China has experienced rapid economic growth fueled by foreign investment and global demand for cheap goods. This has made China the world's fastest growing major economy. Key factors driving China's growth include acquiring knowledge from foreign companies, political reforms that created impetus for economic change, and openness to foreign investment and trade. China's growing middle class is fueling domestic consumer demand. However, concerns remain about inequality and worker conditions in factories.

1. U-T Special Report / The Dragon Awakes
Foreign investments,
global demand for cheap
goods and labor give
China the fastest-growing
economy in the world
By Dean Calbreath
UNION-TRIBUNE STAFF WRITER
March 20, 2005
SHANGHAI, China – Jostling with the crowds in
downtown Shanghai, it's easy to understand why
economists predict that China soon will displace the
United States as the world's biggest consumer nation.
Gleaming storefronts along neon-lit Nanjing Street are
laden with luxury goods by Ralph Lauren, Polo and
Prada – and many are the real thing, not the bootlegged
knockoffs sold on the cheap in the city's side streets and bazaars.
"A few years ago, nobody in China knew Lancome, Burberry or Louis Vuitton," said Annie
Wang, editor of a Shanghai fashion magazine. "Now they know everything and want everything."
The glitzy brands are just one sign of China's rapidly growing economic clout.
In the past decade, foreign investments and worldwide demand for cheap goods have turned
China's economy into the fastest-growing across the globe. It is expanding three times as fast as
the U.S. economy, four times as fast as Europe's and nearly nine times as fast as Japan's.
Some economists predict that by 2015, China will have enough spending power to become the
world's primary engine of economic growth, unseating the United States, which has held that
role since the end of World War II. By 2040 – and perhaps much sooner – China may have a
greater gross domestic product than the United States, giving it the world's No. 1 economy. It
now ranks at No. 3.
Although China's growth has been accelerating for some time, only recently has it become clear
how wide-ranging the repercussions are:
A construction boom in China – which is on pace to build the equivalent of a Houston or a
Philadelphia every month to keep up with rising population – has led to tight supplies and
higher prices for concrete, lumber, copper and steel throughout the world.
Christina Aguilera/UNION-TRIBUNE

2. Skyrocketing purchases of automobiles in China helped push global oil prices to near record
levels last year. With more than 2.4 million new drivers hitting the road in 2004, the country
guzzled 6.5 million barrels of crude a day, displacing Japan as the world's second-biggest oil
consumer. But it remains far behind the United States, which consumes 20.5 million barrels a
day.
China's cheap labor costs have lowered prices worldwide for such diverse items as televisions,
toys, T-shirts, kitchen appliances, athletic
shoes and power tools. The Morgan Stanley
investment bank says U.S. consumers saved
up to $600 billion over the past eight years by
buying Chinese imports.
China's manufacturing prowess also has
resulted in massive layoffs throughout the
world, as factories either were shut down or
moved to China to be competitive. The
Economic Policy Institute, a liberal-leaning
think tank in Washington, D.C., said the
United States is losing more than 2,000
factory jobs a month because of the shift of
work to China.
Many observers compare China's growth rate
to Japan's rise in the 1960s and 1970s,
emerging from the ruins of World War II to
become the world's second-largest economic
power.
But such comparisons underestimate China's
growth.
"China represents an entirely different future
than Japan did," said Ted C. Fishman, a
former currency trader who recently wrote the book "China Inc.: How the Rise of the Next
Superpower Challenges America and the World."
"China has an incredible domestic market which Japan never had. That will allow China to keep
growing instead of stagnating. And where Japan hit us very strongly in a few market sectors,
China is big enough to hit the whole world from every direction."
Money pouring in
Propelling China's growth is a steady stream of foreign investment attracted by the country's
seemingly inexhaustible pool of 1.3 billion workers and its growing body of consumers.
Economists note that even if only 8 percent of China's people made a middle-income salary, that
THE DRAGON AWAKES
Long an economic backwater, the world's
most populous country is becoming a
powerhouse with global economic clout.
 Sunday: The effects of China's emergence
as an economic superpower.
 China's rise: The blueprint
 China's evolving ties with the United
States
 Imbalance of power
 U.S., Europe criticize yuan as an unfair
trade weapon
 Export boom tips balance of trade with
the United States
Monday: China's demand for building
materials drives up prices worldwide
Tuesday: Flexing power through trade

3. would still amount to 100 million people – a base of consumers almost as big as the entire U.S.
middle class.
Last year, foreigners invested $60 billion in the Chinese mainland and more than $30 billion in
Hong Kong. It was the second year in a row that the mainland displaced the United States as the
world's most popular investment locale.
The impact of that investment is magnified by the artificially low value of China's currency.
Economists estimate that one Chinese yuan can buy as much in China as $4.60 can buy in the
United States, so $60 billion worth of investments there has the same impact as $276 billion in
the United States.
Since China opened its economy to international trade in 1978, foreign investments have totaled
more than a half-trillion dollars, helping fuel one of the greatest industrial expansions the world
has ever seen.
Each year, between 15,000 and 20,000 manufacturing facilities are built in China, mostly with
foreign capital or with funding from China's debt-ridden banks, which have run themselves into
technical insolvency to keep the boom going.
Those factories draw several million workers a year from the poverty-stricken countryside –
typically young women in their late teens or early 20s who work for two to three years before
returning home to marry.
Although the factories pay workers an average of less than $1 an hour, they form the backbone
of China's economic expansion, enticing Western companies to invest in the country. To an
extent that has not been seen in other low-wage havens, such as Mexico or Thailand, China has
succeeded in using its factories as a base to create a viable middle class of managers, engineers
and designers. Chinese colleges pump out 325,000 engineers a year, while the country's
elementary schools prepare students for jobs that prize innovation over rote learning.
"When I was a child, we never learned much about science," said Wang Yongmei, who teaches
fifth and sixth grades in Yancheng, 300 miles northwest of Shanghai. "But our students are very
active with science, computers and information technology. And they are learning a lot of
English – writing essays about their daily life, families and friends."
Nationwide, this growth in the population of educated workers has helped boost salaries an
average of 250 percent over the past 10 years. The greatest growth has come in coastal cities,
such as Shanghai and Shenzhen, where salaries have nearly quadrupled. Although wages are
still low by U.S. standards – averaging $7,310 a year for a white-collar worker in Shanghai –
they are enough for Chinese consumers to start buying the accessories of modern life.
Nearly 82 percent of Chinese own a color television, compared with 40 percent in 1994. Nearly
two-thirds have a land-line telephone, compared with 10 percent a decade ago. Nearly half have
a videodisc player, according to a recent Gallup survey.

