China: The Lotus Flower Is Blossoming Again
China only occasionally appears in the daily news in the United States, but it actually deserves much more attention. The road ahead is a rocky one, but leading inexorably toward colossal power.
by Cecil E. Maranville
The story of IBM's sale of its personal computer (PC) unit to China's Lenovo Group Ltd. sent a jolt through the business world. But it didn't garner the attention it deserved from the world in general. Perhaps the story did not catch your eye or ear.
Still, it is a story you should know, for it portends much for the future of the entire world. Get used to hearing "China" in conjunction with manufacturing, exports, imports, the value of the U.S. dollar, trade deficits, military confrontations and much more.
Let's begin by examining what's happening between IBM and Lenovo. It's an oversimplification to say that IBM sold the entirety of its PC business to the Chinese computer giant. Actually, IBM CEO Samuel Palmisano negotiated a business partnership with Lenovo, a deal that instantly makes it the third largest computer company in the world (behind Dell and Hewlett-Packard). IBM isn't selling the store and walking away. At least for the next five years, it will handle all sales and marketing of the PCs that Lenovo produces.
When announcing the deal, Palmisano called it "three-dimensional." IBM will assist China in one of the most significant trends in today's world, that of turning the developing giant into a high technology country. Palmisano nurtured a relationship with the government, as well as with Lenovo executives, for more than a year before putting ink to a contract. He explains, "What we wanted was not a divestiture, but the strategic relationship with Lenovo and China" (Steve Lohr, "Deal With Lenovo Is IBM's 'China Card,'" The New York Times, Dec. 14, 2004).
The Washington Post reported a human-interest angle that illustrates what is happening, not only with this deal, but also with many others: "During an IBM employee meeting here Wednesday [Dec. 8 at IBM's PC division in North Carolina], a worker got up and asked a question that perhaps only 10 years ago would have been unthinkable: If he wanted to keep his job helping to design some of the world's most advanced computers, would he have to move to China?
"On the other side of the globe, at a Lenovo employee meeting in Beijing, a worker got up and asked a similar question that a decade ago also would have been unthinkable, but for different reasons: If he wanted to keep his job, would he have to move from Communist China to America?" (Griff White, "IBM Reassures Workers After Milestone China Deal," Dec. 9, 2004).
IBM in China, Lenovo in North Carolina
The intriguing answer in both cases was, probably not. The home office for Lenovo's PC business will be New York City, but the operations center will be in IBM's former plant in Research Triangle Park North Carolina under the oversight of an IBM executive.
Close to 1,900 IBM employees in North Carolina will become Lenovo employees, and they will continue doing the same jobs that they have been doing. Another 8,200 IBM employees already in China will now work for Lenovo, likewise continuing to do the jobs that they have been doing. So IBM is far from separating itself from the PC business. In fact, it will own 18.9 percent of Lenovo as part of the deal.
China is moving away from the stereotype of "the kingdom of cheap labor." For decades, it has siphoned off manufacturing jobs from the United States and other countries, with its multiple million-man armies of workers, who earn the equivalent of $80 per month.
China, with 9.6 million square miles, is the third largest country in the world. Its population represents roughly one fifth of the earth's people. There is a massive population shift of inhabitants from the rural areas to urban centers. In 1950, less than 13 percent of Chinese lived in cities. The United Nations estimates that 60 percent will live in urban areas by 2060! Naturally, the poorer people want to move to where they can improve their living standard. That isn't working well, as millions find themselves living in poverty in the cities.
China's booming economy hasn't floated all of its workers up the economic ladder. UN and World Bank officials estimate that the number of Chinese living in poverty is approximately 100 million. Wealth is reaching only about 20 percent of its 1.3 billion citizens, and this block consumes 50 percent of the nation's domestic market. The poorest 20 percent consume less than 5 percent.
Most of the development in the nation is occurring in the east. For example, 80 percent of Beijing has been completely rebuilt. Shanghai and, of course, Hong Kong have strong economies; all are in the eastern coastal region of the nation. But much of the rural interior is undeveloped.
Let's consider what kind of market 20 percent of 1.3 billion people represents. That's 260 million people with money to spend—a marketplace that's the envy of anyone with something to sell.
