As Competitor or as Buyer, China's Here to Stay
BEIJING (XFN) -- The days when China and its economy could be dismissed with the word "potential" have passed. This country is now well on its way to becoming the factory of the world, while its booming domestic economy is being targeted by companies from all over the world.
CBS MarketWatch - October 07, 2003

By Graham Earnshaw, Xinhua Financial Network

From a U.S. perspective, the big issue in recent weeks has been the question of whether China's currency, the yuan, is being kept artificially low to strengthen the export capacity of Chinese companies.

This country's fast-growing foreign exchange reserves -- now at $365 billion -- and the mounting trade deficit with the U.S. clearly reflect an imbalance of some sort.

But the whole debate masks a fundamental shift of global manufacturing into the Chinese mainland, and a revaluation of the yuan will do nothing more than slow that process.

Also worth considering is the fact that China's booming export trade to the U.S., for instance, comes not only at the expense of factory workers in Michigan, but possibly even more at the expense of other export-strong countries.

Japan's trade surplus with the U.S. is falling, and all the former Asian Tigers, from Taiwan to Hong Kong to South Korea and Singapore, are watching the transfer of production capacity into China with mounting unease.

In other words, China's growing trade surplus with the United States is to some extent at least a soaking up of trade surpluses from other countries.

China is also doing well at attracting capital from abroad -- this year's foreign direct investment is expected to top last year's impressive total of $52.5 billion -- because it provides competitively priced stable manufacturing with cheap, well-educated labor. Plus, a once-in-a-lifetime opportunity to grab a slice of the last great consumer frontier on earth.

China has gone in just over a decade from being almost anti-consumerism to being arguably the most rabidly capitalist and fiercely competitive retail environment in the world.

The dream of 1.3 billion consumers is finally coming true. Foreign brands are now making big bucks in the China market. McDonalds (MCD), Coca-Cola (KO), Anheuser-Busch (BUD), Boeing (BA), Motorola (MOT), AIG (AIG), Intel (INTC) and Microsoft (MSFT) -- all the big names are here and those listed are all probably doing more than OK.

Some, and maybe many, foreign companies lose out in China, of course, and in the early stages of entry to a unique market environment, it's a struggle as the outsiders learn how to operate effectively.

But for any company that's serious about its business growth over the coming decades, China can no longer be ignored. Either as a competitor or as a buyer, China is here to stay.

The Chinese consumers of the coastal cities are racing to create lifestyles for themselves that match what they see on their pirated DVD movies from the United States. They want it all and they want it now, providing an extraordinary opportunity for brands from Dunhill to Drambuie at a time when sales in Japan, Europe and the U.S. are hardly sizzling.

The Chinese economy is growing at somewhere around 8 percent year on year, and even when taking into account the unexpected -- SARS came and went and business bounced back even stronger -- the economy is expected to maintain that same growth rate for the foreseeable future.

The middle classes of China's cities have decided they want to own their own home, something almost unknown here 10 years ago. This has sparked a massive building boom across the country, along with some property bubbles too, of course. But in the process, China is on course to becoming the world's biggest consumer of a wide range of building related products.

Another indicator of the strength of China's domestic economy is domestic tourism, which now completely overshadows foreign tourist numbers in the eyes of China's hotels and airlines.

The first week of October was the national day holiday, and the hordes flew out of Shanghai and Beijing and other cities heading for the domestic resorts in south China, not to mention Thailand, Hong Kong, Malaysia and even further afield.

The number of Chinese tourists heading out to play is growing at more than 20 percent year-on-year. The high rollers in Las Vegas these days come not from Japan but from mainland China.

All this is not to say that China doesn't have problems. It does. Investment here can be a bureaucratic nightmare, and the regulatory environment is still struggling towards full effectiveness. The Chinese banking system is weighed down by mountains of non-performing debt from state-owned enterprises, the lack of transparency in some areas is a cause for pause and the Chinese capital markets and its regulators are still struggling between a desire to suck in more foreign money and a fear of shrinking control.

But the fact is now inescapable -- the Chinese are here. So it's best to learn to say "welcome" -- or better yet "huan ying."