4. Golf as indicator
Although much of the nation still is impoverished, there is a growing element of wealth.
Such wealth is evident at the Mission Hills Golf Club in Shenzhen – the world's largest country
club – 90 minutes north of Hong Kong.
Although half of its members come from Hong Kong, as many as 3,000 come from the mainland
– entrepreneurs, factory owners and business executives with the money to pay the club's
minimum fee of $25,000 a year, which is enough to pay the average annual salaries of 25
Chinese factory workers.
Every weekend, Chinese entrepreneurs can be seen wandering through 10 lush 18-hole courses
designed by such greats as Jack Nicklaus, Ernie Els, Nick Faldo and Vijay Singh, or browsing
through the pro shop to check out equipment made by Callaway, Bridgestone and Titleist.
"There's a trend in China for picking up golf," said Mission Hills member William Hong, a
nattily dressed real estate agent who handles retail properties in Shanghai and Shenzhen. "For
me, golf is a multifunctional tool. Getting into the high-end lifestyle helps you meet wealthier
business people. It's easier to judge whether they're of good background."
Hong is a typical self-made entrepreneur, parlaying his one-time job as a public relations
manager for a real estate company into a thriving business for himself. He meets most of his
investors and clients on the course.
"In the past, you could meet business contacts through your bank or through the government,
but it could take a lot of time to know if they're financially sound," Hong said. "If you meet
people here, it saves a bit of time to dig out their history. If a person has the time and money to
play golf, it probably means they're financially stable. I can also project that kind of image."
A few dozen businessmen have each spent $1.8 million to $2.2 million on multistory homes
overlooking the golf course – mansions with pools, wine cellars, cinema rooms, saunas, billiards
parlors and hidden servants' quarters. The houses are in gated communities with names such as
Knightsbridge, Mayfair and Rosedale.
"Some of them are not even into golf," said Winky Wong, a spokeswoman for the club. "They
just like the environment."
Factory life
The wealth at the Mission Hills Country Club is a stark contrast to the low wages in the factories
in Shenzhen.
The widening gap between rich and poor has led to more worker protests, especially in
Shenzhen and the surrounding Guangdong province, home to many of China's export-oriented
factories. By official count, there were 833 worker protests in Guangdong last year involving 1
million workers, prompting the government to order factories to pay $84 million in back wages.

5. "There are a lot more protests than there used to be," said Susan Shirk, a former U.S. deputy
assistant secretary of state for China who now teaches international relations at the University of
California San Diego. "But so far the government has done a very effective job of dealing with
them: siding with the protesters, paying them off, blaming local officials for any problems and
then throwing the protest organizers into jail."
Zheng Juan is a typical worker. Zheng grew up on a farm in rural Anhui province in southeast
China and started factory work as soon as she graduated from high school.
In her first job, Zheng often toiled from 8 a.m. to 10 p.m. gluing together shoes at a shoe factory,
working every Saturday and most Sundays, and earning three days of vacation per year.
"It was very bad," she said.
Working such hours nearly every day with little vacation also violated Chinese labor laws, which
are seldom enforced.
Now 20, Zheng works for a Taiwanese-owned subcontractor for a major American athletic-shoe
maker. The hours are much better, she said, since Verité – an Amherst, Mass.-based labor rights
organization – began working with the owners to keep the factory in compliance with Chinese
law.
Zheng still works six days a week for about $90 to $120 a month, depending on how much
overtime is involved. But she gets Sundays off and works no more than 36 hours of overtime a
month. The company does not charge Zheng for the rough-hewn bunk bed in a 250-square-foot
dorm room that she shares with five other workers. Other factories charge workers as much as
half their monthly pay for such lodgings.
"Our factory is like a home," Zheng said recently while dining with friends in downtown
Shenzhen. "I've got very good wages and very good working hours."
Qing Zhang, who heads Verité's operations in China, says Zheng's positive feelings about her
factory are not unusual, despite the low wages and overtime.
"These kids from the countryside remind me of my parents' generation," Qing said. "Kids in the
cities expect a lot nowadays: high pay, ability to go overseas, ability to criticize the government.
But workers in small towns have no sense of entitlement."
Even so, she adds, workers from the countryside are increasingly apt to protest as the gap
between rich and poor widens in China.
Back in Shanghai, Wang, the fashion editor, also worries about the increasing divide between
rich and poor.
At a karaoke party with friends – twentysomethings in China's rising middle class – she watched
as they puffed on Mild Seven cigarettes and ordered bottles of VSOP cognac, Baileys Irish Cream
and Johnnie Walker whiskey, some of which cost more per bottle than an average worker in the
countryside makes in a week.

6. Wang listened as a young office worker wondered how much flirting she should put up with
from her married, middle-age boss in order to get ahead. She eavesdropped on a venture
capitalist boasting about the amount of foreign investment money he has been able to attract.
"In the old days, there was a noble quality to not having much wealth in China because everyone
knew that everyone else was in the same situation," Wang said. "That noble quality is gone.
People have realized how poor they are. And right now they are very focused on building
capital."

7. U-T Special Report / The Dragon Awakes
China's rise: The blueprint
By Dean Calbreath
UNION-TRIBUNE STAFF WRITER
March 20, 2005
"It is glorious to get rich."
When the late Chinese leader Deng Xiaoping first uttered those words in 1978, China was one of
the poorest nations on Earth.
Nearly one-quarter of the population – 250 million people – did not have proper food or
clothing. Much of the country lacked electricity, running water or even outdoor toilets. One out
of 300 people owned a telephone. Fewer than 5 percent of households had refrigerators or
washing machines.
Today, China has a consumer class that soon could rival that of the United States. Its highways
are jammed with automobiles. Middle-class homes are equipped with DVD players and laptop
computers. Stores are full of shoppers seeking the latest goods. Although poverty still plagues
the countryside, salaries there have doubled in the past 10 years and tripled in the cities.
So how has China expanded its economy when other countries, such as Mexico and India,
remain burdened by overwhelming poverty? Here are a few answers:
1. Acquiring knowledge
As foreign firms entered China, Beijing pressured them to share their technologies with Chinese
partners. To launch a factory in China, manufacturers often were required to set up research
labs or sponsor technical training programs, such as the telecom schools that Qualcomm,
Motorola and Ericsson run in Beijing.
Christina Aguilera/UNION-TRIBUNE