Chinese consumers by the hundreds of millions
"Chinese consumer" is a new concept to some, perhaps, but not to the business world. McDonald's, Coca-Cola, Microsoft, Accenture, BearingPoint and many other multinational companies all do business in China. So does Bentley, the British luxury automaker, which has a dealership in Beijing. The base price for a Bentley is $400,000, and the dealership sold 29 units in its first nine months of operation.
China is Japan's second largest market (after the United States). Chinese consumers themselves purchased 13 million PCs in 2003, according to a Washington D.C. market research company. The company estimates that the 2004 figure will be 15 to 16 million. Dell and Hewlett-Packard are aggressively competing in China for its PC market, not to contract for cheap labor to build their machines, but rather to sell their products to Chinese buyers.
You are likely raising your eyebrows now, as you begin to realize the size and buying power of the Chinese market. Merrill Lynch Chairman and CEO Stan O'Neal told an audience of investors about a 27-year-old real estate developer who bought a $900,000 German-made car at a Beijing auto show in early 2003. Clearly, the Chinese have money to spend. O'Neal reported that U.S. companies sold $220 billion in goods to China in 2003.
In fact, China has become one of the world's largest markets for automobiles. It's General Motors' fourth-largest market, soon to leapfrog to the number two spot. In November, a Chinese firm announced it would buy Rover, the British car company.
But China buys more than cars. It may surprise many to learn that the country is now the fourth-largest market in the world for Steinway pianos—and Steinway's most expensive models at that. China intends to be a major player in the global economy.
Outsourcing U.S. and European jobs to India, to China
Outsourcing of jobs was a hot-button political issue in the recent U.S. elections and is a continuing issue for Europe. India is a principal recipient of those jobs in the technology sector, due to the fact that many of its people speak English (from its 300-year history of being a British colony) and to the availability of high-tech workers.
However, India has begun to outsource its contracts to China, which is training engineers at a rate of almost two-to-one over India. A technology sector report by the Pacific News Service says that continuing at this rate, China will actually be able to compete with India for these jobs in a minimum of three to five years.
But China has far from arrived at economic superpower status. In fact, the present GDP (Gross Domestic Product) of the country is approximately the same as the relatively small economy of Italy. Jeffrey Garten, dean of the Yale School of Management, explains that China will be no match for the United States for the foreseeable future.
However, the long-term future is a different matter. China's development progresses at a truly mind-boggling rate. It is estimated that the nation will consume 55 percent of the world's concrete production this year in its building projects, along with 40 percent of the world's steel (this demand affects supplies and prices on a world scale).
Competing with the United States, but a long way to go
Garten's assessment: "China doesn't want to accept U.S. leadership. Confrontation is therefore inevitable" (Tim Luard, "China Takes Place on World Stage," BBC, Oct. 21, 2004). China is doing its best to secure oil from regions of the world that the United States cannot control—and therefore cannot shut off—such as Chile, Sudan and Iran, and it is willing to pay more than the market rate to do so.
Strangely, even its phenomenal economic growth rate of about 10 percent is a potential problem for China. Inevitably, prices rise in a booming economy, which will likely slow it down.
But the situation is more complex, as the government, not the market, controls the availability of money, as well as the value of the Chinese currency, the yuan. Presently, the yuan is greatly undervalued. In order to participate in the globalized economy, sooner or later, the government is going to have to allow a free market. Should the government do that now, the yuan would spiral upward, making Chinese products much more expensive.
The Chinese government also holds approximately 600 billion U.S. dollars, buying dollars at the rate of $15 billion per month. Theoretically, China could create havoc in international banking if it should dump its dollars and turn to euros or Japanese yen. But China already has significant holdings of euros and yen, and it wouldn't benefit China's growth plans to sell off its dollar reserves now and thus disrupt the global economy. For now the Chinese government feels compelled to keep the yuan pegged to the U.S. dollar. As the dollar sinks, so does the yuan, ensuring that Chinese products remain attractive to U.S. consumers, who thereby benefit even when their dollar is weakened. How long can this imbalance continue?
When and how China will transition from a controlled to a free market also isn't clear. The behemoth has a long way to go in transforming itself.
Ravenous appetite for energy
Modern China has an insatiable appetite for energy. It cannot get enough. So many dams have been constructed on its rivers that they have created widespread flooding in some areas and water shortages in others. Its demand for electricity is expected to increase by 11 percent this year, when the country plans to spend $24.2 billion to build enough power plants to power the equivalent of three New York cities. China recently purchased two Canadian resource giants, Noranda Inc. and Husky Energy Inc.
