Japan has held the No. 2 ranking after America since 1968, when it overtook the former West Germany. From the aftermath of World War II, Japan rose to become a global manufacturing giant and financial powerhouse. But Japan’s so-called “economic miracle” turned into a massive real estate bubble in the 1980s before imploding in 1991.

Japan experienced a decade of stagnant growth and economic malaise from which the country has yet to emerge. Prime Minister Naoto Kan (right), elected in June, faces a long list of difficult problems, including a rapidly aging and shrinking population, persistently weak consumer demand, deflation, and slowing growth in vital export markets.

On the other hand, China’s growth continues to be spectacular. China has a voracious appetite fueling demand for resources, machinery and products from the rest of the developing world, including rich economies such as Japan and Australia. China is Japan’s top trading partner.

China’s emergence has produced obvious and glaring contradictions within the country. There is a wealth gap between the elite, profiting from over three decades of reform and the 1997 inclusion of Hong Kong (pictured at the top of this post), and the extreme poor. China has dozens of billionaires while the rest of its 1.3 billion people are among the world’s poorest.

By comparison, Japan’s people are still among the richest, with a per-capita income of $37,800 last year. China’s per-capita income is $3,600; America’s per-capita income is $42,240. However, the U.S. gap between the very rich and poor also is widening with our lingering recession.

What Are The Implications?

“We should be concerned about per-capita GDP,” says Kyohei Morita, chief economist at Barclays Capital in Tokyo. China overtaking Japan is “just symbolic … nothing more than that.”

But the symbolism may be exactly the “wake-up call” Japanese leaders need,” says Schulz of the Fujitsu Research Institute. “Japan is always strangely inward looking, and nobody is doing anything about it.”

Interestingly, Japan’s people appear nonchalant to the power shift. A national poll conducted earlier this year by the Asahi, one Japan’s largest newspapers, showed a roughly equal split between those that believed Japan’s fall to No. 3 (behind America and China) posed a major problem and those who did not. More than half of the 2,347 respondents said Japan does not need to be a global superpower.

The country’s annualized growth in the second quarter already was below expectations of 2.3 percent in a Kyodo news agency survey of analysts. On a quarterly basis, Japan’s GDP grew only 0.1 percent from January to March, according to the country’s Cabinet Office.

We at WMB think the implications of China’s growing dominance are significant as it relates to a percentage of debt.

China’s long-term government debt is only 16.9 percent of GDP. On the other hand, the United States' same relative debt is 52.9 percent of GDP. And, amazingly Japan’s is a whopping 189.9 percent, second only to Zimbabwe.

China is moving to an increasingly strong position in the world. If China decides to sell off its Treasury bills, for instance, it would result in an even larger debt for our country.


WMB believes the United States needs to invest in new technology and cultivate our brain trust in achieving new productivity to create wealth. It is becoming clearer we cannot spend our way out of this recession, and Japan also is unlikely to spend its way out of its slowdown.

We see technology advancement and its subsequent manufacturing as the fastest way to create wealth for any country in this volatile world market. The rules of the economic game have changed, so our strategies need to reflect new thinking.

This post is by TechMan, WMB co-author who blogs about trends, issues and ideas affecting industry, business, technology and consumers. If you like this post, please share it with colleagues, friends and family.

Doing Business In This Economy

I recently addressed this topic before the Women Business Owners Association after doing online research, checking with contractors and discussing the issue with members of a local entrepreneur group. Here are the business promotion tips:

· Look for niche-market print: Target weekly, biweekly and monthly “free-delivered” papers and subscription publications, such as regional business journals.

· Build an affordable web site: Keep it simple, easy to understand and navigate, and create a flexible schedule to add or remove content as needed for freshness.

· Track new business by location: Gather basic info such as hometowns, e-mail addresses, phone numbers and other demographics when purchases are made.

· Use hooks to get publicity: Sponsor or host something newsworthy, such as a charitable event, and promote via web, local cable TV, radio, newspapers.

· Go where customers are: Check out Facebook and other social networking sites when time permits because the contacts you make may be your future customers.

· Get and cultivate referrals: Encourage e-mails, letters and business card exchanges – anything that brings “word-of-mouth buzz” to what you do.

Some of these may be obvious, especially the more traditional print options. But other alternatives, especially social networking and web sites, offer fresh ways of branding and expanding businesses, products or services.

The nice parts are the low cost and wide reach offered by combining several methods. The tricky part is measuring the effectiveness of each one and shifting more effort into those areas that work the best.

I practice what I preach at writenowworks.com. Any other thoughts on business promotion in this economy? Please share them.