8. Armed with new technologies from abroad, the Chinese have begun building domestic firms that
can compete in the global marketplace, such as the ZTE and Huawei wireless firms and Haier,
which makes refrigerators and other major appliances.
The emphasis on acquiring knowledge goes beyond technology. It also entails picking up
business skills that were lost during the Maoist era.
Niko Canner, head of the Katzenbach Partners management consulting firm in New York, said
China emphasizes having its executives learn Western management skills – either by working at
foreign firms or studying for master's degrees in business administration.
"There's a mentality among Chinese MBAs that's different than anywhere else in the world," said
Canner, whose firm is tracking the careers of more than 100 Chinese MBAs. "In a way that's
unique to China, they view professional management as an ethical calling, which will help China
become a better place and fulfill its destiny."
2. Impetus for change
Deng launched his reforms at a critical time in China. After three decades of unremitting poverty
under communist revolutionary leader Mao Zedong, including a decade of severe political
repression under the Cultural Revolution, the public was soured on Maoist appeals to "Serve the
people and build the revolution."
"The Cultural Revolution left China particularly demoralized," said Susan Shirk, a professor of
international relations at the University of California San Diego who recently wrote a book on
China's economic policies. "Deng was looking for a way to rebuild popular support for the
Communist Party's rule, and he felt the party needed to prove it could deliver economic growth."
Although Deng twice had been persecuted during the Cultural Revolution for not being
sufficiently hard-line, he was no wild-eyed reformer. Among other things, he supported the
shooting of protesters in Tiananmen Square in 1989. But he realized that if the Communist
Party was going to stay in power, it would have to improve the lives of the people. The only way
to do that would be to allow more economic freedom.
3. Openness to foreigners
One of Deng's first steps was to open China to outside investment, reversing Mao's ban on
foreign-owned factories. Deng's move was not immediately popular.
"Even 10 years ago, people were worried that foreign companies would come in and occupy
China like armies," said Wang Ping, who heads the Chinese operations of Germany's Henkel
Loctite Co. "But we needed jobs, and our capital was limited. So the government said let's invite
them in and let them make money as long as they hire our people and pay taxes."
By the late 1970s, manufacturers from the then-British colony of Hong Kong began opening
factories in special economic zones in China. But the flood of foreign investments really took off
in the mid-1990s, when multinationals such as Motorola and Sony launched Chinese operations.

9. To a large extent, China's modernization has been fueled by investments from abroad. Foreign
companies are investing $60 billion a year in the Chinese economy, employing millions of
workers.
"Now," Wang said, "nobody complains about the foreigners."
4. Central planning
Even after China opened its markets, the government retained a strong role in economic
development. It can raze farmlands or old neighborhoods easily to pave the way for factories and
new housing. And it can unilaterally decide where to establish business clusters: designating
Datang as a factory town for socks, for instance, while nearby Shengzhou specializes in ties.
In the once-rural city of Yancheng, this style of planning is on display in the showroom of the
Municipal Development Planning Commission, where a massive model of the city covers about
one-third of an acre on the building's ground floor.
The map does not show what Yancheng looks like now, but rather what it will look like in 10
years, showing the roads, factories and apartment houses that will be built as the city more than
triples in size from 300,000 to 1 million people.
"The municipality has decided that autos will be the mainstay of the city," city spokesman Xu
Xiaoyuan said as he pointed to the model of an automotive plant on the map.
Korea-based automaker Kia operates a factory in town, and there are a handful of auto
equipment suppliers. The government has spent $25 million laying the groundwork to help Kia
expand: building a bridge, roads, a power plant, water mains and gas lines. The government is
training local farmers for new careers as autoworkers. And it is working to bring other auto-
related companies into town.
Each big city in China has a scale model like Yancheng's, serving as a tangible goal of what the
future will look like. That kind of planning mystifies Americans, who are used to a more laissez-
faire approach. So far, the Chinese appear to be hitting most of their goals.

10. U-T Special Report / The Dragon Awakes
As U.S. trade gap balloons, China soars
with more high-tech products and leaves
behind its cheap-export reputation
By Dean Calbreath
UNION-TRIBUNE STAFF WRITER
March 20, 2005
YANTIAN, China – A dozen years ago,
Yantian was a tiny fishing village
surrounded by a brush-covered
shoreline, known only to weekend
beachcombers from the nearby
industrial city of Shenzhen.
In the past decade, the fishing village
has exploded into a megaport that
handles more cargo containers than
New York or Long Beach, and it is one of
the most humbling examples of what the
growing trade imbalance between China
and the United States really means.
When cargo ships leave Yantian's sprawling docks, they are laden with 20-foot containers of
toys, garments, furniture and other goods, mostly bound for the United States. When the ships
return from abroad, 70 percent of the containers are empty.
There are so many empty containers that the port has set aside a special platform to speed them
through customs, so they can be refilled quickly with export items and shipped back overseas.
"If empty cargo containers were a product, they would be our largest export to China, which sort
of begs the question of who is the advanced country and who is the developing country," said
Bob Baugh, who heads the Industrial Union Council of the AFL-CIO.
"China imports raw materials from us and exports finished goods," said Peter Schiff, president
of Euro Pacific Capital in Newport Beach. "That's what America used to look like not too many
years ago. But judging from our trade activity, now we look like a colony and they look like the
empire."
The U.S. trade gap with China has been widening ever since Deng Xiaoping opened his nation to
foreign trade in 1978. From 1978 to 2001, Chinese exports rose more than 15 percent a year –
ANDREW WONG / Getty Images
THE OLD: When China opened to foreign markets, it specialized in
low-skilled factory work, such as the work still being performed at
this textile mill. By the late 1990s, it dominated world production
of such goods as shoes, toys and clothing.

