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A Little Dish on China as a Big Powerhouse

September 1, 2005 By:
Craig G. Langweiler
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The United States has been home to the world's most powerful economy since the end of World War II, but probably not for much longer. Some economists believe that China will soon assume the mantle of reigning global economic superpower.

Surprised? China has long been thought of as a source of inexpensive imports.

But no more: It has the third-largest economy in the world and is on track to be the largest by 2040, perhaps sooner. China's economy is also growing faster than any other country, expanding three times faster than the U.S. economy.

Whether you view China's ascension in the global economy as menace or miracle, here are some facts that may help you see the situation more clearly:

• China's burgeoning population has led to a construction boom that produces the equivalent of a city the size of Houston or Philadelphia every month. Chinese demand for lumber, concrete, steel and other materials has contributed to shorter supplies around the world.

• Although China's 1.3 billion workers are still employed mostly by factories, the nation is rapidly producing educated workers with lucrative skills, allowing it to focus on producing more high-quality and technologically advanced products. As a result, salaries have grown by about 250 percent on average over the past decade.

• Greater wealth has helped the Chinese afford more modern luxuries, especially automobiles. More than 2.4 million new drivers were added in 2004 alone. This - combined with China's heavy investment in industrial machinery - has placed greater demand on the world's oil supply and helped drive up prices.

• The United States and Europe have loudly criticized China for keeping its currency - the yuan - artificially low, alleging it creates an unfair trading advantage against other currencies. One dollar's worth of yuan can buy as much in China as $4.60 can buy in the United States, making goods purchased in China seem like a more attractive buy.

• To keep the yuan's value low, China holds $600 billion worth of foreign currency in reserve, including nearly $200 billion in U.S. Treasury debt. Chinese officials have said that they intend to allow the yuan to trade more freely someday, but a sharp increase could damage exports and harm China's domestic producers by making imports more competitive.

• A Federal Reserve study found that China's monetary policy has also produced a surprising benefit for the U.S economy: slower inflation. Since China began pegging the yuan's value to the dollar, declines in the dollar's value have resulted in smaller increases in overall import prices.

China's ascent appears to be well under way. How investors are positioned will help determine whether this inevitable development is an opportunity or a disadvantage.

Craig G. Langweiler is president of Langweiler Financial Group in Newtown. Reach him at: [email protected].

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