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Economics: Don't Blame China!
New York: March 16, 2005
By John R. Stephenson

It seems hard to fathom - the sheer size and potential of a country such as China which is just now starting to flex its economic muscle. With 1.3 billion citizens, most of whom are extremely poor but exceedingly enterprising, China has started a major transformation from an agrarian society to a rapidly industrializing one. Today, the country turns out billions of dollars of low-cost, high quality goods that are in demand throughout the world. Leading companies such as Wal-Mart, the largest corporation in the world, has 80 percent of its suppliers based in China. And yet, China gets no respect by U.S. lawmakers.

As the world continues to flatten with international trade and influence growing all the time, we here in North America are starting to look inward and away from China. Instead of embracing China as the world's workshop, China is increasingly the source of blame for the anemic economic growth at home and every day the drumbeat of protectionism is starting to grow louder.

To be sure, economic growth in the U.S. leaves something to be desired. Job and wage growth has been positively lackluster and the U.S. is suffering from a massive foreign-trade deficit (now at a record 5.7% of GDP). The U.S. trade deficit (exports minus imports) now stands at a staggering $666 billion. The problem? Some 25 percent of this trade deficit or $162 billion annually is with China. In the estimation of U.S. lawmakers, China is the culprit with its cheap currency waging war against America by robbing her of market share and jobs.

Never mind the growing evidence of the benefits to the world economy of a strong and prosperous China. A recent study conducted by Morgan Stanley, an investment bank, concluded that China has saved U.S. consumers some $600 billion over the past decade because of the reduced cost of manufactured goods. U.S. manufacturers have benefited even more from their relationship with China. The Economist magazine noted that: "It was largely thanks to China's robust growth that the world as a whole escaped recession after America's stockmarket bubble burst in 2000-01." In short, it has been to the advantage of American consumers to have access to low-cost goods from China.

Although China gets blamed for unfair competition, the numbers are not quite what they seem. For starters, fully 62 percent of China's export growth over the last decade has come from Chinese subsidiaries of multinational firms with headquarters in Europe, Asia and America. China, as well, has acted as the financier for America's proliferate ways, by allowing the U.S. government to keep borrowing and spending by sopping up U.S. treasury bonds at a record rate.

The problems in the U.S. did not appear out of thin air. They arose in large part because of the actions or inaction of the U.S. government itself. A surging trade deficit is the product of an unprecedented decrease in the overall U.S. savings rate. With the personal savings rate standing near zero and the government budget swinging from surplus to deficit, the U.S. has had no choice but to import surplus savings from elsewhere - thereby running up massive trade deficits.

But in spite of evidence to the contrary, American lawmakers are unmoved. Their answer is to restrict trade with China until such time as the renminbi (the Chinese currency) is revalued. Presently, the currency is pegged at 8.3 renminbi per dollar - an unfair exchange rate according to the U.S. government. Lawmakers recently voted to impose a 27.5 % tariff on all Chinese goods sold in the U.S. While the bill has yet to go to final deliberation, the lesson is clear - the U.S. government would rather blame China for its woes than to make the difficult policy changes necessary to right the ship.

The rise of protectionism is never a good thing. While dislocations are difficult, it is only through addressing competition that domestic firms become strong and competitive on a global basis. Seventy years ago, protectionism was the order of the day and marked one of the darkest periods in America - the Great Depression. While the mantle of economic might will likely be passed to China sometime during this century, we would be wise to do more to get our own house in order rather than direct precious energy toward blaming others for the problems we have largely created ourselves.

Investors looking to profit from the rise of China could consider a small investment in some of the many mutual funds specializing in Chinese equities. Funds such as the Fidelity China Region (FHKCX) and the Dreyfus Premier Greater China Fund all offer exposure to China with the benefits of professional money management.

StephensonFiles is a division of Stephenson & Company Inc. an investment research and asset management firm which publishes research reports and commentary from time to time on securities and trends in the marketplace. The opinions and information contained herein are based upon sources which we believe to be reliable, but Stephenson & Company makes no representation as to their timeliness, accuracy or completeness. Mr. Stephenson writes a regular commentary on the markets and individual securities and the opinions expressed in this commentary are his own. This report is not an offer to sell or a solicitation of an offer to buy any security. Nothing in this article constitutes individual investment, legal or tax advice. Investments involve risk and an investor may incur profits and losses. We, our affiliates, and any officer, director or stockholder or any member of their families may have a position in and may from time to time purchase or sell any securities discussed in our articles. At the time of writing this article, Mr. Stephenson may or may not have had an investment position in the securities mentioned in this article
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