11. nearly twice as fast as U.S. exports and easily besting the performance of any other major
economy.
That was just for starters.
Since China entered the World
Trade Organization in 2001, its
exports have grown more than 30
percent a year, helping China
unseat Germany last year as the
world's third-largest trading
power behind the United States
and Japan.
Last year, the U.S. trade deficit
with China soared 31 percent to
$162 billion – the biggest
imbalance ever recorded between
any two countries. Seven years ago,
the U.S. trade deficit with the entire
world was lower than its current
deficit with China.
"China's export growth represents extraordinarily fast-paced integration for an extraordinarily
fast-paced economy," said Edward Gresser, director of the Progressive Policy Institute in
Washington, D.C.
Gresser said the United States has never had 30 percent export growth except after wars: 1946,
after World War II; 1919, after World War I; and 1866, after the Civil War. The only two-year
period of such growth was 1815-16, after the War of 1812.
"China's growth makes the competitive world a lot tougher for the U.S.," Gresser said.
In the early days of Chinese trade, most Chinese exports were cheap, low-quality, labor-
intensive products such as toys, shoes and clothing. As with many developing countries, China's
chief tool for attracting foreign manufacturers was to offer low-wage semi-skilled labor,
bolstered by an artificially low currency.
The salary and benefits of a Chinese factory worker average about 92 cents an hour, according to
a 2004 study by the Goldman Sachs investment firm. That compares with $1.20 in Thailand,
$1.70 in Mexico and $21.80 in the United States.
But Goldman Sachs may be overestimating. A study commissioned late last year by the U.S.
Bureau of Labor Statistics estimated that the average Chinese factory worker makes 64 cents an
hour, including benefits.
The low wages have drawn businesses from around the world to China. Between 15,000 and
20,000 new manufacturing facilities open each year in China – mostly subcontractors to U.S.
FREDERIC J. BROWN / AFP/Getty Images
THE NEW: China's factories have become increasingly high-tech.
They now make most of the world's TVs, cell phones and
computers - and account for nearly all of the growing U.S. trade
deficit in high-tech products.

12. and other foreign firms. Many of the factories are more modernized than their rivals overseas,
giving them a competitive edge. Nearly half of Chinese factories are less than 10 years old,
compared with less than 10 percent of U.S. factories.
"While America's industrial base continues to erode, China has been investing steadily in new
plants and equipment, adding state-of-the-art production capacity," said Jim Pinto, founder of
Action Instruments, who now works as a business consultant in San Diego. "America is just not
investing in machinery the way that China is."
More than 1.7 million U.S. factory workers have lost their jobs to China over the past 15 years,
according to the Economic Policy Institute in Washington, D.C. The rate of job losses has been
increasing steadily: 70,000 per year between 1989 and 1997; 105,000 per year between 1997
and 2001; and 234,000 per year since China entered the World Trade Association in 2001.
As long as only low-skilled jobs were being transferred to China, relatively few politicians or
economists complained. They maintained that the United States could ship its low-wage work
overseas while keeping a lead in high-tech industries.
"For the past few decades, the Western world assumed that it could let countries like China do
all the cheap, low-cost manufacturing while the West concentrated in more knowledge-intensive
industries," Pinto said. "But that's not true with China. They're coming up with companies that
can challenge Cisco, which has some of the best technologies around. And they're competing in
biotech and a lot of other areas, too."
Cisco, the world's largest computer networking company, is facing tough competition from
China's Huawei, which has teamed with 3Com to produce rival equipment.
China now produces half of the world's DVD players and digital cameras, more than one-third of
its personal desktop and laptop computers, and about one-fourth of its mobile phones,
televisions and car stereos.
In Shenzhen, the toy and clothing production lines that feed the ports of Yantian are being
supplemented with new high-tech campuses exporting telecommunications and electronics
equipment.
"In the past few years, we've really pushed forward the intellectual life of Shenzhen so that we
can industrialize our intellectual property," said Zhang Hengchun, deputy director-general of
the Shenzhen High-Tech Industrial Park, one of five government-supported science parks in the
city.
Zhang said his park exports more than $3 billion in telecommunication and high-tech products
each year, more than half of which were produced and developed within the park rather than
being contract work farmed out from abroad.
Even in Shenzhen's low-tech factories there are signs that a high-tech revolution is taking place.
Many of the factories offer computer classes to help their workers prepare for their next jobs.

13. Luo Yong, a 19-year-old from rural Jiangtze province, said she took her job in a Shenzhen shoe
factory specifically so she could take advantage of its after-hours computer training classes.
"My parents, who worked in the fields, weren't satisfied with the education I was getting in the
countryside, especially since our school didn't have any computers," Luo said. "I figured I would
get more exposure to computers in Shenzhen. I'd really like to work in computer design."
The latest trade figures demonstrate how China is expanding more into high-tech trade. As
recently as June 2002, the United States exported more high-tech equipment than it imported.
But that trade advantage no longer exists. Last year, the United States ran a record $37 billion
tech deficit, with 99 percent of the deficit attributed to China.
At a time when U.S. colleges are reporting declining enrollments for engineers, Chinese colleges
are churning out 350,000 engineers a year, which suggests that greater technology deficits are
in store in the future, as China pushes more of its own products onto the market.
Politicians in Washington are becoming vocal about the trade gap. A dozen senators last month
a measure to impose tariffs on China unless it begins to boost the value of its currency, the yuan,
to alleviate the trade deficit.
So far, the White House has voiced lukewarm support for revaluing the yuan, although it
opposes the idea of tariffs. Its main tools for fighting the trade deficit have been anti-dumping
suits, which accuse the Chinese of exporting goods below the cost of production.
In the past several years, the White House has filed anti-dumping suits involving a wide variety
of items, including socks, bras, televisions, shrimp, furniture and steel.
The drawback of anti-dumping suits is that they only affect companies that are headquartered in
the targeted country – in this case, China.
The bulk of the U.S. trade deficit with China does not come from Chinese companies.
Between 60 percent and 80 percent of the goods China exports to the United States are the
products of such companies as Adidas, Sony, Mattel, Walt Disney, Dell Computers or other
multinationals that have set up shop in China to take advantage of its low costs. Those
multinationals would not be affected by anti-dumping rules.
"China is unfairly singled out because it is at the end of the production chain," said Gordon
Hanson, an economist at the University of California San Diego.
The recent rumbling about tariffs and dumping in Washington suggests that trouble is brewing
over the trade deficit. The attacks on China are reminiscent of the "Japan bashing" that occurred
in the late 1980s, when labor unions and politicians pushed "Buy American" campaigns to
counter cheap Japanese imports, going so far as to smash Japanese TV sets on the steps of the
Capitol.
Few pundits envision that happening with Chinese goods.

