The Final Paper for My Independent Study in Beijing

As part of my Spring semester at BNU, I opted out of taking the class focusing on newspaper reading (which I probably should have taken as it is very useful but a complete drag in terms of the workload) and decided to do an independent study paper. I decided to focus on China’s economic rise. The paper is fairly informal, as I was given a lot of leeway from my advisor, who simply wanted us to show her that I had researched and learned something, but it did provide me with a great foundation of working knowledge regarding China and its economy, as well as US-Sino relations. It also proved to me that my interest in China has not waned; while writing the paper, even though I left it to the last few days before the deadline, I found myself researching because I enjoyed learning, not because I wanted to get the paper done. To me, this revelation meant more than the grade. This paper is a healthy ten pages double-spaced, so feel free to skim.

Grade Received: A

The Changing of the Guard: China’s Rise to the Top of the World Economy

Although I am the proud owner of a blue passport with United States of America stamped on it, I have always had an interest in the Chinese half of the blood running through me. My mother is originally from Taiwan and emigrated to New Jersey when she was seven.  Chinese was never spoken at home, although she remembers enough of the language to order food during our many weekend trips to Chinatown for dim sum.  In fact, until I started high school and took classes in Chinese as a foreign language, I didn’t know a single word of the language.

Six years after stepping into that first Chinese class, my passion for Chinese language, culture, and its current place in the world has been the one constant in my life that has persevered through high school and into college. I am currently double majoring in Chinese Language & Culture and Political Science with a focus on Asia.  In addition I am completing a year of coursework abroad to study the language in Beijing. I have lived in Beijing for almost a year now, and am thus very comfortable with the city. In fact, Beijing feels as much of a home to me as California does.

This ability to live comfortably in either country allows me to further explore the relationship that both countries have with one another. In any given week, I can examine that relationship, be it on the political level through following each country’s policymaking, the economic level through my dialogues with business executives on both sides of the Pacific, or on a much more individual level through chatting with the Chinese people of all ages and socioeconomic backgrounds that I come into contact with every day while living in Beijing. People from both countries love to point out the similarities between America and China. More importantly, however, the differences and the criticisms of each country provide for me a more comprehensive base of information that I can then use to draw my own opinions and conclusions from.

It is commonly accepted knowledge that China will play more and more of a crucial role in global economic and political spheres in the very near future. This is evidenced by the attention that not only citizens of America but also the Federal government pay to China. The economies of the US and China are inextricably intertwined despite the much publicized back-and-forth verbal jousting between the two countries, because China holds a substantial amount of US debt. China’s astronomical growth rates require careful planning by the government or they can easily be mismanaged and can run out of control. This can hurt China, and with it, the U.S. Therefore it is up to not only each country’s politicians, but also each country’s businessmen, to keep relations open and make sure that the China bubble does not pop. This paper will first outline both countries’ economic situations. It will then explore both the economic and social aspects of the relationship between China and the United States.  It will also examine how Chinese business is conducted both domestically in China and abroad.

Globalization is the defining trend of the 21st century. As more and more countries are modernizing and becoming players on the world market, isolationist growth is simply not possible anymore. Countries like the United States have a service-based economy that relies on the importation of everything from raw materials to finished goods while exporting very little of its own products. This, coupled with American government’s continual spending way above its sustainable means, has given way to massive deficits that have been bought up by other countries. While likely an unintended consequence, massive foreign investment in American debt has brought relationships between the United States and its debt-holding countries that much closer. Countries like China, which hold much of the U.S. debt, now have a vested interest in the United States’ continued economic survival, at least until it can diversify its mostly American investments into other currencies (Evans-Pritchard).

Fears of America defaulting on its debts are low, and most countries still view the dollar as the most stable currency in the world and thus buy American treasury bonds (Shovelan). China, however, is starting to see the brick wall that the bullet train of America’s economy is dashing towards. “Beijing holds $2 trillion (€1.43 trillion) in dollar assets, accumulated through years of exports to America and massive purchases of Treasur[y bonds] by the Chinese government” as of 2009 (LeVine). Unfortunately, if America cannot get a handle on its ever-growing budget deficit, the dollar (and thus the value of Treasury bonds) will drop, and China stands to lose a lot of money. According to China’s former vice-Chairman of the Standing Committee of the NPC Chen Siwei, “Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies…(Evans-Pritchard)”.

