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Danger seen in China's economic power

THE BALTIMORE SUN

At the end of the 19th century, Great Britain, then the world's dominant political and economic power, made money investing in the fast-growing economy of upstart America on the other side of the Atlantic Ocean.

A few decades later, the British came gradually to recognize, painfully, that the upstart had become the leader - that Wall Street had supplanted London as the world's financial capital and that America's industrial might was supreme.

Now, some are beginning to wonder whether another such realization might be over the horizon formed by another ocean - the Pacific.

So far, America's social and economic power remains unchallenged. But China's economy is growing at an astounding pace. And an $18.5 billion bid last week by CNOOC Ltd., a Chinese oil company, to purchase American-based Unocal Corp. is becoming a focal point for growing concerns in this country about China's mounting strength.

Many business and political leaders believe China is fueling its growth by unfairly manipulating the value of its currency, the yuan. By holding the value of the yuan down, the Chinese make their goods cheaper here and U.S. goods more expensive there.

Last year, the United States imported almost $200 billion in goods from China, up from only $3.8 billion in 1994.

Not only are we buying Chinese goods, we are also sending the Chinese jobs. A significant share of the goods we buy every year, both high-tech - television sets, computers, cell phones and the like - and low-tech - clothing - comes from China.

Because consumers in the United States purchase far more goods from China than we sell there, China has accumulated more than $230 billion from our steadily increasing trade deficit.

Until recently, the Chinese invested much of that money in U.S. government bonds. But recently the Chinese have started using their dollars to bid for American businesses. Last year, IBM's personal computer business was purchased by Lenavo Group, a Chinese computer maker. This month, Haier Group, a Chinese home appliance maker, offered $2.25 billion for landmark American manufacturer Maytag.

It is logical for China to begin buying companies, if for no other reason than to diversify after purchasing so many U.S. government bonds. And owning companies is more profitable, economists note.

But the Chinese pursuit of an oil company rang a particular bell for Americans increasingly concerned with soaring oil prices that flirted last week with reaching a record $60 a barrel. The stock market fell sharply at the end of the week as investors worried about the potential economic harm from higher energy costs in regard to transportation and manufacturing.

The growing appetites for oil in China, India and other developing countries have helped push global oil prices higher. Unocal has many oil fields in Asia, so Chinese ownership could be aimed at keeping that oil in the region.

Americans are angry about widespread sales in China of illegal copies of American music CDs and DVD movies. But the focal point of frustration is the Chinese government policy of pegging the value of the yuan to the dollar, when in the free market its value should be much higher.

University of Maryland economist Peter Morici believes that America is giving China an enormous trade advantage by allowing the yuan to be valued 50 percent lower than it should be if it were allowed to float against the dollar. He says that in 2004 alone, China gained $206.3 billion in unfair profits in its U.S. trading, based on international check-clearing data.

Morici brands the Bush administration "appeasers for permitting China to compete in the world economy with an unfair set of rules."

On Thursday, Treasury Secretary John W. Snow told a congressional committee assessing China trade issues that, "It's time for China to move to greater flexibility" on the yuan

Snow predicted that the Chinese would revalue the yuan and said that if they didn't, the Treasury Department would probably be forced to issue a report condemning China as a "currency manipulator."

Those might be fighting words among economic diplomats, but they do little for the trade deficit. So frustrated members of Congress are ready to do more than condemn. A number of bills have been introduced in the House and the Senate that would impose substantial tariffs on imported Chinese goods if the yuan is not revalued.

"They cannot be allowed to continue to cheat the system with no penalties," Sen. Susan Collins, a Maine Republican, told reporters last Thursday.

But Federal Reserve Board Chairman Alan Greenspan warned Congress to be careful when considering what to do about trade with China. "It is essential that we not put ... our future at risk with a step back into protectionism," he said.

Greenspan and other economists say that even if the yuan is revalued, other less-developed countries might pursue the same strategy with similar effects.

Clearly, some U.S. businesses and consumers benefit from inexpensive Chinese laptops, televisions and clothing. A significant fraction of the goods sold by Wal-Mart, America's largest retailer, are manufactured in China.

And many American corporations have invested heavily in the fast-growing Chinese economy. Some are busy marketing to that nation's relatively small, but fast-growing middle class.

The current China crisis has its roots in recent American trade policies. In the early 1990s the Clinton administration worked hard to develop trade and investment ties between the United States and China. Integrating China into the world economy was seen as a way to lower political barriers in the post-Cold War era.

But, last week, the Defense Department issued a report expressing concern about the rapid growth in capabilities of China's large standing army - a development fueled, in part, by profits from China's success in international trade.

Chinese business leaders say they are only doing what America did in the 19th century - showing a great deal of industrial energy to compete in world markets.

But Morici, the Maryland economist, sees enormous differences between America then and China now. American economic growth he says, was fueled by technological innovations here, while the Chinese are copying technologies developed elsewhere.

The real losers in China's current economic scramble, Morici says, are the poorly paid workers who staff that country's booming factories.

Indeed, China is likely to face significant internal economic and social stresses, with workers seeking more monetary rewards and freedom in a growing, increasingly sophisticated economy.

That sounds a bit like what happened in that upstart America that England was investing in a century ago.

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