14. Because the United States has moved so much of its factory work overseas, whole categories of
goods are almost entirely made abroad, including textiles, toys, televisions, computers and DVD
equipment.
If consumers tried to "Buy American" goods in those categories, they would come away empty-
handed, because most no longer are made in the United States. Fewer than 10 percent of
Chinese imports compete directly with U.S.-produced goods.
"The problem is not that foreigners shun American products, but simply that America is not
producing any that are worth buying," said Euro Pacific Capital's Schiff. "We're working hard
these days, but we're not producing anything. All that China is doing is being our enabler,
providing us with goods as we don't produce anything."

15. U-T Special Report / The Dragon Awakes
China's evolving ties with the United States
1949 People's Republic of China is
born after a bloody civil war
between Communists and
Nationalists, who retreat to Taiwan.
The United States recognizes
Taiwan, but not the mainland.
1956 Private property is banned.
1959-61 The Great Famine kills
millions of Chinese. Historians say
the famine was exacerbated by
China's collective farm policies.
1966-69 The Cultural Revolution
devastates China.
1971 Ping-Pong matches between
the United States and China renew
ties between the nations.
1972 President Nixon visits China,
shifting U.S. focus toward Beijing.
1976 Communist leader Mao
Zedong dies. The Gang of Four,
blamed for many of the excesses of
the Cultural Revolution, is arrested.
1978-79 Deng Xiaoping takes
unofficial control of China,
loosening bans on private property.
An early experiment with free
speech, the Democracy Wall, is
born and fades. President Carter
establishes full diplomatic ties with
Beijing.
1985 Mikhail Gorbachev takes
command in the Soviet Union,
beginning a long wave of reforms
throughout the communist world.
1987 Anti-government protests
lead to shake-up of China's
Politburo.
1989 Chinese army cracks down on
protesters in Tiananmen Square,
killing many demonstrators.
Relations between China and the
West temporarily chill.
1997 British colony Hong Kong
reverts to Chinese control. Deng
dies.
1998 Premier Zhu Rongji stresses
policy of economic pragmatism.
2000 United States grants China
permanent normal trade relations.
2001 China enters the World Trade
Organization and secures the 2008
Olympics for Beijing.
2003 President Hu Jintao and
Premier Wen Jiabao take charge,
representing the first generation of
leaders with no adult memories of
China's revolutionary period.
President Bush works with China to
resolve nuclear issue in North
Korea and warns Taiwan against
provoking Beijing.
2004 The Bush administration
launches a series of anti-dumping
lawsuits against Chinese imports.
Former Chinese Foreign Minister
Qian Qichen attacks Bush's foreign
policies for their "cocksuredness
and arrogance."
LOOKING AHEAD
2010 China joins the Association of
Southeast Asian Nations, or
ASEAN, in creating the world's
largest tariff-free trade zone, with
an 11-nation region of more than 2
billion people. (Source: ASEAN)
2014 China outstrips Japan as the
world's second-largest economy.
(Source: Goldman Sachs)
2015 China surpasses the United
States as the primary driver of the
global economy, based on strength
of consumer spending and the rate
of annual growth. (Source: Fred
Alger Management)
2020 China and ASEAN create
unified political and economic
community, similar to the
European Union. (Source: ASEAN)
2022 China becomes the second-
largest airline market, with five
times as many air passengers as
today. (Source: Airbus)
2025 China outstrips the United
States as the world's largest
automobile market. (Source:
General Motors)
2034 Chinese bank deposits
surpass deposits in the U.S.
(Source: HSBC Bank)
2039 China outstrips the United
States as the world's biggest
economy. (Source: Goldman Sachs)
2050 The Chinese economy could
be 75 percent bigger than the U.S.
economy. (Source: Harvard
economist Jeffrey Sachs)

16. U-T Special Report / The Dragon Awakes
U.S., Europe criticize yuan as an unfair trade weapon
By Dean Calbreath
UNION-TRIBUNE STAFF WRITER
March 20, 2005
Over the past 10 years, as the Chinese economy galloped forward, one key item was frozen in
place: the value of the yuan, or renminbi, known in China as "the people's currency."
Since May 1995, the yuan has traded at a rate of about 8.28 to the dollar.
While the yuan once was praised as a model of stability on the often volatile Asian continent, it
now is being attacked as an unfair trade weapon.
From the European Parliament to Capitol Hill, critics say China has unfairly rigged the yuan to
keep its exchange rate low, giving it an unfair trading advantage against other currencies.
"China's refusal to play by international economic rules cripples our ability to compete on a level
playing field," Sen. Charles Schumer, D-N.Y., said last month he introduced a bill to impose
tariffs on Chinese imports unless Beijing raises the value of the yuan.
So far, Chinese officials have balked at the pressure, which comes not only from Congress but
from the leaders of the European Union and the Group of Seven industrialized countries.
"China needs more time to reform its banking and financial systems to pave the way for
reforming the currency policy," Zhou Xiaochuan, governor of the state-run People's Bank of
China, told reporters after a meeting of the G-7.
Zhou reiterated – as Chinese officials have many times in the past several years – that he
eventually would like the yuan to trade more freely, but not if it will jeopardize China's growth.
Developing countries often strive to keep the value of their currencies low in order to make their
products attractive to outside buyers. Japan began its meteoric economic rise in the 1960s by
keeping the value of the yen low.
That has become more difficult over the past several years, as the value of the dollar has plunged
because of massive U.S. trade and budget deficits. The plunge in the U.S. dollar has meant a rise
in such currencies as the Canadian and Australian dollars, the British pound and the European
euro.
Some countries – notably China, Japan and South Korea – have used their own currencies to
buy vast amounts of U.S. dollars in order to keep the value of their own currencies from rising.
To keep the value of the yuan low, China has built a $600 billion foreign currency reserve,
including $194 billion in U.S. Treasury bills. Only Japan holds more securities, with $712 billion.
Together, Japan and China finance the bulk of the U.S. debt.

