The Shifting Tide of Global Economic Power Towards China

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The Shifting Tide of Global Economic Power Towards China
As the Chicago Tribune1 reported recently, every minute of every day in 2005, Americans bought $463,200 worth of products from China.

The world’s demand for cheap goods has transformed China into an economic titan. In just one generation, China has lifted more of its people out of poverty at a faster pace than any nation at any time in history. Today, one-third of its 1.3 billion people live above the poverty line, and it has just created its first billionaires.

According to Bloomberg News,2 when Boston Consulting Group identified the 100 companies based in developing economies that were doing the most to change the world, it determined that 44 of them were in China.

The Tribune3 reports that China’s economy is growing faster than that of any other major country. In fact, it is growing so rapidly that Beijing recently announced that it had underestimated its growth by 17 percent, which is the equivalent of adding Austria’s GDP to its own.

Until recently, the world’s largest country was far behind the developed world, but in the past 25 years it has sped through the equivalent of the first several decades of the 20th century.

Consider two examples of the progress it has made in developing a consumer class that has adopted technologies that were once rare in China:

In 1980, very few people in China owned telephones; by 2005, China had more than 350 million cell phone customers.

In 1985, according to The Christian Science Monitor,4 China produced just 5,200 passenger cars, and bicycles were the primary mode of transportation. By 2004, the Chinese were buying 2.4 million cars per year, and growth is expected to increase by 10 to 15 percent each year. By 2020, China will be the largest automobile market on the planet, and it will have 130 million cars on the road.

The demand for cars has spurred China to invest in its infrastructure, which in turn has inspired more demand for cars. It will spend nearly $6 billion by 2010 to build a national highway system that will include 1.4 million miles of modern roads and link 90 percent of Chinese cities that have more than 200,000 people each.

But if investors and executives consider only these statistics, they’ll get an overly positive view of China as a place to do business or buy stock. The reality is that its economic growth masks some problems, and investors and businesspeople should approach China with caution.

That’s why it is particularly troubling that foreign investors are placing high market capitalizations on assets of dubious quality...

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