Its demand for crude oil was a major factor in keeping world prices high in 2004. In 2003 China surpassed Japan as the world's second-largest importer of oil, leaping over 30 percent from 2002 imports. (While most Asian nations look to the Middle East for their oil, China prefers to buy as much as possible from Russia, enabling Russia to now rival the output of Saudi Arabia at 8 million barrels per day.)
A 1998 World Bank study found that 16 of the world's 20 most polluted cities were in China, and that it is polluting not only its own environment, but also the air over Korea and Japan. Consequently, China wants to turn away from coal usage, but the conversion to cleaner energy sources is a slow go.
As recently as last year, 35 million Chinese qualified to receive aid through the UN's WFP (World Food Program), assistance the UN has been giving China for the past 25 years. WFP officials announced in December 2004 that, according to their estimation, China not only can feed itself, but also that it should now begin to contribute food to needy countries. This shows not only China's growth, but also the fact that it is, in some ways, just out of the undeveloped nation stage.
Obsessed to a flaw over Taiwan
China has kept the percentage of its GDP allotted to defense spending essentially even, but as the GDP grows 10 percent per year, so also does defense spending. It is upgrading every aspect of its armed forces, including the acquisition of missiles that could strike mainland U.S. cities. But the United States isn't in China's crosshairs for the time being. Rather, it is obsessed with Taiwan. A military confrontation, or worse, an invasion, would do great damage to China in the long run.
There is a real fear that much of its military preparedness (particularly cruise missiles and naval build-up) is being done with an eye toward assaulting Taiwan. In late December, China announced in brutal language that its army would "crush" any move by Taiwan toward independence. Yet that would likely bring the might of the U.S. military down on China, in defense of Taiwan.
The Chinese should wake up to the fact that they are already winning Taiwan back, if only they would exercise the patience for which they are famous. Presently, Taiwan exports twice as much to China as it does to the United States. Foreign investors are flocking to China and away from Taiwan, which has seen such capital drop by half in the last five years—much of it going to China. In fact, 15 times as much foreign investment is pouring into China as into Taiwan.
The recent IBM-Lenovo deal was particularly shocking to Taiwan, which used to be known as the "silicon island" of East Asia. But perhaps the most telling phenomenon is the migration of close to a million people from the tiny island back to the mainland to work. Taiwan only has 23 million people, so this represents a significant portion of its population. But more than that, most of the emigrants are highly skilled managers between the ages of 30 and 50, representing a significant brain drain and leaving Taiwanese and Taiwan-based multinational companies struggling to replace them.
Massive war looms in future
What is the future of China? Mark Helprin, a senior fellow at the Claremont Institute and recently the author of The Pacific and Other Stories, wrote in The Wall Street Journal that he believes China is aiming for military parity with the United States in 20 or more years.
However, if the United States should scale down its military for some reason, China would catch up much more quickly. Conversely, if China slips into civil war or revolution as it transforms into its modern self, it will be set back.
Yet it seems inevitable that China will be both an economic and a military superpower. When considering major issues like peace in the Middle East, Iran's nuclear capabilities, the North African crises, Russian-Asian oil, as well as the economies of the Western nations, China must be considered. When you consider what you will have to pay for gasoline and heating oil, what your computer will cost, what your clothing will cost (including your Armani ties, which China makes), you will have to factor in what is happening in China.
A sobering prophecy found in Revelation 9 foretells a time when an army of 200,000,000 troops will mobilize in a world war that will result in catastrophic casualties.
"Then the sixth angel sounded: And I heard a voice from the four horns of the golden altar which is before God, saying to the sixth angel who had the trumpet, 'Release the four angels who are bound at the great river Euphrates.' So the four angels, who had been prepared for the hour and day and month and year, were released to kill a third of mankind. Now the number of the army of the horsemen was two hundred million; I heard the number of them" (Revelation 9:13-16).
Whether by itself or in league with other large population nations of Asia, it seems probable that China will be involved in fielding this incredible army. Of course, Asia lies to the east of the Euphrates, which is a natural and a symbolic dividing point between Asia and the heart of the Middle East, as well as North Africa.
You can learn more about the coinciding of economic and military forces in the end time through our free booklets The Middle East in Bible Prophecy, You Can Understand Bible Prophecy, The Book of Revelation Unveiled and Are We Living in the Time of the End? You can download these at www.ucg.org. WNP
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