America is the world’s largest economy, with a nominal GDP of 14.2 trillion dollars in 2009, relative to China’s 4.9 trillion dollars, though the Purchasing Power Parity (PPP) of America is just under twice that of China. PPP attempts to measure the relative value of a currency. For example, the “Big Mac Index” mentioned in The Economist measures the price of a Big Mac in various countries around the world, and then uses those prices to calculate PPP (Burgernomics). Using PPP as the measurement, China is the second largest economy behind the United States, meaning that despite the roughly 6.8 RMB/ 1 USD current exchange rate, the actual value of the RMB is much higher, with 1 USD being worth approximately 1.8 RMB. This shows that the RMB is kept artificially undervalued by the Chinese government, which is most likely to help exporters selling goods from China abroad, who use the exchange rate, not the PPP, to set prices for other countries.  This is one of the points of contention between both countries. China’s artificially undervalued currency means that exporters

America relies heavily on imports to sustain itself. Unlike virtually all other developed countries, which levy taxes on their imported goods, the United States taxes products that it exports to other countries. This not only hurts those American companies who try to sell their product overseas, but also discourages any foreign companies who would otherwise try to set up shop in America for ease of distribution, etc. The very fact that their product would be manufactured on American soil would make their product uncompetitive on an international market due to the taxes they would have to pay, which they would then have to pass on to the consumer. This not only hurts domestic companies who sell abroad—it also keeps jobs that would go to Americans overseas, all because of America’s tax policy. In her article Traub states that,

“2.4 million jobs were lost or displaced as a result of U.S. trade with China between 2001 and 2008…Cities like Los Angeles, Austin, and San Diego saw the most employment disappear, and [m]ost of the lost jobs were manufacturing positions, middle-class jobs with good benefits to support families. (Traub)”

This, combined with America’s borrowing from foreign countries to cover its own debt, means America is not self-sufficient, even by modern “Globalism” standards.

China, on the other hand, by the aforementioned PPP standards has the third largest economy (measured in exchange rate terms, China’s GDP is third, behind Japan) in the world. China’s growth has been one of the most closely watched explosions by eyes all around the world. Since 1981, “the proportion of population living in poverty in China fell from 53 percent to just eight percent (Ravillion)”. China’s economy has steadily been growing at break-neck speeds, staying in double-digit percentages, for years straight. Though many critics of China point to this expansion as unsustainable, the key point they seem to miss is that China has been doing this steadily.

China’s growth has been carefully planned by its government—a concept that many Westerners find difficult to grasp. Instead of letting the ebb and flow of the world market ‘plan’ its economy, China has planned a steady transition to its own form of ‘market’ economy, which has been set up specifically to benefit China. China has been implementing its economic policy steadily throughout the years relative to its growing importance in the world market. China’s GDP growth has not outpaced its foreign trade in over 25 years (US and China Economic Relationship). This means that, though China’s economy has been growing at such remarkable speeds, it has had a world market to grow in to; a market has been able to purchase the products of its growth, the whole time.

Additionally, a large portion of China’s growth has been due to the government’s investment into internal infrastructure, and heavy industry—things that not only help Chinese people in the form of ease of transportation, etc., but also indirectly further streamlines foreign trade, because good are transported to ports on the same roads that the Chinese population now use to get around. Unlike America and many other countries that were hit hard by the Financial Crisis that kicked off in 2007/8, China has largely stayed in the black, even going so far as to launch its “Economic Stimulus Plan” to help not only itself, but more importantly the rest of the world, recover from the effects of the crisis (National Economic Accounts).

Nevertheless, China has an economy that is reliant heavily on export to foreign countries, while domestic consumption of those same products is relatively low when compared to other countries. They are as reliant on America to sell off their exported goods as America is to buy them. Unfortunately for America, China knows this, and while both countries are intrinsically tied together, China that selling product to the world for profit, while the U.S. sells its debt to the rest of the world for more debt. This means that, while the U.S. has more leverage against China than any other country, China still holds the reins.

The Obama administration’s policy towards China has been decidedly ineffective, with the lack of results after this past Strategic & Economic Dialogue in Beijing falling under scrutiny. China’s continual support of its own domestic exporters at the expense of its foreign trade partners (America) has Senators in America nipping at Treasury Secretary Timothy Geithner’s heels. Geithner, who represented the American half of the Economic part of the S&ED, was questioned about China’s lack of enforcement of intellectual property rights (Chan). Chinese manufacturers have taken to stealing the ideas that come out of the heads of American researchers. As soon as a new American product hits the market, it will be reverse-engineered in China, then manufactured domestically and sold for a fraction of the price both in China and around the world, effectively cutting out any profit that the original company would make on their end-product (China CEO). This combined with the ever-rising quality of China’s products, and China’s allegedly (though I think it is fairly obvious) artificially low currency strikes a massive blow to other countries’ international trade profits. The U.S. alleges that China has not implemented, or not honored those that it has said to already implement, many of the requirements set forth by the WTO, which China joined in December of 2001.

The interesting thing is, the cheap labor that has attracted so much international investment and has been a main pillar of China’s expansion is going to run out soon. The next generation in China, all single children growing up under the One Child Policy, is not willing to work in factories for paltry wages. Between growing up under the auspices of their parents and grandparents, as well as witnessing firsthand China’s economic expansion, this generation of Chinese has an ambition that means that they will not settle for the current workforce situation in China (People’s Daily Online). I think the Chinese government knows this.

For example, the recent strikes at Honda manufacturing plants in China were televised. In a country that is famous for its heavy hand when dealing with social unrest, with things like strikes being dealt with quickly and quietly by local officials, the government not only didn’t put them down, but they allowed the strikes to be shown on national television (Ryder). I think that the government recognizes that the source of cheap labor that makes them so attractive to foreign companies is, due to China’s own expansion, not sustainable.

