China Economy Rising at Pace to Rival U.S.

By KEITH BRADSHER

New York Times

June 28, 2005

GUANGZHOU, China, June 26 - A line of Chinese-made cars began rolling onto a ship here Friday, bound for Europe. The cars, made at a gleaming new Honda factory on the outskirts of this sprawling city near Hong Kong, signal the latest move by China to follow Japan and South Korea in building itself into a global competitor in one of the cornerstones of the industrial economy.

China's debut as an auto exporter, small as it may be for now, foretells a broader challenge to a half-century of American economic and political ascendance. The nation's manufacturing companies are building wealth at a remarkable rate, using some of that money to buy assets abroad. And China has been scouring the world to acquire energy resources, with the bid to buy an American oil company only the latest overture.

Indeed, fierce domestic competition and a faster accumulation of financial assets are laying the groundwork for the arc of China's rise to be far greater than Japan's.

"It's going to be like the Arabs in the 70's and the Japanese in the 80's - we were worried they'd buy everything," said William Belchere, the chief Asia economist for Macquarie Securities in Hong Kong. But unlike those previous challenges, which soon faded, "longer term," he added, China will "be a much bigger force."

China's economy has risen rapidly with foreign expertise and investment. The Guangzhou airport here has a terminal designed by an American company, boarding gates supplied by a Danish company, and an air traffic control tower engineered by a company from Singapore.

The resulting bilateral corporate tango - in contrast to the confrontations reminiscent of the 1980's and early 1990's when Japanese capital poured into the United States - means that China has many American corporate comrades, who have a stake in helping generate its growth.

China, economists and Asia experts say, does not face some of the inherent limitations that ultimately stymied Japan and led to economic stagnation there over the last 14 years. With its giant population, China is developing a large and diverse economy, creating an almost Darwinian competition for a domestic market that has extremely low-cost companies ready to export inexpensive goods around the globe.

"The economy is much more flexible, adaptable than Japan's," said Liang Hong, an economist in Hong Kong for Goldman Sachs. "Being a continental economy is an advantage because it has competition within."

To be sure, China is still at an earlier stage of development than was Japan when its economic rise became a national obsession in the United States. In the 1980's and early 1990's, Japanese companies claimed a sizable chunk of the American car market and purchased Rockefeller Center and the Pebble Beach golf course.

The bid by the China National Offshore Oil Corporation for Unocal has raised worries among some politicians in Washington. That $18.5 billion bid comes as America's trade deficit with China is ratcheting ever higher and the dollar is getting support from rising inflows of Chinese capital, which also helps support low interest rates.

More disconcerting to others in Washington is China's growing ability to finance any political and military ambitions. China has missiles with nuclear weapons that intelligence experts describe as already able to hit not just Hawaii but probably California. Beijing also remains chilly toward American entreaties to put more pressure on North Korea to abandon its nuclear weapons program.

In contrast, Japan's military dependence on the United States made it more willing to accept a steep appreciation in the yen in 1985 that hobbled Japanese exporters. So far, China has put off Bush administration demands to let its yuan appreciate.

But China's economic rise also faces many obstacles. Its banks have huge portfolios of nonperforming loans that have not yet become a crippling problem because of rapid growth, but that could, as in Japan, make a recession someday even harder to combat.

Banks suffering from fraud and political pressures have frequently made poor decisions on which borrowers should receive loans, so that China requires more investment for each dollar of economic growth than many rivals. Xu Xiaonian, an economist at the China Europe International Business School in Shanghai, said that China and Japan shared weak traditions of corporate governance, shareholder rights and the rule of law, and this has hurt efficiency.

"Efficiency rules the game and will decide who wins the game, and not how fast a country grows," he said.

China also has a one-party political system that has not changed nearly as quickly as its economy over the last quarter-century, and a population that will soon start to age rapidly because of the "one child" policy. The Asian Development Bank forecasts that from 2015 to 2030, China's labor force will drop to 813 million from 842 million, as India's rises.

The big question is how smoothly China will make the transition from central planning to capitalism.

One of the best places to see the scope of China's challenge to the West, including China's economic strengths and its political weaknesses, is here in Guangzhou, a city of 12.2 million that is often compared to Los Angeles.

At the new Honda factory, a tall fence of yellow wire mesh encloses a long section of the assembly line, where white robots poke and crane their long, vulture-like heads into gray, half-completed car bodies to perform 2,100 of the 3,000 welds needed to assemble each car.

Workers in white uniforms and gray caps complete the rest of the welds, working as quickly as workers in American factories - but earning roughly $1.50 an hour in wages and benefits, compared with $55 an hour for General Motors and Ford factories in the United States.

"Our export activities are based on the synergy of China's competitive advantage and Honda's global network," said Atsuyoshi Hyogo, the chairman of the Honda subsidiary here.

As G.M. and Ford struggle with high health care costs for unionized work forces with an average age of nearly 50 in the United States, most of the Honda workers here appear to be in their 20's. They are unlikely to go to the doctor very often and when they do, doctors here charge less than $5 for an office visit and administering a few stitches.

At a long hall in downtown Guangzhou, it quickly becomes apparent why the Honda workers are young and the pay is low. Rows of young men and women sit in plastic chairs watching two huge television screens covered with Chinese characters and numbers. While it resembles an off-track betting parlor in Hong Kong, 100 miles down the Pearl River, this is really the city's main government-run employment center.

Some of the employers are hiring dozens of workers at a time, but one of the columns on each screen shows a requirement that would be illegal to list in the United States: the age range for acceptable applicants, most often 20 to 35.

The official average unemployment rate in China's cities is 4.2 percent. But that excludes China's vast army of rural adults with little or no work to do, an army estimated as high as 150 million people. Millions move to the cities each year, an immense migration that slowed increases in Chinese industrial wages until the last year or two, when the Chinese economy has grown so rapidly that employers have begun bidding up workers' wages anyway.

The plight of these migrants seems to be improving, and as it improves they may become even more attractive job applicants for multinationals looking for workers.

"People who came here looking for jobs used to be dirty and wearing bad clothes, but now they are coming in suits and ties," said Zhang Jieming, the director of the Guangzhou Bureau of Labor and Social Security.

One question is how China can retain the political stability it has shown for most of the last three decades while moving toward more democratic processes that the Communist Party has long claimed as its goal. A neighborhood election here on Saturday suggested that the path to political pluralism may be long.

Gathered in a junior high school classroom were 45 representatives elected by 5,400 neighborhood residents. Only the representatives, not the general public, were allowed to vote for the next level of government, a seven-member council.

Liu Yonghong, the director of the council and a Communist Party member, was re-elected, 44 to 1, defeating a nonparty member. Chen Xuangu, the deputy director and also a party member, turned back his opponent, also not a party member, by 40 to 5.

The winners may not be in a hurry for change.

"If we have stability," said Li Weijie, the director general of the municipal bureau of civil affairs, "we can have successful development."