17. Economists estimate that China's reserves keep the yuan undervalued by 15 percent to 40
percent.
"That's the largest export subsidy – and the largest transfer of wealth – in the history of
mankind," said Peter Morici, a University of Maryland economist.
The low value of the yuan makes Chinese wages and real estate prices seem lower than their
actual value in the Chinese market.
Economists at the World Bank estimate that $1 worth of yuan can buy as many goods in China
as $4.60 could buy in the United States, so a Chinese worker making the average salary of 92
cents an hour would have the purchasing power of a worker making $4.23 an hour in the United
States – well below the U.S. minimum wage of $5.15 an hour.
To help alleviate that gap, Schumer and his allies on Capitol Hill say China must begin acting
within the next six months to boost the yuan by 15 percent to 40 percent. If it does not, their bill
would impose a 27.5 percent tariff on Chinese goods.
Some voices in Washington urge caution. Former U.S. Treasury Secretary Robert Rubin last
month that a massive revaluation in China could hurt U.S. financial markets and the dollar by
discouraging China from buying U.S. securities.
"You wouldn't want them to stop buying dollars," Rubin said. "That could be awkward."
Even if Beijing decides to revalue the yuan, it is unlikely to let it rise anywhere close to 40
percent, for fear of throwing the economy into recession. The best guesses on Wall Street are
that China may revalue between 5 percent and 7.5 percent. Morici said such a move would be
"inconsequential."
Even if China revalued the yuan by 40 percent, U.S. companies would have difficulty competing
on wages. The average U.S. factory worker makes in two weeks what the average Chinese worker
makes in a year. If the yuan were revalued by 40 percent, it still would take a U.S. worker less
than three weeks to make an annual Chinese salary.

18. U-T Special Report / The Dragon Awakes
Boom felt across globe
China's voracious appetite for materials drives up costs in West
By Dean Calbreath
UNION-TRIBUNE STAFF WRITER
March 21, 2005
SHANGHAI, China – From the Cloud 9 bar atop the world's highest hotel, a visitor can get a
bird's-eye view of the world's largest construction boom, which has fueled price increases and
market disruptions around the globe.
Just 15 years ago, the Pudong area of Shanghai consisted of little more than dilapidated housing
and muddy patches of ox-plowed farmland. Now it looks like downtown Manhattan.
From Cloud 9's windows on the 87th floor, visitors can pick out some of Pudong's more
flamboyant buildings: the Oriental Pearl, Asia's tallest TV tower, which is studded with glass
spheres that house stores, restaurants and museums; the sprawling Opera House, with separate
venues for folk music, Chinese opera, classical music and Western opera; and the Science and
Getty Images
Chinese mills in cities such as Baotou are producing steel at such a rapid rate that China soon
could be producing enough to meet its needs

19. Technology Museum, one of the world's biggest, featuring an indoor rain forest and a 230-foot-
tall geodesic dome.
And that's just one neighborhood in one Chinese city.
Each month, China needs to build the equivalent of a Houston or a Philadelphia just to keep up
with population growth. Each year, Shanghai – about the geographic size of the city of San Diego
but with 10 times the population – constructs or renovates 200 million square feet of building
space, about the same amount as all the office space in New Jersey.
To fuel that boom, and to feed its hungry factories, China uses more than two-fifths of the
world's annual output of cement, one-third of its iron ore, one-quarter of its lead and steel, and
more than one-fifth of its copper, aluminum and zinc.
The country's unprecedented demand for raw materials has had far-reaching effects, helping
drive up the price of raw materials last year and creating short-term shortages throughout the
world.
When victims of the 2003 San Diego County wildfires tried to rebuild their homes, some were
told the price of wood had risen because of demand from China. And when the Sweetwater
School District in Chula Vista wanted to repair some of its facilities last year, it had a hard time
finding cheap concrete because so much was being used by China.
"A number of factors affected construction costs and timelines, but not the least was the
tremendous demand for concrete and steel from China," said Bruce Husson, Sweetwater's chief
operating officer.
Partly because of the price increases in raw materials, Husson said, some contractors submitted
bids last year for almost twice what the projects were budgeted for.
"We had to slow down a number of (contract) awards because we couldn't afford such exorbitant
prices," he said.
To most consumers, perhaps the most visible effect of China's growing demand is the recent rise
in worldwide oil prices, as an ever-increasing number of Chinese switch from bicycles to
automobiles.
More than 2 million new drivers hit the roads in China last year – helping make China the
world's No. 2 consumer of oil, after the United States – and the number of new drivers is
increasing at double-digit rates each year.
"The unexpected demand from China helped push crude oil prices above $50 a barrel," said Joe
Sparano, president of the Western States Petroleum Association. "You have a market of 1.3
billion people that has suddenly discovered the automobile."

20. Although China represents only 8 percent of the world's oil demand – compared with 25 percent
for the United States – its thirst is increasing exponentially and represents 50 percent of the
growth in the market.
Steel and concrete
China is not the only reason
for last year's shortages and
price increases. War,
terrorism and political
disruptions helped push up
the price of oil. Hurricanes
and plant consolidations
also put a crimp on building
materials. Renewed
production by North
American factories chewed
into metal supplies. In
California, the demand for
construction materials was
also driven by a spate of
public works projects.
Unlike one-time events that roil the marketplace, China's demand for raw materials represents a
growing source of pressure that could affect commodities for decades to come.
"Over the long term, China's appetite for commodities and energy suggests that prices will rise,
which will mean less spending power for the U.S. consumer and slimmer profit margins for U.S.
companies," said Zachary Karabell, senior economic analyst and portfolio manager of the China-
U.S. Growth Fund at Fred Alger Management.
There have been positive side effects of China's expansion. It has created a new market for
suppliers of raw materials from Chile to South Africa and has breathed new life into the copper
mines of Arizona, cement plants of California and steel mills of Pennsylvania.
As recently as three years ago, U.S. steel mills were in crisis, facing low-cost competition from
China and other foreign locales. Some U.S. companies, led by the venerable Bethlehem Steel,
filed for bankruptcy. Others shut down their mills and blast furnaces. Nationwide, steel mills
were running at 78 percent capacity.
The situation was so bad that steel companies persuaded the Bush administration to go against
its own laissez-faire inclinations and briefly impose trade barriers against Chinese and European
steelmakers.
As China's construction boom took off over the past five years, the global steel market tightened,
prices rose and steel mills in the United States revved up to 94 percent of capacity.
File photo / AFP / Getty Images
A billboard advertises construction of a business center in Beijing. The building
boom in China has put a pinch on raw materials worldwide.