As the standard of living in China rises, Chinese laborers want to be paid more for their work. But the current labor situation in China does not provide workers with an opportunity to achieve the prosperity that they hope for. In order to maintain social stability, the government allows strikes at foreign companies to go on, in order to provide the impetus for wage reform in China. I think that Chinese government leaders, ever pragmatic, are trying to move away from the low-cost labor that attracted the foreign investment that originally jumpstarting China’s economy. The government knows just as well that the dearth of domestic consumption is a problem that needs to be addressed. People in China are more and more resentful of their low wages, and feel that they have not profited from the economic boom that they bore so much of the burden of. By letting the strikes be covered by national media, China provides a beacon of hope to the youth who are worried that they will never be able to realize their ambitions.

What’s more, the strikes have worked—Honda agreed to a wage increase of 24% (Ryder). The problem China faces now is how to convince the rest of the world that an increase in wages for Chinese people will help companies abroad. If cheap labor were no longer available in China, most companies would naturally look for cheap labor in other countries. But the Chinese government has an answer to this too—that gigantic domestic market that so many international companies like to criticize China for, the market that does not consume nearly as much domestically as it should relative to other countries, can with higher wages begin to buy more of the same product that they work to produce in those international companies’ factories. Chinese news media summarized what the government hopes foreign companies in China will realize, that “[t]he cost of hiring Chinese workers who supply the world with inexpensive goods is climbing. But workers with a deeper pocket are good news for foreign companies that see them as customers” (People’s Daily Online). It is this concept that I hope to capitalize on.

Many U.S. businesses are still looking to break into China, and now with more Chinese people having more money, breaking into that market is going to be profitable. Additionally, China’s lack of available energy is so problematic that the government gives benefits to Chinese companies who go abroad to resource-rich countries to invest in foreign companies. Before I came to China, my ear was constantly bombarded with advice from American businessmen that in order to successfully do business in China, I had to figure out this impossibly complex culture, replete with this undefined-yet-complex system of ‘guanxi’—that indefinable system of relationships and personal favors that is said to accompany most business dealings in China. Many Americans still have that unfortunately American viewpoint of China—that it is a backwards country full of poor, repressed people. The fact that there are so many books published for the international CEO coming over to China explaining how much China is not like the American perception is further evidence of this. After reading some of them, I still think that they are outdated and oversimplified, and still place too much importance on this fabled “guanxi” (Fernández). Granted, I have only been here a year and I have had relatively limited experience with the workplace atmosphere in China.  I have, however, talked with people well versed in the Chinese way of doing business.

I was originally planning to get an internship during my stay in Beijing, both to further my research for this paper, as well as build connections that I can use once I graduate. I did not end up getting the internship this school year (though I am coming back in five weeks over summer to do it), but I was able to sit down with the CEO of the company that I am going to intern at so he could answer some of my questions from the Chinese businessman’s point of view. (Chen).

I talked with David Chen, the owner of Yuantel Telecommunications and China Century Investment. Having worked for Oracle in America for nine years before returning to China to start his own businesses, David was able to provide some insight into the Chinese viewpoint of business with the United States. According to him, the Chinese government works to support its domestic companies who acquire foreign business. For example, Geely Automotive, one of the car manufacturers in China, recently signed a deal to buy Volvo from Ford (Nordstrom). Geely Automotive is a relatively small independent car manufacturer in China, yet it was able to acquire Volvo from Ford Motors for a price of $1.8 billion (Gao). This is because the government has helped to subsidize the cost of the purchase. Geely is looking to open up Volvo to the domestic market in China, which is the biggest automotive market in the world already, and under the government’s auspices, it will be successful (Chen).

David, who is currently in the process of cutting a three-way deal with Chang’an, one of China’s largest auto manufacturers, and China Telecomm for an OnStar-type product in China, says that the government has for the most part stayed out of his dealings, and he only has to tap into his ‘guanxi’ connections for certain deals. He said that for most industries in China, the government stays out of the way. That being said, ‘guanxi’ and personal favors are still useful tactics, especially when a government permit is needed. He stressed that the concept of ‘guanxi’ is not nearly as intrinsic to Chinese business as the West likes to think—in fact, the new generation of Chinese businessmen recognize that some of the business traditions, the favors, can detract from business, and increasingly adhere to Western styles of doing business.

After learning about China from a Western viewpoint for most of my life, I am glad that I can finally see the country from the inside. Living in China and following the economics and relationships between China and the United States has taught me how both sides can view the same problem so differently. I think China has all the makings to replace America as the top country in the world, and although China’s standard of living is still behind America by a few decades, the gap will take mere years to close. This, coupled with America’s mismanagement of its own finances as well as its inability to become more self-sufficient does not bode well for its future. As much as I love my country, I see more hope and more prospects in the Middle Kingdom than I ever did back home.

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