The talk of the town at Davos: China

Posted in China , Asia | 24-Jan-04 | Author: Eric Pfanner| Source: International Herald Tribune

DAVOS, Switzerland - The normally loquacious politicians, chief executives, scholars and journalists gathered here for the World Economic Forum's annual talkfest have a simple, one-word answer for many of the key questions facing the world in 2004: China.

The world's fastest-growing economy? China. The market you can't afford not to be in? China. The source of the funds needed to keep the U.S. economy from going bust? China. The engine behind global trade growth? China. The unfair trader manipulating the value of its currency at the expense of Europe and the United States? China. The giant gorilla siphoning off jobs from the West? China. The indifferent employer pushing labor standards lower throughout the developing world? China.

The official theme of the forum's annual meeting here is "partnering for security and prosperity." But in the same way that the gathering was dominated last year by the impending war with Iraq, Davos this year unofficially seems to be about the prodigious economic potential - and oft-criticized social and labor conditions - of the world's most populous country.

"Everything is China, China, China," said Lourdes Casanova, a professor at the Insead business school near Paris who studies Latin American economies, which have fallen out of the spotlight. "I specialize in the lost causes."

How did China move to the top of the Davos buzz-o-meter? It may help that the government of the People's Republic, unlike that of almost every other big country, sent no official representatives to defend itself at a gathering of the global capitalist elite. Instead, there are university professors and corporate officials - some of them, to be sure, with links to Beijing.

With more then $50 billion in foreign direct investment in 2002, China may figure that it doesn't need to hold out the begging bowl to the multinational companies gathered in Davos. Most of them already have growing presences in China anyway.

The bigger question, and one that has preoccupied many Davos participants, is what to do with all that money. Some analysts worry that the Chinese economy is overheating, that it cannot sustain the 8.5 percent annual rate of economic growth it chalked up during the first three quarters of the year.

Not to worry, says Fu Jun, deputy dean of Peking University. Outside of a few sectors, such as auto manufacturing, steelmaking and real estate, there are few signs that the economy is growing in a potentially inflationary manner. "China now has very sophisticated economic managers who understand the role of the market versus the role of the government," he said in a panel discussion.

One aspect of Beijing's economic management, the fixed currency exchange rate it maintains, has proved to be highly unpopular in Washington. The Bush administration has applied pressure on China to back away from the pegged rate, which, the United States says, keeps the yuan artificially low and floods America with cheap Chinese imports.

Still, Donald Evans, the U.S. commerce secretary, took a conciliatory tone toward China during a Davos appearance this week. "China is headed in the right direction and is currently in safe hands," he said.

A Chinese analyst at Davos, who did not want to be identified, said he thought any near-term change in China's yuan rate was very unlikely, even if it might make sense in the medium term to move to a rate pegged to a basket of currencies, rather than only against the dollar as at present.

Some analysts say Washington ought to quit complaining and instead be grateful about China's currency policies. One way in which China has been keeping the yuan fixed against the dollar has been by purchasing billions of dollars worth of U.S. Treasury securities. That has the benefit of helping to keep long-term interest rates low in the United States, lowering the cost of home mortgages and other loans and keeping a debt-ridden economy afloat.

But by managing dollar exchange rates, China and other Asian countries that are intervening in the market to limit gains in their currencies are pushing up the value of the euro, which reached $1.2576 late Friday. That hurts Europe's export performance, so China is also drawing blame for the sluggishness of the euro zone's recovery.

Meanwhile, the Chinese economy marches along. A study by Goldman Sachs that was released here Friday said China would overtake the United States as the world's largest economy by 2041. It is fast becoming a significant base for many multinational companies.

Three short years ago, for example, China was only the 13th largest among Asia-Pacific markets for Havas, the Paris-based advertising and media company. Now, it is the biggest, with revenue growing at double-digit rates, according to Alain de Pouzilhac, chief executive of Havas.

Thirty-thousand bicycle messengers deliver direct-marketing information for Havas companies in China on a contract basis - nearly double the company's total global work force, De Pouzilhac noted, in a conversation in the Davos conference center.

China's low-wage workers - the attraction for many foreign investors - have also made it target No. 1 for many of the nongovernmental organizations and monitoring groups that increasingly are part of the Davos dialogue.

Trade unions complain that China, along with India, is gobbling up jobs as multinational companies increasingly look to outsource service jobs, much as they did with manufacturing years ago. Increasingly, some labor officials say, China is even stealing away jobs from its neighbors by flouting international labor standards.

"We're concerned about a global race to the bottom in trade, with China in the lead," said Tim Noonan, campaign and communications director for the International Textile, Garment and Leather Workers Federation.

Arthur DeFehr, president of Palliser Furniture, a Canadian company, said his effort to uphold "fair trade" standards in his dealing with contract manufacturers in Asia were made more difficult by Chinese companies that "work their employees 29 out of 30 days and dump chemicals into rivers" - but that can produce at a lower cost.