21. "In a relatively short period of time, most of the mills that had gone idle came back on line," said
Nancy Gravatt, spokeswoman for the American Iron and Steel Institute. "All the steel mills were
working fast and furious to meet the needs."
Thanks largely to demand from Asia, the U.S. steel mills should be humming for at least the next
two years, according to a recent report from the International Iron and Steel Institute.
The cement industry saw a similar increase in demand. At the peak of the market last year, all
118 cement plants in the United States were operating at close to 100 percent capacity, and even
then they could not keep up with demand. Last fall, 35 states including California were suffering
cement shortages, causing delays for some construction projects, according to the Portland
Cement Association.
"Last year was really a nightmare for a lot of projects," said Ben Sabati, who oversees cost
control at Vanir Construction Management, a Sacramento specialist in such public projects as
schools, hospitals and ports. "Many contractors couldn't get the materials they wanted."
He estimated that the cost of materials in the United States rose an average of 15 percent to 25
percent, compared with 3 percent to 5 percent in previous years. Although several factors
contributed to the price increases – rising demand for steel in U.S. factories, the need for
construction material after Florida's hurricanes, steel mill and cement plant closures – one of
the biggest reasons was China.
"A lot of cement that the U.S. typically buys from Asia was diverted to China," Sabati said. "And
China's demand for steel caused shortages in anything having to do with steel – steel structures,
metal struts, sheet metal."
The shortage of materials has eased since last summer, but prices are still higher than before.
Larry Zolezzi, president of San Diego's LZ Construction, said that before the demand began
rising in 2003, he could buy a yard of concrete for about $78. As demand peaked last year, the
price soared well above $100. And even though prices have abated, they still range between the
upper $80s and upper $90s. For some materials, such as plywood, which tripled in price last
year, costs have not come down, he said.
"With all these price rises, you could easily see a 15 (percent) to 18 percent increase in the cost of
a house," Zolezzi said. "When you're talking about a product worth $300,000 or $400,000, that
could be a significant increase in price."
Dave Konstantin, who heads K-Co Construction in San Diego, said the continuing price
increases make it hard to calculate costs when writing a contract for clients.
"The prices I quote one day don't benefit me two months later," he said. "It's very difficult to
quantify beforehand how high prices are going to rise. We constantly have to raise our prices
with customers to keep our profitability. It's brutal."

22. Cooling the boom
The Chinese government also worries that its red-hot growth rate could lead to bigger and
longer-lasting worldwide price increases, sparking inflation not only in the United States and
other countries, but in China itself.
To slow demand, Chinese officials have been raising interest rates, which has cooled
construction a little. But foreign investment and skyrocketing exports have counteracted the
government's lukewarm measures.
"Everyone knows Beijing is trying to slow things down. And everyone knows it won't succeed,"
said Anthony Chan, senior economist for JPMorgan Fleming Asset Management. "The bottom
line is they can't slow the economy too much. They have between 70 million and 100 million
people who don't have a job, so they're still under a lot of pressure to grow fast."
For America's cement and steel industries, the long-term solution is to ramp up production to
meet an anticipated rise in demand. U.S. cement companies plan to expand their manufacturing
capacity by 17 million tons by 2009, roughly an 18 percent increase in domestic capacity.
They will run into tough competition from China. The country already dominates the global
cement landscape, accounting for 37 percent of the cement produced, followed by India and the
United States. By 2006, China is expected to produce 340 million tons of crude steel a year,
representing 30 percent of world production.
While China's demand for steel is increasing at 11 percent per year, production is growing at an
even hotter 20 percent. That means China soon could be producing enough steel to meet its own
needs and swamp the global market with cheap exports. That would lower prices for U.S.
consumers – especially given the low value of the Chinese currency – but would throw the U.S.
steel industry into another slowdown.
"If we get back to a situation where there's excess capacity on the market, China's low currency
and the fact we have few trade barriers could once again make the U.S. an attractive place for it
to dump steel," said Gravatt, the steel industry spokeswoman. "That could be our one area of
vulnerability."

23. U-T Special Report / The Dragon Awakes
Flexing power through trade
China gains diplomatic clout as opinion of U.S. in Pacific Rim weakens
By Dean Calbreath
UNION-TRIBUNE STAFF WRITER
March 22, 2005
YANTAI, China – For nearly 60 years,
the United States has been the economic
engine of the Pacific Rim – able to use its
financial ties to Japan, South Korea and
most nations of Southeast Asia to exert
its will throughout the region.
But that era is drawing to a close.
In 2003, China overtook the United
States as the biggest trading partner of
South Korea. Last year, China became
Japan's biggest trading partner. By the
end of this year, it is likely to become the
dominant trader with the Association of
Southeast Asian Nations, or ASEAN, a
10-nation bloc stretching from the
Philippines to Cambodia. By the end of 2006, China could become Australia's chief partner,
leapfrogging the United States and the European Union.
That economic prowess is beginning to turn into political clout, as Chinese President Hu Jintao
and Premier Wen Jiabao conduct a "charm offensive" throughout the region – offering to erase
trade barriers with friendly nations. And the fact that the Bush administration seems to be
ignoring most of east Asia while concentrating on Iraq and the Middle East has helped Beijing,
diplomats and analysts say.
"The U.S. is losing the competition for influence in Southeast Asia," Tommy Koh, Singapore's
ambassador-at-large, said earlier this year. "The winner, at least for the time being, is the
People's Republic of China."
Walk through downtown Yantai, a busy port on China's northeastern seaboard, and you get a
good idea of how rapidly China is becoming the main hub of business in the Pacific Rim.
Twenty years ago, Yantai was a little-known backwater largely closed off to the rest of the world.
Foreigners who visited the port at the time say the only people they saw on the streets were
bicycle-riding Chinese workers clad in Mao caps and jackets.
Getty Images
President Bush's focus on the Middle East has aided
President Hu Jintao and China's efforts to boost political
clout and trade in Asia.

