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Today's Commentary: 10.25.05
What We Can (Not) See

From an outsider's view, China seems poised to create an economy of unprecedented flexibility and unbridled growth, the likes of which no Asian nation before has seen.

The Bush administration has done just that. Instead of embracing the possibilities that China could offer our nation, we have sought to have them first revalue their currency and now, adopt western banking practices.

In essence, the United States' claim that global imbalances are distinctly possible should China stay on its current course have done little to change how this giant operates. In fact, growth has been so vibrant, that much of the rhetoric offered by Treasury Secretary John Snow has fallen on deaf ears. China is a nation of savers, resembling our old fashioned economy during our industrial age.

China's industries have surged forward in spite of what the U.S. views as poor banking and nonexistent lending practices. Growth of 16% in industrial production coupled with a 50% savings rate makes the administration's claims to allow their citizens a higher standard of living thorugh easier access to lending markets seem shallow. China has criticized the administrations policies of deficit spending and even gone so far as to wonder how an economy can continue to grow if straightforward loans are replaced by creative, less transparent loans to riskier borrowers.

The suggestion that China become more Americanized may not work as well as the administration had hoped. The new White House message encourages consumer based growth, organically grown from within their borders. Currently China is using vast amounts of its money from exports to grow their economy, a risky move many believe will impact the global economy.

The question remains, "does China need to change and if so, what kind of time table should they set for themselves?"

Organic growth has already begun as U.S. companies flock to Chinese shores offering elaborate financial solutions to their unique situation. Many of China's problems are evident when held alongside the way the U.S. economy operates. There is still a great deal of corruption in the country's banking systems. They lack corporate governance but in light of some of the recent scandals, most recently with Refco, we seem to have issues there as well.

With so much co-ownership between corporations and the government, their stock market and the brokerage houses that serve those markets have not been allowed to gel as well as they have in capitalistic markets.

The idea that their monetary and currency policies should change have not been met with open arms. The effects of those monetary polices are not as great as the Bush administration suggests. The Chinese believe that their currency will adjust itself if left alone but, in the meantime, the deficits currently burdening the United States should be addressed as well.

China, acting much like the fair maiden being courted, finds little reason to conform to their suitor's wishes. Companies are lining up for the opportunity to tap the markets within its borders, currently closed to foreign investment unless those investors are in a partnership with an approved entity.

The Chinese economy is, without a doubt, on the edge of rapid expansion. Folks who watch these growth patterns understand that they come with a certain amount of pain. Economists forecasting China's economy over the next five years see spikes, followed by soft patches. Many feel as though they are to be expected as they evolve into the strongest economic force on the planet.

The world's stage will arrive in China in the coming decade with the high profile Olympics in 2008 and the World Expo in 2010. Also in 2008, the 17th Party Congress meets and a new government takes over the following year.

The question of whether China can continue its current torrid pace are based on the assumption that higher oil prices will hamper that growth. So far, it has not. Trade imbalances could begin to surface as early as next year. The United States is poised for a continuing slowdown that could result in less imports. If that happens, the Chinese could create additional pressure on the American economy by investing in themselves instead of American debt.

China will need to do two things in order to keep themselves growing. Allowing workers to spend money by providing increased job security and benefits will promote spending without creating a debtor society. (It should be noted that the current policy in Washington is to do exactly the opposite by pulling benefits and forcing the citizenry to fend for themselves in the wake of less business regulation and accountability, slower wage growth and inflation.) Those benefit costs will get passed on to consumers even as their own personal asset bases grow. This will, all on its own, force the banking system to begin to loan money in increasing quantities, spurring their economy on further.

China will also need to open their borders to overseas investing. Their current protectionist policies serve a more provincial society, one that China no longer can constrain. This participation on a global scale will allow the Chinese to increase their wealth but will admittedly create havoc among the government agencies designed to keep freedom monitored.

Once these two byproducts of consumerism take hold, the economy will slow somewhat to a less volatile level and then expand at a brisk pace for decades to come.

There is just one overlooked part of the equation that could undermine any need for the Chinese to conform to current global requests. The development of the Asian Development Bank could create a rivalry for the current U.S. credit markets. Without using the Treasury to serve as a proximity bank to stash profits, the Development Bank could become the one-stop shop for Asian growth, allowing growing businesses an opportunity to raise additional cash by issuing bonds. It would also serve a growing savings base that is currently finding its way into our bonds.

BlueMoney Report

The Blue Money Report
Financial Commentary covering a wide range of topics concerning money, investing, and how it effects the average investor and their financial health.

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