24. In the past few years, Yantai has become a major port of call for Pacific shipping and a humming
manufacturing center for South Korea and Japan.
Such South Korean businesses as Hyundai, Daewoo and LG Electronics have launched factories
in Yantai, drawn by the region's cheap work force. So many Korean executives call Yantai home
that the city has set up a Korean-language school for their children.
Japanese firms include the Atsugi sock company, which produces 50 million socks a year – most
of which are exported back to Japan.
"I feel a lot of similarity between Japan of the 1960s and China of today," said Hideo Sasaki, a
Tokyo transplant who oversees the factory.
Companies from many nations, including the United States and members of the European
Union, have opened factories in China. And along the Pacific Rim, China is using the trade ties
to establish stronger political relationships with its neighbors. And China seems to be filling a
vacuum created by the United States' shrinking reputation in the region.
Asians still talk about the contrast between visits by Bush and Jintao to Australia in late 2003.
Bush used his speech before the Australian parliament to push for more support of the war in
Iraq, eliciting boos from some parliamentarians, who had to be forcibly removed from the hall.
Hu used his speech to call for "deeper and broader" trade ties between China, drawing a much
more positive response.
"China in general has a smile diplomacy for Southeast Asia, whereas we have a seemingly
unidimensional approach that can lead to complaints," said Ralph Cossa, president of the Pacific
Forum of the Center for Strategic and International Studies in Honolulu.
"You hear a lot of people in Asia saying, 'The Chinese come in and tell us how wonderful we are
and how wonderful they are. The Americans come in and hector us all the time and tell us how
we need to do more against terror, terror, terror.' "
Cossa said the U.S. diplomatic corps is stretched thin when dealing with Asia. Only one assistant
secretary of state is responsible for the Asia-Pacific region, including North Korea, he said.
"And when you've got a nation that's threatening nuclear war compared to a lot of other nations
that are relatively peaceful, you know where your priorities are going to be," Cossa said.
On the other hand, China's "smile diplomacy" has its limits.
The smile comes off when dealing with Taiwan, which has had an autonomous government
since the Communist Revolution of 1949. Early this month, the Chinese government enacted a
law authorizing the use of military force against Taiwan if it ever formally declares
independence. If China invaded, the United States and Japan likely would be drawn into war to
defend the island.
China's hard-line stance on Taiwan has helped drive Japan closer to the United States. As China
unveiled its anti-independence law, Japan joined with the Bush administration to oppose

25. European arms sales to the mainland and stressed that it would not tolerate an invasion of
Taiwan – its strongest statement on the issue in decades.
China's heavy-handedness on Taiwan extends to nations that are overly friendly with the
government in Taipei. When Singapore's then-Deputy Prime Minister Lee Hsien Loong visited
Taiwan last July, Beijing cut off official visits and exchanges with Singapore and delayed talks on
a free-trade agreement. Bilateral talks between Beijing and Singapore – which since has
appointed Lee prime minister – did not get back on track until last month.
"China is in a kinder, gentler mode. But if you do something not on Beijing's agenda, they're not
hesitant to take you to the woodshed," Cossa said.
Image problem
China's diplomatic initiatives have been aided by the low opinion that many Asians have of the
Bush administration.
The war in Iraq, the U.S. refusal to sign the Kyoto environmental pact and the nuclear crisis in
North Korea – which many Asians believe has been mishandled by the White House – have
contributed to that negative image.
In Indonesia, for instance, 54 percent of poll respondents said in February that they have a
negative opinion of the United States, despite the large amounts of cash and assistance that
Americans have donated for tsunami relief. In 2003, 83 percent of Indonesians had a negative
opinion of the United States.
In South Korea, long one of the United States' closest allies, 39 percent of poll respondents last
year said the United States is the biggest threat to their security. By contrast, 33 percent named
the country's long-standing enemy, North Korea, and 12 percent said China.
Reflecting that mood, more than half the legislators elected to South Korea's parliament last
year say they believe their nation's relationship with China is more important than the one it has
with the United States.
South Koreans stress that they are not anti-American. Their attitude reflects their feelings about
Bush administration policy. But shifting trade ties are drawing them closer to China at the same
time that they are feeling alienated from the United States.
In the past two years, South Korea's growing trade with China has accounted for 98 percent of
the increase in its gross domestic product. Without Chinese trade, South Korea's economic
growth would have been close to zero.
The shift in trade ties has created a wide opening for China. One of China's chief goals is to exert
regional influence through trade deals, bringing nations closer to its fold by making it easier for
them to cater to its market of 1.3 billion people.

26. China's most ambitious goal is a pact to erase trade barriers with ASEAN, which aims to build an
Asian community of nations resembling the European Union within the next 15 years.
Under a free-trade pact signed in November, China and ASEAN plan to start cutting trade
barriers in July. By 2010, China plans to drop all barriers with Brunei, Indonesia, Malaysia, the
Philippines, Singapore and Thailand. That would create the world's biggest free-trade zone, with
more than 2 billion people. By 2015, the other members of ASEAN are slated to join the pact.
"That's a rather ambitious schedule, especially considering the fact that China's never signed a
free-trade agreement before," said Edward Gresser, director of the Progressive Policy Institute
in Washington, D.C.
"Even so, you get the feeling that China and other Asian governments are intensely involved in
setting up legal and public policy frameworks that do not include the United States and are
likely to put us at a long-term policy disadvantage."
Beyond trade
Some observers question how much good the trade deals will do.
Like Japan, South Korea and the United States, the nations in ASEAN, are already losing large
numbers of jobs to China because of its low-wage policies. The ASEAN agreements will

27. accelerate the job losses by removing all trade barriers, said John Tkacik Jr., a research fellow
on China policy with the Heritage Foundation, a conservative think tank.
"In the end, manufacturing in ASEAN will be swamped by duty-free competition from China,
and investment in ASEAN will shift to China," Tkacik recently told a congressional panel.
Nevertheless, China's dealings with ASEAN are extending beyond trade to include closer
diplomatic and political relations.
The November accord also involves increased political and security talks, military trust-building
activities, and cooperation in such fields as investment, finance, agriculture, energy and
information technology.
By contrast, the United States has stayed on the sidelines.
Partly because of its antipathy for the dictatorial government of ASEAN member Myanmar,
Washington not only has declined to sign a friendship treaty with ASEAN but also stays out of
the bloc's annual summit meetings, which draw such nations as China, Japan, Korea, India,
Australia and New Zealand.
As Koh sees it, "The U.S. needs to revamp its public diplomacy in Southeast Asia, in order to
redress the serious deterioration in public support for the U.S. and its policies."